SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2020
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
Commission File Number 001-35370
Luxfer Holdings PLC
(Exact Name of Registrant as Specified in Its Charter)
|England and Wales||98-1024030|
|State or Other Jurisdiction of|
Incorporation or Organization
|I.R.S. Employer Identification No.|
Lumns Lane, Manchester, United Kingdom M27 8LN
Address of principal executive offices
Registrant’s telephone number, including area code: +1 414-269-2419
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Symbol||Name of each exchange on which registered|
|Ordinary Shares, nominal value £0.50 each||LXFR||New York Stock Exchange|
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ☐ Accelerated filer ☒
Non accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of ordinary shares held by non-affiliates of the Registrant was approximately $359,000,000 based on the last reported sale price of such securities as of June 26, 2020, the last business day of the Registrant’s most recently completed second quarter.
The number of shares outstanding of Registrant’s only class of ordinary stock on December 31, 2020, was 27,636,153.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's definitive proxy statement for its annual general meeting to be held on June 9, 2021, to be filed no later than 120 days after the end of the fiscal year covered by this annual report, are incorporated by reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.
|Item 1.||Business||1 |
|Item 1A.||Risk Factors||10 |
|Item 1B.||Unresolved Staff Comments||24 |
|Item 2.||Properties||24 |
|Item 3.||Legal Proceedings||24 |
|Item 4.||Mine Safety Disclosures||24 |
|Item 5.||Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities||25 |
|Item 6.||Selected Financial Data||27 |
|Item 7.||Management's Discussion and Analysis of Financial Condition and Results of Operations||28 |
|Item 7A.||Quantitative and Qualitative Disclosures About Market Risk||44 |
|Item 8.||Financial Statements and Supplementary Data||46 |
|Item 9.||Changes in and Disagreements With Accountants on Accounting and Financial Disclosure||96 |
|Item 9A.||Controls and Procedures||96 |
|Item 9B.||Other Information||97 |
|Item 10.||Directors, Executive Officers and Corporate Governance||98 |
|Item 11.||Executive Compensation||98 |
|Item 12.||Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters||98 |
|Item 13.||Certain Relationships and Related Transactions, and Director Independence||98 |
|Item 14.||Principal Accountant Fees and Services||98 |
|Item 15.||Exhibits and Financial Statement Schedules||99 |
|Item 16.||Form 10-K Summary||100 |
Item 1. Business
Background and business overview
Luxfer Holdings PLC ("Luxfer," "the Company," "we,""our") is a global manufacturer of highly-engineered industrial materials which focuses on value creation by using its broad array of technical know-how and proprietary technologies. Luxfer's high-performance materials, components and high-pressure gas containment devices are used in defense and emergency response, healthcare, transportation and general industrial applications.
We focus primarily on product lines related to magnesium alloys, zirconium chemicals and carbon composites. We have a long history of innovation derived from our strong technical expertise, and we work closely with customers to apply solutions to their most demanding product needs. Our proprietary technologies and technical expertise, coupled with strong customer service and global presence, provide competitive advantages and have established us as leaders in the global markets we serve. We believe that we have leading positions in key product areas, including magnesium aerospace alloys, photo-engraving plates, zirconium chemicals for automotive catalytic converters and high-pressure composite cylinders for breathing applications and a wide variety of other uses.
We have a global presence, operating 16 manufacturing plants in the U.S., the U.K., Canada and China, of which four relate to discontinued operations and also have a joint venture in Japan. We employ approximately 1,400 people, including temporary staff, of which approximately 200 relate to discontinued operations. In 2020, our net sales from continuing operations were $324.8 million (2019: $373.4 million, 2018: $401.9 million) and our net income from continuing operations was $20.8 million (2019: $8.7 million, 2018: $27.7 million).
Luxfer operates in two business segments - Elektron and Gas Cylinders.
Our Elektron Segment focuses on specialty materials based primarily on magnesium and zirconium. In 2020, sales from our Elektron Segment represented approximately 56% (2019: 59%, 2018: 62%) of our consolidated net sales from continuing operations. Our top ten customers represented 38% of segment sales. No customer represented 10% or more of our Elektron Segment sales.
Key product lines include:
•Advanced lightweight, corrosion-resistant and heat- and flame-resistant magnesium alloys including our dissolvable SoluMag® alloy.
•Magnesium powders used in countermeasure flares that protect aircraft from heat-seeking missiles and also for heating pads for self-heating meals used by the military and emergency-relief agencies.
