lxfr-20221231
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For the fiscal year ended December 31, 2022
OR
Commission File Number 001-35370
Luxfer Holdings PLC
(Exact Name of Registrant as Specified in Its Charter)
8989 North Port Washington Road, Suite 211,
Milwaukee, WI, 53217
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: +1414-269-2419
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Symbol Name of each exchange on which registered
Ordinary Shares, nominal value £0.50 each LXFR New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐No☒
Indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Act. Yes ☐No☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ☐Accelerated filer☒ Emerging growth company ☐
Non accelerated filer ☐ Smaller reporting company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. Yes ☐ No ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §.10D-1(b). Yes ☐ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of ordinary shares held by non-affiliates of the Registrant was approximately $406,336,108 based on the last reported sale price of such securities as of June 26, 2022, the last business day of the Registrant’s most recently completed second quarter.
The number of shares outstanding of Registrant’s only class of ordinary stock on December 31, 2022, was 26,934,973.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's definitive proxy statement for its annual general meeting to be held on June 7, 2023, to be filed no later than 120 days after the end of the fiscal year covered by this annual report, are incorporated by reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments 24
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Mine Safety Disclosures 24
PART II
Item 6. [Reserved] 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 43
Item 8. Financial Statements and Supplementary Data 45
Item 9A. Controls and Procedures 89
Item 9B. Other Information 89
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 91
PART III
Item 10. Directors, Executive Officers and Corporate Governance 92
Item 11. Executive Compensation 92
Item 14. Principal Accountant Fees and Services 92
PART IV
Item 15. Exhibits and Financial Statement Schedules 93
Signatures 95
PART I
Item 1. Business
Background and business overview
Luxfer Holdings PLC ("Luxfer," "the Company," "we," "our") is a global industrial company innovating niche applications in materials engineering. Luxfer focuses on value creation by using its broad array of technical know-how and proprietary technologies to help create a safe, clean and energy-efficient world. Luxfer's high-performance materials, components and high-pressure gas containment devices are used in defense, first response and healthcare, transportation and general industrial applications.
We focus primarily on product lines related to magnesium alloys, zirconium chemicals and carbon composites. We have a long history of innovation derived from our strong technical expertise, and we work closely with customers to apply solutions to their most demanding product needs. Our proprietary technologies and technical expertise, coupled with strong customer service and global presence, provide competitive advantages and have established us as leaders in the global markets we serve. We believe that we have leading positions in key product areas, including magnesium alloys and powders for aerospace, military, and commercial applications, zirconium chemicals for automotive catalytic converters and industrial catalysis, high-pressure composite cylinders for self-contained breathing apparatus, as well as transport and storage of compressed natural gas ("CNG") and hydrogen, photo-engraving plates, and a wide variety of other uses.
We have a global presence, operating 13 manufacturing plants in the U.S., the U.K., Canada and China, one of which relates to discontinued operations, and we also have a joint venture in Japan. We employ approximately 1,400 people, including temporary staff, of which fewer than 50 support our discontinued operations. In 2022, our net sales from continuing operations were $423.4 million (2021: $374.1 million, 2020: $324.8 million), and our net income from continuing operations was $32.0 million (2021: $30.0 million, 2020: $20.8 million).
Luxfer operates in two business segments - Elektron and Gas Cylinders.
Elektron Segment
Our Elektron Segment focuses on specialty materials based primarily on magnesium and zirconium. In 2022, sales from our Elektron Segment represented approximately 57% (2021: 52%, 2020: 56%) of our consolidated net sales from continuing operations. Our top ten customers represented 40% of segment sales. No singular customer represented 10% or more of our Elektron Segment sales.
Key product lines include:
•Advanced lightweight, corrosion-resistant and heat- and flame-resistant magnesium alloys for use in aerospace, healthcare and oil and gas applications.
•Magnesium powders used in countermeasure flares that protect aircraft from heat-seeking missiles and also for heating pads for self-heating meals used by the military and emergency-relief agencies.
•High-performance zirconium-based materials and oxides used as catalysts and in the manufacture of advanced ceramics, fiber-optic fuel cells, pharmaceuticals and many other performance products.
•Magnesium, copper, and zinc photo-engraving plates for graphic arts and luxury packaging.
Gas Cylinders Segment
Our Gas Cylinders Segment manufactures and markets specialized, highly-engineered cylinders using carbon composites and aluminum alloys. In 2022, sales from our Gas Cylinders Segment represented approximately 43% (2021: 48%, 2020: 44%) of our consolidated net sales. Our top ten customers represented 53.9% of segment sales. Two customers represented 12% of our Gas Cylinders Segment sales. No other singular customer represented greater than 10% of Gas Cylinders Segment sales.
Key product lines include:
•Carbon fiber composite cylinders for self-contained breathing apparatus (SCBA), used by firefighters and other emergency-responders. Our products are also used by scuba divers and personnel in potentially hazardous environments, such as mines.
•Carbon fiber composite cylinders for compressed natural gas (CNG) and hydrogen containment in alternative fuel (AF) vehicles.
•Cylinders used for the containment of oxygen and other medical gases used by patients, healthcare facilities and laboratories.
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Our U.S. aluminum gas cylinder business was sold in March 2021, our Superform U.K. business was sold in September 2021, and we expect our Superform U.S. business to be sold within the next twelve months. As a result, only our Superform U.S. business remains on the balance sheet as held-for-sale at December 31, 2022. Results from the three operations were disclosed as discontinued in the income statement for the corresponding years' of ownership.
All information included within this section relates to continuing operations, unless otherwise stated.
Financial Information about Segments and Geographic Areas
See Note 17 ("Segment Information") to our consolidated financial statements for further information regarding our operating segments and our geographic areas.
Suppliers and raw materials
Update on 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. This recovery in demand across the global macro environment following the onset of COVID-19 has resulted in supply chain challenges characterized by significant increases in cost of key inputs, including magnesium, aluminum, carbon fiber and energy, material and labor availability issues and transport cost increases. Additionally, during 2022 two critical suppliers for our Elektron Segment of magnesium and zirconium, respectively, had enforced force majeure, a standard clause in contracts to remove liability for unexpected and unavoidable catastrophes that interrupt the normal course of business and prevent participants from fulfilling contractual obligations. The force majeure for magnesium was declared in 2021 and remains in place, impacting our U.S. domestic procurement of this key material. The continuing 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 these supply chain disruptions, we have secured alternative sources of supply for key material inputs affected by force majeure and have built additional raw material inventory throughout the year. Furthermore, in the majority of cases, we are able to pass through raw material inflation to our customers. Currently, we expect the impact of material availability and inflation, as well as energy cost inflation and labor and transport constraints to continue through 2023. We also expect to be able to source sufficient material to meet demand and in the majority of cases, we expect to be able to pass on cost increases to our customers. However, the outlook remains uncertain with both the size and timing of future cost increases difficult to predict.
Impact of conflict in Ukraine
The Russian invasion of Ukraine and ongoing military conflict which commenced on February 24, 2022, has resulted in displacement of the Ukrainian population and disruption to the Ukrainian economy. Wide 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. Currently, we do not expect the impact on Luxfer from these developments to be significant. We hold no direct operations in the region, and our sales to Russia and Ukraine combined represent less than one percent of total revenue by destination. Furthermore, neither country is a critical supplier of our raw materials. While Russia is a major global exporter of magnesium, we are able to source the metal from various alternative locations, including China, Israel and Turkey. Historically, we also sourced magnesium domestically, however, due to the force majeure declared by U.S. Magnesium LLC, the only U.S. producer of magnesium, in 2021, we currently cannot source from the U.S.
Elektron Segment
Key raw materials used by our Elektron Segment are magnesium, zircon sand and rare earths.
The world demand for magnesium is around one million metric tons per year. China provides about 80% of the world supply. Production outside of China, however, is significant, including, Dead Sea Magnesium in Israel, RIMA Industrial in Brazil, and smaller producers in Turkey and Russia. We purchase approximately 40% of our magnesium needs from China. We historically used only U.S.-sourced materials for our products sold to the U.S. military, for which U.S. sourcing is mandatory. However, given the current force majeure declared by our U.S. supplier of magnesium, we are in the process of qualifying non-U.S.-sourced material for sale to the U.S. military.
We generally purchase raw materials from suppliers on a spot basis under previously contracted terms and conditions. We have long-term supply contracts in place with U.S. Magnesium for raw material purchases of magnesium ingot for both military and commercial applications. The military contract covers magnesium purchases through December 31, 2023, whereas the commercial contract covers purchases through December
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31, 2023. However, given the current force majeure declared by U.S. Magnesium LLC, we do not know when or if we will be able to recommence the magnesium ingot purchases specified under this contract.
We purchase and process zircon sand, which is found in heavy-minerals sand, titanium dioxide and other products. Global production of zircon sand is estimated at approximately 1.5 million metric tons. We source premium-grade zircon sand from suppliers in South Africa, Senegal, Indonesia and Australia. We also purchase intermediate zirconium chemicals from suppliers in China. The level of these purchases is based on a number of factors, including required properties and relative market prices. During part of 2022, one of our suppliers of zircon sand had enforced force majeure.
There are 17 rare earth metals that are commonly found in nature. Usually mixed together with other mineral deposits, these rare earths exhibit magnetic and light-emitting properties that make them invaluable to high-technology manufacturers. These rare earth metals are used as ingredients in our zirconium chemical and magnesium alloy products. Our largest rare earth requirement is cerium, which we use in automotive catalysis compounds because of its unique oxygen-storage capabilities.
Gas Cylinders Segment
Key raw materials used in the Gas Cylinders Segment include high-strength carbon fiber and aluminum. Our main carbon fiber suppliers are Toray and Mitsubishi. In recent years, the carbon fiber has experienced periods of tight supply conditions due to increased demand for commercial aerospace, military and clean energy applications. Over time, we have built relationships with our suppliers, providing them predictable requirements and annual contracts that help to ensure procurement of our required volume of carbon fiber.
In 2022, we purchased approximately 40% of our aluminum from Rio Tinto Alcan and its associated companies. Aluminum represented approximately 35% of Gas Cylinders Segment's raw material costs in 2022. The price of aluminum, and carbon fiber, has been volatile in the past and has increased substantially in 2022. While we generally have passed through changes in input costs to our customers, some of our Gas Cylinders Segment contracts contain look-back provisions that result in a lag to our ability to adjust pricing for changes in input costs.
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Our end-markets
Key end-markets for Luxfer products fall into three categories:
Transportation (31% of 2022 sales): Many Luxfer products serve a growing need to improve and safeguard the environment in the field of transportation, including our (i) lightweight, high-pressure carbon composite cylinders that contain compressed natural gas and hydrogen; (ii) zirconium-based products that reduce automotive and other emissions; and (iii) lightweight magnesium alloys used in fuel-efficient aerospace and automotive designs.
Area of Focus Product End-market drivers
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Defense, First Response & Healthcare (32% of 2022 sales): Luxfer offers many products that help to protect people, equipment and property in hazardous conditions, conflicts and emergencies. These products include magnesium powders used for countermeasure flares that defend aircraft against heat-seeking missiles, flameless ration heaters used in meals Ready-to-Eat, cylinders used in SCBA equipment for firefighters and other emergency service personnel, and chemical detection and decontamination products. Other products include lightweight gas cylinders for containment of medical and laboratory gases, zirconium powders for pharmaceutical products, magnesium materials for lightweight orthopedic devices, specialized magnesium alloys for the automotive industry, and zirconium materials for biomedical applications and dental implants.
