Luxfer Reports Third-Quarter 2012 Results

SALFORD, England--(BUSINESS WIRE)-- Luxfer Group (NYSE: LXFR), a global materials technology company, today issued its unaudited financial results for the three-month and nine-month periods ended September 30, 2012.

FINANCIAL HIGHLIGHTS (Unaudited)

 

Three-month periods-
ended September 30,

   

Nine-month periods-
ended September 30,

    2012   2011     2012   2011

Net revenue

$109.2m

 

$113.2m

$345.4m

 

$332.2m

Rare earth chemical surcharge

$5.3m

$28.0m

$36.2m

$52.7m

Revenue   $114.5m   $141.2m     $381.6m   $384.9m

Trading profit

$16.4m $21.2m $52.7m $51.5m

Trading margin

 

14.3%

 

15.0%

   

13.8%

 

13.4%

Net income $10.5m $14.2m $32.5m $32.2m

Net income margin

 

9.2%

 

10.1%

   

8.5%

 

8.4%

Adjusted net income (1)

$10.2m $13.2m $32.3m $31.3m

Adjusted net income margin

 

8.9%

 

9.3%

   

8.5%

 

8.1%

Adjusted EBITDA (2)

$20.0m $24.8m $63.5m $62.2m

Adjusted EBITDA margin

 

17.5%

 

17.6%

   

16.6%

 

16.2%

Pro forma earnings per share  (3)

$0.78 $1.06 $2.43 $2.41

Equivalent per American Depositary Share ("ADS")

 

$0.39

 

$0.53

   

$1.21

 

$1.20

Net cash inflow/(outflow) from operating activities   $6.8m   $3.7m     $51.7m   $(3.4)m
Net Debt   $88.2m   $129.8m     $88.2m   $129.8m

(1)

  Adjusted net income consists of net income adjusted for the post tax impact of other income (expense) items. A reconciliation to net income is disclosed in Note 5 to the interim consolidated financial statements "Reconciliation of non-GAAP measures".

(2)

Adjusted EBITDA consists of profit for the period before tax expense, interest items, other income (expense) items and depreciation and amortization. A reconciliation to net income is disclosed in Note 5 to the interim consolidated financial statements "Reconciliation of non-GAAP measures".

(3)

Pro forma earnings per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding in the period, as adjusted for the Initial Public Offering, as shown in Note 6 to the interim consolidated financial statements "Earnings per share".
 

COMMENTARY FOR THE THREE-MONTH AND NINE-MONTH PERIODS-ENDED SEPTEMBER 30, 2012


INTRODUCTION

Third-quarter net revenue, which excludes rare earth chemical surcharges of $5.3 million, was $109.2 million, down $4.0 million from net revenue of $113.2 million for the same period in 2011. Lower European automotive demand impacted our Elektron division's revenue with underlying revenue, excluding translation and the impact of rare earth surcharges, down 8.2%. However, the impact was partly offset by growing sales for high-performance magnesium alloys and new zirconium industrial chemical catalysis products ("Chemcat"), both of key strategic importance to Luxfer Group going forward. Chemcat revenue grew 66% with sales of $1.5 million for the quarter, representing, we believe, on-going commercial applications rather than just prototype material.

The Gas Cylinders division's revenue grew in the quarter by 4.5%, driven by rising composite cylinder sales and higher demand and revenues in medical oxygen and compressed natural gas ("CNG") alternative fuel markets. This progress was in keeping with profit improvement plans for the division.

2011 profitability was significantly skewed to the third quarter of that year because of some exceptional gains in that quarter, but profits in 2012 have been much more consistent. Overall adjusted EBITDA at $20.0 million for the quarter was as expected, and the trading profit of $16.4 million represented a trading margin of 14.3%. The adjusted EBITDA margin was 17.5%. Adjusted net income was $10.2 million, which represents a margin on sales revenue of 8.9%, above the average for the year of 8.5%.

