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.
Authorized shares
Our authorized share capital consists of 40.0 million ordinary shares with a par value of £0.50 per share.
Contractual obligations
The following summarizes our significant contractual obligations that impact our liquidity:
Payments Due by Period
In millions Total Less than1 year 1 – 3years 3 – 5years After5 years
Contractual cash obligations
Revolving Credit Facility 31.9 — — 31.9 —
Capital commitments 1.4 1.4 — — —
Off-balance sheet measures
At December 31, 2022, we had no off-balance sheet arrangements other than the three bonding facilities as described above.
COMMITMENTS AND CONTINGENCIES
Capital commitments
At December 31, 2022, the Company had capital expenditure commitments of $1.4 million (2021: $1.5 million and 2020: $1.1 million) for the purchase of new plant and equipment.
Committed banking facilities
The Company refinanced in October 2021, see Note 11 for details of the refinance.
At December 31, 2022 the Company had committed banking facilities of $100.0 million with an additional $50.0 million of uncommitted facilities through an accordion provision. Of these committed facilities, $31.9 million was drawn at December 31, 2022.
At December 31, 2021, the Company had committed banking facilities of $100.0 million with an additional $50.0 million of uncommitted facilities through an accordion provision. Of the committed facilities, $10.8 million was drawn at December 31, 2021.
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Contingencies
In November 2018, an alleged explosion occurred at a third-party waste disposal and treatment site in Grand View, Idaho, reportedly causing property damage, personal injury, and one fatality. We contracted with a service company for removal and disposal of certain waste resulting from the magnesium powder manufacturing operations at the Reade facility in Manchester, New Jersey. We believe this service company, in turn, contracted with the third-party disposal company, at whose facility the explosion occurred, for treatment and disposal of the waste. In November 2020, we were named as a defendant in three lawsuits in relation to the incident – one by the third-party disposal company, one by the estate of the decedent, and one by an injured employee of the third-party disposal company. We believe that we are not liable for the incident, have asserted such, and continue to fully defend the Company against these lawsuits. Therefore, we do not currently expect any eventual outcome in these matters to have a material impact on the Company's financial position or results of operations.
NEW ACCOUNTING STANDARDS
See ITEM 8, Note 1 of the notes to the Consolidated Financial Statements, included in this Form 10-K, for information pertaining to recently adopted accounting standards or accounting standards to be adopted in the future.
CRITICAL ACCOUNTING ESTIMATES
We have adopted various accounting policies to prepare the consolidated financial statements in accordance with GAAP. Our significant accounting policies are more fully described in ITEM 8, Note 1 of the Notes to Consolidated Financial Statements. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry and information available from other outside sources, as appropriate. We consider an accounting estimate to be critical if:
•it requires us to make assumptions about matters that were uncertain at the time we were making the estimate; and
•changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.
Our critical accounting estimates include the following:
Impairment of goodwill and other identifiable intangible assets
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible net assets and identifiable intangible assets purchased and liabilities assumed.
Goodwill is tested at least annually for impairment and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may elect not to perform the qualitative assessment for some or all reporting units and perform a quantitative impairment test. Management carried out its qualitative review on the last day of the third quarter of 2022 and 2021, which showed no indicators of impairment. As a result, the Company concluded its review and was not required to perform a quantitative review.
Identifiable intangible assets
Our primary identifiable intangible assets include: (i) customer relationships and technology; and (ii) traded related assets. All our identifiable intangible assets have finite lives and are amortized over that period. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. No such events occurred during the year ended December 31, 2022.
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Pension and other post-retirement plans
We sponsor U.S. and non-U.S. defined-benefit pension and other post-retirement plans. The amounts recognized in our consolidated financial statements related to our defined-benefit pension and other post-retirement plans are determined from actuarial valuations. Inherent in these valuations are assumptions, including: (i) discount rates; (ii) inflation rates; (iii) pension increases; and (iv) life expectancy. These assumptions are updated annually and are disclosed in ITEM 8, Note 14 to the Notes to Consolidated Financial Statements. Differences in actual experience or changes in assumptions can have a material impact on the pension and other post-retirement obligations and future expense.
We recognize changes in the fair value of plan assets and net actuarial gains or losses for pension and other post-retirement benefits annually in the fourth quarter each year ("mark-to-market adjustment") and, if applicable, in any quarter in which an interim remeasurement is triggered. Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension and other post-retirement plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses each year are (i) changes in the discount rate used to value pension and other post-retirement benefit obligations as of the measurement date and (ii) differences between the expected and the actual return on plan assets. This accounting method also results in the potential for volatile and difficult to forecast mark-to-market adjustments. The remaining components of pension expense, including service and interest costs and the expected return on plan assets, are recorded on a quarterly basis as ongoing pension expense.