•High-performance zirconium-based materials and oxides used as catalysts and in the manufacture of advanced ceramics, fiber-optic fuel cells, and many other performance products.
•Magnesium, copper, and zinc photoengraving plates for graphic arts and luxury packaging.
Gas Cylinders Segment
Our Gas Cylinders Segment manufactures and markets specialized, highly-engineered cylinders using carbon composites and aluminum alloys. In 2020, sales from our Gas Cylinders Segment represented approximately 44% (2019: 41%, 2018: 38%) of our consolidated net sales. Our top ten customers represented 63% of segment sales. One customer represented 15% and another represented 14% of our Gas Cylinders Segment sales with no other customer greater than 10%.
Key product lines include:
•Carbon composite cylinders for self-contained breathing apparatus (SCBA), used by firefighters and other emergency-responders. Our products are also used by scuba divers and personnel in potentially hazardous environments such as mines.
•Cylinders used for containment of oxygen and other medical gases used by patients, healthcare facilities and laboratories.
•Carbon composite cylinders for compressed natural gas (CNG) and hydrogen containment in alternative fuel (AF) vehicles.
Our Superform aluminum superplastic forming business operating from sites in the U.S. and the U.K, and our U.S. aluminum gas cylinder business were historically included in the Gas Cylinders segment. Beginning in the fourth quarter of 2020, we have reflected the results of operations of these businesses as discontinued operations in the Consolidated Statements of Income for all periods presented, as we look to divest these businesses and exit certain markets. As a result, for all periods presented we have reclassified all income and expenses as discontinued operations in the Consolidated Statements of Income and the assets and liabilities as held-for-sale on the Consolidated Balance Sheets.
All information included within this section relates to continuing operations, unless otherwise stated
Financial Information about Segments and Geographic Areas
See Note 17 ("Segmental Information") to our consolidated financial statements for further information regarding our operating segments and our geographic areas.
Suppliers and raw materials
Key raw materials used by our Elektron Segment are magnesium, zircon sand and rare earths.
The world demand for magnesium is around one million metric tons per year. China provides about 70% of the world supply. Western primary production is, however, significant, from North American suppliers, Dead Sea Magnesium in Israel, RIMA Industrial in Brazil and two smelters in Russia. We purchase approximately 40% our magnesium needs from China. We use only U.S.-sourced materials for our products sold to the U.S. military, for which U.S. sourcing is mandatory.
We generally purchase raw materials from suppliers on a spot basis under standard terms and conditions. We have supply contracts in place with U.S. Magnesium for raw material purchases of magnesium ingot for both military and commercial applications. The military contract covers magnesium purchases through December 31, 2023, whereas the commercial contract covers through December 31, 2021.
We purchase and process zircon sand, which is found in heavy-minerals sand, titanium dioxide and other products. Global production of zircon is estimated at approximately 1.5 million metric tons. We source premium-grade zircon sand from suppliers in South Africa and Australia. We also purchase intermediate zirconium chemicals from suppliers in China; the level of these purchases is based on a number of factors, including required properties and relative market prices.
There are 17 rare earth metals that are reasonably common in nature. Usually found mixed together with other mineral deposits, these rare earths have magnetic and light-emitting properties that make them invaluable to high-technology manufacturers. These are ingredients in our zirconium chemical and magnesium alloy products, with our main requirement is for cerium, which we use in automotive catalysis compounds because of its unique oxygen-storage capabilities.
Gas Cylinders Segment
A key material in the Gas Cylinder segment is high-strength carbon fiber used in our composite products. Our main suppliers are Toray and Mitsubishi. In recent years, carbon fiber shortages have occurred from increased demand for commercial aerospace and military applications. Over time, we have built relationships with our suppliers, providing them predictable requirements and fixed-price annual contracts to encourage successful procurement of our required volume of carbon fiber.
In 2020, we purchased approximately 40% of our aluminum from Rio Tinto Alcan and its associated companies, and aluminum represented approximately 40% of the segment's raw material costs in the year.
The price of aluminum has been somewhat volatile in the past and while we pass on most price movements to our customers, sometimes through contractual cost-sharing formulas, doing so can be more difficult or time consuming with our higher-value products.
