Our Gas Cylinders segment manufactures and markets specialized products using composites and aluminum, including pressurized cylinders for use in various applications including self-contained breathing apparatus (SCBA) for firefighters, containment of oxygen and other medical gases for healthcare, alternative fuel vehicles, and general industrial.
Other primarily represents unallocated corporate expense and includes non-service related defined benefit pension cost / credit.
Unallocated assets and liabilities include those which are held on behalf of the Company and cannot be allocated to a segment, such as taxation, investments, cash, retirement benefits obligations, bank and other loans and holding company assets and liabilities.
The following tables present certain geographic information by geographic region for the FirstThird Quarter ended March 27,September 25, 2022, and March 28,September 26, 2021:
(1) Net sales are based on the geographic destination of sale.
(2) Other includes Canada, South America, Latin America and Africa.
15. Commitments and Contingencies
Committed and uncommitted banking facilities
The Company had committed banking facilities of $100.0 million at March 27,September 25, 2022 and December 31, 2021. Of these committed facilities, $36.9$37.6 million was drawn at March 27,September 25, 2022 and $10.8 million at December 31, 2021. The Company also had an additional $50.0 million of uncommitted facilities through an accordianaccordion provision.
The Company also has 2a separate uncommitted(uncommitted) bonding facility for bank guarantee facilities, 1guarantees, denominated in GBP sterling of £0.5 million (2022: $0.7or $0.5 million 2021:(2021: £0.6 million or $0.9 million), and 1 denominated in USD of $0.9 million (2021: $1.5 million). Of that dominated in GBP, £0.1 million ($0.20.1 million) and £0.1 million ($0.2 million) was utilized at March 27,September 25, 2022, and December 31, 2021, respectively. Of that denominated in USD,
The Company has a separate (uncommitted) facility for letters of credit, which at September 25, 2022, was $2.0 million (2021: $1.5 million). $1.1 million and $0.9 million of this was utilized at March 27,September 25, 2022, and December 31, 2021, respectively.
The Company also has a $4.0 million separate overdraft facility of which none was drawn at March 27,September 25, 2022 and at December 31, 2021.
Contingencies
In November 2018, an alleged explosion occurred at a third-party waste disposal and treatment site in Boise, Idaho, reportedly causing property damage, personal injury, and one fatality. We had contracted with a service company for removal and disposal of certain waste resulting from the magnesium powder manufacturing operations at the Reade facility in Lakehurst, New Jersey. We believe this service company, in turn, apparently contracted with the third-party disposal company, at whose facility the explosion occurred, for treatment and disposal of the waste. In November 2020, we were named as a defendant in 3three lawsuits in relation to the incident – 1- one by the third-party disposal company, 1one by the estate of the decedent, and 1one by an injured employee of the third-party disposal company. At present, we have received insufficient information on the cause of the explosion. We do not believe that we are liable for the incident, have asserted such, and, therefore, do not currently expect this matter to have a material impact on the Company’s financial position or results of operations.
16. Subsequent Events
No material events.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Information regarding forward-looking statements
This Interim Report on Form 10-Q contains certain statements, statistics and projections that are, or may be, forward-looking. These forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that could cause our actual results of operations, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results, as well as those of the markets we serve or intend to serve, to differ materially from those expressed in, or suggested by, these forward-looking statements. The accuracy and completeness of all such statements, including, without limitation, statements regarding our future financial position, strategy, plans and objectives for the management of future operations, is not warranted or guaranteed. These statements typically contain words such as "believes," "intends," "expects," "anticipates," "estimates," "may," "will," "should" and words of similar import. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations reflected in such statements are reasonable, no assurance can be given that such expectations will prove to be correct. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. These factors include, but are not limited to, factors identified in "Business," "Risk factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," or elsewhere in this Interim Report, as well as:
•general economic conditions, or conditions affecting demand for the services offered by us in the markets in which we operate, both domestically and internationally, being less favorable than expected;
•worldwide economic and business conditions and conditions in the industries in which we operate;
•post-pandemic impact of COVID-19 and future pandemics;
•fluctuations in the cost and / or availability of of raw materials, labor and utilities,energy, as well as our ability to pass on cost increases to customers;
•currency fluctuations and other financial risks;
•our ability to protect our intellectual property;
•the significant amount of indebtedness we have incurred and may incur, and the obligations to service such indebtedness and to comply with the covenants contained therein;
•relationships with our customers and suppliers;
•increased competition from other companies in the industries in which we operate;
•changing technology;
•our ability to execute and integrate new acquisitions;
•claims for personal injury, death or property damage arising from the use of products produced by us;
•the occurrence of accidents or other interruptions to our production processes;
•changes in our business strategy or development plans, and our expected level of capital expenditure;
•our ability to attract and retain qualified personnel;
•restrictions on the ability of Luxfer Holdings PLC to receive dividends or loans from certain of its subsidiaries;
•climate change regulations and the potential impact on energy costs;
•regulatory, environmental, legislative and judicial developments; and
•our intention to pay dividends.
Please read the sections "Business,""Business" and "Risk factors,"factors" included within the 2021 Annual Report on Form 10-K and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Risk factors" of this Interim Report on Form 10-Q for a more complete discussion of the factors that could affect our performance and the industries in which we operate, as well as those discussed in other documents we file or furnish with the SEC.
About Luxfer
Luxfer Holdings PLC ("Luxfer," "the Company," "we," "our") is a global manufacturer of highly-engineered industrial company innovating niche applications in materials, engineering. Luxferwhich focuses on value creation by using its broad array of technical know-how and proprietary technologies. Luxfer's high-performance materials, components and high-pressure gas containment devicesproducts are used in defense firstand emergency response, and healthcare, transportation, and general industrial applications.settings. For more information, visit www.luxfer.com.
