Luxfer Holdings plc — Q3 2020 Form 10-Q
Period: Unaudited third quarter ended September 27, 2020 (13 weeks), with year-to-date results covering 39 weeks. Comparatives are the quarter ended September 29, 2019 and corresponding year-to-date period. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 39 weeks 2020 | 39 weeks 2019 |
|---|---|---|---|---|
| Net sales | $90.4m | $107.1m | $283.7m | $344.0m |
| Gross profit / margin | $18.3m / 20.2% | $25.2m / 23.5% | $61.6m / 21.7% | $86.3m / 25.1% |
| Operating income | $5.5m | $6.6m | $18.8m | $10.7m |
| Net income | $2.6m | $5.8m | $12.9m | $5.5m |
| Diluted EPS | $0.09 | $0.21 | $0.46 | $0.20 |
| Adjusted EBITDA | $14.2m | $16.7m | $39.7m | $55.4m |
| Adjusted diluted EPS | $0.25 | $0.36 | $0.72 | $1.21 |
Q3 sales fell 15.6% year over year and year-to-date sales fell 17.5%. Gross margin contracted 3.3 percentage points in Q3 and 3.4 points year to date, mainly from adverse product mix. SG&A and R&D costs declined, but lower sales and margin weighed on results. Q3 operating income included $2.3m of customer compensation; it also included $4.3m of restructuring charges. Year-to-date operating income improved despite lower sales, with lower restructuring costs than in 2019 and the absence of the prior-year $2.7m environmental charge among the factors.
- Segments: Gas Cylinders Q3 sales were $45.0m, down 17.0%, while adjusted EBITDA rose 20.6% to $7.6m, aided by customer compensation, productivity and savings. Elektron sales were $45.4m, down 14.2%, and adjusted EBITDA fell 36.5% to $6.6m as reduced volumes and adverse mix outweighed savings.
- Cash flow: Operating cash flow was $36.7m for the first nine months, versus cash used of $13.6m in 2019. Investing activities used $4.7m; capital expenditures were $6.0m. Financing activities used $27.3m, including $16.5m of net debt repayment and $10.2m of dividends.
- Balance sheet and liquidity: Cash was $14.2m and restricted cash $0.7m at quarter end. Debt was $74.7m, including $25.0m current maturities due in 2021; the $150m revolving facility was undrawn. Management reported net debt to EBITDA of 1.1x, down from 1.5x at Q2 end, and compliance with debt covenants. Total assets were $359.6m and shareholders’ equity $176.7m.
- Other: The company paid $10.2m of dividends year to date, or $0.375 per ordinary share, and declared a further $3.4m dividend after quarter end. Management expected 2020 capital expenditures of approximately $10m.
Business context, outlook and risks
Luxfer manufactures engineered materials, components and high-pressure gas containment products through its Gas Cylinders and Elektron segments. Management attributed weaker results primarily to COVID-19-related economic disruption, especially in industrial and transportation markets. Q3 industrial and transportation end-market sales declined 19.4% and 19.3%, respectively, year over year. Certain sites had reduced capacity and partial furloughs; further operational reductions remained possible. Management cited cost-saving actions, productivity, plant consolidation, innovation and cash generation as priorities. It did not provide specific sales or earnings guidance.
COVID-19 creates uncertainty around demand, supply availability and operations. Other disclosed risks include raw-material and utility costs, currency movements, customer and supplier relationships, competition, product-liability claims, indebtedness and covenant obligations. A legacy environmental remediation project at the Manchester site was expected to finish in Q1 2021, with no significant further costs anticipated. A product-liability claim arising from a 2014 cylinder rupture was not expected by the company to have a material impact. No material subsequent events were reported.
Controls: Disclosure controls were reported ineffective because a previously disclosed material weakness in internal control over financial reporting had not been fully remediated. The company had implemented some enhanced ERP-access and process controls and stated that additional operation over a sufficient period was required before the weakness could be considered remediated. Management said additional procedures were performed and the financial statements were fairly presented.
Important facts for investors to verify
- How COVID-19 demand and supply effects, capacity reductions and cost actions affect subsequent-period sales, margins and cash generation.
- The timing and refinancing or repayment plan for the $25m 2021 loan-note maturity, and continued access to the undrawn revolving facility.
- Progress in remediating the material weakness in internal controls.
- The sustainability of earnings excluding the $2.3m customer compensation and the impact of continuing restructuring costs.
- The filing gives inconsistent prior-year year-to-date effective tax rates: 46.1% in the MD&A table versus 42.7% in the tax note; verify the appropriate comparator.