CEO COMMENTARY

Brian Purves, Chief Executive, Luxfer Holdings PLC, commented:

"Our Q3 of 2012 results are in line with our expectations and consistent with trading profit margins in the first half of this year, with comparisons to prior year distorted by the exceptional gains made in Q3 of 2011. Strategically we made significant progress in this third quarter of 2012, with good progress in sales of industrial catalyst products, and the acquisition of Dynetek Industries, which strengthens our global position in the growing market for alternative fuel gas containment. At a time when many industrial markets and economies remain in or close to recession, we are sowing seeds for future growth and profitability. We expect the recent successful Initial Public Offering on the New York Stock Exchange provides Luxfer with the financial firepower to commercialize the wide range of new products and technologies that we hope to bring to the market in the next few years."

FORWARD LOOKING STATEMENTS

This report contains forward-looking statements.

Examples of such forward-looking statements include, but are not limited to:

(i) statements regarding the Group's results of operations and financial condition,

(ii) statements of plans, objectives or goals of the Group or its management, including those related to financing, products or services,

(iii) statements of future economic performance and

(iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", "intends", "forecasts" and "plans" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. The Group cautions that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to:

(i) future revenues being lower than expected; (ii) increasing competitive pressures in the industry; (iii) 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; (iv) 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; (v) contractual restrictions on the ability of Luxfer Holdings PLC to receive dividends or loans from certain of its subsidiaries; (vi) fluctuations in the price of raw materials and utilities; (vii) currency fluctuations and hedging risks; and (viii) worldwide economic and business conditions and conditions in the industries in which we operate.

The Group cautions that the foregoing list of important factors is not exhaustive. These factors are more fully discussed in the sections "Forward-Looking Statements" and "Risk Factors" in our prospectus dated October 3, 2012 filed with the U.S. Securities and Exchange Commission. When relying on forward-looking statements to make decisions with respect to the Group, investors and others should carefully consider the foregoing factors and other uncertainties and events. Such forward-looking statements speak only as of the date on which they are made, and the Group does not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

INVESTOR PRESENTATION AND CONFERENCE CALL

Luxfer Group will conduct a presentation and conference call on November 13, 2012, at 8:30 a.m. U.S. Eastern Time to discuss the financial results for its third quarter ended September 30, 2012. The U.S. dial-in number is 877 341 8545, and the non-U.S. dial-in number is +1 908 982 4601. The conference ID is 68332278.

Presentation slides for the conference call will also be available via this Internet link: https://event.webcasts.com/starthere.jsp?ei=1010372

ABOUT LUXFER GROUP

Luxfer is a global materials technology company specializing in the design and manufacture of high-performance materials, components and gas cylinders for environmental, healthcare, protection and specialty end-markets. Luxfer customers include both end-users of its products and manufacturers that incorporate Luxfer products into finished goods.

Luxfer products include highly specializedmagnesium alloys, powders, extrusions, plate and rolled sheet used in industrial, aerospace, automotive, defense and medical applications; photo-sensitive magnesium plates used to produce luxury packaging and greeting cards; zirconium chemicals used in automotive and industrial catalysts, filters, electro-ceramics and dental ceramics; high-pressure aluminum and composite gas cylinders used to contain medical oxygen, breathing air for firefighters and other first-responders, compressed natural gas for alternative-fuel vehicles and specialty gases for microchip and electronics manufacturing; and metal panels "superformed" into complex shapes for aerospace, automotive, rail, medical and architectural applications. For more information, visit www.luxfer.com.

Luxfer Group is listed on the New York Stock Exchange and trades under the symbol "LXFR".

TRADING STATEMENT FOR THE THREE-MONTH AND NINE-MONTH PERIODS-ENDED SEPTEMBER 30, 2012

BUSINESS REVIEW

Third-quarter Results

Luxfer Group revenue in the quarter was $114.5 million and, excluding rare earth chemical surcharges, net revenue was $109.2 million. This represents an underlying reduction in net revenue of -1.9% or $2.1 million, when adjusting for a $1.9 million negative impact due to adverse translation exchange rate changes. On a statutory reported basis, revenue was down -18.9%, reflecting a -1.5% negative impact relating to the translation of revenue of non-U.S. operations into U.S. dollars and a -15.9% negative impact on revenue relating to the reduction in the surcharge levied to recover increased rare earth costs.