Key trends and uncertainties regarding our existing business
Update on ongoing challenging global macro environment and related impact on supply chain disruption
Demand from most end-markets we serve has continued to improve following the adverse impact of COVID-19
on volumes, notably in 2020. This sharp recovery in demand across the global macro environment has resulted in supply chain challenges characterized by significant increases in material cost inflation on key inputs (including magnesium, aluminum and carbon fiber), labor availability issues and energy and transport cost increases. Additionally, in the prior year we were faced with two critical suppliers of magnesium and zirconium respectively declaring force majeure, of which the former remains in place. The developingcontinuing conflict in Ukraine which has resulted in punitive sanctions against the Russian Federation has further exacerbated the availability
and price of certain raw materials and energy supplies. In response to the supply chain disruption, we have been
successful in securing alternative sources of supply for key material inputs affected by force majeure.
Furthermore, in the majority of cases, we are able to pass through inflation to our customers. Currently, our
expectation is that the impact of material availability / inflation and energy cost inflation and labor and transport
constraints will continue into at least the second half of 2022;2023; that we will be able to source sufficient material to meet demand and that in the majority of cases we expect to be able to pass on cost increases. However the outlook remains highly uncertain with both the size and timing of future cost increases difficult to predict.
Impact of conflict in Ukraine
However the outlook remains highly uncertain with both the size and timing of future cost increases difficult to predict. The Russian invasion of Ukraine and ongoing military conflict which commenced on February 24, 2022, has resulted in massive displacement of the Ukrainian population and huge disruption to its economy. Wide-rangingWide ranging sanctions have been imposed on the Russian Federation by the international community, targeting individuals, banks, businesses, funds transfers and imports and exports and are expected to have a significant adverse impact on Russia's economy as well as on international businesses active in the region. The impact on Luxfer is not expected to be significant as we have no direct operations in the region, and our sales to Russia and Ukraine combined typically represent less than one percent of total revenue by destination. Furthermore, neither country is a critical supplier of our raw material needs, and while Russia is a major global exporter of magnesium, we are able to source the metal from various alternative locations, including China, Israel, Turkey and the United States.
Operating objectives and trends
In 2022, we expect the following operating objectives and trends to impact our business:
•Organic growth initiatives with particular focus on revenue from new products;
•Actions to ensure continuity of supply of critical materials and services while safeguarding margins;margins amid inflationary pressures;
•Proactive response on health and well-being of employees, post pandemic, including continuous improvement on safety;
•Targeted improvements in ESG standing through investment in new projects;
•Continued focus on recruiting and developing talent and driving a high-performance culture; and
•Continued focus on operating cash generation leveraging our recent years' of restructuring activity and targeting strong working capital performance.
CONSOLIDATED RESULTS FROM CONTINUINGOF OPERATIONS
The consolidated results from continuingof operations for the First QuartersThird Quarter of 2022 and 2021 of Luxfer were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | First Quarter | | % / point change | |
| In millions | | 2022 | | 2021 | | | | 2022 v 2021 | | | |
| Net sales | | $ | 97.0 | | | $ | 85.2 | | | | | 13.8 | % | | | |
| Cost of goods sold | | (72.8) | | | (60.0) | | | | | 21.3 | % | | | |
| Gross profit | | 24.2 | | | 25.2 | | | | | (4.0) | % | | | |
| % of net sales | | 24.9 | % | | 29.6 | % | | | | (4.7) | | | | |
| Selling, general and administrative expenses | | (10.7) | | | (10.6) | | | | | 0.9 | % | | | |
| % of net sales | | 11.0 | % | | 12.4 | % | | | | (1.4) | | | | |
| Research and development | | (1.3) | | | (0.8) | | | | | 62.5 | % | | | |
| % of net sales | | 1.3 | % | | 0.9 | % | | | | 0.4 | | | | |
| Restructuring charges | | (1.4) | | | (1.4) | | | | | — | % | | | |
| % of net sales | | 1.4 | % | | 1.6 | % | | | | (0.2) | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Acquisition-related costs | | (0.2) | | | (0.2) | | | | | — | % | | | |
| % of net sales | | 0.2 | % | | 0.2 | % | | | | — | | | | |
| Other charges | | — | | | (1.1) | | | | | n/a | | | |
| % of net sales | | — | % | | 1.3 | % | | | | (1.3) | | | | |
| Operating income | | 10.6 | | | 11.1 | | | | | (4.5) | % | | | |
| % of net sales | | 10.9 | % | | 13.0 | % | | | | (2.1) | | | | |
| Net interest expense | | (0.8) | | | (0.8) | | | | | — | % | | | |
| % of net sales | | 0.8 | % | | 0.9 | % | | | | (0.1) | | | | |
| Defined benefit pension credit | | 0.4 | | | 0.6 | | | | | (33.3) | % | | | |
| % of net sales | | 0.4 | % | | 0.7 | % | | | | (0.3) | | | | |
| Income before income taxes | | 10.2 | | | 10.9 | | | | | (6.4) | % | | | |
| % of net sales | | 10.5 | % | | 12.8 | % | | | | (2.3) | | | | |