Discount rate
The discount rate used represents the annualized yield based on a cash flow matched methodology with reference to an AA corporate bond spot curve and having regard to the duration of the Plan’s liabilities. This yield produced a weighted-average discount rate for our U.K. plans of 4.80% in 2022, 1.90% in 2021 and 1.40% in 2020. The discount rate on our U.S. plans was 5.10% in 2022, 2.70% in 2021 and 2.30% in 2020. There are no known or anticipated changes in our discount rate assumption that will impact our pension expense in 2023.
To indicate the sensitivity of results to this assumption, a 0.1% per annum increase in the discount rate for our U.K. plans would reduce the value of the liabilities and therefore increase the pension surplus by approximately $2.4 million and increase the projected 2023 income statement credit by approximately $0.1 million.
Inflation rate
In September 2019, the UK Statistics Authority announced plans to reform the RPI inflation index. On November 25, 2020, the government and UK Statistics Authority confirmed these plans to reform the RPI index to bring it into line with the CPIH index from 2030, with no compensation for the holders of index-linked gilts. Inflation measured by the CPIH is consistently significantly lower than that measured by RPI, and therefore, these plans imply a significant expected reduction in RPI inflation from 2030 onwards. As a result we have taken a stepped approach and used different inflation rates pre and post 2030.
To indicate the sensitivity of results to the CPI assumption, a 0.1% per annum decrease in all CPI-linked assumptions, (including pension increases) for our U.K. plan, would reduce the value of the liabilities and therefore increase the pension surplus at December 31, 2022 by approximately $2.4 million and increase the projected 2023 income statement credit by approximately $0.1 million.
Pension increases
The pension increase assumptions have been set with reference to the corresponding CPI inflation assumption and take account of the caps and floors applicable to the various components of pension indexation.
Life expectancy
The life expectancies of male and female members aged 65 on 31 December 2022 are assumed to be 21.2 and 23.0 years, respectively, with the life expectancies of male and female members aged 65 on 31 December 2042 assumed to be 22.5 and 24.5 years, respectively.
To indicate the sensitivity of results to the life expectancy assumption, a one year increase in assumed life expectancy on the U.K. plan could increase the value of the liabilities and therefore decrease the pension surplus at December 31, 2022 by approximately $7.2 million.
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Expected rate of return
Our expected rate of return on plan assets for our U.K. plans was 5.60% in 2022, 3.30% in 2021 and 3.00% in 2020. The expected rate of return on our U.S. plans was 4.70% in 2022, 2.50% in 2021 and 5.00% in 2020. The expected rate of return is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecast economic conditions, our asset allocations, input from external consultants and broader longer-term market indices.
See ITEM 8, Note 14 of the Notes to Consolidated Financial Statements for further information regarding pension and other post-retirement plans.
Loss contingencies
Accruals are recorded for various contingencies, including legal proceedings, self-insurance and other claims that arise in the normal course of business. The accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarial determined estimates. Additionally, we record receivables from third party insurers when recovery has been determined to be probable.
Our critical judgment revolves around the recognition of litigation and environmental liabilities in relation to the closure of our French site. We have recognized a loss contingency of $3.3 million, for which we have engaged with external experts to assist with the valuation of these liabilities.
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Item 7A. Quantitative and qualitative disclosures about market risk
Market risk is the potential economic loss arising from adverse changes in market rates and market prices such as interest rates, foreign currency exchange rates, commodity prices and changes in the market value of equity instruments. We are exposed to market risk, primarily related to foreign exchange, commodity prices and interest rates. Counterparties to all derivative contracts are major financial institutions. All instruments are entered into for other than trading purposes. The major accounting policies and utilization of these instruments is described more fully in ITEM 8, Note 1 of the Notes to Consolidated Financial Statements.
Foreign currency risk
We conduct business in various locations throughout the world and are subject to market risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar. Periodically, we use derivative financial instruments to manage these risks. The functional currencies of our foreign operating locations are generally the local currency in the country of domicile. We manage these operating activities at the local level and revenues, costs, assets and liabilities are generally denominated in local currencies, thereby mitigating the risk associated with changes in foreign exchange. However, our results of operations and assets and liabilities are reported in U.S. dollars and thus will fluctuate with changes in exchange rates between such local currencies and the U.S. dollar.
