Luxfer Holdings plc — Q2 2019 Form 10-Q
Business context and period. Luxfer manufactures engineered industrial materials through its Gas Cylinders and Elektron segments. This unaudited report covers the 13 weeks ended June 30, 2019, and the first half of 2019; comparisons are to Q2 and the first half of 2018. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $116.5m | $128.2m | $236.9m | $247.9m |
| Gross profit / margin | $31.0m / 26.6% | $33.6m / 26.2% | $61.1m / 25.8% | $63.9m / 25.8% |
| Operating income | $5.2m | $14.6m | $4.1m | $27.4m |
| Net income (loss) | $3.5m | $11.4m | ($0.3m) | $21.3m |
| Reported EPS, diluted | $0.13 | $0.41 | ($0.01) | $0.78 |
| Adjusted EBITDA (non-GAAP) | $20.2m | $21.4m | $38.7m | $40.6m |
| Operating cash flow | Not separately presented for the quarter | ($15.6m) | $21.4m |
- Q2 sales fell 9.1% year over year; first-half sales declined 4.4%. Gross margin improved 0.4 percentage points in Q2 but was flat for the half.
- Q2 operating income included $12.7m of restructuring charges and a $2.9m disposal gain. First-half results included $21.7m of restructuring charges and $1.7m of net acquisition/disposal-related costs.
- Management reported adjusted net income of $12.4m in Q2 and $23.6m for the first half, versus $12.2m and $22.2m, respectively, in 2018. Adjusted diluted EPS was $0.44 and $0.85, respectively. These are non-GAAP measures and exclude specified items.
Segments and sales drivers
- Gas Cylinders: Q2 sales were $58.1m, down 3.8%; adjusted EBITDA was $7.1m, up from $5.0m. First-half sales declined 2.7% to $116.5m, while adjusted EBITDA rose 5.5% to $11.6m. Cost savings supported margins; lower aluminum-cylinder sales during the French factory move and weaker Superform sales weighed on revenue, partly offset by alternative-fuel cylinders.
- Elektron: Q2 sales were $58.4m, down 13.9%; adjusted EBITDA was $13.1m, down 20.1%. First-half sales declined 6.1% to $120.4m and adjusted EBITDA fell 8.4% to $27.1m. Lower SoluMag alloy, disaster-relief and graphic-arts sales were partly offset by zirconium-based catalysis and aerospace alloys.
- Company-wide sales declines reflected adverse currency effects ($2.7m in Q2; $7.1m in the first half), reduced SoluMag and prior-year disaster-relief sales, and lower-margin product declines. Management also cited improved production-cost savings.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $20.4m; total debt was $109.2m and net debt was $88.8m, compared with $77.1m and $63.3m, respectively, at December 31, 2018. Debt included $28.2m drawn on the revolving facility and $7.2m of overdrafts.
- Current assets were $192.9m and current liabilities $82.0m. Total assets were $412.1m and shareholders’ equity $178.0m.
- The company used $15.6m of operating cash in the first half, versus $21.4m generated in 2018. Investing cash use was $1.3m, including $7.1m of capital expenditures, partly offset by proceeds from business and property sales. Financing provided $23.5m, including $32.0m of net banking-facility drawdowns; dividends paid were $6.8m.
- Luxfer reported $150.0m of committed banking facilities and compliance with debt covenants through June 30, 2019. Management said it expects operating cash generation to meet long-term needs and facilities to cover short-term cash-flow variation, while noting that major debt repayments depend on alternative financing or substantial operating returns.
Outlook, commentary and notable risks
- Management expected restructuring actions to support further margin growth in 2019, while pursuing productivity improvements, sales recovery, lean manufacturing and faster product innovation. It forecast 2019 capital expenditures of approximately $15m–$20m. No formal revenue or earnings guidance was provided.
- Restructuring focused on closing the French Gas Cylinders site and significantly reducing operations at a U.S. Magtech site. The filing states further restructuring costs were expected during 2019. Q2 charges included $7.7m related to the French closure and $4.6m for Magtech-related asset write-downs and employee costs.
- The first-half effective tax rate was 116.7%, affected by non-deductible costs tied to the terminated Neo Performance Materials acquisition and restructuring; management’s adjusted effective tax rate was 19.7%, versus 23.2% in 2018.
- Luxfer sold its Czech magnesium recycling business in Q2, recognizing a $2.9m gain. First-quarter acquisition/disposal costs included reimbursement and professional fees relating to the terminated Neo acquisition.
- In July 2019, the company began removing low-level naturally occurring radioactive material from a redundant Manchester building. The remediation was expected to finish in Q2 2020 and cost about $2.6m.
- Risks cited include demand and general economic conditions, raw-material and utility costs, foreign exchange, competition, customer and supplier relationships, product-liability claims, indebtedness and covenant obligations, and regulatory or environmental developments. Brexit-related risks remained applicable; the U.K.’s EU exit deadline had been deferred to October 31, 2019.
- A 2014 cylinder rupture resulted in claims by three people reporting minor injuries. The company said it did not believe it was liable and did not expect a material financial impact. It also reported no material pending legal proceedings and no material change in market risks.
Most important facts for investors to verify
- Whether restructuring delivers the anticipated cost savings and margin improvement, and whether additional charges arise.
- Whether revenue and Elektron profitability recover, especially given weaker SoluMag, disaster-relief and graphic-arts sales.
- How negative operating cash flow, increased net debt and working-capital needs develop, while monitoring covenant compliance and facility availability.
- Whether the $2.6m Manchester remediation estimate and completion schedule remain valid.
- The effects of the unusually high reported first-half tax rate, terminated-acquisition costs, and the distinction between GAAP and adjusted results.
- Any developments in the cylinder-related claims, Brexit exposure, foreign-exchange risk and planned capital spending.