Area of Focus Product End-market drivers
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General industrial (37% of 2022 sales): Our core technologies serve various industrial markets and applications. These products include zirconium-based compounds to purify drinking water and clean industrial exhausts; magnesium alloys shaped for use in various general engineering applications; and high-pressure gas cylinders used for high-purity specialty gases, beverage dispensing, scuba diving and performance racing. Our metal foil-stamping and embossing dies are used primarily for luxury packaging, labels and greeting cards. Our high-quality magnesium, copper, brass and zinc plates are ideal for these and other graphic applications.
Area of Focus Product End-market drivers
Our competitive advantages
Focus on innovation and product development for growing specialized end-markets. We continue to produce a steady stream of new products, including those developed in close collaboration with our customers.
Strong technical expertise and know-how. Using our expertise in metallurgy and material science, we specialize in advanced materials, developing products with superior performance to satisfy the most demanding requirements in the most extreme environments. Further, we benefit from the growth in the number of our patented products, including many of our alloys and compounds.
Diversified customer base with long-standing relationships. We put the customer at the heart of our strategy, and we have long-standing relationships with many of our customers, including global leaders in our key markets.
Launch of the Luxfer Business System. The Luxfer Business System serves as a tool to realize growth potential embedded in our business. The system places emphasis on serving the customer and profitable growth, consisting of the following key themes:
•Commercial Excellence
•Lean Operations
•Innovation
•Sustainability
•People Excellence
•Strategy Deployment
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Seasonality
Historically, we have shutdown periods at most of our manufacturing sites, during which we carry out maintenance work. Shutdowns typically last two weeks in the summer and one to two weeks around the year-end holidays, resulting in reduced levels of activity in the second half of the year compared to the first half. Third quarter and fourth quarter sales and operating profit can be affected by our own manufacturing site shutdowns and by shutdowns of various industrial customers. We also operate in various geographic areas that are susceptible to bad weather during winter months, such as Calgary, Canada, and various U.S. eastern states. Bad weather can unexpectedly disrupt production and shipments from our manufacturing facilities, which can lead to reduced revenue and operating profit. Additionally, we manufacture products that are used in graphic arts and premium packaging, seasonal demand for which increases ahead of the year-end holidays.
Research and Development
Luxfer recognizes the importance of research in materials science and the need to develop innovative new products to meet future needs of customers and to grow sales and operating profit. Each year, we invest in the development of new products and processes directed towards our end-markets. Our product development projects also include utilizing skills of our wider commercial technical sales staff, manufacturing engineers and general management, many of whom are highly qualified scientists and engineers. A large proportion of senior sales and management time is spent overseeing development of products and working with customers on integrating our products and solutions into their product designs.
To provide customers with improving products and services, we invest in new technology and research and employ some of the world's leading specialists in materials science and metallurgy. Our engineers and metallurgists collaborate closely with our customers to design, develop and manufacture our products. We also co-sponsor ongoing research programs at major universities in the U.S., Canada and Europe. Thanks to the ingenuity of our own research and development teams, Luxfer has developed a steady stream of new products, most recently including:
•Soluble magnesium alloys, branded SoluMag®, for down-well oil and gas applications;
•Ultra-lightweight large composite cylinders, branded G-StorTM, for containment of CNG, hydrogen, helium and other gases;
•AF systems solutions for buses, trucks and bulk gas transportation;
•Zirconium catalysts for automotive end-use, including advances in gasoline particulate filtration used in hybrid vehicles;
•L7X® high-strength aluminum alloy and carbon composite gas cylinders;
•Luxfer ECLIPSE, a new carbon composite cylinders for firefighter self-contained breathing apparatus (SCBA); and
•Unitized Group Ration - Express (UGR-E) heater meals developed to deliver hot meals to multiple soldiers in a combat or training environment.
We believe that our commitment to research and new product development, through dedicated resources and significant use of management's time, forms the core of Luxfer's growth potential. This commitment reflects our strategy of focusing on high-performance, value-added products and markets as well as leveraging our collaboration with universities. We invest in developing products for end-markets that we believe hold long-term growth potential.
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Intellectual Property
Luxfer relies on a combination of patents, trade secrets, copyrights, trademarks, and proprietary manufacturing processes and design rights, together with non-disclosure agreements and technical measures, to establish and protect proprietary rights in our products. Our Elektron Segment holds key patents related to protected applications, including numerous aerospace alloys and magnesium-gadolinium alloys, as well as patents related to environmental applications, including water-treatment products and our specialized G4 process used to manufacture zirconium-cerium oxides for emissions-control catalysts. The Elektron Segment also has patented technology for magnesium-based flameless heater pads used to heat meals and beverages. Key patents held by our Gas Cylinders Segment relate to composites and alloys for pressurized hollow bodies. No individual patent or such intellectual property is considered material to either the Elektron or Gas Cylinders Segment.
In certain areas, we rely more heavily upon trade secrets and unpatented proprietary know-how than patent protection in order to establish and maintain our competitive advantage. We generally enter into non-disclosure and invention assignment agreements with our employees and subcontractors, as well as our customers and vendors.
Human Capital Management
The Company employed approximately 1,400 people as of December 31, 2022, fewer than 50 of whom support our discontinued operations. Of the approximately 1,350 employees associated with continuing operations, approximately 750 are employed in the United States and 600 are employed internationally.
Attracting and retaining talent remains a challenge in the post-COVID landscape. To succeed in today’s competitive labor market, Luxfer takes a proactive approach to human capital management by pursuing several priorities that we believe are critical in recruiting, retaining, motivating, and developing top talent. Such priorities include: (i) ensuring occupational health and safety; (ii) providing opportunities for professional growth and development; (iii) maintaining diverse and inclusive workplaces; and (iv) promoting financial, physical, and emotional well-being.
Our Board of Directors and Executive Leadership Team play a key role in setting our human capital management strategy and driving accountability for meaningful progress. Informed by data, our human capital management initiatives are supported by local leadership, with significant functional oversight by our local human resource teams. All Luxfer facilities collect data on employee retention, talent acquisition, training, and safety. Metrics are recorded quarterly on our internal scorecard and are reported to executive management regularly.
Occupational Health and Safety
Luxfer is committed to safeguarding the health and safety of our employees at work. We have well-defined health and safety policies and procedures that are reinforced by ongoing employee training. We conduct annual on-site audits to identify and manage environmental health and safety risks, as well as to evaluate compliance with regulatory requirements and Luxfer policy. All functional business units report metrics to assess health and safety performance, which are reviewed regularly by executive leadership and management. In fiscal year 2022, the Company had eight Lost Time Accidents and an Incident Frequency Rate of 1.59 with zero work-related fatalities.
Professional Growth and Development
Providing opportunities for professional growth and development is key to Luxfer’s retention strategy. Luxfer maintains talent and succession planning processes, including regular review by the Executive Leadership Team and reports to the Board of Directors. We operate leadership and management development programs, which provide a consistent approach to the development to the Company’s future leaders and managers. With a multi-faceted curriculum, these programs develop critical problem-solving, communication, management, and leadership skills. Luxfer also maintains training and development programs for employees at the workforce level, in addition to regular coaching and support from their supervisor and performance evaluations. To further support their career aspirations, employees can access Luxfer’s online learning platform which offers over 180,000 courses, videos, and books designed to strengthen critical business, leadership, productivity, and computer software skills.
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Diverse and Inclusive Workplaces
The professional conduct of our employees furthers the Company’s mission, promotes productivity, minimizes disputes, and enhances our reputation. As such, the Company is committed to creating and maintaining a diverse, global workforce that provides fair and equitable opportunities, thereby advancing Luxfer’s innovation culture and customer first values. With continued focus on diversity and equity, Luxfer’s diversity initiatives include, but are not limited to, practices and policies on recruitment and selection, including targeted sourcing of personnel from diverse backgrounds; compensation and benefits; professional development and training; advancement opportunities; and the ongoing development of a diverse and inclusive work environment. All Luxfer personnel are required to complete a variety of anti-harassment, non-discrimination, diversity, and unconscious bias trainings annually. Luxfer’s talent acquisition teams and hiring managers undergo additional training to ensure that a diverse slate of candidates is considered for all job openings. Further, Luxfer monitors the composition of its current workforce for diversity, age, and gender demographics. This data is used to enhance employment and recruitment practices and is continually improved to ensure that a diverse and talented workforce is maintained.
Financial, Physical, and Emotional Well-Being
Fair Wages and Competitive Benefits: Luxfer offers competitive base pay and, depending on position, variable incentive pay associated with both Company and individual performance. Full-time employees and, in some cases, part-time employees who have met the minimum hours of service requirement are eligible to participate in various retirement savings plans, such as the Company’s 401(k) defined contribution plan in the U.S. and various pension schemes available to U.K. employees. We also offer paid time off, group medical, dental, and vision plans, in addition to various life, disability and paid family and sick leave options, which vary by jurisdiction.
Employee Share Plans: Luxfer encourages participation in its U.S. Employee Stock Purchase Plan (ESPP) and U.K. Share Incentive Plan (SIP), which provide employees an opportunity to become Luxfer shareholders at a reduced price. Under the ESPP, U.S. employees can purchase Company stock at a 15% discount through payroll deductions. Under the SIP, U.K. employees can purchase company stock through payroll deductions and, in turn, the Company matches one free share per every two shares purchased.
Fitness and Wellness Programs: Luxfer is proud to offer several optional fitness and wellness programs and healthy living incentives to our employees. Our Employee Healthy Lifestyle Program is available to U.S. employees and offers partial reimbursement for certain gym and fitness center memberships, weight loss programs, and group exercise classes. U.S. employees are also eligible to participate in a smoking cessation program through which employees who complete a 90-day program are rewarded with lower insurance rates.
Emotional Well-Being: We support the social and emotional health of our employees by providing access to wellness clinics and funded mental health counseling services. As a part of Luxfer’s group medical insurance plan, U.S. employees have convenient access to live video visits with a board-certified doctors or licensed therapists. Luxfer also offers access to the Employee Assistance Program, which connects employees and their families with credentialed counselors, free of charge, to provide a variety of work-life services and resources for family matters, including legal assistance, financial budgeting, and more.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q , Current Reports on Form 8-K and any exhibits or amendments to such are made available, free of charge, on our website at http://www.luxfer.com as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the Securities and Exchange Commission ("SEC"). Information on our website is not incorporated by reference herein and is not made a part of this report.
Financial and other material information regarding the Company is routinely posted and accessible on our website at http://www.luxfer.com/investors.
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Item 1A. Risk Factors
The risks described below are not the only risks facing us. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations. See also "Information Regarding Forward-Looking Statements" for certain warnings regarding forward-looking information contained in this document.
Economic and Industry risks
Our results of operations may be negatively impacted by the ensuing effects of the coronavirus disease pandemic, as well as the subsequent adverse impact on availability of key inputs and associated cost inflation.
Activity in most of the end markets we serve improved throughout 2021 and continued to improve in 2022 following the global COVID-19 outbreak. The 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. Currently, our expectation is that the impact of material and energy cost inflation and labor and transport constraints will continue into 2023. While we aim to pass on cost increases to customers through increased price, there is no guarantee that we will be able to do so in all circumstances (see: We are exposed to fluctuations in the costs of the raw materials that are used to manufacture our products, and such fluctuations could lead us to incur unexpected costs and could affect our margins and / or working capital requirements), and failure to do so could have a material adverse impact on our results of operations, financial position and cash flows.
We depend on certain end-markets, including automotive, alternative fuels, self-contained breathing apparatus ("SCBA"), aerospace, defense, healthcare, oil and gas and printing and paper. An economic downturn, or regulatory changes, in any of those end-markets, could reduce sales and profit margins on those end-markets.
We have significant exposures to certain end-markets, including some end-markets that are cyclical in nature or subject to high levels of regulatory control, including automotive, SCBA, aerospace and defense. Dependence of either of our segments on certain end-markets is even more pronounced.
