Luxfer Holdings plc — Q1 2022 Form 10-Q
Reporting period: 13 weeks ended March 27, 2022; unaudited. Comparisons are with the 13 weeks ended March 28, 2021. Amounts are in U.S. dollars unless stated otherwise.
Business context and results
Luxfer is a global industrial company with two continuing reportable segments: Gas Cylinders and Elektron. Its products serve general industrial, transportation, defense, first response and healthcare markets. The Superform aluminum-forming business is reported as discontinued operations.
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $97.0 million | $85.2 million |
| Gross profit / margin | $24.2 million / 24.9% | $25.2 million / 29.6% |
| Operating income / margin | $10.6 million / 10.9% | $11.1 million / 13.0% |
| Continuing operations net income | $7.7 million | $8.6 million |
| Reported net income | $7.6 million | $14.5 million |
| Diluted EPS | $0.28 | $0.52 |
| Adjusted EBITDA (non-GAAP) | $16.1 million | $17.7 million |
Sales rose 13.8%, including approximately 11% contribution from passing through material-cost inflation. The SCI acquisition also added $7.1 million of Gas Cylinders sales versus the prior-year quarter. Gross margin fell 4.7 percentage points, as higher material and labor costs and supply-chain investments were not fully recovered through pricing, and SCI had lower margins. Reported net income declined substantially in part because Q1 2021 included a $7.5 million after-tax gain on disposal of a discontinued business.
Segments and cash flow
- Gas Cylinders: Sales increased 17.1% to $42.4 million; adjusted EBITDA fell 55% to $2.7 million, with margin declining to 6.4% from 16.6%. Management cited SCI losses and inflation not fully covered by price increases.
- Elektron: Sales increased 11.4% to $54.6 million; adjusted EBITDA increased 14.5% to $13.4 million, with margin rising to 24.5% from 23.9%. Growth in magnesium powders and zirconium products was partly offset by lower Magtech product sales and foreign exchange.
- Operating cash flow: Cash used was $9.3 million, versus $15.2 million provided in Q1 2021. Management attributed the outflow primarily to a working-capital increase, including inventory built to protect supply.
- Investing and financing: Capital expenditures were $1.0 million. Financing provided $21.4 million, including $26.7 million of net borrowing, offset in part by $3.4 million of dividends and $1.5 million of share repurchases. Cash and cash equivalents were $17.2 million at quarter-end.
Debt, liquidity and other financial matters
Debt was $85.9 million on the balance sheet, net of unamortized issuance costs; principal debt was $86.9 million. The revolving facility balance rose to $36.9 million from $10.8 million at year-end, leaving $63.1 million undrawn under the $100 million committed facility. The company reported compliance with debt covenants. Loan notes of $25 million mature in 2023; $25 million of notes and the revolving facility mature in 2026. The company said it believes available facilities are sufficient for short-term cash-flow variation, while noting that working capital, debt service and investment needs remain key liquidity requirements.
The effective tax rate was 24.5%, versus 21.1% a year earlier, primarily reflecting geographic profit mix. A $1.4 million restructuring charge related to the closure of Luxfer Gas Cylinders France. The quarter included a $0.1 million net loss from discontinued operations; Superform U.S. remained classified as held for sale, and management expected its sale in 2022. No material subsequent events were reported.
Outlook, commentary and risks
Management expected material availability and cost inflation, energy costs, and labor and transport constraints to continue at least into the second half of 2022. It said it had secured alternative sources for key inputs affected by supplier force majeure and expected to pass on cost increases in most cases, but emphasized uncertainty around the size and timing of further increases. The Ukraine conflict was not expected to have a significant direct impact: sales to Russia and Ukraine combined were typically less than 1% of revenue, and management cited alternative magnesium sources.
Management expected 2022 capital expenditures of approximately $10 million to $12 million. Operating priorities included new-product growth, securing critical supplies while protecting margins, and working-capital and operating-cash discipline. The filing gives no specific earnings or revenue guidance. Principal risks include supply and input-cost pressures, the ability to pass costs to customers, demand and currency movements, indebtedness and covenant obligations, and operational or product-liability claims.
A waste-disposal-site explosion in Idaho is the subject of lawsuits naming Luxfer. The company said it lacked sufficient information on the cause, denied expected liability, and did not currently expect a material financial impact. Management characterized the likelihood of a material adverse impact from legal matters as remote.
Important facts for investors to verify
- Whether pricing actions and supply availability offset inflation sufficiently to stabilize gross margins, particularly in Gas Cylinders and SCI.
- Whether the inventory build converts into sales and operating cash, given Q1 operating cash use and higher receivables and inventories.
- Progress and proceeds from the expected 2022 sale of the Superform U.S. business.
- Debt maturity and refinancing plans, covenant headroom, and the impact of additional borrowing on liquidity.
- The outcome and potential exposure from the Idaho litigation, and the timing and cost of remaining restructuring activity.
- Reconcile the filing’s share-repurchase period descriptions: the cash-flow and equity statements report $1.5 million of Q1 2022 repurchases, while the MD&A wording refers to purchases in the first quarter of 2021.