While trading conditions remained challenging in the third quarter, particularly because of reduced demand from the European automotive sector, demand grew for our composite cylinders, high-performance magnesium alloys and industrial catalyst products.

Though revenues were lower than expected, trading profit in the quarter of $16.4 million is consistent with our expectations for the period and is $4.8 million, or -22.7%, less than the $21.2 million trading profit for the third quarter of 2011. A combination of unique circumstances in the third quarter of 2011 resulted in some exceptional gains and therefore an unusually high trading profit. As we previously stated, this quarter was not indicative of on-going organic growth expectations. Trading profit for the third quarter of 2012 exceeded all other quarters in 2011, as well as the 2010 third-quarter trading profit of $12.1 million.

Divisional Analysis of Revenue and Trading Profit

 
 

THIRD QUARTER 2012

 

THIRD QUARTER 2011

Gas

   

Gas

   

Cylinders

Elektron

Group

Cylinders

Elektron

Group

 

$M

 

$M

 

$M

$M

 

$M

 

$M

Revenue

  57.5   57.0  

114.5

  55.9   85.3  

141.2

Trading profit

  4.0     12.4    

16.4

  1.6     19.6    

21.2

Return on Sales %

7.0% 21.8%

14.3%

2.9% 23.0%

15.0%

Gas Cylinders

The Gas Cylinder division's revenue was $57.5 million in the third quarter of 2012, an increase of $1.6 million from the $55.9 million in the third quarter of 2011. Excluding the $0.9 million adverse impact of exchange rate translation, organic revenue grew by $2.5 million or 4.5% over the third quarter of 2011.

Our strategy of improving the sales mix in traditional aluminum cylinder markets continued in the third quarter of 2012, and while overall unit volumes of aluminum cylinders were lower by -15% compared to the equivalent period of 2011, the change in sales mix resulted in a revenue increase of 2.5% over the same period. We saw strong demand for aluminum cylinders in U.S. beverage and industrial sectors and increased sales of our higher-pressure L7X® cylinders into the European medical market.

Globally, sales volumes of composite cylinders increased by 14% in the third quarter of 2012 compared to the same period in 2011, and revenue was up 16% with growth in both the U.S. and Europe. Demand for composite cylinders in the healthcare sector remains particularly strong. Sales of our patented L7X® composite cylinders in Europe more than doubled compared to the third quarter of 2011 as UK home oxygen providers purchased additional units to support new National Health Service contracts. Sales volumes of large composite cylinders used in alternative fuel vehicle systems were up 8% in the third quarter of 2012 compared to the prior year. This increase excludes any new volumes from Dynetek Industries, which Luxfer acquired towards the end of the quarter.

Component sales at Superform were down in the third quarter of 2012 compared to the third quarter of 2011 due to lower demand from automotive and rail sectors in Europe, but the drop was partially offset by increased demand from U.S. civil and military aerospace sectors.

The Gas Cylinder division's third quarter trading profit of $4.0 million in 2012 represents a significant increase of $2.4 million, or 150%, over the $1.6 million trading profit in the third quarter of 2011. Increased sales volumes, sales mix improvements and higher selling prices raised trading profit by $2.3 million in the quarter. A $0.3 million increase in retirement benefit charges was allocated to the Gas Cylinders division in the quarter compared to the equivalent period of 2011, but other costs decreased by $0.4 million in the same period.

Elektron

The Elektron division's revenue was $57.0 million in the third quarter of 2012, a decrease of $28.3 million from $85.3 million in the third quarter of 2011. The major change was in the scale of rare earth surcharges. During the third quarter of 2012, the average Asian Metal Index quoted price for Cerium Carbonate (oxide contained) was $37 per kilo. By comparison, the equivalent price for the third quarter of 2011 was an extraordinary $230 per kilo. As a result of this cost decrease, the surcharge levied on customers to recover increased rare earth costs fell sharply to $5.3 million in the third quarter of 2012 from the $28.0 million levied in the third quarter of 2011, a reduction of $22.7 million. Unfavorable exchange rate translation also impacted revenue quarter on quarter by $1.2 million. Underlying revenue in the third quarter of 2012, excluding translation and the impact of rare earth surcharges, was $4.6 million less than the third quarter of 2011, an 8.2% decrease.

