Business context and reporting period
Luxfer Holdings plc filed this Form 10-K for the fiscal year ended December 31, 2020. The company manufactures engineered materials and gas cylinders through its Elektron and Gas Cylinders segments. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Unless stated otherwise, financial amounts are in U.S. dollars.
Beginning in the fourth quarter, Luxfer classified its Superform aluminum forming business and U.S. aluminum gas-cylinder business as discontinued operations and held for sale, with divestiture expected in 2021. Prior periods were recast to reflect the classification.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Continuing-operations net sales | $324.8 million | $373.4 million |
| Gross profit / margin | $80.9 million / 24.9% | $103.7 million / 27.8% |
| Operating income / margin | $28.5 million / 8.8% | $18.7 million / 5.0% |
| Continuing-operations net income | $20.8 million | $8.7 million |
| Consolidated net income, including discontinued operations | $20.0 million | $3.1 million |
| Diluted EPS, continuing operations | $0.74 | $0.31 |
| Adjusted EBITDA, continuing operations | $53.9 million | $67.1 million |
| Operating cash flow, continuing operations | $49.3 million | $5.0 million |
| Capital expenditures | $8.0 million | $13.1 million |
Adjusted diluted EPS was $1.03 versus $1.47. Adjusted net income was $28.9 million versus $40.9 million; these are non-GAAP measures. Year-end cash was $1.5 million. Debt was $53.4 million net of issuance costs, including $50.0 million of notes and $4.1 million drawn on the revolving facility. The company reported net debt to EBITDA of 1.0x, compared with 1.2x a year earlier. Of its $150 million committed revolving facility, $145.9 million was available.
Fourth-quarter continuing-operations sales were $82.1 million, versus $82.3 million in Q4 2019; operating income was $8.4 million versus $6.2 million, and net income was $6.6 million versus $1.6 million. The company paid $13.6 million in dividends during 2020 ($0.50 per share).
Material changes versus the prior comparable period
- Full-year continuing sales declined 13.0%, reflecting COVID-19 disruption, weakness in industrial and transportation markets, and $7.6 million of sales no longer present after the 2019 Czech magnesium-recycling business divestiture.
- Elektron sales fell 16.8% to $182.9 million and adjusted EBITDA fell 27.2% to $32.6 million; its adjusted EBITDA margin declined to 17.8% from 20.4%. Lower demand affected catalysts, photoengraving plates, countermeasure flares, and aerospace alloys.
- Gas Cylinders sales fell 7.6% to $141.9 million, while adjusted EBITDA decreased 4.5% to $21.3 million. Its adjusted EBITDA margin improved to 15.0% from 14.5%, supported by productivity gains and cost savings.
- Gross margin fell 2.9 percentage points, mainly because of adverse mix and COVID-related inefficiency. Operating income nevertheless increased, principally as restructuring charges declined to $8.9 million from $25.9 million.
- Cash from continuing operations increased substantially, including working-capital cash releases; financing cash outflow included $38.2 million of net debt repayments. Luxfer repaid $25 million of notes due 2021 early on December 31, incurring a $0.5 million early-repayment charge.
- Discontinued operations generated a $0.8 million net loss in 2020, compared with a $5.6 million loss in 2019. Their 2020 sales were $53.2 million. Held-for-sale assets were $36.0 million and related liabilities $11.4 million at year-end.
Outlook, commentary, risks and unusual items
Management described ongoing uncertainty from COVID-19, including demand weakness and potential supply constraints. It said all facilities were operating after temporary closures earlier in the year, while cost reductions, including headcount actions, continued. For 2021, management identified pandemic response, divestiture of non-strategic aluminum businesses, productivity, post-pandemic growth recovery, and cash generation as priorities. It anticipated 2021 capital expenditures of approximately $15 million and further costs related to the French Gas Cylinders site closure. The existing revolving facility was due to mature in July 2022; the company expected to negotiate a replacement facility in the first half of 2021. No specific revenue or earnings guidance was provided.
- Key risks include pandemic-driven market volatility; cyclical end markets; dependence on major customers and suppliers; raw-material and foreign-exchange exposure; regulatory and environmental obligations; product-liability and cybersecurity risks; and execution of planned divestitures.
- Defined-benefit pension plans had an aggregate accounting deficit of $50.8 million, up from $35.2 million. The U.K. plan alone had a $45.1 million deficit; scheduled deficit-reduction contributions were £4.1 million annually, subject to review after the next actuarial valuation.
- The company recorded $0.4 million in 2020 charges for remediation of a legacy environmental issue at its Manchester site; the work was expected to finish in Q1 2021. Two disclosed litigation matters were not expected by management to have a material impact, though one involved a fatality at a third-party waste facility.
- No goodwill impairment was recorded in 2020, but the auditor identified the goodwill impairment assessment as a critical audit matter because of the significant estimates used in discounted cash-flow valuations. Goodwill was $70.2 million.
- Management and the auditor reported effective internal control over financial reporting at year-end. A material weakness related to the 2019 ERP implementation was reported as remediated in 2020.
Important facts for investors to verify
- Progress, timing, and proceeds from the planned sales of Superform and the U.S. aluminum gas-cylinder business, and whether the assets’ carrying values are recovered.
- Whether the recovery in alternative-fuel products and transportation demand continues, and whether weakness in general industrial and other markets persists.
- Actual cash generation, restructuring and capital-spending requirements, and the terms and timing of the replacement revolving-credit facility.
- Pension funding developments, including the next U.K. actuarial valuation and any changes to deficit-reduction contributions.
- Resolution and potential financial exposure from the disclosed cylinder-rupture and third-party waste-site lawsuits, as well as completion of environmental remediation.
- Key assumptions supporting goodwill valuations and the company’s ability to sustain margins while sales and adjusted EBITDA remain below 2019 levels.