IPO Preview: Luxfer Holdings PLC

| About: Luxfer Holdings (LXFR)

Based in Salford, England, Luxfer Holdings PLC (proposed LXFR) scheduled a $151 million IPO with a market capitalization of $392 million at a price range mid-point of $14 for Wednesday, December 14, 2011. A total of 11 IPOs to raise $3.5 billion the week of December 12, includes Zynga. See the full IPO calendar.


LXFR sales are up 27% to $385 million from $302 million for the nine months ended September 2011. For the same period profits are up 68% to $32 million from $19 million


In terms of the price-to-earnings ratio, LXFR is priced at a significant discount. Allegheny Technology (NYSE:ATI) and RTI International (NYSE:RTI), are in the same broadly defined industry and compete in general with LXFR’s Elektron division, which contributed 85% of operating profit for the nine months ended September 2011. LXFR’s gross profit is higher than either ATI’s or RTI’s.


LXFT is in a cyclical business that is doing well in 2011, and it has been consistently profitable, although profits have been uneven.

At an annualized price/earnings ratio of 9, LXFR seems attractively priced. If LXFR breaks the IPO price then it might be a good trade a week or so out


LXFR has two divisions. The Elektron division focuses on specialty materials based on magnesium, zirconium and rare earths. The other division makes gas cylinders.

Customers include both end-users and manufacturers that incorporate LXFR products into their finished goods.

Competitive issues

  • There is excess capacity in the US medical cylinder market, making it difficult for LXFR to raise prices to account for increased aluminum costs.
  • Chinese exports also affect LXFR’s prices, and some competitors are relocating to Asia for cost reasons.


LSFR is organized into two operational divisions, Elektron and Gas Cylinders, which represented 51% and 49%, respectively, of total revenue in 2010.

For the September 2011 nine months the Elektron division contributed 85% of trading profit, defined “operating profit before restructuring and other income (expense)” and Gas Cylinders contributed 15%.


The Elektron division focuses on specialty materials based on magnesium, zirconium and rare earths. Within this division, LSFR sells its products through two brands.

Under the Magnesium Elektron brand, LXFR develops and manufactures specialist lightweight, corrosion-resistant and flame-resistant magnesium alloys, extruded magnesium products, magnesium powders, magnesium plates and rolled sheets and photo-engraving plates for the aerospace (light-weight alloys and components), automotive (lightweight alloys and components), defense (powders for countermeasure flares) and printing (photo-engraving sheets) industries.

Under the MEL Chemicals brand, LXFR develops and manufactures specialty zirconium compounds for use in automotive applications (exhaust catalysts), electronics (ceramic sensors), structural ceramics (dental crowns), aerospace (thermal barrier coatings) and chemical synthesis (industrial catalysts).


The Gas Cylinders division focuses on products based on aluminum, composites and other metals using technically advanced processes. Within this division, LSFR sells its products through two brands.

Under LXFR’s Luxfer Gas Cylinders brand, LXFR develops and manufactures advanced high-pressure aluminum and composite aluminum/carbon fiber gas containment cylinders for use in healthcare (oxygen), breathing apparatus (air), electronics (industrial gas), fire-fighting (carbon dioxide) and transportation (CNG) applications.

Under the Superform brand, LSFR designs and manufactures highly complex shaped, sheet-based products for a wide range of industries, including aerospace (engine air intakes), specialist automotive (body panels and door inners), rail transport (train fronts and window frames) and healthcare (non-magnetic equipment casings).


The key end-markets fall into four categories:

Environmental technologies: LXFR believes many of its products serve a growing need to protect the environment and conserve its resources. Increasing environmental regulation, "green" taxes and the increasing cost of fossil fuels are driving growth in this area and are expected to drive growth in the future.

For example, LXFR’s products are used to reduce weight in vehicles improving fuel efficiency, in catalytic converters in automotive engines, removing noxious gases and to remove heavy metals from drinking water and industrial effluent.