To the extent that any of these cyclical end-markets are in decline, at a low point in their economic cycle, or subject to regulatory change, sales and margins on those sales may be adversely affected. It is possible that all or most of these end-markets could be in decline at the same time, i.e. during an economic downturn. Any significant reduction in sales could have a material adverse impact on our results of operations, financial position and cash flows.
Our global operations expose us to economic conditions, potential tax costs, political risks and specific regulations or restrictions in the countries in which we operate, which could have a material adverse impact on our results of operations, financial position and cash flows.
We derive our sales and earnings from operations in many countries and are subject to risks associated with doing business internationally. We have wholly-owned operations in the U.S., the U.K., Canada and China, as well as a joint venture in Japan. Doing business in different countries has risks, including the potential for adverse changes in the local, social, political, financial or regulatory climate, difficulty in staffing and managing geographically diverse operations, and the costs of complying with a variety of laws and regulations. For example, 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 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 in 2022 was not 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. However, this has caused macro-economic disruption which could adversely affect the Company and/or our supply chain, business partners or customers.
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Due to the fact we have operations in many countries, we are also liable to pay taxes in many fiscal jurisdictions. Our tax burden depends on the interpretation of local tax regulations, bilateral or multilateral international tax treaties and the administrative doctrines in each jurisdiction. Changes in these tax regulations may increase our tax burden, or otherwise affect our accounting for taxes. For example, in March 2021, the U.K. government announced an increase in the statutory rate of Corporation tax from the current 19% to 25%, which will take effect from April 2023, and is expected to increase the future tax burden on earnings from our U.K. operations.
The principal markets for our products are located in North America, Europe and Asia, and any financial difficulties experienced in these markets may have a material adverse impact on our businesses. For example, the maturity of some of our markets, such as the U.S. market for photo-engraving plates, could require us to increase sales in developing regions, which may involve greater economic and political risks. We cannot provide any assurances that we will be able to expand sales in these regions. Any of these factors could have a material adverse impact on our results of operations, financial position and cash flows.
Our operations rely on a number of large customers in certain areas of our business, and the loss of any of our major customers could negatively impact our results of operations.
If we fail to maintain our relationships with our major customers, or fail to replace lost customers, or if there is reduced demand from our customers or for products produced by our customers, such failures or reduced demand could materially reduce our sales. In addition, we could experience a reduction in sales if any of our customers fail to perform or default on any payment pursuant to our contracts with them. Long-term relationships with customers are especially important for suppliers of intermediate materials and components such as ourselves. We often work closely with customers to develop products that meet particular specifications as part of the design of a product intended for an end-user market. The bespoke nature of many of our products could make it difficult to replace lost customers. Our top 10 customers accounted for approximately 31% of our net sales in 2022. Any significant reduction in sales or customer payment default could have an adverse material impact on our results of operations, financial position and cash flows.
We depend upon our larger suppliers for a significant portion of our raw materials, and a loss of one of these suppliers, or a significant supply interruption could negatively impact our financial performance.
We rely, to varying degrees, on major suppliers for some of the principal raw materials of our engineered products, including aluminum, zirconium and carbon fiber. For example, in 2022, we obtained approximately 42% of our aluminum from Rio Tinto Alcan and its associated companies. Moreover, demand for carbon fiber is increasing, which has led to occasional periods of short supply in recent years with a number of expanding applications competing for the same supply of this specialized raw material. Our largest suppliers of carbon fiber are Toray and Grafil, a subsidiary of Mitsubishi Chemical. For additional details of some of our major suppliers (see ITEM 1 - Suppliers and raw materials).
We generally purchase raw materials from suppliers on a spot basis under standard terms and conditions. We also enter into supply contracts with Rio Tinto Alcan for a substantial portion of our aluminum requirements. In addition, we have supply contracts in place with U.S. Magnesium for raw material purchases of magnesium ingot for both military and commercial applications. In 2021 U.S. magnesium entered force majeure and deliveries reduced up until late 2022, when they ceased completely, with an expectation that they would not recommence until the second half of 2023. We successfully secured and qualified magnesium from alternative sources to meet requirements for both military and commercial applications for the remainder of 2023.
An interruption in the supply of essential raw materials used in our production processes or an increase in the costs of raw materials due to market shortages, supplier financial difficulties, government quotas or natural disturbances, could significantly affect our ability to provide competitively priced products to customers in a timely manner. For example, the significant increase in demand for materials and energy stemming from the post-COVID economic recovery and current conflict in Ukraine has resulted in significant constraints on availability of key inputs such as magnesium, aluminum and energy supplies with a consequent spike in prices. In the event of a significant interruption in the supply of any materials used in our production processes, or a significant increase in their prices, we may have to purchase these materials from alternative sources, build additional inventory of raw materials, increase our prices, reduce our margins or possibly fail to fill customer orders by deadlines required in contracts, which could result in, among other things, contractual penalties. We can provide no assurance that we would be able to obtain replacement materials quickly on similar terms or at all. Failure to maintain relationships with key suppliers or to develop relationships with alternative suppliers could have a material adverse effect on our results of operations, financial position and cash flows.
In 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. We have been successful in securing alternative sources of supply for key material inputs affected by force majeure, although typically at an increased cost.
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We are exposed to fluctuations in the costs of the raw materials that are used to manufacture our products, and such fluctuations could lead us to incur unexpected costs and could affect our margins and / or working capital requirements.
Fluctuations in the costs of raw materials could affect margins and working capital requirements in the businesses in which we use them, see ITEM 7A. We cannot always pass on cost increases or increase our prices to offset these cost increases immediately or at all, whether because of fixed-price agreements with customers, competitive pressures that restrict our ability to pass on cost increases or increase prices, or other factors. It can be particularly difficult to pass on cost increases or increase prices in product areas such as gas cylinders, where competitors offer similar products made from alternative materials, such as steel, if those materials are not subject to the same cost increases. Higher prices necessitated by large increases in raw material costs could make our current or future products unattractive compared to competing products made from alternative materials that have not been so affected by raw material cost increases, or compared to products produced by competitors who have not incurred such large increases in their raw material costs.
If, for example, the cost of aluminum or carbon fiber were to rise, we may not be able pass those cost increases on to our customers or manage the exposure effectively through hedging instruments. From time to time we use derivative financial instruments to hedge our exposures to fluctuations in aluminum costs. Although it is our treasury policy to enter into these transactions only for hedging and not for speculative purposes, we are exposed to market risk and credit risk with respect to the use of these derivative financial instruments, see ITEM 7A.
In the past several years and during 2022, we have made additional purchases of large stocks of magnesium alloys in an effort to delay the effect of potentially increased costs in the future. However, even though such purchases are not made for speculative purposes, there can be no assurance that costs will move as expected. Moreover, these strategic purchases increase our working capital needs, thus reducing our liquidity and cash flow. Accordingly, a substantial increase in raw material costs could have a material adverse effect on our results of operations, financial position and cash flows.
Changes in foreign exchange rates could reduce profit margins on our sales and reduce the reported sales of our non-U.S. operations and have a material adverse effect on our results of operations.
We conduct a large portion of our commercial transactions, purchases of raw materials and sales of goods in various countries and regions, including the U.S., the U.K., continental Europe, Australia and Asia. Our manufacturing operations based in the U.S. and Asia usually purchase raw materials and sell goods denominated in their local currency, but our manufacturing operations in the U.K. often purchase raw materials and sell products in different currencies. Changes in the relative values of currencies can decrease the profits of our subsidiaries when they incur costs in currencies that are different from the currencies in which they generate all or part of their revenue. These transaction risks principally arise as a result of purchases of raw materials in U.S. dollars, coupled with sales of products to customers in euros. This impact is most pronounced in our exports to continental Europe from the U.K. In 2022, our U.K. operations sold approximately €53 million of goods into the Eurozone. Our policy is to hedge a portion of our net exposure to fluctuations in exchange rates with forward foreign currency exchange contracts. Therefore, we are exposed to market risk and credit risk through the use of derivative financial instruments. Moreover, any failure of hedging policies could negatively impact our profits, and thus damage our ability to fund our operations and to service our indebtedness. Exchange rate volatility continues to be experienced against a background of the COVID-19 pandemic and U.K. political uncertainty, and continued volatility is to be expected.
In addition to subsidiaries in the U.S., we have operating subsidiaries located in the U.K., Canada, China and Australia, as well as a joint venture in Japan, each of whose revenue, costs, assets and liabilities are denominated in local currencies. As our consolidated financial statements are reported in U.S. dollars, we are exposed to fluctuations in those currencies when those amounts are translated to U.S. dollars for purposes of reporting our consolidated financial statements, which may cause declines in results of operations. The largest risk is from our operations in the U.K., which, in 2022, generated an operating profit of $6.4 million and sales of $176 million. Fluctuations in exchange rates, particularly between the U.S. dollar and GBP sterling (which has been subject to significant fluctuations, as described above), can have a material effect on our consolidated income statement and consolidated balance sheet. In 2022, movements in the average U.S. dollar exchange rate had a negative impact impact on net sales of $15.6 million. In 2021 movements in the average U.S. dollar exchange rate had a positive impact on net sales of $9.5 million. Changes in translation exchange rates decreased net assets by $13.2 million in 2022, compared to a decrease of $0.8 million in 2021.
These foreign exchange risks could have a material adverse effect on our results of operations, financial position and cash flows. For additional information on these risks, and the historical impact on our results, see ITEM 7A.
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Our defined benefit pension plans historically have had funding deficits, (currently a surplus) and are exposed to market forces that could require us to make increased ongoing cash contributions in response to changes in market conditions, actuarial assumptions and investment decisions These market forces could expose us to significant short-term liabilities if a wind-up trigger occurred in relation to such plans, each of which could have a material adverse impact on our results of operations and financial position.
We have defined benefit pension arrangements in the U.K. and in the U.S., see ITEM 8, Note 14. Our largest defined benefit plan, the Luxfer Group Pension Plan, which closed to new members in 1998, remained open for accrual of future benefits based on career-average salary until April 5, 2016. However, following a consultation, it was agreed with the Trustees and plan members to close the Luxfer Group Pension Plan in the U.K. to future accrual of benefits, effective from April 5, 2016. Moreover, when increasing pension benefit payments, it was agreed to use the CPI as the reference index, in place of the RPI where applicable. The Luxfer Group Pension Plan is funded according to the regulations in effect in the U.K. and, as of December 31, 2022, and December 31, 2021, had an accounting surplus of $27.0 million and $13.7 million, respectively. There is no guarantee that the surplus funding position will be maintained and adverse market movements could result in a reversion to a deficit funding position. According to the latest triennial actuarial valuation of the Luxfer Group Pension Plan as of April 5, 2021, the Luxfer Group Pension Plan had a deficit of £12.2 million on a plan-specific basis (reduced from £26.5 million at the previous valuation in April 2018). This valuation was carried out prior to a one-off deficit reduction contribution of £9.6 million made in December 2021. Should a wind-up trigger occur in relation to the Luxfer Group Pension Plan, the buy-out deficit of that plan will become due and payable by the employers. The aggregate deficit of the Luxfer Group Pension Plan on a buy-out basis was estimated at £86 million as of April 5, 2021 (reduced from £145 million in April 2018). The Trustee has the power to wind-up the Luxfer Group Pension Plan if it determines that in the best interests of members, there is no reasonable purpose in continuing the Luxfer Group Pension Plan.