| Provision for income taxes | | (2.5) | | | (2.3) | | | | | 8.7 | % | | | |
| Effective tax rate | | 24.5 | % | | 21.1 | % | | | | 3.4 | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Net income / (loss) | | $ | 7.7 | | | $ | 8.6 | | | | | (10.5) | % | | | |
| % of net sales | | 7.9 | % | | 10.1 | % | | | | (2.2) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Third Quarter | | % / point change | |
| In millions | | 2022 | | 2021 | | | | 2022 v 2021 | | | |
| Net sales | | $ | 100.2 | | | $ | 91.2 | | | | | 9.9 | % | | | |
| Cost of goods sold | | (77.0) | | | (70.1) | | | | | 9.8 | % | | | |
| Gross profit | | 23.2 | | | 21.1 | | | | | 10.0 | % | | | |
| % of net sales | | 23.2 | % | | 23.1 | % | | | | 0.1 | | | | |
| Selling, general and administrative expenses | | (10.3) | | | (10.6) | | | | | (2.8) | % | | | |
| % of net sales | | 10.3 | % | | 11.6 | % | | | | (1.3) | | | | |
| Research and development | | (1.0) | | | (1.3) | | | | | (23.1) | % | | | |
| % of net sales | | 1.0 | % | | 1.4 | % | | | | (0.4) | | | | |
| Restructuring charges | | (0.3) | | | (0.5) | | | | | (40.0) | % | | | |
| % of net sales | | 0.3 | % | | 0.5 | % | | | | (0.2) | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Acquisition and disposal related costs | | — | | | (0.6) | | | | | (100.0) | % | | | |
| % of net sales | | — | % | | (0.7) | % | | | | 0.7 | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Operating income | | $ | 11.6 | | | $ | 8.1 | | | | | 43.2 | % | | | |
| % of net sales | | 11.6 | % | | 8.9 | % | | | | 2.7 | | | | |
| Net interest expense | | (1.0) | | | (0.8) | | | | | 25.0 | % | | | |
| % of net sales | | 1.0 | % | | 0.9 | % | | | | 0.1 | | | | |
| Defined benefit pension credit | | 0.2 | | | 0.6 | | | | | (66.7) | % | | | |
| % of net sales | | 0.2 | % | | 0.7 | % | | | | (0.5) | | | | |
| Income before income taxes | | $ | 10.8 | | | $ | 7.9 | | | | | 36.7 | % | | | |
| % of net sales | | 10.8 | % | | 8.7 | % | | | | 2.1 | | | | |
| Provision for income taxes | | (2.3) | | | (1.9) | | | | | 21.1 | % | | | |
| Effective tax rate | | 21.3 | % | | 24.1 | % | | | | (2.8) | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Net income from continuing activities | | $ | 8.5 | | | $ | 6.0 | | | | | 41.7 | % | | | |
| % of net sales | | 8.5 | % | | 6.6 | % | | | | 1.9 | | | | |
The consolidated results of operations for the nine months of 2022 and 2021 of Luxfer were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year-to-date | | % / point change | |
| In millions | | 2022 | | 2021 | | 2022 v 2021 | |
| Net sales | | $ | 306.7 | | | 275.4 | | | 11.4 | % | |
| Cost of goods sold | | (233.6) | | | (203.2) | | | 15.0 | % | |
| Gross profit | | 73.1 | | | 72.2 | | | 1.2 | % | |
| % of net sales | | 23.8 | % | | 26.2 | % | | (2.4) | | |
| Selling, general and administrative expenses | | (32.5) | | | (33.9) | | | (4.1) | % | |
| % of net sales | | 10.6 | % | | 12.3 | % | | (1.7) | | |
| Research and development | | (3.5) | | | (2.9) | | | 20.7 | % | |
| % of net sales | | 1.1 | % | | 1.1 | % | | — | | |
| Restructuring charges | | (2.0) | | | (2.1) | | | (4.8) | % | |
| % of net sales | | 0.7 | % | | 0.8 | % | | (0.1) | | |
| | | | | | | | |
| | | | | | | | |
| Acquisition and disposal related costs | | (0.3) | | | (1.5) | | | (80.0) | % | |
| % of net sales | | 0.1 | % | | (0.5) | % | | 0.6 | | |
| Other charges | | — | | | (1.1) | | | n/a | |
| % of net sales | | — | % | | 0.4 | % | | (0.4) | | |
| Operating income | | 34.8 | | | 30.7 | | | 13.4 | % | |
| % of net sales | | 11.3 | % | | 11.1 | % | | 0.2 | | |
| Net interest expense | | (2.7) | | | (2.4) | | | 12.5 | % | |
| % of net sales | | 0.9 | % | | 0.9 | % | | — | | |
| Defined benefit pension credit | | 0.9 | | | 1.8 | | | (50.0) | % | |
| % of net sales | | 0.3 | % | | 0.7 | % | | (0.4) | | |
| Income from continuing operations | | 33.0 | | | 30.1 | | | 9.6 | % | |
| % of net sales | | 10.8 | % | | 10.9 | % | | (0.1) | | |
| Provision for income taxes | | (7.2) | | | (3.6) | | | 100.0 | % | |
| Effective tax rate | | 21.8 | % | | 12.0 | % | | 9.8 | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Net income from continuing operations | | $ | 25.8 | | | $ | 26.5 | | | (2.6) | % | |
| % of net sales | | 8.4 | % | | 9.6 | % | | (1.2) | | |
Net sales
Adjusting for foreign exchange headwinds of $4.9 million and $9.8 million, net sales have increased by 15.2% and 14.9% in the third quarter and first nine months of 2022 respectively. The passing through of material cost inflation, where not constrained by contract, accounted for approximately 11%14.6% and 13.0% of the 13.8% increase in consolidated net sales in the third quarter and first nine months, respectively, of 2022 from 2021. Furthermore, there was a benefit in the quarter from:
•Additional contribution to net sales in Luxfer Gas Cylinders of $7.1 million due to the acquisition of SCI at the end of the first quarter, 2021, which primarily impacted sales of cylinders used in aerospace and alternative fuels applications;
•Growth inIncreased sales of magnesium powders used in both military and commercial flares;
•Increased sales in our zirconium products; andapplications;
•Increased demand for industrial aluminumcomposite cylinders used in gas calibration.aerospace and medical applications, although constrained by historical contractual prices;
•Increased sales of magnesium alloys, especially those used in aerospace applications; and
•Higher demand for our zirconium products particularly in industrial applications.