Key end-markets for Luxfer products fall into three categories:
Transportation (28% of 2020 sales): Many Luxfer products serve a growing need to improve and safeguard the environment in the field of transportation, including our lightweight, high-pressure carbon composite alternative fuel cylinders that contain clean-burning compressed natural gas and hydrogen; our zirconium-based products that reduce automotive emissions; and our lightweight magnesium alloys used in fuel-efficient aerospace and automotive designs.
|Area of Focus||Product||End-market drivers|
|Alternative fuels||• Alternative fuel ("AF") cylinders|
• Bulk gas transportation cylinders
|• "Clean air" initiatives|
• Abundance of natural gas
• Acceptance of hydrogen as fuel source for public transport in Europe
• Increasing compress natural gas ("CNG") filling infrastructure
|Environmental catalysts (cleaning of exhaust emissions)|
• Zirconium compounds with specific properties used in auto-catalysis washcoats
|• Emissions legislation and regulation generally including gasoline particulate filtration |
• Cost effective for vehicle manufacturers as they reduce the use of precious metals
• Increasing demand for gasoline-electric hybrid vehicles
• Elektron® aerospace alloys in cast, extruded, and sheet form
|• Growing aircraft build rate|
• Fuel efficiency
Defense, First Response & Healthcare (37% of 2020 sales) : Luxfer offers several products that address principal factors driving growth in this market, such as increased protection of people, equipment and property during conflicts and emergencies. Our products include magnesium powders for countermeasure flares that defend aircraft against heat-seeking missile attack and for flameless heaters used in meals, life-support cylinders for firefighters and other emergency-service personnel, and chemical agent decontamination products. Other products include lightweight gas cylinders for containment of medical and laboratory gases; zirconium powders for pharmaceutical products; magnesium materials for lightweight orthopedic devices; specialized magnesium alloys for cardiovascular stents and implants; and zirconium materials for biomedical applications and dental implants.
|Area of Focus||Product|| ||End-market drivers|
|Life-support breathing apparatus||• Composite cylinders used in self-contained breathing apparatus ("SCBA")|| ||• Increased awareness of importance of properly equipping firefighting services |
• Demand for lightweight products to upgrade from heavy all-metal cylinders
• Periodic upgrade of new U.S. National Institute for Occupational Safety and Health (NIOSH) standards and natural replacement cycles
• Asian and European fire services looking to adopt more modern SCBA equipment
• Ultra-fine magnesium powders for flares used to protect aircraft from attack by heat-seeking missiles
• Use in combat and training
• Maintenance of countermeasures reserves (shelf-life restrictions)
|Military personnel and emergency relief agencies|
• Self-heating meals used by military personnel and emergency-relief agencies
• Chemical detection and chemical decontamination kits
• Ensuring protection and well-being for military personnel and victims of natural disasters
• Use in combat and training and in response to terrorist activities
|Medical gases||• Portable aluminum and composite cylinders ||• Shift to paramedics, who need portable, lightweight products|
• Growing trend to provide oxygen therapy in the home and to keep patients mobile
• Increase in respiratory diseases
• Magnesium sheets
• Improved mobility through use of easy-to-wear, lightweight braces and trusses
• MELsorb® material being developed as active ingredient in dialysis equipment and enterosorbents
• ISOLUX free-flowing powder, removes heavy metals and other contaminants from drinking water
• Growth in kidney problems
• New technologies to remove noxious elements from the body
General industrial (35% of 2020 sales): Our core technologies have enabled us to serve various markets and applications. Our products include zirconium-based compounds to purify drinking water and clean industrial exhausts; magnesium alloys shaped for use in various general engineering applications; and high-pressure gas cylinders used for high-purity specialty gases, beverage dispensing, scuba diving and performance racing. Metal foil-stamping and embossing dies are used primarily for luxury packaging, labels and greeting cards. Our high-quality magnesium, copper, brass and zinc plates are ideal for these and other graphic applications.
|Area of Focus||Product||End-market drivers|
• Magnesium billets, sheets, coil, tooling plates
• Zirconium ceramic compounds for hard working components
|• Need for components to operate in more extreme environments for longer periods, such as underground or in the ocean|
| Hydraulic fracturing or "fracking"|
• Dissolvable SoluMag® magnesium alloy
• Onshore shale gas exploration linked to increasing energy demand
• Bacote™ and Zirmel™, both formaldehyde-free insolubilizers that aid high-quality printing
• Elimination of toxic chemicals
• Photo-engraving plates
• Luxury packaging as part of marketing high-end products
Our competitive advantages
Focus on innovation and product development for growing specialized end-markets. We continue to produce a steady stream of new products, including those developed in close collaboration with our customers.
Strong technical expertise and know-how. Using our expertise in metallurgy and material science, we specialize in advanced materials, developing products and materials with superior performance to satisfy the most demanding requirements in the most extreme environments. Further, we benefit from the fact that a growing number of our products are patented, including many of our alloys and compounds.
