LUXFER HOLDINGS PLC quarterly report, Q1 FY2020

Luxfer Holdings plc — Q1 2020 Form 10-Q

Reporting period: 13-week quarter ended March 29, 2020; comparison is the quarter ended March 31, 2019. Luxfer manufactures engineered industrial materials through its Gas Cylinders and Elektron segments. Figures are in U.S. dollars unless noted.

Financial performance

MetricQ1 2020Q1 2019
Net sales$103.8 million$120.4 million
Gross profit / margin$24.5 million / 23.6%$30.1 million / 25.0%
Operating income (loss)$8.0 million($1.1) million
Net income (loss)$6.2 million; $0.22 diluted EPS($3.8) million; ($0.14) diluted EPS
Adjusted EBITDA (non-GAAP)$15.1 million$18.5 million
Cash from operations($4.5) million($7.8) million
Capital expenditures$2.5 million$3.2 million
Cash and cash equivalents, quarter-end$17.3 million$10.2 million at Dec. 31, 2019
Debt, quarter-end$108.8 million$91.4 million at Dec. 31, 2019

Sales declined 13.8%; gross margin fell 1.4 percentage points. Net income improved from a prior-year loss, while adjusted EBITDA declined about 18%. The effective tax rate was 21.5%, compared with negative 131.3% in Q1 2019; management attributed the prior-year rate to nondeductible acquisition and restructuring expenses. Adjusted net income was $8.4 million versus $11.2 million, and adjusted diluted EPS was $0.30 versus $0.40.

Cash used in operating activities was partly offset by $14.5 million of financing cash inflow, including $18.9 million of net borrowing; cash increased $7.1 million during the quarter. The company had $34.7 million drawn and $115.3 million undrawn under its revolving facility. Current assets were $189.0 million and current liabilities $69.2 million. Total debt less cash was approximately $91.5 million, a derived figure. The company reported compliance with debt covenants.

Business and segment trends

  • Gas Cylinders: Sales decreased 9.9% to $52.6 million; adjusted EBITDA fell 22.2% to $3.5 million. Lower Superform and aluminum-cylinder sales were partly offset by alternative-fuel cylinder growth.
  • Elektron: Sales decreased 17.4% to $51.2 million and adjusted EBITDA fell to $11.6 million from $14.0 million. Lower zirconium catalyst sales and the $4.4 million effect of the 2019 Czech business divestiture weighed on revenue. The filing reports adjusted EBITDA margin of 22.7%, versus 22.6%.

Management cited adverse product mix, particularly lower zirconium catalysis sales, as a factor in the consolidated gross-margin decline. Cost reductions and productivity improvements provided partial offsets.

Outlook, risks and unusual items

  • COVID-19 had a relatively limited effect on Q1 results, but management expected a significant near-term adverse impact. Weaker demand, supply constraints, and facility suspensions or reduced capacity could affect subsequent results; the ultimate impact was described as highly uncertain. No specific earnings or revenue guidance was provided.
  • Management said it was monitoring cash flow and using cost-reduction and business-continuity measures. It reported no liquidity concerns from covenant stress testing and stated that credit availability was sufficient, while noting that assumptions could change as the pandemic evolved.
  • Fiscal 2020 capital expenditures were expected to be approximately $10–$12 million. Other stated priorities included productivity, plant consolidation, lower restructuring activity, and improved operating cash generation.
  • Q1 restructuring charges were $2.8 million, predominantly costs associated with the French Gas Cylinders operation closure. The comparable 2019 charge was $9.0 million. The company also reported $0.2 million of acquisition-related costs, versus $4.6 million in 2019, which included costs from the aborted Neo Performance Materials acquisition.
  • COVID-19 triggered a goodwill and intangible-asset impairment assessment; the company identified no impairment or marginal valuation outcomes based on its then-current forecasts.
  • Disclosure controls were deemed ineffective because a previously reported material weakness had not been fully remediated. Management said additional post-closing procedures were performed and the financial statements were fairly presented in all material respects.
  • A $0.125-per-share dividend, totaling $3.4 million, was paid in February; a further $0.125-per-share dividend was declared after quarter-end for payment in May. A longstanding product-liability claim involving a cylinder incident was not expected by management to have a material impact.

Important facts for investors to verify

  • Subsequent-quarter sales, margins, cash generation, customer demand, and supply-chain effects of COVID-19, including whether facility suspensions or capacity reductions expanded.
  • Available revolver capacity, debt levels, interest costs, and continued compliance with facility and note covenants.
  • Progress and remaining costs related to the French closure and other restructuring initiatives, and whether forecast goodwill and intangible values remain supportable.
  • Remediation of the material weakness in internal controls and the timing of any conclusion that disclosure controls are effective.
  • Segment performance and the accuracy of the filing’s stated Elektron revenue comparison; its table shows a 17.4% decline, despite a contradictory “increase” wording in the accompanying narrative.