These increases were partially offset by:
•Unfavorable foreign exchange variances of $1.2 million;as highlighted above;
•DecreasedSoftening sales of flameless ration heaters ("FRH") and chemicalChemical detection kits, in Luxfer Magtech; and
•LowerAlternative fuel cylinders down on strong quarter in prior year.
Further to the above, the first nine months of the year were also affected by:
•Increased sales of magnesium powders used in alternative fuel (AF) cylinders, excluding SCI, due to timing of orders.military applications; and
•Higher demand for photo-engraving plates
Gross profit
The 4.72.4 percentage point decrease in gross profit as a percentage of sales in the first nine months of 2022 from 2021 was primarily the result of increased material and labor costs and other supply chain investments to overcome disruption, not fully covered by price increases, particularly in the Gas Cylinders Division.
The 0.1 percentage point increase in gross profit as well as lower marginsa percentage of sales in SCI.the third quarter of 2022 from 2021 is a result of positive sales mix between the Elektron and Gas Cylinders Division offsetting the impact of fixed-priced contracts in the Gas Cylinders Division.
Selling, general and administrative expenses ("SG&A")
SG&A costs as a percentage of sales in 2022 from 2021 has decreased by 1.41.3 percentage points and 1.7 percentage points in the quarter and first nine months respectively, largely due to the impact of price increases on revenue, as well as cost reduction programs effected in the prior year. We have also benefited from foreign currency translation of $1.0 million and $1.6 million in the quarter and first nine months respectively.
Research and development costs
Research and development costcosts as a percentage of sales increaseddecreased by 0.4 percentage points in the third quarter and remained flat for the first nine months of 2022 relative to 2021 or $0.5respectively. The reduction in the quarter has brought the year-to-date spend in line with the prior year. There has been a $0.1 million as activity levels picked up as we recovered fromimpact due to foreign exchange, accounting for half of the COVID-19 economic downturn.percentage point reduction.
Restructuring charges
The $1.4$0.3 million and $2.0 million restructuring charge in the third quarter and first nine months of 2022 relates solelypredominantly to costs associated with the closure of Luxfer Gas Cylinders France, which ceased operations in 2019. There was $0.2 million recognized in the second quarter of 2022 relating to one-time employee termination benefits in the Elektron division in relation to the consolidation of production facilities in the Magnesium Powders operations.
The $1.4$0.5 million and $2.1 million restructuring charge in the third quarter and first nine months of 2021 included $0.5$0.3 million as a resultand $1.1 million respectively of further costs associated with the previously announced closure of Luxfer Gas Cylinders France, which wereand was largely legal and professional fees; and $0.9Mfees. The first nine months of 2021 also includes $0.9 million of one-time employee termination benefits in the Elektron division, largely in relation to the planned divestiture of our small Luxfer MagtechElektron production facility in Ontario, Canada.
Acquisition-relatedAcquisition and disposal related costs
Acquisition relatedNet costs of $0.2$0.3 million incurred in the first nine months of 2022 and $0.6 million and $1.5 million in 2022the third quarter and first nine months of 2021 respectively, represents amounts incurred in relation to the acquisition of SCI.Structural Composites Industries.
Other charges
Other charges in the First Quarterfirst nine months of 2021 relates to the settlement of a class action lawsuit in the Gas Cylinders segment in relation to an alleged historic violation of the Californian Labor Code, concerning aan Human Resources administration matter.
Net interest expense
Net interest expense of $1.0 million in the third quarter of 2022 increased $0.2 million from $0.8 million in the third quarter 2021,due to combination of increased interest rates and higher drawings. Interest expense of $2.7 million in the first nine months of 2022 was flat compared to 2021 as average debt levels were consistent year-over-year.also higher than the $2.4 million in the first nine months of 2021.
Defined benefit pension credit
The $0.2$0.4 million and $0.9 million decrease in defined benefit pension credit to $0.4$0.2 million and $0.9 million in the third quarter and first nine months of 2022 from $0.6 million and $1.8 million in 2021 is primarily due to the combined effect on the U.K. plan of lower projected asset returns and a higher inflation projection.projection coupled with the weakening of the pound sterling.
Provision for income taxes
The movement in the statutory effective tax rate from 21.1%12.0% in 2021, to 24.5%21.8% in 2022, was impacted primarily bydue to the impact of the enacted tax rate change in geographic profit mix.the U.K. in 2021, which is due to rise from 19% to 25% in April 2023. The subsequent increase in the value of deferred tax assets related to our defined benefit pension plan resulted in a credit of $2.2 million recorded in our tax charge in the second quarter of 2021. When stripping out the effectimpact of this, as well as other less significant adjusting items, the non-deductible restructuring expenses, our adjusted effective tax rate has increased to 22.0%21.5% in 2022 from 20.4%21.2% in 2021.