Underlying zirconium volumes in the third quarter of 2012 were -11% less than in the third quarter of 2011. Quarter-on-quarter sales volumes of our auto-catalyst products were down -25%, mainly as a consequence of lower demand from the European automotive market. Offsetting this reduction were increased sales volumes of industrial catalysts and ceramic oxides. Magnesium volumes were also down -11% in the third quarter of 2012, primarily due to weaker demand for high-volume but lower-grade recycle and commercial-type products, also mainly used in automotive applications which have little profit impact. Of greater strategic importance were sales of our lightweight specialist magnesium alloys and high-performance powders, which increased quarter on quarter by 6% and 10%, respectively.

The Elektron division's trading profit of $12.4 million for the third quarter of 2012 was $7.2 million less than the exceptional trading profit of $19.6 million for the third quarter of 2011, which was not indicative of management's ongoing organic growth expectations. Changes in exchange rates used to translate segment profit into U.S. dollars resulted in a $0.1 million adverse third-quarter impact in 2012.

Lower volumes and other sales and purchase cost movements reduced overall trading profit by $6.0 million in the third quarter of 2012 compared to the prior year. As might be expected, it became difficult to recover all our historic rare earth costs, as spot prices fell. Foreign exchange transaction rates on sales and purchases had a positive quarter-on-quarter effect of $0.3 million, net of the benefit of utilizing foreign exchange derivative contracts. An additional retirement benefit charge of $0.3 million was allocated to the Elektron division in the third quarter of 2012 compared to the same period in 2011, and other costs increased by $1.1 million over the same period.

Operating Profit to Net Income for the Period

Operating profit was $16.4 million compared to $22.8 million for the third quarter of 2011. In addition to changes outlined in trading profit, operating profit in 2011 included a $1.6 million exceptional gain on one- off changes made to the main UK pension scheme in that quarter.

Other income and expenses in the quarter were a gain of $0.3 million (2011: expense of $0.1 million) resulting from Luxfer's acquisition of Dynetek Industries in September 2012. We have performed an initial fair value exercise indicating that the value of assets acquired is $0.3 million higher than the consideration paid to selling shareholders plus the acquisition costs. Valuation work is still ongoing, and this analysis is subject to potential further revisions in the fourth-quarter and year-end audit process. Currently no formal evaluation of the fair value of Dynetek's intangible assets has been performed. Additional analysis of the acquisition can be found in Note 11 to the interim consolidated financial statements.

The net interest charge fell to $1.5 million (2011: $2.3 million) for the third quarter, a result of lower borrowing levels. With the fall in rare earth costs and the related surcharge, working capital was reduced and, in turn, our borrowing costs fell. Part of the surcharge levied in 2011 had been to recover this additional financing cost.

Profit on Operation before tax was $15.2 million in the third quarter of 2012 (2011: $20.4 million). Tax expense was $4.7 million (2011: $6.2 million), giving an effective quarterly rate of tax of 30.9% (2011: 30.4%).

Net Income in the period was $10.5 million (2011: $14.2 million). Adjusting for non-trading exceptional items (being certain acquisition, disposal, rationalization and one-off pension costs), Adjusted net income was $10.2 million (2011: $13.2 million).

Cash Flow and Net Debt

There was a $6.8 million net cash inflow from operating activities in the quarter compared with an inflow of $3.7 million in the third quarter of 2011. Purchases of property, plant and equipment resulted in a cash outflow of $4.2 million (2011: $5.5 million). During the quarter Luxfer Group acquired Dynetek Industries Limited for a cash consideration of $11.0 million (net of cash acquired). In addition, approximately $1 million of acquisition expenses will be paid in the fourth quarter. A third-quarter $3.8 million cash outflow was paid in shareholder dividends.

Luxfer Group had $20.5 million of cash and cash equivalents as at September 30, 2012, compared to an equivalent figure of $8.3 million as at September 30, 2011. As at September 30, 2012, net debt had been reduced to $88.2 million from $129.8 million as at September 30, 2011.