Diversified customer base with long-standing relationships. We put the customer at the heart of our strategy, and we have long-standing relationships with many of our customers, including global leaders in our key markets.
Our Business Excellence Standard Toolkit. The "Luxfer B.E.S.T. Model," consists of the following key themes:
•A common set of values that drives accountability, innovation, customer first, personal development, teamwork and integrity.
•Disciplined capital allocation with the aim of maximizing organic growth and the product portfolio value through value-enhancing acquisitions and divestitures.
•Balanced score-card used in an effort to continuously improve employee performance in an effort to help translate our vision into actionable individual goals and ensure that employee compensation is commensurate with individual performance.
•A published Customer Charter designed to enable us to retain and grow our customer base and capture additional market share.
•A lean enterprise philosophy that helps drive operational process excellence in all functions.
Historically,we have shutdown periods at most of our manufacturing sites during which we carry out maintenance work. Shutdowns typically last two weeks in the summer and one to two weeks around the year-end holidays, resulting in reduced levels of activity in the second half of the year compared to the first half. Third-quarter and fourth-quarter sales and operating profit can be affected by our own shutdowns and by shutdowns by various industrial customers. In particular, we have found that our fourth-quarter results are generally lower, since many customers reduce production activity from late November through December. However, due to shutdowns at both Luxfer and customer plants in the first half of 2020, we have not seen this similar trend, with results improving during the latter months as demand has increased after the initial lockdowns enforced as a result of the COVID-19 pandemic. We also operate in various geographic areas that are susceptible to bad weather during winter months, such as Calgary, Canada, and various U.S. eastern states. Bad weather can unexpectedly disrupt production and shipments from our manufacturing facilities, which can lead to reduced revenue and operating profits. We also manufacture products that are used in graphic arts and premium packaging, demand for which increases in the run up to the year-end holidays.
Research and Development
Luxfer recognizes the importance of research in materials science and the need to develop innovative new products to meet future needs of customers and to continue providing growth opportunities for the business. Each year, we invest in the development of new products and processes directed towards transportation, defense and emergency response, healthcare and general industrial end-markets. Our product development projects also include utilizing skills of our wider commercial technical sales staff, manufacturing engineers and general management, many of whom are highly qualified scientists and engineers. A large proportion of senior sales and management time is spent overseeing development of products and working with customers on integrating our products and solutions into their product designs.
To provide customers with improving products and services, we invest in new technology and research and employ some of the world's leading specialists in materials science and metallurgy. Our engineers and metallurgists collaborate closely with our customers to design, develop and manufacture our products. We also co-sponsor ongoing research programs at major universities in the U.S., Canada and Europe. Thanks to the ingenuity of our own research and development teams, Luxfer has developed a steady stream of new products, most recently including:
•soluble magnesium alloys, branded SoluMag®, for down-well oil and gas applications;
•ultra-lightweight large composite cylinders, branded G-StorTM, for containment of CNG, hydrogen, helium and other gases;
•enabling technologies for AF systems, including high-pressure valves, branded G-FloTM, and pressure- release devices;
•zirconium catalysts for for automotive end-use including advances in gasoline particulate filtration used in hybrid vehicles;
•L7X® higher-strength aluminum alloy and carbon composite gas cylinders;
•Luxfer ECLIPSE, a new carbon composite cylinders for firefighter self-contained breathing apparatus (SCBA);
•bioresorbable magnesium alloys, branded SynerMag®; and
•zirconium sorbents, branded MELsorb®, being developed for use as an active ingredient in kidney dialysis equipment.
We believe that our commitment to research and new product development, through dedicated resources and significant use of management's time, is the core of Luxfer's growth potential worldwide. This commitment reflects our strategy of focusing on high-performance, value-added product lines and markets and leveraging our collaboration with universities. We invest in developing products for end-markets that we believe have long-term growth potential.
Luxfer relies on a combination of patents, trade secrets, copyrights, trademarks, proprietary manufacturing processes and design rights, together with non-disclosure agreements and technical measures, to establish and protect proprietary rights in our products. Our Elektron Segment holds key patents related to protected applications, including numerous aerospace alloys and magnesium-gadolinium alloys, as well as patents related to environmental applications, including water-treatment products and our specialized G4 process used to manufacture zirconium-cerium oxides for emissions-control catalysts. The Segment also has patented technology for magnesium-based flameless heater pads used to heat meals and beverages. Key patents held by our Gas Cylinders Segment relate to composites and alloys for pressurized hollow bodies. No individual patent or such intellectual property is considered material to either the Elektron or Gas Cylinders segment.