To hedge foreign currency risks, we enter into short duration currency contracts. The below table details the foreign currency contracts which we have in place over sales and purchases. Changes in the fair value of all derivatives are recognized immediately in income unless the derivative qualifies as a hedge of future cash flows. Gains and losses related to a hedge are deferred and recorded in the Consolidated Balance Sheets as a component of Accumulated Other Comprehensive Income ("AOCI") and are subsequently recognized in the Consolidated Statements of Income and Comprehensive Statements of Income when the hedged item affects earnings.
Sales hedges U.S. dollars Euros Canadian Dollars
Sales hedges U.S. dollars Euros Japanese Yen
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Commodity price risk
We are exposed to commodity price risks in relation to the purchases of our raw materials.
There is no financial market to hedge magnesium, zirconium raw materials or carbon fiber, and prices for these raw materials have been volatile in recent years, with substantial increases in the second half of 2021 and throughout 2022. To help mitigate these risks, we have a number of fixed-price supply contracts for a portion of these raw materials, which limits our exposure to price volatility over a calendar year. However, we remain exposed over time to rising prices in these markets, and therefore rely on the ability to pass on any major price increases to our customers in order to maintain our levels of profitability especially for for carbon fiber wrapped composite cylinders, zirconium, and magnesium-based products. We have also in the last few years, when we felt it was appropriate, made additional physical purchases of magnesium and some rare earth chemicals to delay the impact of higher prices, but this has had a cash flow impact on occasion, thereby leading to greater utilization of our revolving credit bank facilities.
Primary aluminum is a global commodity, with its principal trading market on the LME. In the normal course of business, we are exposed to aluminum price volatility to the extent that the costs of aluminum purchases are more closely related to the LME price than the sales prices of certain of our products. Our Gas Cylinders Segment will buy various aluminum alloys, in log, sheet, or tube form, and the contractual price will usually include an LME-linked base price plus a premium for a particular type of alloy, as well as the cost of casting, rolling or extruding. The price of high-grade aluminum, which is actively traded on the LME, has fluctuated significantly in recent years.
Interest rate risk
As of December 31, 2022, we had both fixed rate and variable rate debt outstanding on our consolidated balance sheet. As a result of this exposure, we have in the past hedged interest payable under our floating rate indebtedness based on a combination of forward rate agreements, interest rate caps and swaps. There were no fixed or variable rate interest hedge agreements in place as of December 31, 2022, and December 31, 2021.
Luxfer has exposure to variable interest rates when it draws down on the revolving credit facilities. As a result of this exposure, we may decide to hedge interest payable based on a combination of forward rate agreements, interest rate caps and swaps. It has also used fixed rate debt within its financing structure to mitigate volatility in interest rate movements as disclosed in Notes 11 and 12 in the Notes to the Consolidated Financial Statements.
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Item 8. Financial Statements and Supplementary Data
Luxfer Holdings PLC
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 876) 46
Consolidated Statements of Income 48
Consolidated Statements of Comprehensive Income 49
Consolidated Balance Sheets 50
Consolidated Statements of Cash Flows 51
Consolidated Statements of Changes in Equity 52
Notes to Consolidated Financial Statements 53
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Luxfer Holdings PLC
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Luxfer Holdings PLC and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022and 2021, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2022in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Pension Benefit Obligations
As described in Notes1 and 14 to the consolidated financial statements, the Company had pension benefit obligations of $258.2million as of December 31, 2022.As disclosed by management, the amounts in the consolidated financial statements related to the pension benefit obligations are determined from actuarial valuations. The valuation of the pension benefit obligations requires estimation in determining appropriate assumptions including: (i) discount rates; (ii) inflation rates; (iii) pension increases; and (iv) life expectancy. Differences in actual experience or changes in these assumptions can have a material impact on the determination of the liabilities in the Company’s pension schemes.
The principal considerations for our determination that performing procedures relating to the valuation of the pension benefit obligationsis a critical audit matter are the significant judgments and assumptions made by management, including the use of management’s specialists, when determining the pension benefit obligations. This in turn resulted in a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate management's significant assumptions for: (i) discount rates; (ii) inflation rates; (iii) pension increases; and (iv) life expectancy. The audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.These procedures included testing the effectiveness of controls relating to the valuation of the pension benefit obligations. These procedures alsoincluded, among others, testing the completeness, accuracy and relevance of the underlying data used in the valuation of the pension benefit obligations. With the assistance of professionals with specialized skill and knowledge, these procedures also included (i) testing management’s process for estimating the pension benefit obligations, (ii) evaluating the reasonableness of the assumptions used in calculating the pension benefit obligations, including the discount rates, inflation rates, pension increases, and life expectancy assumptions; and (iii) assessing the appropriateness of management’s methodology in line with the requirements of ASC 715 Compensation — Retirement Benefits.