Following the actuarial valuation as of April 5, 2021, we agreed with the Trustee to make a one-off cash contribution in December 2021 of £9.6 million in addition to the £4.1 million annual payment agreed as a result of the previous valuation. While there is an expectation that no further contributions will be required until at least after the next valuation in 2024, there is no guarantee that this will be the case; and no contributions were made during 2022. The Trustee can request additional contributions, and the U.K. Pensions Regulator ("TPR") has the power to order further funding in the current three-year window should increasingly stringent regulation require it (see Environmental and regulatory risks: The Pensions Regulator in the U.K. has the power in certain circumstances to issue contribution notices or financial support directions that, if issued, could result in significant liabilities arising for us). We remain legally responsible and committed to ensuring that the Luxfer Group Pension Plan has the funding required to meet its liabilities as they fall due. Future funding requirements will likely be reassessed and revised following the next triennial actuarial valuation in April 2024. Regulatory burdens have also proved to be a significant risk, such as the U.K.'s Pension Protection Fund Levy, which was £0.3 million in 2022.
Our other defined benefit plans are less significant than the Luxfer Group Pension Plan and, as of December 31, 2022, and December 31, 2021, had aggregate accounting deficits of $4.5 million and $1.9 million, respectively. The largest of these additional plans is the BA Holdings, Inc. Pension Plan in the U.S., which was closed to further benefit accruals in December 2005, and merged with the much smaller Luxfer Hourly Pension Plan, effective January 1, 2016. In September 2021, we commenced an exercise that we expect to result in a buyout of the U.S. plan liability. An initial lump sum exercise took place in December 2022, with an annuity purchase and full buyout expected in early 2023.
We are exposed to various risks related to our defined benefit plans, including the risk of loss of market value of the plan assets, the risk of actual investment returns being less than assumed rates of return, the Trustees of the Luxfer Group Pension Plan switching investment strategy (which does require consultation with the employer), and the risk of actual experience deviating from actuarial assumptions for such things as mortality of plan participants. In addition, fluctuations in interest rates cause changes in the annual cost and benefit obligations, and increasingly stringent regulation can further increase the financial burden. Any of these risks could have a material adverse impact on our results of operations, financial position and cash flows.
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Environmental and regulatory risks
The Pensions Regulator in the U.K. has the power in certain circumstances to issue contribution notices or financial support directions that, if issued, could result in significant liabilities arising for us.
The Pensions Regulator may issue a contribution notice to the employers that participate in the Luxfer Group Pension Plan, or any person who is connected with, or is an associate of, these employers where the Pensions Regulator is of the opinion that the relevant person has been a party to an act, or a deliberate failure to act, which had as its main purpose (or one of its main purposes) the avoidance of pension liabilities or where such act has a materially detrimental effect on the likelihood of payment of accrued benefits under the Luxfer Group Pension Plan being received. A person holding alone or together with his or her associates, directly or indirectly, one-third or more of our voting power, could be the subject of a contribution notice. The terms "associate" and "connected person," which are taken from the Insolvency Act 1986, are widely defined and could cover our significant shareholders and others deemed to be shadow directors. If the Pensions Regulator considers that a plan employer is "insufficiently resourced" or a "service company" (which terms have statutory definitions), it may impose a financial support direction requiring such plan's employer or any member of the Group, or any person associated or connected with an employer, to put in place financial support in relation to the Luxfer Group Pension Plan. Liabilities imposed under a contribution notice or financial support direction may be up to the difference between the value of the assets of the Luxfer Group Pension Plan and the cost of buying out the benefits of members and other beneficiaries of the Luxfer Group Pension Plan. The Pension Schemes Act 2021 further strengthened regulation in this area and includes new criminal and civil penalties for breaches in pensions law (including unlimited fines) and new notifiable events that apply to certain corporate transactions which have the potential to adversely affect the security of the pension plan and therefore increase the likelihood of a contribution notice. In practice, the risk of a contribution notice being imposed may restrict our ability to restructure or undertake certain corporate activities. Additional security may also need to be provided to the Trustee of the Luxfer Group Pension Plan before certain corporate activities can be undertaken (such as the payment of an unusual dividend), and any additional funding of the Luxfer Group Pension Plan may have a material adverse effect on our financial position and cash flows.
Our operations may prove harmful to the environment resulting in reputational damage and clean-up or other related costs.
We are exposed to substantial environmental costs and liabilities, including liabilities associated with divested assets and prior activities performed on sites before we acquired an interest in them. Our operations, including the production and delivery of our products, are subject to a broad range of continually changing environmental laws and regulations in each of the jurisdictions in which we operate. These laws and regulations increasingly impose more stringent environmental protection standards on us with respect to, among other things, air emissions, wastewater discharges, the use and handling of hazardous materials, noise levels, waste disposal practices, soil and groundwater contamination and environmental clean-up. Complying with these regulations involves significant and recurring costs.
We cannot predict our future environmental liabilities and cannot assure investors that our management is aware of every fact or circumstance regarding potential liabilities, or that the amounts provided and budgeted to address such liabilities will be adequate for all purposes. In addition, future developments, such as changes in regulations, laws or environmental conditions, may result in reputational damage or increase environmental costs and liabilities that could have a material adverse effect on our results of operations, financial position and cash flows.
The health and safety of our employees and the safe operation of our business is subject to various health and safety regulations in each of the jurisdictions in which we operate. These regulations impose various obligations on us, including the provision of safe working environments and employee training on health and safety matters. Complying with these regulations involves recurring costs.
Certain of our operations are highly regulated by different agencies that require products to comply with their rules and procedures and can subject our operations to penalties or adversely affect production.
Certain of our operations are in highly regulated industries that require us to maintain regulatory approvals and, from time to time, obtain new regulatory approvals from various countries. This can involve substantial time and expense. In turn, higher costs of compliance reduce our cash flows from operations. For example, manufacturers of gas cylinders throughout the world must comply with high local safety and health standards and obtain regulatory approvals in the markets in which they sell their products. Furthermore, military organizations require us to comply with applicable government regulations and specifications when providing products or services to them directly or as subcontractors. In addition, we are required to comply with U.S. and other export regulations with respect to certain products and materials. The E.U. has also passed legislation governing the registration, evaluation and authorization of chemicals, known as REACH, pursuant to which we are required to register
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chemicals and gain authorization for the use of certain substances. Following the U.K.’s withdrawal from the E.U. and the subsequent transition period, the E.U. REACH Regulation has been brought into U.K. law, and REACH, and related legislation, have therefore been replicated in the U.K. In the U.S., there is similar legislation under the Toxic Substance Control Act 1976 ("TSCA") which was substantially amended in 2016. Although we make reasonable efforts to obtain all licenses and certifications that are required by countries in which we operate, there is always a risk that we may be found not to comply with certain required procedures. This risk grows with increased complexity and variance in regulations across the globe. As regulatory schemes vary by country, we may also be subject to regulations of which we are not presently aware and could be subject to sanctions by a foreign government that could materially and adversely affect our operations in the relevant country.
Governments and their agencies have considerable discretion to determine whether regulations have been satisfied. They may also revoke or limit existing licenses and certifications or change the laws and regulations to which we are subject at any time. If our operations fail to obtain, experience delays in obtaining or lose a needed certification or approval, we may not be able to sell our products to our customers, expand into new geographic markets or expand into new product lines. In addition, new or more stringent regulations, if imposed, could result in us incurring significant costs in connection with compliance. Non-compliance with these regulations could result in administrative, civil, financial, criminal or other sanctions against us, which could have negative consequences on our business and financial position. Furthermore, if we begin to operate in new countries, we may need to obtain new licenses, certifications and approvals.
Our customers are also often subject to similar regulations and risks. We therefore face the risk that our customers may have the demand for their products reduced as a result of regulatory matters that fall outside our direct control. This would in turn reduce demand for our products and have a negative financial impact on our operating results.
Any of these factors could have a material adverse impact on our results of operations, financial position and cash flows.
We are subject to legislation and regulations to reduce carbon dioxide and other greenhouse gas emissions.
Although we are working to improve our energy efficiency, our manufacturing processes and the manufacturing processes of many of our suppliers and customers are still energy-intensive and use or generate, directly or indirectly, greenhouse gases ("GHGs"). In recent years, current regulatory programs impacting GHG emissions from large industrial plants and other sources include the E.U. Emissions Trading Scheme, the CRC Energy Efficiency Scheme in the U.K. and certain federal and state programs in the U.S., including GHG reporting and permitting rules issued by the U.S.E.P.A and the California Cap and Trade Program.
Moreover, in December 2015, 195 countries participating in the United Nations Framework Convention on Climate Change, at its 21st Conference of the Parties meeting held in Paris, adopted a new global agreement on the reduction of climate change (the "Paris Agreement"). The Paris Agreement set a goal of holding the increase in global average temperature to well below 2 degrees Celsius and pursuing efforts to limit the increase to 1.5 degrees Celsius, to be achieved by commitments by the participating countries to set emissions reduction targets, referred to as "nationally determined contributions." The Paris Agreement came into effect on November 4, 2016, after it was ratified the previous month, with implementation efforts beginning from 2018 with reassessment every five years.
In November 2021, 197 countries joined together at the 26th Conference "COP26" in Glasgow, U.K., resulting in the Glasgow Climate Pact, which contains all necessary guidelines for fully implementing the Paris Agreement. The package of decisions within the Pact consists of a range of agreed items, including strengthened efforts to build resilience to climate change, to curb greenhouse gas emissions and to provide the necessary finance for both. Nations collectively agreed to work to reduce the gap between existing emission reduction plans and what is required to reduce emissions, so that the rise in the global average temperature can be limited to 1.5 degrees Celsius.
Increased costs of compliance with climate change regulations and the potential impact on energy costs could have a material adverse effect on our results of operations, financial position and cash flows.
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Due to the nature and use of the products that we manufacture, we may in the future face large liability claims.
We are subject to litigation in the ordinary course of our business, which could be costly to us and which may arise in the future. We are exposed to possible claims for personal injury, death or property damage, which could result from a failure of a product manufactured by us or of a product integrating one of our products. For example, improperly manufactured gas cylinders could explode at high pressure, which can cause substantial personal and property damage. This risk may be increased through the use of new technologies, materials and innovations. We also supply many components into aerospace applications in which the potential for significant liability exposures necessitates additional insurance costs.
Many factors beyond our control could lead to liability claims, including:
•the failure of a product manufactured by a third party that incorporated components manufactured by us;
•the reliability and skills of persons using our products or the products of our customers; and
•the use by customers of materials or products that we produced for applications for which the material or product was not designed.
If we cannot successfully defend ourselves against claims, we may incur substantial liabilities. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
•decreased demand for our products;
•reputational injury;
•initiation of investigation by regulators;
•costs to defend related litigation;
•diversion of management time and resources;
•compensatory damages and fines;
•product recalls, withdrawals or labeling, marketing or promotional restrictions;
•loss of revenue;
•exhaustion of any available insurance and our capital resources; and
•a decline in our stock price.
We could be required to pay a material amount if a claim is made against us that is not covered by insurance or otherwise subject to indemnification or that exceeds the insurance coverage that we maintain. Moreover, we do not currently carry insurance to cover the expense of product recalls, and litigation involving significant product recalls or product liability could have a material adverse effect on our results of operations, financial position and cash flows.
We are exposed to risks related to cybersecurity threats and general information security incidents which may also expose us to liability under data protection laws, including the GDPR.
In the conduct of our business, we increasingly collect, use, transmit and store data on information technology systems. This data includes confidential information belonging to us, our customers and other business partners, as well as personally identifiable information of individuals, including our employees. Like other global companies, we have experienced, and expect to continue to be subject to, cybersecurity threats and incidents, ranging from employee error or misuse, individual attempts to gain unauthorized access to information technology systems, and to sophisticated and targeted measures known as advanced persistent threats, none of which have been material to the Company to date.