In certain areas, we rely more heavily upon trade secrets and unpatented proprietary know-how than patent protection in order to establish and maintain our competitive advantage. We generally enter into non-disclosure and invention assignment agreements with our employees and subcontractors, as well as our customers and vendors.
Human Capital Management
As of December 31, 2020, the Company employed approximately 1,400 people worldwide, including approximately 200 individuals that relate to our discontinued operations. Of the roughly 1,200 employees related to our continuing operations, approximately 700 are employed in the United States and approximately 500 are employed outside the United States.
Luxfer's workforce is one of our greatest sources of sustainable value. Our ability to deliver on our objectives and build lasting relationships with our customers depends on the capabilities, attraction and retention of the talented individuals who come to work every day. One of Luxfer’s core values is ‘Personal Development’ – because we understand that investing in our people makes good business sense. In addition, we have implemented a number of policies and practices that prohibit discrimination, promote workforce diversity, encourage employee education and development, promote community involvement and advance employee health and safety. Through these methods, Luxfer continues to develop a world-class team. We continuously strive to create an environment where differences are valued, supported, and encouraged.
▪Luxfer Values. Luxfer is a value-driven company. Our values - customer first, integrity, innovation, accountability, personal development, and teamwork - are the fundamental principles that define our behavior and how we do business across all our operating units. They guide our interactions with each other, our customers, the environment, and our communities. We constantly strive to satisfy our customers and create value for our shareholders by doing business based on our mission and core values. Realizing that this type of dedication starts with our leadership, all Luxfer Directors and employees undergo Values training, and their performance is continuously evaluated in relation to these values.
▪Diversity. Training is key to promoting equal opportunities and diversity. Our talent acquisition team and hiring managers undergo regular training to ensure that a diverse slate of candidates is considered for all job openings. We have developed recruitment practices to target diverse candidates, including minorities, veterans and women. We also monitor our current workforce for diversity, age, and gender demographics and use this information to develop employment and recruitment practices aimed at providing an inclusive work environment. All new and existing employees are required to undergo anti-harassment, non-discrimination, unconscious bias, and bullying and violence trainings regularly.
▪Training and Development. Luxfer management works closely with employees to ensure that our workforce has the skills, knowledge, and experience necessary for Luxfer's growth and profitability. Our management and executive development program focuses on individual strengths and fosters technical skills and knowledge to create the next generations of well-rounded Luxfer leaders. With a multi-faceted curriculum, our training and development program provides critical problem-solving, business management, and leadership skills necessary for Luxfer's continued success. Additionally, through our online employee training platform, we provide employees with educational resources to further develop the skills and knowledge relevant to their individual role.
▪Community Involvement. Through the investment and involvement of our businesses, sites and employees, we leverage our skills and experience to make a difference in the world through community activities, donations, and employee engagement initiatives that are consistently encouraged and sponsored by our Executive Leadership Team. Luxfer and its business units support a wide variety of charitable causes through both volunteer hours and monetary contributions. Among others, our business units have partnered with Air Ambulance Charity, American Red Cross, Boys and Girls Club of Cincinnati, Feed America, the Piedmont Rescue Mission, Pratham, United Way, and the Veterans Food Bank of Calgary. We also participate in annual blood drives, canned food drives, community clean up events, and holiday gift drives. Luxfer encourages all employees to participate in volunteer activities on an individual basis as well. Our Volunteer Time Off (VTO) program was rolled out to US employees and will soon be extended to all Luxfer employees. Full-time employees can volunteer one working day per calendar year toward a non-profit or charitable organization of their choice, and such day is considered paid time off. Further, Luxfer Gas Cylinders has teamed with United Way to implement an Employee Fair Share Program. Employees are encouraged to donate one hour of pay per month to United Way, and, in exchange, Luxfer provides the participant with one additional vacation day. Through the Fair Share Program, Luxfer Gas Cylinders’ Riverside facility donated $35,000 to United Way, which included both employee and company contributions. Moreover, our business units are committed to providing educational opportunities and work experience to students in our communities. We offer a number of internship and apprenticeship opportunities in various fields. We have developed a Science, Technology, Engineering and Math (STEM) apprenticeship program to encourage students to pursue careers in STEM fields.