/s/ PricewaterhouseCoopers LLP
Manchester, United Kingdom
March 1, 2023
We have served as the Company’s auditor since 2015.
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LUXFER HOLDINGS PLC
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
Selling, general and administrative expenses (43.1) (47.3) (39.8)
Research and development (4.9) (3.9) (3.3)
Restructuring charges (1.9) (6.2) (8.9)
Acquisitions and disposals costs (0.3) (1.5) —
Other income — 0.2 —
Other charges — (1.1) (0.4)
Interest expense (3.9) (3.1) (5.0)
Defined benefit pension credit 0.1 2.3 4.3
Income before income taxes and equity in net income of affiliates 41.0 35.4 27.8
Provision for income taxes (9.0) (5.4) (6.9)
Income before equity in net income of affiliates 32.0 30.0 20.9
Equity in loss of affiliates (net of tax) — — (0.1)
Net income from continuing operations 32.0 30.0 20.8
Net gain on disposition of discontinued operations — 6.6 —
Net loss from discontinued operations (5.1) (6.7) (0.8)
Earnings / (loss) per share(1)
Basic from continuing operations 1.17 1.08 0.75
Basic from discontinued operations (0.19) — (0.03)
Diluted from continuing operations 1.16 1.07 0.74
Diluted from discontinued operations (0.19) — (0.03)
Weighted average ordinary shares outstanding
(1)The calculation of earnings per share is performed separately for continuing and discontinued operations. As a result, the sum of the two in any particular year may not equal the earnings-per-share amount in total.
See accompanying notes to consolidated financial statements
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LUXFER HOLDINGS PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
Other comprehensive (loss) / income
Net change in foreign currency translation adjustment (13.2) (0.8) 3.8
Other comprehensive (loss) / income net of tax (4.4) 30.8 (16.2)
Total comprehensive income $ 22.5 $ 60.7 $ 3.8
See accompanying notes to consolidated financial statements
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LUXFER HOLDINGS PLC
CONSOLIDATED BALANCE SHEETS
December 31,
In millions, except share and per-share data 2022 2021
Current assets
Cash and cash equivalents $ 12.6 $ 6.2
Restricted cash 0.3 0.2
Current assets held-for-sale 9.3 8.5
Non-current assets
Property, plant and equipment, net 77.7 87.5
Right-of-use assets from operating leases 19.8 12.6
Deferred tax assets 3.0 8.0
Pensions and other retirement benefits 27.0 13.7
Investments and loans to joint ventures and other affiliates 0.4 0.4
Current liabilities
Current maturities of long-term debt and short-term borrowings $ 25.0 $ —
Taxes on income 1.8 3.0
Current liabilities held-for-sale 5.0 1.4
Other current liabilities 11.2 19.6
Total current liabilities 110.2 83.9
Non-current liabilities
Pensions and other retirement benefits 4.5 1.9
Deferred tax liabilities 9.9 2.7
Other non-current liabilities 19.0 11.6
Commitments and contingencies (Note 19)
Shareholders' equity
Additional paid-in capital 221.4 70.9
Treasury shares (20.4) (9.6)
Company shares held by ESOP (1.0) (1.1)
Accumulated other comprehensive loss (139.4) (135.0)
Total shareholders' equity $ 207.3 $ 209.1
Total liabilities and shareholders' equity $ 407.1 $ 368.8
See accompanying notes to consolidated financial statements
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LUXFER HOLDINGS PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
Operating activities
Net loss from discontinued operations 5.1 0.1 0.8
Net income from continuing operations 32.0 30.0 20.8
Equity in loss of affiliates — — 0.1
Amortization of purchased intangible assets 0.7 0.9 0.7
Amortization of debt issuance costs 0.5 0.5 0.4
Share-based compensation charge 2.5 2.8 2.8
Deferred income taxes 8.7 (1.6) 4.8
Loss on disposal of property, plant and equipment — — 0.1
Loss on disposal of business 1.0 — —
Defined benefit pension expense / (credit) 0.1 (1.9) (3.9)
Defined benefit pension contributions (0.4) (18.2) (5.8)
Changes in assets and liabilities, net of effects of business acquisitions
Accounts and notes receivable (27.2) (9.8) 10.7
Current assets held-for-sale (3.3) (2.9) 10.0
Other current assets — 1.3 (0.4)
Accrued liabilities 2.4 7.5 (1.9)
Current liabilities held-for-sale 0.9 (1.8) 2.3
Other current liabilities (8.8) 8.4 0.2