Although we devote significant resources to network security, data encryption and other measures to protect our information technology systems and data from unauthorized access or misuse, including those measures necessary to meet certain information security standards that may be required by our customers, there can be no assurance that these measures will be successful in preventing a cybersecurity or general information security incident. We also rely in part on the reliability of certain tested third parties' cybersecurity measures, including firewalls, virus solutions and backup solutions, and our business may be affected if these third-party resources are compromised.
Cybersecurity incidents may result in business disruption, the misappropriation, corruption or loss of confidential information (including personally identifiable information) and critical data (ours or that of third parties), reputational damage, litigation with third parties, regulatory fines, diminution in the value of our investment in research and development and data privacy issues and increased information security protection and remediation costs. As these cybersecurity threats, and government and regulatory oversight of associated risks,
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continue to evolve, we may be required to expend additional resources to remediate, enhance or expand upon the cybersecurity protection and security measures we currently maintain. For example, we are subject to the European Union’s General Data Protection Regulation ("GDPR"), which became enforceable from May 25, 2018, and, following the U.K.'s exit from the E.U. on January 31, 2020, our U.K. based businesses are subject to U.K.-GDPR, which enshrines equivalent requirements in U.K. law. The GDPR introduced a number of new obligations for subject companies, resulting in the need to continue dedicating financial resources and management time to GDPR compliance. Among other things, the GDPR places subject companies under obligations relating to the security of the personally identifiable information they process. While we have taken steps to ensure compliance with the GDPR, there can be no assurance that the measures we have taken will be successful in preventing an incident, including a cybersecurity incident or other data breach, which results in a breach of the GDPR. Fines for non-compliance with the GDPR may be levied up to a maximum of €20,000,000 or 4% of the subject company’s annual, group-wide turnover (whichever is higher). Individuals who have suffered damage as a result of a subject company’s non-compliance with the GDPR also have the right to seek compensation from such a company.
Future cybersecurity breaches, general information security incidents, further increases in data protection costs or failure to comply with relevant legal obligations regarding protection of data could therefore have a material adverse effect on our results of operations, financial position and cash flows.
We could incur future liability claims arising from previous businesses now closed or sold.
We have sold or closed a number of businesses over the years, but the products or services provided when the businesses were open and under our ownership could still result in potential liabilities, which could have a material adverse effect on our operations, financial position and cash flows.
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Risks associated to new and existing products
Our ability to remain profitable depends on our ability to protect and enforce our intellectual property, and any failure to protect and enforce such intellectual property could have a material adverse impact on our results of operations and financial position.
We cannot ensure that we will always have the ability to protect proprietary information and our intellectual property rights. We protect our intellectual property rights (within the U.S., Europe and other countries) through various means, including patents and trade secrets. Due to the difference in foreign trademark, patent and other laws concerning proprietary rights, our intellectual property rights may not receive the same degree of protection in other countries as they would in the U.S. or the U.K. The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Further, competitors may infringe our patents and the costs of protecting our patents could be significant. We cannot assure you that we will have adequate resources to enforce our patents. Our patents will only be protected for the duration of the patent. Some of our older key patents have expired, and others will expire over the next few years. As a result, our competitors may introduce products using the technology previously protected, and these products may have lower prices than our products, which may negatively affect our market share. To compete, we may need to reduce our prices for those products. Additionally, the expiry of certain of those patents has reduced, or will reduce, barriers to entry to possible competitors for certain products and end-markets. With respect to our unpatented proprietary technology, it is possible that others will independently develop the same or similar technology or obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. Nevertheless, we cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, and we have registered or applied to register many of these trademarks. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe our trademarks or that we will have adequate resources to enforce our trademarks.
Any failure to maintain, protect and enforce our intellectual property or the expiry of patent protection could have a material adverse impact on our results of operations, financial position and cash flows.
Expiration or termination of our right to use certain intellectual property granted by third parties, the right of those third parties to grant the right to use the same intellectual property to our competitors, and the right of certain third parties to use certain intellectual property used as part of our business, could have a material adverse impact on our results of operations, financial position and cash flows.
We have negotiated, and may from time to time in the future negotiate, licenses with third parties with respect to third party proprietary technologies used in certain of our manufacturing processes and products. If any of these licenses expire or terminate, we will no longer retain the rights to use the relevant third party proprietary technologies in our manufacturing processes and products, which could have a material adverse effect on our results of operations, financial position and cash flows. Further, the rights granted to us might be non-exclusive, which could result in our competitors gaining access to the same intellectual property.
Some of our patents may cover inventions that were conceived or first reduced to practice under, or in connection with, government contracts or other government funding agreements or grants. With respect to inventions conceived or first reduced to practice under such government funding agreements, a government may retain a non-exclusive, irrevocable, royalty-free license to practice, or have practiced for or on behalf of the relevant country, the invention throughout the world. In addition, if we fail to comply with our reporting obligations, or to adequately exploit the developed intellectual property under these government funding agreements, the relevant country may obtain additional rights to the developed intellectual property, including the right to take title to any patents related to government funded inventions or to license the same to our competitors. Furthermore, our ability to exclusively license or assign the intellectual property developed under these government funding agreements to third parties may be limited or subject to the relevant government's approval or oversight. These limitations could have a significant impact on the commercial value of the developed intellectual property.
We often enter into research and development agreements with academic institutions whereby they generally retain certain rights to the developed intellectual property. The academic institutions generally retain rights over the technology for use in non-commercial academic and research fields, including in some cases the right to license the technology to third parties for use in those fields. It is difficult to monitor and enforce such non-commercial academic and research uses, and we cannot predict whether the third party licensees would comply
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with the use restrictions of these licenses. We could incur substantial expenses to enforce our rights against such licensees. In addition, even though the rights that academic institutions obtain are generally limited to the non-commercial academic and research fields, they may obtain rights to commercially exploit developed intellectual property in certain instances. Under research and development agreements with academic institutions, our rights to intellectual property developed thereunder are not always certain, but instead may be in the form of an option to obtain license rights to such intellectual property. If we fail to exercise our option rights in a timely way and / or we are unable to negotiate a license agreement, the academic institution may offer a license to the developed intellectual property to third parties for commercial purposes. Any such commercial exploitation could adversely affect our competitive position and have a material adverse effect on our business.
If third parties claim that intellectual property used by us infringes upon their intellectual property, our operating profits could be adversely affected.
We may, from time to time, be notified of claims that we are infringing upon patents, copyrights, or other intellectual property rights owned by third parties, and we cannot provide assurances that other companies will not in the future pursue such infringement claims against us or any third party proprietary technologies we have licensed. If we were found to infringe upon a patent or other intellectual property right, or if we failed to obtain or renew a license under a patent or other intellectual property right from a third party, or if a third party from whom we are licensing technologies was found to infringe upon a patent or other intellectual property rights of another third party, we may be required to pay damages, suspend the manufacture of certain products or re-engineer or rebrand our products, if feasible, or we may be unable to enter certain new product markets. Any such claims could also be expensive and time consuming to defend and could divert management's attention and resources. In addition, if we have omitted to enter into a valid non-disclosure or assignment agreement for any reason, we may not own the invention or our intellectual property and may not be adequately protected. Our competitive position could suffer as a result of any of these events and have a material adverse impact on our results of operations, financial position and cash flows.
Any failure of our research and development activity to improve our existing products and develop new products could cause us to lose market share.
Our products are highly technical in nature, and in order to maintain and improve our market position, we depend on successful research and development activity to continue to improve our existing products and develop new products. We cannot be certain that we will have sufficient research and development capability to respond to changes in the industries in which we operate. These changes could include changes in the technological environment in which we currently operate, increased demand for new products or the development of alternatives to our products. For example, the development of lighter weight steel alloys has made the use of steel in gas cylinders a more competitive alternative to aluminum than it had been previously. We may also experience delays in completing development of, enhancements to or new versions of our products, and product innovations may not achieve the market penetration or price stability necessary for profitability. In addition to benefiting from our research collaboration with universities, we spent $4.9 million, $3.9 million and $3.3 million in 2022, 2021 and 2020, respectively, on our own research and development activities. We expect to fund our future research and development expenditure requirements through operating cash flows and restricted levels of indebtedness, but if operating profit decreases, we may not be able to invest in research and development or continue to develop new products or enhancements.
Without the timely introduction of new products or enhancements to existing products, our products could become obsolete over time, in which case our results of operations, financial position and cash flows could be adversely affected.
Increased climate control regulation could negatively impact sales of our products.
As previously mentioned, in November 2021, 197 countries joined together at COP26 in Glasgow, U.K., resulting in the Glasgow Climate Pact (see Environmental and Regulatory risks: We are subject to legislation and regulations to reduce carbon dioxide and other greenhouse gas emissions). Participants at COP26 made specific industrial commitments in order to contribute to overall climate goals. For example, the automotive sector will be required to ensure that all new car sales are to become net-zero by 2040 and in core markets by 2035. This will ultimately curtail demand for products linked to internal combustion engine vehicles, such as our zirconium automotive catalysis products.
While climate change regulation presents opportunities for Luxfer to develop new product lines and increase sales of climate-friendly products such as alternative fuel hydrogen cylinders and lightweight magnesium alloys, the impact on our existing product portfolio could have a material adverse effect on our results of operations, financial position and cash flows.
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Operational Risks
We may not be able to consummate, finance or successfully integrate future acquisitions into our business, which could hinder our strategy or result in unanticipated expenses, losses or charges.
As part of our strategy, we have supplemented and may continue to supplement organic growth by acquiring companies or operations engaged in similar or complementary businesses. If the consummation of future acquisitions, together with integration of acquired companies and businesses, excessively diverts management's attention from the operations of our existing businesses, operating results could suffer. Any acquisition made could be subject to a number of risks, including:
•failing to discover liabilities of the acquired company or business for which we may be responsible as a successor owner or operator, including litigation or environmental costs and liabilities;
•difficulties associated with the assimilation of operations and personnel of the acquired company or business, creating uncertainty for employees, customers and suppliers;
•increased debt service requirements as a result of increased indebtedness to complete acquisitions;
•the loss of key personnel in the acquired company or business;
•a negative effect on our financial results resulting from an impairment of acquired intangible assets, the creation of provisions, or write downs; and / or
•potential adverse effects on our stock price and dividend amount due to the issuance of additional stock.
We cannot ensure that every acquisition will ultimately provide the benefits originally anticipated, which could ultimately have a material adverse impact on our results of operations, financial position and cash flows.
Our failure to perform under purchase or sale contracts could result in the payment of penalties to customers or suppliers, which could have a negative impact on our results of operations, financial position or cash flows.
A failure to perform under purchase or sale contracts could result in the payment of penalties to suppliers and / or customers, which could have a negative impact on our results of operations, financial position or cash flows. Certain contracts with suppliers could obligate us to purchase a minimum product volume (clauses known as "take or pay"), and contracts with customers may impose firm commitments for the delivery of certain quantities of products within certain time periods. The risk of incurring liability under a take or pay supply contract would increase during an economic crisis, which in turn would increase the likelihood of a sharp drop in demand for our products, resulting in a potential material adverse effect on our results of operations, financial position and cash flows.
Our businesses could suffer if we lose certain employees or cannot attract and retain qualified employees.
We rely upon a number of key executives and employees, particularly members of the Executive Leadership Team. If these and certain other employees ceased to work for us, we would lose valuable expertise and industry experience and could become less profitable. We do not carry key person insurance covering the loss of any of our executives or employees.
In addition, future operating results depend in part upon our ability to attract and retain qualified engineering and technical personnel. As a result of intense competition for talent in the market, we cannot ensure that we will be able to continue to attract and retain such personnel. While our key employees are generally subject to non-competition agreements for a limited period of time following the end of their employment, if we were to lose the services of key executives or employees, it could adversely impact our ability to maintain our technological position, and / or have a material adverse effect on our results of operations, financial position and cash flows.