▪Employee Safety. The safety, health, and well-being of all Luxfer employees and our associates is fundamental to delivering sustainable and positive economic performance. We are committed to being an industry leader in safety, and we foster a culture that integrates safety into all activities. To achieve this, Luxfer has established well-defined health and safety policies and procedures, as well as ongoing employee training, which codify our standards for respecting and protecting our employees, the public, and our associates. We regularly conduct gap analyses and develop safety goals and objectives for all functional business units. We monitor, review, and discuss our performance in respect of these objectives and our policies as part of our enterprise-wide risk management system. Moreover, safety measurements are integrated into the performance evaluations of our Executives, proving our dedication to the health and safety of our employees. We emphasize safe behavior and encourage suggestions, ideas, and observations from our workforce. We have implemented a “safety moment” process, which increases employee awareness to workplace and day-to-day hazards while delivering key messages to reduce or minimize the risk of those hazards causing injury. We strive to begin each meeting with a safety moment, and some of our facilities have reserved time each week for a safety moment. Additional safety efforts include: monthly safety meetings with all employees, safety audits by management, safety audits by selected employees, and the inclusion of safety initiatives as part of select employees' incentive plans. Through these safety efforts, many of our facilities' safety records have improved year-over-year. The Company utilizes a mixture of leading and lagging indicators to assess the health and safety performance of its operations. Lagging indicators include the OSHA Total Recordable Incident Rate ("TRIR") and the Lost Time Accidents (“LTA”). Leading indicators include reporting and closure of all near miss events and safety concerns identified. Reported total workforce numbers include employees and supervised contractors. In fiscal year 2020, the Company had a TRIR of 1.85, an LTA of 8 and 0 work-related fatalities
▪Employee Health and Well-Being Section: Promoting the health and well-being of our employees increases productivity, improves morale, creates a positive work environment, and reduces healthcare costs. Luxfer offers several health and wellness benefits that encourage employees to improve their personal health. For example, we implemented a smoking cessation program in the US, under which employees who successfully complete the 90-day program are rewarded with discounted insurance rates. We also implemented the Luxfer Employee Healthy Lifestyle program in the US, which will soon be available to all Luxfer employees worldwide. The purpose of the program is to encourage employees to take steps towards improving their health by offering some reimbursement for certain gym/fitness center memberships and for weight loss programs/group exercise classes. Furthermore, we provide access to wellness clinics and funded counseling sessions to improve our employees’ physical and mental health. Health and wellness information is regularly provided to our employees through notices posted in readily accessible areas and in our company newsletters to ensure that every employee has an opportunity to take advantage of these benefits. We believe that by supporting our employees’ individual health, we can build a healthier workforce.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q , Current Reports on Form 8-K and any exhibits or amendments to such are made available, free of charge, on our website at http://www.luxfer.com as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the Securities and Exchange Commission ("SEC"). Information on our website is not incorporated by reference herein and is not made a part of this report.
Financial and other material information regarding the Company is routinely posted and accessible on our website at http://www.luxfer.com/investors.
Item 1A. Risk Factors
The risks described below are not the only risks facing us. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations. See also "Information Regarding Forward-Looking Statements" for certain warnings regarding forward-looking information contained in this document.
Economic and Industry risks
Our results of operations may continue to be negatively impacted by the coronavirus disease pandemic.
In December 2019, the 2019 novel coronavirus disease ("COVID-19") surfaced in Wuhan, China. In March 2020, the World Health Organization characterized COVID-19 a pandemic. The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy, resulting in an economic downturn that could impact demand for our products and our ability to produce them. With many countries affected, there have been widespread disruptions from the temporary closure of third-party supplier and manufacturer facilities and interruptions in product supply. To date the outbreak has resulted in a decline in revenues and profitability as highlighted in ITEM 7, Management Discussion and Analysis of Financial Condition and Results of Operations. While there have been some positive indicators such as restrictive measures being reduced in many countries and the reopening of temporarily closed facilities, the future impact remains uncertain and cannot be predicted and there is no assurance that the outbreak will not have a material adverse impact on the future results of the Company. The extent of the impact will depend on future developments, including global and country-specific actions taken to contain the spread of COVID-19, such as the roll-out and efficacy of the vaccination program, as well as the ability of the global economy to recover from the adverse economic consequences.
We depend on certain end-markets, including automotive, alternative fuels, self-contained breathing apparatus, aerospace and defense, healthcare, oil and gas and printing and paper. An economic downturn, or regulatory changes, in any of those end-markets, could reduce sales and profit margins on those end-markets.