Other non-current assets and liabilities (2.5) — (0.8)
Net cash provided by operating activities - continuing 15.8 26.0 49.3
Net cash provided by operating activities - discontinued 0.1 0.1 0.3
Net cash provided by operating activities 15.9 26.1 49.6
Investing activities
Capital expenditures (8.3) (9.1) (8.0)
Proceeds from sale of property, plant and equipment 3.7 — —
Proceeds from sale of businesses — 23.4 1.5
Settlements from sale of businesses (1.0) — —
Acquisitions, net of cash acquired — (19.3) —
Net cash used for investing activities - continuing (5.6) (5.0) (6.5)
Net cash used for investing activities - discontinued (0.1) (0.1) (0.3)
Net cash used for investing activities (5.7) (5.1) (6.8)
Financing activities
Net drawdowns / (repayments) of long-term borrowings 24.8 6.4 (38.2)
Debt issuance costs — (1.0) —
Deferred consideration paid — — (0.4)
Proceeds from sale of shares — — 1.1
Share-based compensation cash paid (1.4) (1.5) (1.4)
Repurchase of deferred shares (0.1) — —
Repurchase of ordinary shares (11.1) (6.4) —
Net cash used for financing activities (2.0) (16.1) (52.5)
Effect of exchange rate changes on cash and cash equivalents (1.7) — 0.9
Net increase / (decrease) 6.5 4.9 (8.8)
Cash, cash equivalents and restricted cash; beginning of year 6.4 1.5 10.3
Cash, cash equivalents and restricted cash; end of year $ 12.9 $ 6.4 $ 1.5
Supplemental cash flow information:
Interest payments $ 4.0 $ 3.2 $ 5.1
Income tax payments 0.6 5.3 2.1
See accompanying notes to consolidated financial statements
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LUXFER HOLDINGS PLC
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Net income — — — — — — — 20.0 — 20.0
Shares sold from ESOP — — 0.8 — — 0.1 0.3 — — 1.1
Other comprehensive loss, net of tax — — — — — — — — (16.2) (16.2)
Dividends declared and paid — — — — — — — (13.6) — (13.6)
Share-based compensation — — 2.8 — — — — — — 2.8
Net income — — — — — — — 29.9 — 29.9
Other comprehensive income, net of tax — — — — — — — — 30.8 30.8
Dividends declared and paid — — — — — — — (13.6) — (13.6)
Share-based compensation — — 2.8 — — — — — — 2.8
Repurchase of ordinary shares — — — (0.3) (6.4) — — — — (6.4)
Cancellation of ordinary shares (0.1) — (0.6) 0.1 0.7 — — — — —
Net income for the year — — — — — — — 26.9 — 26.9
Other comprehensive loss, net of tax — — — — — — — — (4.4) (4.4)
Dividends declared — — — — — — — (14.2) — (14.2)
Share-based compensation charges — — 2.5 — — — — — — 2.5
Repurchase of ordinary shares — — — (0.7) (11.1) — — — — (11.1)
Cancellation of deferred shares — (149.9) 149.8 — — — — — — (0.1)
See accompanying notes to consolidated financial statements
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LUXFER HOLDINGS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business description
Luxfer Holdings PLC 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. It comprises two reportable segments being Gas Cylinders and Elektron.
Principles of consolidation
The consolidated financial statements comprise the financial statements of Luxfer Holdings PLC and its subsidiaries (collectively "we," "our," "Luxfer" or "the Company" ) that we control. Investments in unconsolidated affiliates, where we have the ability to exercise significant influence over the operating and financial policies, are accounted for using the equity method. All inter-company balances and transactions, including unrealized profits arising from intra-company transactions, have been eliminated in full.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and are presented in U.S. dollars ("USD"). The books of the Company's non-U.S. entities are converted to USD at each reporting period date in accordance with the accounting policy below. The functional currency of the holding company, Luxfer Holdings PLC, is USD (2020: pounds sterling ("GBP")) and that of its U.K. subsidiaries is GBP, being the most appropriate currency for those particular operations.
Discontinued operations
Certain amounts relating to our discontinued businesses are recorded within assets or liabilities held-for-sale on the consolidated balance sheets and within net loss from discontinued operations on the consolidated statements of income.
Fiscal year
Our fiscal year ends on December 31.