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We could suffer a material interruption in our operations as a result of unforeseen events or operating hazards, including severe weather events linked to climate change.
Our production facilities are located in a number of different locations around the world. Any of our facilities could suffer an interruption in production, either at separate times or at the same time, because of various and unavoidable occurrences. These include severe weather events that may become more frequent or extreme due to the effects of climate change (for example, hurricanes and floods), or other adverse events such as earthquakes, casualty events (for example, explosions, fires or material equipment breakdowns), acts of terrorism, pandemic disease, labor disruptions or other events (for example, required maintenance shutdowns). For instance, our operations in California are subject to risks related to earthquakes. In addition, some of our products are highly flammable, and there is a risk of fire inherent in their production process. Such hazards could cause personal injury or death, serious damage to, or destruction of, property and equipment, suspension of operations, substantial damage to the environment and / or reputational harm. The risk is particularly high in the production and handling of ultra-fine magnesium powders, which are highly flammable and potentially explosive in certain situations or if mishandled. Similar disruptions in the operations of our suppliers and / or customers could materially affect our business and operations. Although we carry certain levels of business interruption insurance, the coverage on certain catastrophic events or natural disasters, a failure of energy supplies and certain other events, is limited, and it is possible that the occurrence of such events may have a significant adverse impact on our results of operations, financial position and cash flows.
Employee strikes and other labor-related disruptions may adversely affect our operations.
Several of our production facilities depend on employees who are members of various trade union organizations. Strikes by, or labor disputes with, our employees may adversely affect our ability to conduct business. We cannot assure you that there will not be any strike, lock-out or material labor dispute in the future. Work interruptions or stoppages could have a material adverse effect on our results of operations, financial position and cash flows.
As a holding company, Luxfer Holdings PLC's main source of cash is distributions from our operating subsidiaries.
Our ultimate parent company, Luxfer Holdings PLC, conducts all of its operations through its subsidiaries. Accordingly, its main cash source is dividends from these 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. Since the subsidiaries are wholly-owned, claims of Luxfer Holdings PLC will generally rank junior to all other obligations of the subsidiaries. If Luxfer's operating subsidiaries are unable to make distributions, Luxfer's 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.
We have a level of indebtedness which has reduced over time, but could adversely affect our cash flows and our ability to operate our business, remain in compliance with debt covenants, make payments on our indebtedness, pay dividends and respond to changes in our business or take certain actions.
As of December 31, 2022, we had $50.0 million of indebtedness under our senior notes (the "Loan Notes") divided into two equal tranches of $25.0 million due in 2023 and 2026, respectively. There was also a $31.9 million balance on the revolving credit facility ("RCF") as of December 31, 2022.
Our indebtedness could have important consequences. For example, it could make it more difficult for us to satisfy obligations with respect to indebtedness, and any failure to comply with the obligations of any of our debt instruments, including financial and other restrictive covenants, could result in an event of default under agreements governing our indebtedness. Further, our indebtedness could require us to dedicate a substantial portion of available cash flows to pay principal and interest on our outstanding debt, which would reduce the funds available for working capital, capital expenditures, dividends, acquisitions and other general corporate purposes. Our indebtedness could also limit our ability to operate our business, including the ability to engage in strategic transactions or implement business strategies. Factors related to our indebtedness could materially and adversely affect our business and our results of operations. Furthermore, our interest expense could increase if interest rates rise, because certain portions of our debt facilities bear interest at floating rates. If we do not have sufficient cash flows to service our debt, we may be required to refinance all or part of our existing debt, sell assets, incur further indebtedness or sell securities, none of which we can guarantee we will be able to do.
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In addition, the agreements that govern the terms of our indebtedness contain, and any future indebtedness would likely contain, a number of restrictive covenants imposing significant operating and financial restrictions on us, including restrictions that may limit our ability to engage in acts that may be in our long-term best interests, including:
•incurring or guaranteeing additional indebtedness;
•capital expenditures;
•paying dividends (including to fund cash interest payments at different entity levels) or making redemptions, repurchases or distributions with respect to ordinary shares or capital stock;
•creating or incurring certain security interests;
•making certain loans or investments;
•engaging in mergers, acquisitions, investment in joint ventures, amalgamations, asset sales and sale and leaseback transactions; and
•engaging in transactions with affiliates.
These restrictive covenants are subject to a number of qualifications and exceptions. The operating and financial restrictions and covenants in our existing debt agreements and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities.
We may be able to incur significant additional indebtedness in the future. Although the agreements governing our indebtedness contain restrictions on the incurrence of certain additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. If we incur new indebtedness, the related risks, including those described above, could intensify.
Any of these factors could have a material adverse impact on our results of operations, financial position and cash flows.
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General risks
Our ability to pay regular dividends on our ordinary shares is subject to the discretion of our Board of Directors and will depend on many factors, including our results of operations, cash requirements, financial position, contractual restrictions, applicable laws and other factors, and may be limited by our structure and statutory restrictions and restrictions imposed by the Revolving Credit Facility and the Loan Notes, as well as any future debt facilities.
We may declare cash dividends on our ordinary shares as described in ITEM 8. However, the payment of future dividends will be at the discretion of our Board of Directors. Any recommendation by our Board to pay dividends will depend on many factors, including our results of operations, cash requirements, financial position, contractual restrictions, applicable laws and other factors, including availability of future debt facilities. Under English law, any payment of dividends would be subject to the Companies Act 2006 of England and Wales (the "Companies Act"), which requires, among other things, that we can only pay dividends on ordinary shares out of profits available for distribution determined in accordance with the Companies Act. Additionally, any change in the level of our dividends or the suspension of the payment thereof could adversely affect the market price of our ordinary shares.
If we fail to establish or maintain an effective system of internal controls, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our ordinary shares may, therefore, be adversely impacted.
We are subject to reporting obligations under U.S. securities laws. Our reporting obligations as a public company place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Our management is required to report on the effectiveness of our internal control over financial reporting, as required annually by Section 404(a), and quarterly by Section 302 of the Sarbanes-Oxley Act, for which we perform system and process evaluation and testing of our internal control over financial reporting.
Over time we may identify and correct deficiencies or weaknesses in our internal controls and, where and when appropriate, report on the identification and correction of these deficiencies or weaknesses. However, the internal control procedures can provide only reasonable, and not absolute, assurance that deficiencies or weaknesses are identified. Deficiencies or weaknesses that have not been identified by us could emerge, and the identification and correction of these deficiencies or weaknesses could have a material adverse impact on our results of operations. If our internal controls over financial reporting are not considered adequate, this may adversely affect our ability to report our financial results on a timely and accurate basis, which may result in a loss of public confidence or have an adverse effect on the market price of our ordinary shares, which could then adversely impact our ability to access equity markets and have a material adverse impact on our results of operations, financial position and cash flows.
It may be difficult to effect service of U.S. process and enforce U.S. legal processes against the directors of Luxfer.
Luxfer is a public limited company incorporated under the laws of England and Wales. A number of our directors and officers reside outside of the U.S., principally in the U.K. A substantial portion of our assets, and the assets of such persons, are located outside of the U.S. Therefore, it may not be possible to effect service of process within the U.S. upon Luxfer or these persons in order to enforce judgments of U.S. courts against Luxfer or these persons based on the civil liability provisions of the U.S. federal securities laws. There is doubt as to the enforceability in England and Wales, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities solely based on the U.S. federal securities laws.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal executive office in the United States is located in leased premises in Milwaukee, Wisconsin and we also have a corporate office located in owned premises in Manchester, United Kingdom. Our operations are conducted in facilities throughout the world. These facilities house manufacturing and distribution operations, as well as sales and distribution offices.
We carry out Elektron manufacturing operations at six plants in the United States and one plant in the United Kingdom.
We carry out Gas Cylinders manufacturing operations at two plants in the United States and single plants in each of the United Kingdom, Canada and China. Gas Cylinders also has a sales and distribution office in both Australia and Italy.
We have a further plant in the United States which is classified as discontinued operations.
Our manufacturing plants comprise both owned and leased properties. We believe that our production facilities are suitable for their purpose and are adequate to support our businesses.
Elektron
Madison, IL Magnesium sheet Lease 805,000
Tamaqua, PA Magnesium powders Own 65,000
Lakehurst, NJ Magnesium powders Own 80,000
Flemington, NJ Zirconium chemicals Own 65,000
Cincinnati, OH Magnesium heating pads Lease 150,000
Saxonburg, PA Magnesium powders Own 70,000
Gas Cylinders
Nottingham, England Composite and aluminum cylinders Lease 145,000
Calgary, Canada Composite cylinders Lease 65,000
Pomona, CA Composite cylinders Lease 175,000
Riverside, CA Composite cylinders Lease / Own 125,000
Shanghai, China Composite cylinders Lease 15,000
Discontinued operations
Riverside, CA Aluminum panels Lease 70,000
Item 3. 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 19 (commitments and contingencies) to the consolidated financial statements in ITEM 8. In the opinion of management, the likelihood that the ultimate disposition of these matters will have a material adverse impact is remote.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the New York Stock Exchange and is traded under the symbol "LXFR." As of December 31, 2022, the Company had 19 shareholders of record.
Dividends
During the years ended December 31, 2021 and 2020, and in February 2022, the Company paid quarterly dividends of $0.125 per ordinary share. In the final three quarters of 2022, the Company paid quarterly dividends of $0.13 per ordinary. This equated to $14.2 million paid in 2022 and $13.6 million in 2021 and 2020 respectively. A further dividend of $3.6 million was declared and paid in the first quarter of 2023. The declaration and payment of any future dividends will be at the discretion of our Board of Directors and will depend upon our results of operations, cash requirements, financial position, contractual restrictions, restrictions imposed by our indebtedness, any future debt agreements or applicable laws and other factors that our Board of Directors may deem relevant. As with all dividends declared to date, we expect future dividends to be paid out of our earnings.
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 the International Accounting Standards Board, which differ in some respects from U.S. 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.
United Kingdom tax consequences for holders of common stock
The United Kingdom tax consequences discussed below do not reflect a complete analysis or listing of all the possible United Kingdom tax consequences that may be relevant to holders of our common stock. Moreover, the statements below only apply to holders of our common stock who are residents for tax purposes outside of the United Kingdom.
Investors should consult their own tax advisers in respect of the tax consequences related to receipt, ownership, purchase or sale or other disposition of our common stock.
United Kingdom withholding tax
Under current law, the Company is not required to make any deduction or withholding for or on account of United Kingdom tax from dividends distributed on our common stock, irrespective of the tax residence or individual circumstances of the recipient shareholder.
United Kingdom income tax on dividends
A non-United Kingdom tax resident holder of our common stock will not be subject to United Kingdom income taxes on dividend income and similar distributions in respect of our shares, unless the shares are attributable to a permanent establishment or a fixed place of business maintained in the United Kingdom by such non-United Kingdom holder.
Stamp duty and stamp duty reserve tax ("SDRT")
While the ordinary shares are held within a depository trust company ("DTC"), provided that DTC satisfies various conditions specified in U.K. legislation, electronic book-entry transfers of such shares should not be subject to U.K. stamp duty, and agreements to transfer such shares should not be subject to U.K. stamp duty reserve tax (“SDRT”). The parties have obtained confirmation of this position by way of formal clearance by HMRC. Likewise, transfers of, or agreements to transfer, the ordinary shares from the DTC clearance service into another clearance service or into a depository receipt system should not, provided that the other clearance service or depository receipt system satisfies various conditions specified in U.K. legislation, be subject to U.K. stamp duty or SDRT.