2021, largely as a result of jurisdictional profit mix.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO GAAP MEASURES FROM CONTINUING OPERATIONS
The following table of non-GAAP summary financial data presents a reconciliation of net income to adjusted net income for the periods presented, being the most comparable GAAP measure. Management believes that adjusted net income, adjusted earnings per share, adjusted EBITA and adjusted EBITDA are key performance indicators (KPIs) used by the investment community and that such presentation will enhance an investor’s understanding of the Company's operational results. In addition, Luxfer's CEO and other senior management use these KPIs, among others, to evaluate business performance. However, investors should not consider adjusted net income and adjusted earnings per share in isolation as an alternative to net income and earnings per share when evaluating Luxfer's operating performance or measuring Luxfer's profitability.
| | | | | | | | | | | | | | | |
| | First Quarter | |
| In millions except per share data | 2022 | | 2021 | | | |
| Net income | $ | 7.7 | | | $ | 8.6 | | | | |
| Accounting charges relating to acquisitions and disposals of businesses: | | | | | | |
| | | | | | | |
| Amortization on acquired intangibles | 0.2 | | | 0.2 | | | | |
| Acquisition costs | 0.2 | | | 0.2 | | | | |
| Defined benefit pension credit | (0.4) | | | (0.6) | | | | |
| Restructuring charges | 1.4 | | | 1.4 | | | | |
| | | | | | | |
| Other charges | — | | | 1.1 | | | | |
| | | | | | | |
| Share-based compensation charges | 0.2 | | | 0.5 | | | | |
| | | | | | | |
| | | | | | | |
| Income tax on adjusted items | (0.1) | | | (0.5) | | | | |
| Adjusted net income | $ | 9.2 | | | $ | 10.9 | | | | |
| | | | | | | |
| Adjusted earnings per ordinary share | | | | | | |
| Diluted earnings per ordinary share | $ | 0.28 | | | $ | 0.31 | | | | |
| Impact of adjusted items | 0.05 | | | 0.08 | | | | |
| Adjusted diluted earnings per ordinary share(1) | $ | 0.33 | | | $ | 0.39 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Year-to-date | |
| In millions except per share data | 2022 | | 2021 | | 2022 | | 2021 | |
| Net income from continuing operations | $ | 8.5 | | | $ | 6.0 | | | $ | 25.8 | | | $ | 26.5 | | |
| Accounting charges relating to acquisitions and disposals of businesses: | | | | | | | | |
| | | | | | | | | |
| Amortization on acquired intangibles | 0.2 | | | 0.3 | | | 0.6 | | | 0.7 | | |
| Acquisition and disposal related costs | — | | | 0.6 | | | 0.3 | | | 1.5 | | |
| Defined benefit pension credit | (0.2) | | | (0.6) | | | (0.9) | | | (1.8) | | |
| Restructuring charges | 0.3 | | | 0.5 | | | 2.0 | | | 2.1 | | |
| | | | | | | | | |
| Other charges | — | | | — | | | — | | | 1.1 | | |
| | | | | | | | | |
| Share-based compensation charges | 0.9 | | | 0.8 | | | 1.8 | | | 2.2 | | |
| | | | | | | | | |
| Other non-recurring tax items(1) | — | | | — | | | — | | | (2.2) | | |
| Income tax on adjusted items | (0.1) | | | (0.4) | | | (0.7) | | | (1.8) | | |
| Adjusted net income | $ | 9.6 | | | $ | 7.2 | | | $ | 28.9 | | | $ | 28.3 | | |
| | | | | | | | | |
| Adjusted earnings per ordinary share | | | | | | | | |
| Diluted earnings per ordinary share | $ | 0.31 | | | $ | 0.21 | | | $ | 0.93 | | | $ | 0.94 | | |
| Impact of adjusted items | 0.04 | | | 0.05 | | | 0.12 | | | 0.07 | | |
| Adjusted diluted earnings per ordinary share(2) | $ | 0.35 | | | $ | 0.26 | | | $ | 1.05 | | | $ | 1.01 | | |
(1)Other non-recurring tax items represents the impact of the enacted U.K. tax rate change (from 19% to 25% with effect from April 2023) on deferred tax assets related to our U.K. defined benefit pension plan.
(2) For the purpose of calculating diluted earnings per share, the weighted average number of ordinary shares outstanding during the financial year has been adjusted for the dilutive effects of all potential ordinary shares and share options granted to employees, except where there is a loss in the period, then no adjustment is made.
| | | | | | | | | | | | | | | |
| | First Quarter | |
| In millions | 2022 | | 2021 | | | |
| Adjusted net income | $ | 9.2 | | | $ | 10.9 | | | | |
| Add back: | | | | | | |
| | | | | | | |
| | | | | | | |
| Income tax on adjusted items | 0.1 | | | 0.5 | | | | |
| Provision for income taxes | 2.5 | | | 2.3 | | | | |
| Net finance costs | 0.8 | | | 0.8 | | | | |
| Adjusted EBITA | $ | 12.6 | | | $ | 14.5 | | | | |
| | | | | | | |
| Depreciation | 3.5 | | | 3.2 | | | | |
| Adjusted EBITDA | $ | 16.1 | | | $ | 17.7 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Year-to-date | |
| In millions | 2022 | | 2021 | | 2022 | | 2021 | |
| Adjusted net income | $ | 9.6 | | | $ | 7.2 | | | $ | 28.9 | | | $ | 28.3 | | |
| Add back: | | | | | | | | |
| | | | | | | | | |
| Other non-recurring tax items | — | | | — | | | — | | | 2.2 | | |
| Income tax on adjusted items | 0.1 | | | 0.4 | | | 0.7 | | | 1.8 | | |
| Provision for income taxes | 2.3 | | | 1.9 | | | 7.2 | | | 3.6 | | |
| Net finance costs | 1.0 | | | 0.8 | | | 2.7 | | | 2.4 | | |
| Gain on disposal of PPE | — | | | — | | | (0.2) | | | — | | |
| Adjusted EBITA | $ | 13.0 | | | $ | 10.3 | | | $ | 39.3 | | | $ | 38.3 | | |
| Depreciation | 3.1 | | | 3.5 | | | 9.8 | | | 10.5 | | |
| Adjusted EBITDA | $ | 16.1 | | | $ | 13.8 | | | $ | 49.1 | | | $ | 48.8 | | |
The following table presents a reconciliation for the adjusted effective tax rate, which management believes is a KPI used by the investment community and that such presentation will enhance an investor’s understanding of the Company's operational results.