Use of estimates
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes, disclosures of contingent assets and liabilities at the date of the financial statements and in the reported amounts of revenues and expenses during the reporting period. Significant estimates include our assessment of goodwill for impairment, estimated realizable value on excess and obsolete inventory, assets acquired and liabilities assumed in acquisitions, estimated selling proceeds from assets held for sale, contingent liabilities, income taxes and pension benefits. Actual results could differ from our estimates.
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1. Summary of Significant Accounting Policies (continued)
Goodwill and other identifiable intangible assets
Business combinations are accounted for using the purchase method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any non-controlling interest in the acquiree. The measurement of non-controlling interest is at fair value and is determined on a transaction by transaction basis. Acquisition costs are expensed as incurred.
Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible net assets, identifiable intangible assets purchased, and liabilities assumed.
Goodwill is tested at least annually for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may elect not to perform the qualitative assessment for some or all reporting units and only perform a quantitative impairment test. At the end of the third quarter of 2022, management carried out its qualitative review, which showed no indicators of impairment, as a result, the Company concluded its review at this point and was not required to perform a quantitative review.
Other intangible assets are measured initially at cost, or, where acquired in a business combination, at fair value, and are amortized on a straight-line basis over their estimated useful lives, as shown in the table below.
Customer relationships 15 - 25 years
Technology and trading related 5 - 25 years
The carrying values are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Reviews are made annually of the estimated remaining lives and residual values of the patents and trademarks.
Investments in affiliates
The company owns interest in the following affiliate:
Nikkei-MEL Co. Limited Japan Ordinary shares 50% Joint venture Equity method
Property, plant and equipment, net
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight-line basis over the estimated useful life of the particular asset. The depreciation expense during 2022, 2021 and 2020 was $12.9 million, $14.7 million and $12.6 million, respectively. The estimated useful lives are summarized as follows:
Freehold buildings 10 - 33 years
Leasehold land and buildings The lesser of life of lease or freehold rate
Machinery and equipment 3 - 25 years
Including:
Chemical production plant and robotics 7 - 10 years
Other production machinery 5 - 10 years
Furniture, fittings, storage and equipment 3 - 10 years
Computer equipment 5 years
Freehold land is not depreciated.
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1. Summary of Significant Accounting Policies (continued)
Property, plant and equipment, net (continued)
Reviews are made annually of the estimated remaining lives and residual values of individual productive assets, taking account of commercial and technological obsolescence, as well as normal wear and tear.
We review the carrying value for any individual asset or asset group for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists, and where the carrying value exceeds the estimated recoverable amount, the asset is written-down to its estimated recoverable amount. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset or asset group, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets.The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets. During 2021, we recorded an impairment charge of $1.5 million within discontinued operations. There were no impairment charges recognized in 2022 and 2020.
Impairments
The Company will recognize impairments in relation to property, plant and equipment, investments, goodwill, other identifiable intangible assets and other long-lived assets in accordance with the above policies. Impairments relating to restructuring activities, incurred to exit an activity or location, will be recorded within the restructuring line on the Statements of Income. Other impairments will be recorded within the impairment charges line on the Statements of Income. Impairments related to discontinued operations will be recorded within the net loss from discontinued operations line on the Statements of Income.
Within discontinued operations in 2022, there was a $2.6 million impairment charge relating to the right of use asset previously held as a sublet to Neos International Limited, the right of use asset were building leases retained on sale of Superform U.K.
Also within discontinued operations in 2021, there was a $1.5 million impairment charge relating to plant and equipment held in our Superform U.S. business, reflecting updated expectations of fair market value.
Revenue recognition
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The majority of the Company’s contracts have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. There is no variable consideration or obligations for returns, refunds, or other related obligations in the Company’s contracts.
Payment terms and conditions vary by contract type and may include a requirement of payment in advance. In general, our payment terms are 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts do not include a significant financing component.
The Company’s revenue is primarily derived from the following sources and are recognized when or as the Company satisfies a performance obligation by transferring a good or service to a customer:
Product revenues
We recognize revenue when it is realized or realizable and has been earned. Revenue is recognized when the following are met: (i) persuasive evidence of an arrangement exists; (ii) shipment or delivery has occurred (depending on the terms of the sale), which is when the transfer of product or control occurs; (iii) our price to the buyer is fixed or determinable; and (iv) the ability to collect is reasonably assured.
Royalties
Royalty revenue is recognized on an accrual basis in accordance with the substance of the relevant agreements, provided that it is probable that the economic benefits will flow to the Company and the amount of revenue can be measured reliably.
