Luxfer Holdings plc — Q3 2019 Form 10-Q
Business and period: Luxfer manufactures engineered materials and products through its Gas Cylinders and Elektron segments. The unaudited quarter ended September 29, 2019; year-to-date figures cover the first three quarters of 2019. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Net sales | $107.1m | $129.1m | $344.0m | $377.0m |
| Gross profit / margin | $25.2m / 23.5% | $34.0m / 26.3% | $86.3m / 25.1% | $97.9m / 26.0% |
| Operating income / margin | $6.6m / 6.2% | $15.7m / 12.2% | $10.7m / 3.1% | $43.1m / 11.4% |
| Net income | $5.8m | $12.2m | $5.5m | $33.5m |
| Diluted EPS | $0.21 | $0.44 | $0.20 | $1.22 |
| Adjusted EBITDA (non-GAAP) | $16.7m | $23.0m | $55.4m | $63.6m |
Q3 adjusted net income was $10.0m versus $13.4m; adjusted diluted EPS was $0.36 versus $0.48. Year-to-date adjusted net income was $33.6m versus $35.6m, and adjusted diluted EPS was $1.21 versus $1.29. These measures exclude specified items and are not GAAP results.
- Cash flow: Year-to-date operating cash flow was a use of $13.6m, versus $39.9m provided in 2018. Investing used $4.5m; financing provided $16.5m. Cash, cash equivalents and restricted cash ended at $12.1m, down $2.0m from year-end 2018.
- Debt and liquidity: Reported debt was $105.6m, up from $77.1m at December 31, 2018; net debt was $93.7m versus $63.3m. The revolver had $31.7m drawn. The company reported $150m of committed banking facilities and compliance with debt covenants.
- Balance sheet: Current assets were $187.3m and current liabilities $72.5m. Total assets were $402.4m and shareholders’ equity $179.2m at quarter-end.
- Other: Year-to-date capital expenditures were $10.3m; dividends paid were $10.2m ($0.375 per ordinary share). The year-to-date effective tax rate was 42.7%, compared with 22.8%; management cited non-deductible acquisition and restructuring costs. The adjusted rate was 19.0%.
Material changes and management commentary
- Q3 sales fell 17.0% year over year; first-nine-month sales fell 8.8%. Management said results were behind expectations, with lower industrial demand, destocking in North American shale markets and an 84% Q3 decline in SoluMag sales contributing. Foreign-exchange effects reduced sales by $2.8m in Q3 and $9.9m year to date.
- Elektron Q3 sales decreased 20.9% and adjusted EBITDA decreased 37.7%; the segment faced weaker SoluMag and industrial sales, the Czech recycling business divestiture, adverse mix and temporary inefficiencies after storm-related flooding at its Madison, Illinois facility. Gas Cylinders Q3 sales fell 12.9%, while adjusted EBITDA was flat at $6.3m; cost savings and alternative-fuel cylinder strength partly offset weaker industrial-cylinder and European automotive sales.
- Gross margin declined 2.8 percentage points in Q3, reflecting adverse mix and foreign exchange, partly offset by production-cost reductions. Operating income and net income were also affected by charges and lower pension credits.
- Year-to-date restructuring charges were $24.3m, principally related to closing the French Gas Cylinders site and scaling down production at a Magtech site. Further restructuring costs were expected during 2019. A separate $2.7m Q3 charge covers remediation of legacy low-level naturally occurring radioactive material at a redundant Manchester building; completion was expected in Q2 2020, with no significant additional costs envisaged.
- Acquisition and disposal-related costs were $1.7m year to date, including costs from the terminated Neo Performance Materials acquisition, partly offset by a $2.9m gain on sale of the Czech magnesium recycling business.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management anticipated fiscal 2019 capital expenditures of approximately $15m, said cost-saving initiatives were being accelerated, and highlighted increased growth focus in markets such as Defense.
- Management said operating cash generation should meet longer-term needs and that credit facilities should cover short-term cash-flow variation, while noting that major debt repayments depend on refinancing or substantial operating returns. Weak demand, raw-material and utility costs, currency movements, competition, indebtedness and product-liability claims are among the stated risks.
- The company disclosed product-related injury/property claims. It did not expect the 2014 cylinder incident to have a material financial impact; the cause and liability allocation for a 2018 CNG vehicle fire and explosion remained uncertain, with maximum stated exposure of $1.0m under the insurance deductible.
- There were no material changes to previously disclosed risk factors apart from the further deferral of Brexit, then expected by January 31, 2020. No material pending legal proceedings were reported. Management stated disclosure controls were effective.
Important facts for investors to verify
- Whether weaker industrial and SoluMag demand, along with the Madison plant disruption, continued to pressure sales and Elektron margins.
- Restructuring execution, total remaining costs and realized savings from the French closure and Magtech production changes.
- Operating cash-flow recovery, working-capital requirements, and the effect of increased net debt and revolver borrowings on covenant headroom and liquidity.
- Whether the stated $15m capital-spending outlook and expected limited additional environmental remediation costs remained accurate.
- The resolution and potential financial exposure of the disclosed product-liability matters, and the impact of Brexit, foreign exchange and tax-rate variability.