In the event that the ordinary shares have left the DTC clearance service, other than into another clearance service or depository receipt system, any subsequent transfer of, or agreement to transfer, such ordinary shares may, subject to any available exemption or relief, be subject to U.K. stamp duty or SDRT at a rate of 0.5% of the consideration for such transfer or agreement. Any such U.K. stamp duty or SDRT will generally be payable by the transferee and must be paid (and any relevant transfer document stamped by HMRC) before the transfer can be registered in the books of Luxfer Holdings PLC.
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In the event that ordinary shares which have left the DTC clearance service, other than into another clearance service or depository receipt system, are subsequently transferred back into a clearance service or depository receipt system, such transfer, or agreement to transfer, may, subject to any available exemption or relief, be subject to U.K. stamp duty or SDRT at a rate of 1.5% of the consideration for such transfer (or, where there is no such consideration, 1.5% of the value of such ordinary shares). In practice, this liability for stamp duty or SDRT is generally borne by the person depositing the relevant shares in the clearance service or depository receipt system.
Share performance graph
The following information under the caption "Share Performance Graph" in this ITEM 5 of this Annual Report on Form 10-K is not deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the liabilities of Section 18 of the Exchange Act and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent we specifically incorporate it by reference into such a filing.
The following graph sets forth the cumulative total shareholder return on our ordinary shares for the last five years, assuming an investment of $100 on December 31, 2017, and the reinvestment of all dividends since that date to December 31, 2022. The graph also contains for comparison purposes the Russell 2000 Index, assuming the same investment level and reinvestment of dividends.
By virtue of our market capitalization and characteristics, we believe the Russell 2000 Index is an appropriate published industry index for comparison purposes.
Purchase of Equity Securities
In 2022, the Company purchased 711,572 ordinary shares for a total cost of $11.1 million.
Item 6. [Reserved]
Not applicable
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Information regarding forward-looking statements
This Annual Report on Form 10-K 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 Annual 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 raw materials, labor and energy, as well as the ability to pass on cost increases to customers;
•currency fluctuations and other financial risks;
•our ability to protect our intellectual property;
•the 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," "Risk factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K 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.
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About Luxfer
Luxfer Holdings PLC ("Luxfer," "the Company," "we," "our") is a global industrial company innovating niche applications in materials engineering. Luxfer focuses on value creation by using its broad array of technical know-how and proprietary technologies to help create a safe, clean and energy-efficient world. Luxfer's high-performance materials, components and high-pressure gas containment devices are used in defense, first response and healthcare, transportation and general industrial applications.
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, during 2022, we were faced with two critical suppliers of magnesium and zirconium respectively declaring force majeure, of which the former remains in place. The continuing 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 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
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 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 2023, we expect the following operating objectives and trends to impact our business:
•Continuing high activity on revenue growth initiatives with particular focus on increasing volumes;
•Actions to ensure continuity of supply of critical materials and services while safeguarding margins;
•Execution of productivity improvements and increases in selling prices to mitigate and pass through current cost pressure;
•Further improvements in ESG standing through investment in new projects;
•Focus on recruiting, developing and maintaining talent, through our new leadership development programs, while driving a high-performance culture; and
•Continued emphasis on operating cash generation and maintaining strong working capital performance.
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CONSOLIDATED RESULTS OF OPERATIONS
The consolidated results of operations from continuing operations of Luxfer were as follows:
Years ended December 31, % / point change
Selling, general and administrative expenses (43.1) (47.3) (39.8) (8.9) % 18.8 %
Acquisition and disposals costs (0.3) (1.5) — (80.0) % n/a
Other income — 0.2 — (100.0) % n/a
% of net sales — % 0.1 % — % (0.1) n/a
% of net sales — % 0.6 % 1.3 % (0.6) (0.7)
Income before equity in net income of affiliates 32.0 30.0 20.9 6.7 % 43.5 %
Equity in loss of unconsolidated affiliates (net of tax) — — (0.1) — % (100.0) %
% of net sales — % — % — % — —
Net income from continuing operations $ 32.0 $ 30.0 $ 20.8 6.7 % 44.2 %
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Net sales
Adjusting for foreign exchange headwinds of $13.9 million, consolidated net sales have increased by 16.9% in 2022 from 2021. The passing through of material cost inflation, where not constrained by contract, accounted for approximately 75.0% of this increase. Furthermore, there was benefit in the year from:
•Increased sales of magnesium powders used in commercial and military applications;
•Higher demand for composite cylinders used in aerospace and medical applications, although constrained by historical contractual prices;
•Increased sales of magnesium alloys, especially those used in the aerospace market;
•Higher demand for our zirconium products, particularly in industrial applications; and
•An additional contribution to net sales in Luxfer Gas Cylinders of $7.1 million due to the acquisition of Structural Composites Industries LLP ("SCI") at the end of the first quarter 2021, which primarily impacted sales of cylinders used in aerospace and alternative fuels applications.
These increases were partially offset by:
•Unfavorable foreign exchange variances as highlighted above;
•Softening sales of flameless ration heaters ("FRH") due to lower levels of troop deployment and of Chemical detection kits due to supply chain constraints, and
•Reduced sales of CNG alternative fuel cylinders.
The 15.2% increase in consolidated net sales across most major product groups in 2021 from 2020 was primarily due to the acquisition of SCI, as well as the recovery in volumes adversely impacted by COVID-19 in the prior year. The most significant factors were:
•An additional contribution of $24.9 million due to the acquisition of SCI;
•Increased sales of SCBA cylinders used by first responders and of cylinders used for gas calibration and other industrial applications;
•Increased sales in Luxfer MEL Technologies of zirconium automotive catalysis products;
•Increased sales of military powders used in countermeasure flares;
•Increased sales of Luxfer Graphic Arts magnesium photo-engraving plates; and
•Favorable foreign exchange variances of $10.3 million or 3.2%.
These increases were partially offset by decreased sales of heater meals and chemical response kits in our Luxfer Magtech business.
Gross profit
The 3.3 percentage point decrease in gross profit as a percentage of sales in 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 0.8 percentage point increase in gross profit as a percentage of sales in 2021 from 2020 was primarily the result of production efficiency linked to increased volumes as we recovered from the prior year impact of COVID-19. This was partially offset by the impact of material cost inflation not fully covered by price increases primarily in the fourth quarter.
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Selling, general and administrative expenses ("SG&A")
SG&A costs as a percentage of sales have decreased by 2.4 percentage points in 2022 from 2021, largely due to the impact of price increases on revenue, as well as cost reduction programs effected in the prior year. We also benefited from foreign currency translation of $2.3 million.
SG&A costs as a percentage of sales increased marginally by 0.3 percentage points in 2021 from 2020.
Research and development costs
Research and development costs as a percentage of sales has increased by 0.2 percentage points in 2022 when compared to 2021, with actual expenditure increasing by 25.6%, reflecting increased investment in new products and future growth capability.
Research and development costs as a percentage of sales were flat in 2021 when compared to 2020, with actual expenditure increasing by 18.2% as activity levels picked up as we recovered from the COVID-19 economic downturn.
Restructuring charges
The $1.9 million restructuring charges in 2022 includes:
•A further $1.7 million in relation to the closure of Luxfer Gas Cylinders France; and
•$0.2 million 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 $6.2 million restructuring charges in 2021 includes:
•A further $5.0 million in relation to the closure of Luxfer Gas Cylinders France;
•$0.9 million of one-time employee termination costs in the Elektron division, largely in relation to the divestiture of our small Luxfer Magtech production facility in Ontario, Canada; and
•$0.3 million of miscellaneous restructuring project costs in the Gas Cylinders division.
Acquisition and disposals costs
Net costs of $0.3 million and $1.5 million in 2022 and 2021 respectively, primarily relate to the 2021 acquisition of SCI.
Other charges
The $1.1 million other charges incurred in 2021 relates to the settlement of a class action lawsuit in the Gas Cylinders segment from an alleged historic violation of the California Labor Code, concerning a Human Resources administration matter.
Net interest expense
Net interest expense of $3.9 million in 2022 increased from $3.1 million in 2021 due to a combination of increased interest rates and higher drawings.
Net interest expense of $3.1 million in 2021 decreased from $5.0 million in 2020 largely due to the $25 million early repayment in December 2020 of the Loan Notes due in 2021.
Defined benefit pension credit
The defined benefit pension credit of $0.1 million in 2022, includes a credit on the U.K. plan of $3.0 million, partially offset by the recognition of $2.9 million of unamortized losses on the U.S. plan as a result of the settlement triggered by the lump sum exercise in 2022, ahead of the buyout of the U.S. pension plan which we expect to be completed in early 2023.
The defined benefit pension credit of $2.3 million has decreased by $2.0 million in 2021 from 2020. This was primarily due to the combined effect on the U.K. plan of lower projected asset returns and a higher post-2030 inflation projection in the U.K., partially offset by a fall in the discount rate.
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Provision for income taxes
The 6.7 percentage point increase in the effective tax rate in 2022 from 2021 was primarily due to the impact in the prior year of the U.K. tax rate change enacted (from 19% to 25%) which increased the valuation of the U.K. related net deferred tax asset (largely related to the U.K. defined benefit pension plan).
The 9.5 percentage point decrease in the effective tax rate in 2021 from 2020 was primarily due to the impact of the above mentioned change in the U.K. tax rate. In addition, a deferred tax credit of $2.6 million has been recognized in the income statement in respect of future tax relief available as a result of a special one-off pension contribution made to the U.K. plan in December 2021.
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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO GAAP MEASURES
The following table of non-GAAP summary financial data presents a reconciliation of net income from continuing operations 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.
Years ended December 31,
Net income from continuing operations 32.0 30.0 20.8
Accounting charges relating to acquisitions and disposals of businesses:
Amortization on acquired intangibles 0.7 0.9 0.7
Acquisitions and disposals cost 0.3 1.5 —
Defined benefit pension credit (0.1) (2.3) (4.3)
Restructuring charges 1.9 6.2 8.9
Other charges — 1.1 0.4
Share-based compensation charges 2.5 2.8 2.8
Other non-recurring tax items — (1.9) —
Income tax on adjusted items 0.1 (2.1) (0.4)
Adjusted net income from continuing operations 37.4 36.2 28.9
Adjusted earnings per ordinary share from continuing operations
Diluted earnings per ordinary share 1.16 1.07 0.74
Adjusted diluted earnings per ordinary share(1) 1.36 1.29 1.03
(1) 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.
Years ended December 31,
Adjusted net income from continuing operations 37.4 36.2 28.9
Add back:
Other non-recurring tax items — 1.9 —
Income tax on adjusted items (0.1) 2.1 0.4
Adjusted EBITA from continuing operations 50.2 48.7 41.2
Loss on disposal of property, plant and equipment — — 0.1
Adjusted EBITDA from continuing operations 63.1 63.4 53.9
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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.
Years ended December 31,
Adjusted net income from continuing operations $ 37.4 $ 36.2 $ 28.9
Add back:
Other non-recurring tax items — 1.9 —
Income tax on adjusted items (0.1) 2.1 0.4
Provision for income taxes 9.0 5.4 6.9
Adjusted provision for income taxes 8.9 9.4 7.3
Adjusted effective tax rate from continuing operations 19.2 % 20.6 % 20.2 %
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, which is our segment income metric, represents operating income adjusted for restructuring charges, other charges, acquisitions and disposals cost, depreciation and amortization, and share-based compensation charges. A reconciliation to net income and taxes can be found in ITEM 8, Note 17.
GAS CYLINDERS
The results of operations from the Gas Cylinders segment are for continuing operations only.