Practical Expedients
The Company applies the practical expedient and does not disclose information about remaining performance obligations for contracts that have original expected durations of one year or less.
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1. Summary of Significant Accounting Policies (continued)
Cash, Cash Equivalents and Restricted Cash
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted cash is recognized separately in the Consolidated Balance Sheets. Restricted cash balances were $0.3 million at December 31, 2022, and $0.2 million at December 31, 2021. The amounts held in escrow were held in relation to a payment received for an historic doubtful debt in our Elektron division and workers' compensation insurance.
Inventories
Inventories are stated at the lower of cost or net realizable value. Raw materials are valued on a first-in, first-out basis. Strategic purchases of inventories in order to secure supply and reduce the impact of price volatility on the cost of inventories are valued on a weighted-average cost basis. Work in progress and finished goods costs comprise direct materials including, where applicable, direct labor costs, an apportionment of production overheads and any other costs that have been incurred in bringing the inventories to their present location and condition. Inventories are reviewed on a regular basis, and we make allowance for excess or obsolete inventories and write-down to net realizable value based primarily on committed sales prices and our estimates of expected and future product demand and related pricing.
Research and Development
Included within research and development costs are directly attributable salaries, materials and consumables, as well as third-party contractor fees and research costs. These costs are expensed as incurred.
Foreign currencies
Transactions in currencies other than an operation's functional currency are initially recorded in the functional currency at the rate of exchange prevailing on the dates of transactions. At each balance sheet date, the foreign currency monetary assets and liabilities of each operation are translated into the functional currency of that operation at the rates prevailing on the balance sheet date.
All differences are taken to the consolidated statement of income, with the exception of differences on foreign currency borrowings that provide a hedge against a net investment in a foreign entity. These differences on foreign currency borrowings are taken directly to equity until the disposal of the net investment, at which time they are recognized in the consolidated statement of income. Tax charges and credits attributable to exchange differences on those borrowings are also included in equity.
On consolidation, the assets and liabilities of the Company's foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences that arise, if any, are included in Accumulated other comprehensive income (“AOCI”), a separate component of equity. Such translation differences are recognized in the consolidated statements of income in the period in which the Company either loses control of the operation or liquidation occurs.
During 2022, the average USD/GBP sterling exchange rate was £0.8108 compared to the 2021 average of £0.7264. This change resulted in a negative impact of $15.6 million on revenue and $2.3 million on operating income. Based on the 2022 level of revenue and income, a weakening in GBP sterling leading to a £0.05 increase in the USD/GBP sterling exchange rate would result in a decrease of $8.7 million in revenue and a decrease of $1.0 million in operating net income.
On January 1, 2021 the functional currency of Luxfer Holdings PLC was changed from the local currency, GBP to the reporting currency, USD reflecting that the majority of the parent company's cash flows are now denominated in USD, including intercompany loans and interest payments as well as dividends paid to its shareholders. The change was triggered by a revision to our intercompany financing model which now aims to manage foreign exchange risk through Luxfer Group Limited, whose functional currency remains GBP (the same as its local currency).
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1. Summary of Significant Accounting Policies (continued)
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When the Company does not believe that, on the basis of available information, it is more likely than not that deferred tax assets will be fully recovered, it recognizes a valuation allowance against its deferred tax assets to reduce the deferred tax assets to the amount more likely than not to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactments date.
Furthermore, a tax benefit from a tax position may be recognized in the financial statements only if it is more-likely-than-not that the position is sustainable, based solely on its technical merits and consideration of the relevant tax authority’s widely understood administrative practices and precedents. The tax benefit recognized, when the likelihood of realization is more likely-than-not (i.e. greater than 50 percent), is measured at the largest amount that is greater than 50 percent likely of being realized upon settlement.
Employee benefit plans
The Company operates funded defined benefit pension plans in the U.K., the U.S. and France. The levels of funding are determined by periodic actuarial valuations that take into account changes in actuarial assumptions, including discount rates and expected returns on plan assets. The assets of the plans are generally held in separate Trustee-administered funds. The Company also operates defined contribution plans in the U.K., the U.S., Australia and Canada.
Actuarial assumptions are updated annually and are disclosed in Note 14. We recognize changes in the fair value of plan assets and net actuarial gains or losses for pension and other post-retirement benefits annually in the fourth quarter each year (“mark-to-market adjustment”) and, if applicable, in any quarter in which an interim remeasurement is triggered. Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension and other post-retirement plans or when assumptions change, as they may each year. The remaining components of pension expense, including service and interest costs and estimated return on plan assets, are recorded on a quarterly basis.