| | | | | | | | | | | | | | | |
| | First Quarter | |
| In millions | 2022 | | 2021 | | | |
| Adjusted net income | $ | 9.2 | | | $ | 10.9 | | | | |
| Add back: | | | | | | |
| | | | | | | |
| | | | | | | |
| Income tax on adjusted items | 0.1 | | | 0.5 | | | | |
| Provision for income taxes | 2.5 | | | 2.3 | | | | |
| Adjusted income before income taxes | $ | 11.8 | | | $ | 13.7 | | | | |
| | | | | | | |
| Adjusted provision for income taxes | 2.6 | | | 2.8 | | | | |
| Adjusted effective tax rate | 22.0 | % | | 20.4 | % | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Year-to-date | |
| In millions | 2022 | | 2021 | | 2022 | | 2021 | |
| Adjusted net income | $ | 9.6 | | | $ | 7.2 | | | $ | 28.9 | | | $ | 28.3 | | |
| Add back: | | | | | | | | |
| | | | | | | | | |
| Other non-recurring tax items | — | | | 2.2 | | | — | | | 2.2 | | |
| Income tax on adjusted items | 0.1 | | | 0.4 | | | 0.7 | | | 1.8 | | |
| Provision for income taxes | 2.3 | | | 1.9 | | | 7.2 | | | 3.6 | | |
| Adjusted income before income taxes | $ | 12.0 | | | $ | 11.7 | | | $ | 36.8 | | | $ | 35.9 | | |
| Adjusted provision for income taxes | 2.4 | | | 4.5 | | | 7.9 | | | 7.6 | | |
| Adjusted effective tax rate | 20.0 | % | | 38.5 | % | | 21.5 | % | | 21.2 | % | |
SEGMENT RESULTS OF OPERATIONS
The summary that follows provides a discussion of the results of operations of each of our two reportable segments (Gas Cylinders and Elektron). Both segments comprise various product offerings that serve multiple end markets.
Adjusted EBITDA represents operating income adjusted for share based compensation charges; lossgain on disposal of property, plant and equipment, restructuring charges; impairment charges; acquisition and disposal related gains and costs; other charges; depreciation and amortization; and unwind of discount on deferred consideration.amortization. A reconciliation to net income and taxes can be found in Note 14 to the condensed consolidated financial statements.
GAS CYLINDERS
The net sales and adjusted EBITDA for Gas Cylinders were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | First Quarter | | % / point change | |
| In millions | | 2022 | | 2021 | | | | 2022 v 2021 | | | |
| Net sales | | $ | 42.4 | | | $ | 36.2 | | | | | 17.1 | % | | | |
| Adjusted EBITDA | | 2.7 | | | 6.0 | | | | | (55.0) | % | | | |
| % of net sales | | 6.4 | % | | 16.6 | % | | | | (10.2) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Third Quarter | % / point change | | Year-to-date | | % / point change | |
| In millions | | 2022 | | 2021 | | 2022 v 2021 | | 2022 | | 2021 | | 2022 v 2021 | |
| Net sales | | $ | 43.4 | | | $ | 45.6 | | | (4.8)% | | $ | 131.9 | | | $ | 128.3 | | | 2.8% | |
| Adjusted EBITDA | | 3.4 | | | 5.4 | | | (37.0)% | | 9.8 | | | 16.7 | | | (41.3)% | |
| % of net sales | | 7.8 | % | | 11.8 | % | | (4.0) | | 7.4 | % | | 13.0 | % | | (5.6) | |
Net sales
The 17.1% increase4.8% decrease in Gas Cylinders sales in the third quarter of 2022 from 2021 was primarily the result of:
•IncreasedContinued reduction in sales of aluminum products;
•Reduction in alternative fuel and SCBA cylinder sales; and
•$2.6 million FX headwind.
These decreases have been partially offset by:
•Increased demand for composite cylinders used in aerospace; and
•Improved sales of medical oxygen cylinders.
Net sales in Gas Cylinders are still being impacted by the fixed-price contracts in place across the Division.
The first nine months of 2022 has benefited from $7.1 million of sales due to the acquisition of SCI at the end of the first quarter of 2021, which has positively impacted sales of cylinders used in aerospace and alternative fuels ("AF") applications; and
•Increased sales of cylinders for gas calibration and other industrial applications;
These decreases were partially offset by lower AF sales, excluding SCI, due to timing of orders and unfavorable foreign exchange of $0.4 million.
applications.
Adjusted EBITDA
The 10.24.0 percentage point and 5.6 percentage point decrease in adjusted EBITDA for Gas Cylinders as a percentage of net sales in the third quarter and first nine months of 2022 fromrelative to 2021 was primarily the resultcontinue to be impacted by timing of the losses incurred by the acquired SCI business and supply chain inflation not fully covered by price rises.
contractually constrained cost pass-through, though improving. Cost reduction effort activities more than offset adverse foreign exchange impact.
ELEKTRON
The net sales and adjusted EBITDA for Elektron were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | First Quarter | | % / point change | |
| In millions | | 2022 | | 2021 | | | | 2022 v 2021 | | | |
| Net sales | | $ | 54.6 | | | $ | 49.0 | | | | | 11.4 | % | | | |
| Adjusted EBITDA | | 13.4 | | | 11.7 | | | | | 14.5 | % | | | |
| % of net sales | | 24.5 | % | | 23.9 | % | | | | 0.6 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Third Quarter | | % / point change | | Year-to-date | | % / point change | |
| In millions | | 2022 | | 2021 | | 2022 v 2021 | | 2022 | | 2021 | | 2022 v 2021 | |
| Net sales | | $ | 56.8 | | | $ | 45.6 | | | 24.6% | | $ | 174.8 | | | $ | 147.1 | | | 18.8% | |
| Adjusted EBITDA | | 12.7 | | | 8.4 | | | 51.2% | | 39.3 | | | 32.1 | | | 22.4% | |
| % of net sales | | 22.4 | % | | 18.4 | % | | 4.0 | | 22.5 | % | | 21.8 | % | | 0.7 | |
Net sales
The 11.4%24.6% and 18.8% increase in Elektron sales in the third quarter and first nine months, respectively, of 2022 from 2021 was primarily the result of:
•Increased sales of magnesium powders supplied for military andused in commercial flares; andapplications;
•Growth inImproved sales of zirconium products including auto-catalysis.catalysis and traditional oxides; and
•Increased demand for magnesium used in the aerospace market.
