Luxfer Holdings plc — Q2 2023 Form 10-Q
Reporting period: 13-week second quarter ended July 2, 2023; year-to-date figures cover the first half of fiscal 2023. Dollar amounts are in millions except per-share data. Luxfer is a global industrial company operating through Gas Cylinders and Elektron; Superform is reported as discontinued operations.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $110.4 | $109.5 | $211.7 | $206.5 |
| Gross profit / margin | $24.2 / 21.9% | $25.7 / 23.5% | $45.3 / 21.4% | $49.9 / 24.2% |
| Operating income | $7.9 | $12.6 | $15.0 | $23.2 |
| Net income from continuing operations | $4.9 | $9.6 | $5.4 | $17.3 |
| Net income, including discontinued operations | $4.7 | $9.3 | $5.2 | $16.9 |
| Diluted EPS | $0.17 | $0.34 | $0.19 | $0.61 |
| Adjusted EBITDA | $14.4 | $16.9 | $25.7 | $33.0 |
- Sales rose 0.8% in Q2 and 2.5% year to date; excluding foreign exchange effects, management reported increases of 0.6% and 3.5%, respectively. Inflation pass-through contributed about $6.5 million to Q2 sales and $16.5 million to first-half sales.
- Profitability weakened as higher material costs and adverse product mix outpaced price increases, particularly in Elektron. Q2 operating margin was 7.2%, versus 11.5% a year earlier; first-half operating margin was 7.1%, versus 11.2%.
- Q2 adjusted net income was $7.4 million and adjusted diluted EPS was $0.27, compared with $10.1 million and $0.36 a year earlier. First-half adjusted net income was $12.8 million and adjusted diluted EPS was $0.47, versus $19.3 million and $0.70. These are non-GAAP measures.
- Gas Cylinders Q2 sales increased 5.2% to $48.5 million and adjusted EBITDA rose to $4.9 million from $3.7 million. Elektron sales declined 2.4% to $61.9 million, while adjusted EBITDA fell to $9.5 million from $13.2 million.
Cash flow, debt and liquidity
- First-half operating cash flow was negative $1.2 million, including negative $1.3 million from continuing operations, compared with negative $6.8 million in the prior-year period. Capital expenditures were $4.9 million; cash, cash equivalents and restricted cash ended the period at $8.2 million.
- Total debt was $92.4 million at July 2, 2023, compared with $81.2 million at December 31, 2022. The company repaid $25.0 million of 2023 notes and drew a net $35.1 million on its revolving facility during the half. The facility had $68.1 million drawn and $56.9 million undrawn; the company reported compliance with debt covenants.
- Current assets were $207.3 million and current liabilities were $78.1 million. Inventory increased to $119.3 million from $111.1 million at year-end. Management stated that facilities should cover short-term cash-flow variability and that long-term operating cash generation should meet anticipated needs, while noting liquidity and cash generation risks.
- First-half dividends paid were $7.0 million; another $3.5 million dividend was declared for payment after quarter-end. After quarter-end, the Board approved up to $12 million for a potential discretionary share repurchase; the program had not been implemented by the filing date.
Material changes, outlook and risks
- First-half continuing-operations income included an $8.3 million defined-benefit pension charge; management describes a $9.0 million first-half net charge associated with the U.S. pension liability buyout, partly offset by a U.K. pension credit. The U.S. settlement included $2.3 million cash outflow, with a $0.2 million contribution refund in Q2. The reported first-half tax credit was affected by the settlement and impairment charges.
- Restructuring charges were $2.5 million in Q2 and $2.8 million for the half, predominantly including $2.3 million of asset impairments tied to North American Gas Cylinders rationalization. SG&A also included $1.2 million of Q2 and $2.3 million of first-half legal costs, predominantly associated with the disclosed disposal-site litigation.
- Management expects material availability and inflation, energy costs, and labor and transport constraints to continue through 2023. A force majeure remains in place at a key U.S.-sourced magnesium supplier; supply was not expected to resume until at least Q4 2023, and more likely in 2024. Alternative sources were secured at higher cost. The company expects to source sufficient material and pass through most cost increases, but describes the outlook as highly uncertain.
- Operating priorities include revenue and volume growth, continuity of critical supplies, margin protection, productivity and rationalization, price increases, ESG investment, talent development, and cash generation. The filing provides no specific numerical earnings or sales guidance.
- Luxfer expects to sell its Superform aluminum business within 12 months; its assets and liabilities are classified as held for sale. The company is defending lawsuits related to a 2018 explosion at a third-party waste-treatment site and does not currently expect a material financial impact. Management reports no material changes to previously disclosed risk factors or market risks.
Key facts for investors to verify
- Whether Elektron can recover margins as material-cost increases and product-mix pressure ease, and whether Gas Cylinders contract repricing continues to offset inflation.
- Timing and cost consequences of the magnesium supply disruption, including continued availability and pricing of alternative sources.
- Working-capital and operating cash-flow trends, given the first-half cash outflow, inventory build, dividends and increased borrowings.
- Details and progress of the U.S. pension settlement, the Superform sale, and the third-party disposal-site litigation.
- Whether the proposed $12 million discretionary repurchase is implemented and how it affects liquidity and capital allocation.