Pro Forma Balance Sheet in Relation to the Initial Public Offering

Included in this report is a pro forma balance sheet to help demonstrate the impact of the Initial Public Offering as if all transactions had occurred as at September 30, 2012, rather than the actual listing date of October 3, 2012, and settlement date of October 9, 2012. On October 31, 2012, we repaid our term loan debt (drawn through our Senior Facilities Agreement) out of the net proceeds of the offering, and in the pro forma analysis, this transaction has also been presented as if it occurred as at September 30, 2012. An explanation of the preparation of this pro forma balance sheet is found in Note 10 to the interim consolidated financial statements.

Nine-Month Period-Ended 30 September 2012

Reported revenues for the nine-month period were $381.6 million compared to $384.9 million for the same period of 2011. Excluding an adverse translation impact of $6.4 million and movement in the rare earth surcharge levied, a reduction of $16.5 million at constant exchange rates, underlying revenue grew $19.6 million, or 6.0%, in the first nine months of 2012 compared with 2011.

Reported trading profit for the nine-month period was $52.7 million compared to $51.5 million for the equivalent period of 2011, up 2.3%. Due to the exceptional profit made in the third quarter of 2011, the Elektron division's trading profit of $41.2 million was down 6%. However, our Gas Cylinders division's strong nine-month trading profit of $11.5 million was up 49% compared to 2011.

Other income in the period was $0.2 million (2011: expense of $0.2 million), and there was a net interest charge of $5.1 million in the same period (2011: $7.0 million). Profit on operations before tax was $47.8 million in the first nine months of 2012 (2011: $45.9 million). Tax expense was $15.3 million in the first nine months of 2012 (2011: $13.7 million), giving an effective rate of tax of 32.0% for the period (2011: 29.8%). Net income in the first nine months of 2012 was $32.5 million compared to $32.2 million for the first nine months of 2011. Adjusted Net Income (see Note 5) was $32.3 million, up 3.2% on $31.3 million for 2011.

A net cash inflow from operating activities of $51.7 million occurred in the first nine months of 2012 compared to an outflow of $3.4 million in the comparable period of 2011, an increase in cash generation of $55.1 million.

Outlook

Two key markets: European automotive and U.S. defense, are weak and given current uncertain economic conditions are likely to remain so for some time. Despite this, we still expect to deliver better trading profits for our current businesses in 2012 than in any prior year. These two markets mainly impact our Elektron division, and so we are not expecting much improvement in Elektron's results until well into 2013, when the European automotive market may be expected to bounce back, or early 2014 when development projects are targeted to stimulate sales growth. The Cylinders and Superform businesses, however, are enjoying good growth in sales and profits, and we expect to see opportunities for our Gas Cylinders division to make a further significant improvement in 2013, taking the Group results forward, with higher revenue and trading profit.

Rare earth prices have fallen significantly in 2012 and managing material inventories while market prices are falling carries more risk than when they are rising. A return to relative stability at affordable prices is to be welcomed, given that several of our development products contain these materials in varying degrees.

As acquired, Dynetek was a loss-making business, and so the short-term impact will be negative, but we are making good progress towards turning the finances of that business around, and the alternative fuel market is expected to be quite buoyant in Q4 2012 and throughout 2013.

 

CONSOLIDATED INTERIM INCOME STATEMENT FOR THE THREE-MONTH AND NINE-

MONTH PERIODS-ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

       

For the three-month

For the nine-month

periods-ended September 30,

periods-ended September 30,

 

2012

    2011  

2012

    2011

CONTINUING OPERATIONS

  Notes  

 

$M

   

 

$M

     

 

$M

   

 

$M

 

REVENUE

  2    

114.5

      141.2        

381.6

      384.9  
Cost of sales        

(84.9

)

    (104.5 )      

(286.8

)

    (290.3 )
Gross profit

29.6

36.7

94.8

94.6
 
Other Income

-

-

-

0.8
Distribution costs

(1.6

)

(1.6 )

(5.0

)

(5.8 )
Administrative expenses

(11.6

)

(13.9 )

(37.1

)

(3

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