These increases were partially offset by:
•Decreaseby a decrease in sales of flameless ration heaters, heater meals and chemical detectionresponse kits insupplied by Luxfer Magtech; andMagtech.
•Unfavorable foreign exchange movementsNet sales were also impacted by $2.3 million of $0.8 millionFX headwinds.
Adjusted EBITDA
The 0.64.0 and 0.7 percentage point increase in adjusted EBITDA for Elektron as a percentage of net sales in the third quarter and first nine months respectively of 2022 from 2021 was primarily the result of pricethe Division's ability to pass on the continued inflationary cost increases, partially offset by supply chain inflation.as well as the benefit of positive foreign exchange variances.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements arise primarily from obligations under our indebtedness, capital expenditures, acquisitions, the funding of working capital and the funding of hedging facilities to manage foreign exchange and commodity purchase price risks. We meet these requirements primarily through cash flows from operating activities, cash deposits and borrowings under the Revolving Credit Facility and accompanying ancillary hedging facilities and the Loan Notes due, 2023 and 2026. Our principal liquidity needs are:
•funding acquisitions, including deferred contingent consideration payments;
•capital expenditure requirements;
•payment of shareholder dividends;
•servicing interest on the Loan Notes, which is payable at each quarter end, in addition to interest and / or commitment fees on the Senior Facilities Agreement;
•working capital requirements, particularly in the short term as we aim to safeguard the business from supply chain constraints, as well as to achieve organic sales growth; and
•hedging facilities used to manage our foreign exchange risks.
From time to time, we consider acquisitions or investments in other businesses that we believe would be appropriate additions to our business.
We believe that, in the long term, cash generated from our operations will be adequate to meet our anticipated requirements for working capital, capital expenditures and interest payments on our indebtedness. In the short term, we believe we have sufficient credit facilities to cover any variation in our cash flow generation. However, any major repayments of indebtedness will be dependent on our ability to raise alternative financing or to realize substantial returns from operational sales. Also, our ability to expand operations through sales development and capital expenditures could be constrained by the availability of liquidity, which, in turn, could impact the profitability of our operations.
We have been in compliance with the covenants under the Loan Notes and the Senior Facilities Agreement throughout all of the quarterly measurement dates from and including September 30, 2011, to March 27,September 25, 2022.
Luxfer conducts all of its operations through its subsidiaries, joint ventures and affiliates. Accordingly, Luxfer's main cash source is dividends from its subsidiaries. The ability of each subsidiary to make distributions depends on the funds that a subsidiary receives from its operations in excess of the funds necessary for its operations, obligations or other business plans. We have not historically experienced any material impediment to these distributions, and we do not expect any local legal or regulatory regimes to have any impact on our ability to meet our liquidity requirements in the future. In addition, since our subsidiaries are wholly-owned, our claims will generally rank junior to all other obligations of the subsidiaries. If our operating subsidiaries are unable to make distributions, our growth may slow, unless we are able to obtain additional debt or equity financing. In the event of a subsidiary's liquidation, there may not be assets sufficient for us to recoup our investment in the subsidiary.
Our ability to maintain or increase the generation of cash from our operations in the future will depend significantly on the competitiveness of and demand for our products, including our success in launching new products. Achieving such success is a key objective of our business strategy. Due to commercial, competitive and external economic factors, however, we cannot guarantee that we will generate sufficient cash flows from operations or that future working capital will be available in an amount sufficient to enable us to service our indebtedness or make necessary capital expenditures.
Cash Flows
Operating activities
Cash used inby operating activities was $9.3$3.2 million infor the first quarter ofnine months in 2022. It was primarily related to net income from operating activities offset by a significant increaseincreases in working capital related to inventory build to protect supply chain, and net of the following non-cash items: depreciation and amortization,amortization; share-based compensation charges; pension contributionscredit and net changes to assets and liabilities.
Cash generated fromprovided by operating activities was $15.2$34.1 million in the first quarternine months of 2021. It was primarily related to net income from operating activities, net of the following non-cash items: depreciation and amortization; asset impairment charges, pension contributionscredit and net changes to assets and liabilities.
Investing activities
Net cash used forby investing activities was $1.0$1.5 million infor the first quarter ofnine months off 2022, compared to net cash provided byused for investing activities of $0.3$1.2 million in the first quarter of 2021. The2021.The movement was primarily due the $3.7 million cash received in relation to acquisitions and disposals which occurred in 2021, there were no such eventsthe sale of our previously held-for-sale building in the first quarterElektron division and the $0.4 million reduction in capital expenditures. In 2021, we also received net, $4.4 million from the divestiture of 2022. In addition, capital expenditure decreased from $1.4 millionour U.S. aluminum gas cylinder facility in the first quarterU.S. and acquisition of 2021, to $1.0 million in the first quarter of 2022. We anticipate capital expenditures for fiscal 2022 to be approximately $10 million to $12 million.SCI.