The net sales and adjusted EBITDA for Gas Cylinders were as follows:
Years ended December 31, % / point change
Net sales
The 3.0% increase in Gas Cylinders sales in 2022 from 2021 was primarily the result of increased demand for composite cylinders used in aerospace, partially offset by $7.8 million of foreign exchange headwind and a reduction in CNG alternative fuel and SCBA cylinder sales. The segment has benefited from $7.1 million of sales due to the acquisition of SCI at the end of the first quarter in 2021, which has positively impacted sales of cylinders in aerospace and alternative fuels.
Net sales in Gas Cylinders have been impacted throughout the year by the fixed-price contracts in place across the segment.
The 25.7% increase in Gas Cylinders sales in 2021 from 2020 was primarily the result of the recovery of our markets following COVID-19 related disruption in the prior year, as well as the acquisition of SCI which generated $24.9 million of additional revenues. Revenues increased across all significant product lines except for medical oxygen cylinders, sales of which had held up relatively well in the prior year.
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Adjusted EBITDA
The 5.7 percentage point decrease in adjusted EBITDA for Gas Cylinders as a percentage of net sales in 2022 from 2021 is a result of the segment being impacted by timing of contractually constrained cost pass-through. Cost reduction effort activities more than offset adverse foreign exchange impact in the year.
The 2.3 percentage point decrease in adjusted EBITDA for Gas Cylinders as a percentage of net sales in 2021 from 2020 was primarily the result of losses suffered by the newly acquired SCI business from the end of the first quarter, as well as material cost inflation in excess of price increases primarily in the fourth quarter. This was partially offset by productivity improvements as volumes recovered from the Covid-19 affected prior year.
ELEKTRON
The net sales and adjusted EBITDA for Elektron were as follows:
Years ended December 31, % / point change
Net sales
The 22.4% increase in Elektron sales in 2022 from 2021 was heavily impacted by the passing through of material cost-inflation. Furthermore, there was benefit in the year from:
•Increased sales of magnesium powders used in commercial and military applications;
•Improved sales of magnesium alloys, especially those used in the aerospace market; and
•Higher demand for our zirconium products, particularly in industrial applications.
These increases were partially offset by a decrease in sales of FRHs and chemical kits supplied by Luxfer Magtech. Net sales were also adversely impacted by $6.1 million of foreign exchange.
The 7.1% increase in Elektron sales in 2021 from 2020 was primarily the result of the recovery from COVID-19 related disruption affecting the prior year, especially:
•Increased sales of zirconium-based industrial catalysts;
•Increased sales of magnesium photo-engraving plates;
•Increased sales of military powders used in countermeasure flares; and
•Increased sales of wrought magnesium alloys, especially those used in our transportation end markets.
This was partially offset by decreased revenues from Luxfer Magtech chemical detection kits and from heater meals.
Adjusted EBITDA
The 0.2 percentage point increase in adjusted EBITDA for Elektron as a percentage of net sales in 2022 from 2021 was primarily the result of the segment's ability to pass on the inflationary cost increases, as well as the benefit of positive foreign exchange variances.
The 3.0 percentage point increase in adjusted EBITDA for Elektron as a percentage of net sales in 2021 from 2020 was primarily the result of productivity improvements as volumes recovered from the Covid-19 affected prior year, as well as favorable product sales mix.
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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 ("RCF") and accompanying ancillary hedging facilities and the Loan Notes due 2023 and 2026. Our principal liquidity needs are:
•funding acquisitions;
•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 RCF;
•working capital requirements, particularly in the short term as we aim to achieve organic sales growth; and
•hedging facilities used to manage our foreign exchange and aluminum purchase price risks.
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 RCF throughout all of the quarterly measurement dates from and including September 30, 2011, to December 31, 2022.
In October 2021, the Company completed a refinancing of its existing RCF, extending its tenure to October 2026, while providing increased flexibility to incur additional indebtedness outside of this agreement if required and reducing the covenant burden. In January 2023, the Company has increased the capacity of its existing RCF to $125.0 million, an increase of $25.0 million.
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.
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Cash Flows from Continuing Operations
Operating activities
Cash provided by operating activities was $15.8 million and $26.0 million in 2022 and 2021 respectively, which includes approximately $10.0 million and $4.0 million of cash spent on restructuring activities in those years. It was primarily related to net income from operating activities, net of the following non-cash items: (i) depreciation and amortization; (ii) share-based compensation charges; (iii) pension adjustments and (iv) net changes to assets and liabilities. In 2022, the Company has increased its working capital balances, predominantly as a result of inventory build to try and reduce inflationary price rises. In 2021, the Company also made an additional, special one-off deficit reduction payment in the U.K. for $12.7 million.
Investing activities
Net cash used for investing activities was $5.6 million in 2022, compared to net cash used for investing activities of $5.0 million in 2021. The following investing activities impacted our cash flow:
Capital expenditures
Capital expenditures in 2022 was $8.3 million compared to $9.1 million in 2021. 2021 included additional spend as we delayed some projects in the prior year in response to COVID-19. We anticipate capital expenditures for 2023 to be around $15 million as we increase investment in order to grow the business.
Proceeds from sale of property, plant and equipment
In May 2022, the Company sold a previously held-for-sale building in the Elektron segment for $3.7 million. Consideration was paid in full upon sale.
Proceeds from sale of business
In March 2021, the Company sold its U.S. aluminum gas cylinder business for net cash proceeds of $20.2 million. In September 2021, the Company sold its Superform U.K. business for net consideration of $4.0 million, of which $3.0 million was received in 2021 and $1.0 million deferred until 2022. The deferred consideration, while still due to the Company, the payment has not yet been received so has been fully impaired in 2022.
In July 2020, the Company sold its 51% investment in Luxfer Uttam India Private Limited for net cash proceeds of $1.5 million. In September 2021, the Company received deferred consideration of $0.3 million for this sale.
Settlements from sale of business
In October 2022, the Company agreed a final settlement of $1.0 million to the purchasers of the previously disposed aluminum gas cylinder business. The settlement was a reduction to the original consideration paid.
Acquisitions, net of cash acquired
In March 2021, the Company completed the acquisition of the SCI business of Worthington Industries, Inc., based in Pomona, California, for $19.3 million cash consideration.
Financing activities
In 2022, net cash used for financing activities was $2.0 million, (2021: $16.1 million). We made net drawdowns on our borrowing facilities of $24.8 million (2021: net drawdowns of $6.4 million) and dividend payments of $14.2 million (2021: $13.6 million), equating to $0.515 per ordinary share (2021: $0.50 per ordinary share). In 2022, the Company spent $11.1 million repurchasing approximately 700,000 shares, (2021: $6.4 million repurchasing approximately 300,000 shares).
Loan Notes 2023 and 2026
The Note Purchase Agreement contains customary covenants and events of default, in each case with customary and appropriate grace periods and thresholds. In addition, the Note Purchase Agreement requires us to maintain compliance with a minimum interest coverage ratio and a leverage ratio. The interest coverage ratio measures our EBITDA (as defined in the Note Purchase Agreement) to Net Finance Charges (as defined in the Note Purchase Agreement). We are required to maintain an interest coverage ratio of 4.0:1. The leverage ratio measures our Total Net Debt (as defined in the Note Purchase Agreement) to Adjusted Acquisition EBITDA (as defined in the Note Purchase Agreement). We are required to maintain a leverage ratio of no more than 3.0:1. We have been in compliance with the covenants under the Note Purchase Agreement throughout all of the quarterly measurement dates from and including September 30, 2011, to December 31, 2022.
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The Loan Notes due 2023 and 2026 and the Note Purchase Agreement are governed by the law of the State of New York.
The Loan Notes due 2023 and 2026 are denominated in U.S. dollars, which creates a natural partial offset between the dollar-denominated net assets and earnings of our U.S. operations and the dollar-denominated debt and related interest expense of the notes. We have included the Note Purchase Agreement and a form of the Loan Notes due 2023 and 2026 as exhibits to this Annual Report and refer you to the exhibits for more information on the Note Purchase Agreement and the Loan Notes due 2023 and 2026.
Senior Facilities Agreement
A new Senior Facilities Agreement was signed in October 2021, for more information see ITEM 8 Note 11.
Structure. At December 31, 2022 the Senior Facilities Agreement provided $100 million of committed debt facilities in the form of a multi-currency (GBP sterling, U.S. dollars or euros) RCF and an additional $50 million of uncommitted facilities through an accordion clause. In January 2023, we increased the RCF to $125 million and a subsequent reduction in the uncommitted facility to $25 million. The facilities mature in October 2026. As of December 31, 2022, we had drawn down $31.9 million under the Revolving Credit Facility (December 31, 2021: $10.8 million).
Availability. The facility is used for loans and overdrafts. Amounts unutilized under the RCF (or, if the case, under the revolving portion of the accordion) are allocated to ancillary facilities available under the Senior Facilities Agreement in connection with overdraft facilities, bilateral loan facilities and letter of credit facilities. As of December 31, 2022, we had drawn down $1.8 million under the ancillary facilities (December 31, 2021: $2.2 million). We may use amounts drawn under the RCF for our general corporate purposes and certain capital expenditures, as well as for the financing of permitted acquisitions and reorganizations. As of December 31, 2022, $68.1 million (net of $31.9 million drawn down) was available under the RCF. The last month in which we may draw funds from the RCF is September 2026.
The Company also had a separate (uncommitted) bonding facility for bank guarantees; denominated in GBP sterling totaling £0.5 million ($0.6 million) and £0.1 million ($0.2 million) was utilized at December 31, 2022.
Interest rates and fees. Borrowings under the facility bear an interest rate equal to an applicable margin plus either EURIBOR, in the case of amounts drawn in euros, or SONIA (Sterling Overnight Index Average), in the case of amounts drawn in GBP sterling or U.S. dollars.
The tables below sets out the range of ratios and the related margin percentage currently in effect.
Leverage Margin
(% per annum)
Less than or equal to 2.5:1, but greater than 2.0:1 2.50
Less than or equal to 2.0:1, but greater than 1.5:1 2.25
Less than or equal to 1.5:1, but greater than 1.0:1 2.00
Less than or equal to 1.0:1 1.75
As of December 31, 2022, we had drawn down $31.9 million under the RCF (December 31, 2021: $10.8 million). A commitment fee is levied each quarter against any unutilized element of the RCF, excluding overdraft or ancillary facilities.
In the event of a sale of all or substantially all of our business and / or assets, or if any person or group of persons acting in concert gains direct or indirect control (as defined in the Senior Facilities Agreement) of Luxfer Holdings PLC, we will be required to immediately repay all outstanding amounts under the RCF (and, if the case, the accordion) and the ancillary facilities under the Senior Facilities Agreement.
In addition, the Senior Facilities Agreement requires us to maintain compliance with an interest coverage ratio and a leverage ratio. The interest coverage ratio measures our EBITDA (as defined in the Senior Facilities Agreement) to Net Finance Charges (as defined in the Senior Facilities Agreement). We are required to maintain a minimum interest coverage ratio of 4.0:1. The leverage ratio measures our Total Net Debt (as defined in the Senior Facilities Agreement) to the Relevant Period Adjusted Acquisition EBITDA (as defined in the Senior Facilities Agreement). We are required to maintain a leverage ratio of no more than 3.0:1.
We have been in compliance with the covenants under the Senior Facilities Agreement throughout all of the quarterly measurement dates from and including September 30, 2011, to December 31, 2022.
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The Senior Facilities Agreement is governed by English law. For more information see ITEM 8, Note 11.
Dividends
We paid dividends in 2022 of $14.2 million (2021: $13.6 million), or $0.515 (2021: $0.50) per ordinary share.
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 the International Accounting Standards Board, which differ in some respects from U.S. 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.