Luxfer Holdings plc — Q1 2023 Form 10-Q
Reporting period: First quarter ended April 2, 2023 (13 weeks); comparative quarter ended March 27, 2022. Unaudited results are presented in U.S. dollars.
Business context and results
Luxfer is a global industrial materials and gas-containment company operating through its Gas Cylinders and Elektron segments. Superform is classified as discontinued operations following the decision to exit certain aluminum product lines; the company expected its sale in 2023.
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $101.3 million | $97.0 million | +4.4% |
| Gross profit / margin | $21.1 million / 20.8% | $24.2 million / 24.9% | Margin down 4.1 points |
| Operating income / margin | $7.1 million / 7.0% | $10.6 million / 10.9% | Operating income down 33.0% |
| Net income from continuing operations | $0.5 million | $7.7 million | Down 93.5% |
| Diluted EPS | $0.02 | $0.28 | — |
| Adjusted EBITDA | $11.3 million | $16.1 million | Down 29.8% |
| Adjusted diluted EPS | $0.20 | $0.33 | — |
| Operating cash flow | $(14.4) million | $(9.3) million | Cash use increased |
| Capital expenditures | $2.0 million | $1.0 million | — |
Segments and material changes
- Gas Cylinders: Sales were $41.5 million, down 2.1%; adjusted EBITDA was $2.5 million versus $2.7 million. Alternative-fuel cylinder sales and foreign exchange weighed on sales; SCBA and medical oxygen cylinders partly offset declines.
- Elektron: Sales were $59.8 million, up 9.5%; adjusted EBITDA fell to $8.8 million from $13.4 million. Growth in magnesium alloys, zirconium products and chemical detection kits was offset by lower sales or timing in several product lines. The segment’s results included $1.1 million of legal costs.
- Consolidated sales growth included approximately $11.1 million from passing through material-cost inflation, where contracts allowed; foreign-exchange headwinds were $2.3 million. Higher material and labor costs and supply-chain investments were not fully offset by pricing, reducing gross margin.
- SG&A rose to $12.5 million from $10.7 million, including the noted legal costs. Restructuring charges declined to $0.3 million from $1.4 million.
Cash, debt and liquidity
- Cash and cash equivalents were $1.8 million at April 2, 2023, down from $12.6 million at year-end 2022; cash, cash equivalents and restricted cash totaled $2.1 million at quarter-end.
- Total debt was $91.4 million, compared with $81.2 million at December 31, 2022. The revolving credit facility balance rose to $42.2 million after a $9.9 million net draw; $82.8 million remained undrawn. The $25.0 million loan note due in 2023 was current.
- Management reported compliance with debt covenants and stated it believed available credit facilities were sufficient for short-term cash-flow variation. It also cautioned that major debt repayments depend on alternative financing or substantial operating returns.
- Working capital was a significant cash use: inventory increased to $129.4 million from $111.1 million, principally as the company built inventory to protect against supply-chain constraints. Operating cash flow also included a $2.3 million contribution related to the U.S. pension settlement.
- Q1 financing cash flow was $5.3 million, including $9.9 million of net borrowing and $3.5 million of dividends paid. A further $3.5 million dividend, or $0.13 per share, was declared after quarter-end.
Outlook, risks and unusual items
- The filing gives no numerical earnings or revenue guidance. Management expected supply, material and labor cost pressures, energy and transport inflation, and constraints to persist through 2023. It expected sufficient materials to meet demand and to pass on most cost increases, while describing the outlook as highly uncertain.
- A force majeure remained in effect for a key U.S.-sourced magnesium supplier, with supply not expected to resume before at least Q3 2023; Luxfer said it had secured alternative sources outside the U.S. Some Gas Cylinders customer contracts constrain pricing pass-through, with the longest-running contract not renewable until mid-2024.
- The $8.9 million defined-benefit pension charge included a $9.2 million charge related to transferring the U.S. pension liability to an insurer, partly offset by a U.K. pension credit. The transaction included $2.3 million cash and $6.9 million from derecognizing the liability and reallocating accumulated actuarial losses. A $4.9 million tax impact was included in the company’s adjusted-results reconciliation.
- The reported effective tax rate was 116.1%, primarily reflecting non-deductible items and a deferred tax credit associated mainly with the pension buyout; the adjusted effective tax rate was 21.7%.
- Luxfer is defending lawsuits related to a 2018 explosion at a third-party waste-treatment site. Management said it did not expect a material financial impact. The filing reported no material changes to previously disclosed risk factors or market risks and no material subsequent events.
- Management’s stated priorities included revenue growth, supply continuity, productivity and pricing actions, ESG investment, talent development, and cash generation and working-capital discipline.
Most important facts for investors to verify
- Whether pricing actions and cost recovery improve gross margins amid continued input-cost inflation and contract restrictions.
- Whether alternative magnesium sourcing remains adequate, and whether supplier resumption occurs on the expected timeline.
- Working-capital and inventory trends, operating cash generation, and the company’s ability to fund dividends and debt obligations.
- Repayment or refinancing plans for the $25.0 million loan note due in 2023 and compliance with borrowing covenants.
- Completion and proceeds of the planned Superform business sale, and developments in the third-party explosion litigation.