Payments to defined contribution plans are charged as an expense as they fall due.
Commitments and contingencies
Loss contingencies are recognized when the Company has a present obligation as a result of a past event, it is probable that a transfer of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
Share-based compensation
We account for share-based compensation awards on a fair value basis at the grant date. The estimated grant date fair value of each option award is recognized in income on an accelerated basis over the requisite service period (generally the vesting period). The estimated fair value of each option award is calculated using either the Black-Scholes option-pricing model or a Monte-Carlo simulation, both of which are subjective and involve the application of significant estimates and assumptions, including the expected term of the award, implied volatility, expected dividend yield and the risk-free interest rate. Restricted share awards and units are recorded as compensation cost on an accelerated basis over the requisite service periods based on the market value on the date of the grant.
Performance share units ("PSU") are stock awards where the ultimate number of shares issued will be contingent on the Company's performance against certain financial performance targets. The fair value of each PSU is based on the market value on the date of grant. We recognize expense based upon the fair value of the awards on the grant date and the estimated vesting of the PSUs granted. The estimated vesting of the PSUs is based on the probability of achieving certain financial performance thresholds over the specified performance period.
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1. Summary of Significant Accounting Policies (continued)
Trade receivables and concentration of credit risk
The Company is exposed to credit losses primarily through sales of products. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimate of accounts receivable amounts that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default.
Estimates are used to determine the allowance. It is based on assessment of anticipated receipts and all other historical, current and future information that is reasonably available.
We are exposed to credit risk in the event of nonpayment by customers. However, we mitigate our exposure to credit risk by performing ongoing credit evaluations and, when deemed necessary, utilizing credit insurance, prepayments or guarantees. No individual customer represented more than 10% of our revenue or accounts receivable. The concentration of credit risks from financial instruments related to the markets we serve is not expected to have a material adverse effect on our consolidated financial position, cash flows or future results of operations.
Derivative financial instruments
We recognize all derivatives as either assets or liabilities (within accounts and other receivables or other current liabilities) at fair value in our Consolidated Balance Sheets. Any changes in fair value are reported in the income statement immediately in cost of sales. We use derivative instruments for the purpose of hedging commodity price risk and currency exposures, which exist as part of ongoing business operations.
New accounting standards
There were no new accounting standards issued which required adoption in the fiscal year ended December 31, 2022.
Accounting standards which have been early adopted
None
Accounting standards issued but not yet effective
There are no accounting standards that have been issued, but are not yet effective, that are expected to have a material impact on our results of operations or balance sheet presentation.
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2. Revenue
Disaggregated revenue from continuing operations for the fiscal years ended December 31, 2022, 2021, and 2020, are included below and in Note 17, Segment Information.
Years ended December 31,
The Company’s performance obligations are satisfied at a point in time. With the classification of our Superform business as discontinued operations, none of the Company's revenue is satisfied over time. As a result, the Company's contract receivables, contract assets and contract liabilities at December 31, 2022, December 31, 2021 and December 31, 2020 are included within current assets and liabilities held-for-sale.
3. Acquisitions and disposals
In March 2021, the Company completed the acquisition of the Structural Composites Industries LLC ("SCI") business of Worthington Industries, Inc., based in Pomona, California, for $19.3 million cash consideration. The fair value of assets and liabilities acquired were equal to the cash consideration paid.
Acquisition-related costs of $0.3 million and $1.5 million in 2022 and 2021 respectively, represent transitional costs and professional fees incurred in relation to the above SCI acquisition.
In 2021, the Company recognized a net gain on disposition of $6.6 million, consisting of a $7.1 million gain on our U.S. aluminum business, sold in March 2021, partially offset by a $0.5 million loss on our Superform U.K. business sold in September 2021.
In 2020, the Company sold its 51% investment in Luxfer Uttam India Private Limited to our joint venture partner for INR 137.4 million ($1.8 million) cash. Allowing for legal costs, we generated a profit on disposal of less than $0.1 million. During the year we also incurred $0.4 million costs in relation to M&A exploration activities offset by deferred consideration adjustment and profit on previous written-down inventory.
4. Restructuring charges
During 2022, 2021 and 2020, we initiated and continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business.
In 2022, there was an additional $1.7 million of costs in relation to the closure of Luxfer Gas Cylinders' French site, which was largely legal and professional fees. In addition, $0.2 million of costs were incurred relating to one-time employee termination benefits, in the Elektron division, in relation to the consolidation of production facilities in the Magnesium Powders operations.