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
| Metric | Q1 2020 | Q1 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.