Healthcare technologies: LXFR has a long history in the healthcare end market, and sees this as a major growth area through the introduction of new product technologies. LSFR products, among other applications, contain medical gases, are featured in medical equipment and are used in medical treatment.

For example, LXFR’s recently announced innovations include the lightweight IOS medical oxygen delivery system featuring LXFR’s patented L7X higher-strength aluminum alloy and carbon composite cylinders integrated with LSFR’s patented SmartFlow valve-regulator technology.

Protection technologies: LSFR offers a number of products that are used to protect individuals and property. Principal factors driving growth in this end-market include increasing societal expectations regarding the protection of individuals and armed forces personnel, tightening health and safety regulations and the significant cost of investing in and replacing technologically-advanced military property.

LXFR products are used in the protection of emergency services personnel, the protection of military vehicles, aircraft and personnel.

For example, LXFR manufactures ultra-lightweight breathing-air cylinders that lighten the load on emergency services personnel working in dangerous environments.

Specialty technologies: LXFR’s core technologies have enabled LXFR to exploit various other niche and specialty markets and applications. LXFR products include photo-engraving plates and etching chemicals used to produce high-quality packaging, as well as cylinders used for high-purity gas applications, beverage dispensing and leisure applications such as paintball.


Magnesium Elektron serves a wide range of customers globally and has close and collaborative relationships with its customers. The top ten customers for magnesium products accounted for 26% of the Elektron division's revenue in 2010. Our largest Magnesium Elektron customer accounted for 6% of divisional revenue in 2010.

Magnesium Elektron competes in various specialist niches, including in the production of military powders and high-performance alloys. Competition is fragmented and varies from sector to sector, and includes competition from Chinese suppliers of magnesium die-casting alloys.


LXFR has made and will continue to make expenditures on environmental compliance and related matters. In 2010, LXFR spent $0.9 million on environmental remediation.

LXFR estimates that expenditures on environmental matters could be approximately $1.9 million in 2011. These expenditures primarily relate to closure of the Swinton landfill and the remediation at the Redditch site. The exact timing of these expenditures is still uncertain and they may get delayed, reducing the expenditures in 2011 and pushing work into 2012 and later years. Since the magnitude of environmental problems often become clearer as remediation is undertaken, the actual cost of such remediation could be much higher than LXFR’s estimate. (S-1 page 127)


Key patents held by the Elektron division relate to lightweighting alloys, magnesium gadolinium alloy (protection applications), water treatment and G4 (environmental applications).

Key patents held by LXFR’s Gas Cylinders division relate to smartflow technology, aluminum alloy for pressurized hollow bodies and superplastic forming techniques.


In the U.S. the medical cylinder market has a number of dedicated producers with excess capacity, making it very difficult for LXFR to raise customer prices to offset aluminum cost increases.

More generally, LXFR may face potential competition from producers that manufacture products similar to our aluminum-, magnesium- and zirconium-based products using other materials, such as steel, plastics, composite materials or other metals, minerals and chemicals

In recent years, LXFR has also experienced increased competition from new geographic areas, including Asia, where manufacturers can benefit from lower labor costs.

Competition with respect to less complex zirconium chemicals has been particularly intense, with Chinese suppliers providing low-cost feedstock to specialist competitors, making it especially difficult to compete in commodity products such as paint dryers.

Chinese magnesium also continues to be imported into Europe in large volumes, which may impact LXFR’s competitive position in Europe regarding magnesium alloys.

LXFR is also impacted by a trend for Western-based competitors to relocate production to Asia to take advantage of the lower production costs.


73% owned by private equity firms pre-IPO


Of $100 from sale of eight million ADSs. Shareholders intend to sell 2.7 million ADSs, or 27% of the IPO

  • Repay $48 million in debt.
  • Contribute $25 million towards the purchase, to the extent commercially available, of insurance for LXFR’s pension plans to reduce volatility of pension liabilities
  • Balance for other general corporate purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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