Financing activities
In the first nine months of 2022, net cash provided fromby financing activities was $21.4$12.7 million (2021: $14.8$19.3 million inflow)used for financing activities). We made net drawdownsdrawdown on our banking facilities of $26.7$31.7 million (2021: $19.5$4.4 million drawdown)repayment) and dividend payments of $3.4$10.6 million (2021: $3.4$10.2 million), equating to $0.125$0.385 and $0.375 per ordinary share.share respectively. In addition, we extendedpaid out $1.4 million (2021: $1.9 million) in settling share based compensation and $6.9 million (2021: $2.8 million) in repurchasing our own shares as part of the share buyback program announcedwhich equates to 350,000 shares (2021: 90,000 shares).
Capital Resources
Dividends
We paid year-to-date dividends in 2021, purchasing 60,100 ordinary shares totaling $1.52022 of $10.6 million in the first quarter of 2021. On March 10, 2022 we declared a $3.6(2021: $10.2 million dividend,year-to-date), or $0.13$0.385 per ordinary share to be paid May 4, 2022.(2021: $0.375).
Any payment of dividends is also subject to the provisions of the U.K. Companies Act, according to which dividends may only be paid out of profits available for distribution determined by reference to financial statements prepared in accordance with the Companies Act and UK-adopted International Accounting Standards,IFRS as adopted by the E.U., which differ in some respects from GAAP. In the event that dividends are paid in the future, holders of the ordinary shares will be entitled to receive payments in U.S. dollars in respect of dividends on the underlying ordinary shares in accordance with the deposit agreement. Furthermore, because we are a holding company, any dividend payments would depend on cash flows from our subsidiaries.
Authorized shares
Our authorized share capital consists of 40.0 million ordinary shares with a par value of £0.50 per share.
Contractual obligations
The following summarizes our significant contractual obligations that impact our liquidity:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period | |
| | Total | | Less than 1 year | | 1 – 3 years | | 3 – 5 years | | After 5 years | |
| | (in $ million) | |
| Contractual cash obligations | | | | | | | | | | |
| | | | | | | | | | | |
| Loan Notes due 2023 | $ | 25.0 | | | $ | — | | | $ | 25.0 | | | $ | — | | | $ | — | | |
| Loan Notes due 2026 | 25.0 | | | — | | | — | | | 25.0 | | | — | | |
| Revolving credit facility | 36.9 | | | — | | | — | | | 36.9 | | | — | | |
| | | | | | | | | | | |
| Obligations under operating leases | 28.7 | | | 4.8 | | | 8.8 | | | 6.5 | | | 8.6 | | |
| Capital commitments | 1.0 | | | 1.0 | | | — | | | — | | | — | | |
| Interest payments | 21.9 | | | 4.1 | | | 10.1 | | | 2.3 | | | 5.4 | | |
| Total contractual cash obligations | $ | 138.5 | | | $ | 9.9 | | | $ | 43.9 | | | $ | 70.7 | | | $ | 14.0 | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period | |
| | Total | | Less than 1 year | | 1 – 3 years | | 3 – 5 years | | After 5 years | |
| | (in $ million) | |
| Contractual cash obligations | | | | | | | | | | |
| Loan Notes due 2023 | $ | 25.0 | | | $ | 25.0 | | | $ | — | | | $ | — | | | $ | — | | |
| Loan Notes due 2026 | 25.0 | | | — | | | — | | | 25.0 | | | — | | |
| Revolving credit facility | 37.6 | | | — | | | — | | | 37.6 | | | — | | |
| Obligations under operating leases | 33.3 | | | 5.5 | | | 11.1 | | | 7.3 | | | 9.4 | | |
| Capital commitments | 0.9 | | | 0.9 | | | — | | | — | | | — | | |
| Interest payments | 17.2 | | | 3.8 | | | 6.8 | | | 6.6 | | | — | | |
| Total contractual cash obligations | $ | 139.0 | | | $ | 35.2 | | | $ | 17.9 | | | $ | 76.5 | | | $ | 9.4 | | |
| | | | | | | | | | | |
Off-balance sheet measures
At March 27,September 25, 2022, we had no off-balance sheet arrangements other than thosethe two bonding facilities disclosed in Note 15 to the consolidated financial statements.15.
NEW ACCOUNTING STANDARDS
See Note 1 of the Notes to Condensed Consolidated Financial Statements for information pertaining to recently adopted accounting standards or accounting standards to be adopted in the future.
CRITICAL ACCOUNTING POLICIES
We have adopted various accounting policies to prepare the consolidated financial statements in accordance with GAAP. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. In our 2021 Annual Report on Form 10-K, filed with the SEC on February 24, 2022, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements.
Item 3. Quantitative and qualitative disclosures about market risk
There have been no material changes in our market risk during the quarterfirst nine months ended March 27,September 25, 2022. For additional information, refer to Item 7A of our 2021 Annual Report on Form 10-K, filed with the SEC on February 24, 2022.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter ended March 27,September 25, 2022, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective, at a reasonable assurance level, as of the quarter ended March 27,September 25, 2022, to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 27,September 25, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in various lawsuits and is subject to various claims that arise in the normal course of business, the most significant of which are summarized in Note 15 (commitments and contingencies) to the consolidated financial statements in ITEM 1. In the opinion of management, the likelihood that the ultimate disposition of these matters will have a material adverse impact is remote.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Item 1A. of our 2021 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 6. Exhibits
101 The financial statements from the Company’s Interim Report on Form 10-Q for the quarter and year ended March 27,ended September 25, 2022, formatted in XBRL: (i) Condensed Consolidated Statements of Income, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Changes in Equity, and (vi) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | |
| | | Luxfer Holdings plc | |
| | | (Registrant) | |
| | | | |
| | | /s/Alok MaskaraAndrew Butcher | |
| | | Alok MaskaraAndrew Butcher | |
| | | Chief Executive Officer | |
| | | (Duly Authorized Officer) | |
| | | AprilOctober 25, 2022 | |