We have significant exposures to certain end-markets, including some end-markets that are cyclical in nature or subject to high levels of regulatory control, including automotive, self-contained breathing apparatus ("SCBA"), aerospace and defense. Dependence of either of our segments on certain end-markets is even more pronounced.
To the extent that any of these cyclical end-markets are in decline, at a low point in their economic cycle, or subject to regulatory change, sales and margins on those sales may be adversely affected. It is possible that all or most of these end-markets could be in decline at the same time, i.e. during an economic downturn such as that caused by the current COVID-19 pandemic. Any significant reduction in sales could have a material adverse impact on our results of operations, financial position and cash flows.
Our global operations expose us to economic conditions, potential tax costs, political risks and specific regulations or restrictions in the countries in which we operate, which could have a material adverse impact on our results of operations, financial position and cash flows.
We derive our sales and earnings from operations in many countries and are subject to risks associated with doing business internationally. We have wholly-owned operations in the U.S., the U.K., Canada and China; and a joint venture facility in Japan. Doing business in different countries has risks, including the potential for adverse changes in the local, social, political, financial or regulatory climate, difficulty in staffing and managing geographically diverse operations, and the costs of complying with a variety of laws and regulations.
Due to the fact we have operations in many countries, we are also liable to pay taxes in many fiscal jurisdictions. Our tax burden depends on the interpretation of local tax regulations, bilateral or multilateral international tax treaties and the administrative doctrines in each jurisdiction. Changes in these tax regulations may increase our tax burden, or otherwise affect our accounting for taxes. For example, as a result of the reduction in the statutory corporate income tax rate in the U.S. pursuant to the Tax Cut and Jobs Act (TCJA) enacted on December 22, 2017, we recorded a reduction in the value of our deferred tax assets in the U.S. of $4.0 million in 2017. It is possible that the election of the new administration in the U.S. could result in the reversal of some or all of the changes introduced by TCJA.
The principal markets for our products are located in North America, Europe and Asia, and any financial difficulties experienced in these markets may have a material adverse impact on our businesses. For example, the maturity of some of our markets, such as the U.S. market for photoengraving plates could require us to increase sales in developing regions, which may involve greater economic and political risks. We cannot provide any assurances that we will be able to expand sales in these regions. Any of these factors could have a material adverse impact on our results of operations, financial position and cash flows.
Following the U.K.'s exit from the European Union (the "E.U.") on January 31, 2020 a free trade agreement was reached between the U.K. and E.U. member states in December 2020, with new arrangements taking effect from January 1, 2021. The agreement allows for zero tariffs on goods moving between the U.K. and E.U. However, the rules are complex and it is still possible that tariffs will apply depending on the origin of components ("rules of origin") of any goods produced either in the U.K. or the E.U. There is also increased regulatory complexity and potential for disruption to the movement of raw materials and finished goods at the border. The impact of these changes will take time to be fully understood and may adversely affect our operations and financial results.
Our operations rely on a number of large customers in certain areas of our business, and the loss of any of our major customers could negatively impact our results of operations.
If we fail to maintain our relationships with our major customers, or fail to replace lost customers, or if there is reduced demand from our customers or for products produced by our customers, such failures or reduced demand could materially reduce our sales. In addition, we could experience a reduction in sales if any of our customers fail to perform or default on any payment pursuant to our contracts with them. Long-term relationships with customers are especially important for suppliers of intermediate materials and components such as ourselves. We often work closely with customers to develop products that meet particular specifications as part of the design of a product intended for an end-user market. The bespoke nature of many of our products could make it difficult to replace lost customers. Our top 10 customers accounted for approximately 35% of our net sales in 2020. Any significant reduction in sales or customer payment default could have an adverse material impact on our results of operations, financial position and cash flows.
We depend upon our larger suppliers for a significant portion of our raw materials, and a loss of one of these suppliers, or a significant supply interruption could negatively impact our financial performance.
We rely, to varying degrees, on major suppliers for some of the principal raw materials of our engineered products, including aluminum, zirconium and carbon fiber. For example, in 2020, we obtained approximately 40% of our aluminum from Rio Tinto Alcan and its associated companies. Moreover, demand for carbon fiber is increasing, which has led to occasional periods of short supply in recent years with a number of expanding applications competing for the same supply of this specialized raw material. Our largest suppliers of carbon fiber are Toray and Grafil, a subsidiary of Mitsubishi Chemical. For additional details of some of our major suppliers (see ITEM 1 - Suppliers and raw materials).
We generally purchase raw materials from suppliers on a spot basis under standard terms and conditions. We also enter into supply contracts with Rio Tinto Alcan for a substantial portion of our aluminum requirements. In addition, we have supply contracts in place with U.S. Magnesium for raw material purchases of magnesium ingot for both military and commercial applications. The military contract covers magnesium purchases through December 31, 2023, whereas the commercial contract covers through December 31, 2021.
An interruption in the supply of essential raw materials used in our production processes or an increase in the costs of raw materials due to market shortages, supplier financial difficulties, government quotas or natural disturbances such as the recent outbreak of the COVID-19 coronavirus, could significantly affect our ability to provide competitively priced products to customers in a timely manner. In the event of a significant interruption in the supply of any materials used in our production processes, or a significant increase in their prices (as we have experienced, for example, at different times with aluminum, magnesium and rare earths), we may have to purchase these materials from alternative sources, build additional inventory of raw materials, increase our prices, reduce our margins or possibly fail to fill customer orders by deadlines required in contracts, which could result in, among other things, contractual penalties. We can provide no assurance that we would be able to obtain replacement materials quickly on similar terms or at all. Failure to maintain relationships with key suppliers or to develop relationships with alternative suppliers could have a material adverse effect on our results of operations, financial position and cash flows.
We are exposed to fluctuations in the costs of the raw materials that are used to manufacture our products, and such fluctuations could lead us to incur unexpected costs and could affect our margins and / or working capital requirements.
Fluctuations in the costs of raw materials could affect margins and working capital requirements in the businesses in which we use them, see ITEM 7A. We cannot always pass on cost increases or increase our prices to offset these cost increases immediately or at all, whether because of fixed-price agreements with customers, competitive pressures that restrict our ability to pass on cost increases or increase prices, or other factors. It can be particularly difficult to pass on cost increases or increase prices in product areas such as gas cylinders, where competitors offer similar products made from alternative materials, such as steel, if those materials are not subject to the same cost increases. Higher prices necessitated by large increases in raw material costs could make our current or future products unattractive compared to competing products made from alternative materials that have not been so affected by raw material cost increases, or compared to products produced by competitors who have not incurred such large increases in their raw material costs.
If, for example, the cost of aluminum or carbon fiber were to rise, we may not be able pass those cost increases on to our customers or manage the exposure effectively through hedging instruments. From time to time we use derivative financial instruments to hedge our exposures to fluctuations in aluminum costs. Although it is our treasury policy to enter into these transactions only for hedging and not for speculative purposes, we are exposed to market risk and credit risk with respect to the use of these derivative financial instruments, see ITEM 7A.
In the past several years we have made additional purchases of large stocks of magnesium alloys in an effort to delay the effect of potentially increased costs in the future. However, even though such purchases are not made for speculative purposes, there can be no assurance that costs will move as expected. Moreover, these strategic purchases increase our working capital needs, thus reducing our liquidity and cash flow. Accordingly, a substantial increase in raw material costs could have a material adverse effect on our results of operations, financial position and cash flows.
Changes in foreign exchange rates could reduce profit margins on our sales and reduce the reported sales of our non-U.S. operations and have a material adverse effect on our results of operations.
We conduct a large portion of our commercial transactions, purchases of raw materials and sales of goods in various countries and regions, including the U.S., the U.K., continental Europe, Australia and Asia. Our manufacturing operations based in the U.S., continental Europe and Asia usually purchase raw materials and sell goods denominated in their local currency, but our manufacturing operations in the U.K. often purchase raw materials and sell products in different currencies. Changes in the relative values of currencies can decrease the profits of our subsidiaries when they incur costs in currencies that are different from the currencies in which they generate all or part of their revenue. These transaction risks principally arise as a result of purchases of raw materials in U.S. dollars, coupled with sales of products to customers in euros. This impact is most pronounced in our exports to continental Europe from the U.K. In 2020, our U.K. operations sold approximately €50 million of goods into the Eurozone. Our policy is to hedge a portion of our net exposure to fluctuations in exchange rates with forward foreign currency exchange contracts. Therefore, we are exposed to market risk and credit risk through the use of derivative financial instruments. Moreover, any failure of hedging policies could negatively impact our profits, and thus damage our ability to fund our operations and to service our indebtedness. Exchange rate volatility has been experienced since the 'Brexit' referendum in the U.K. in 2016 with GBP sterling reaching a five-year low against the U.S. dollar in March 2020 and against the euro in August 2019, and while the terms of the U.K.'s relationship with the E.U. have now been agreed, against a background of the COVID-19 pandemic, continued volatility is to be expected.
In addition to subsidiaries and joint ventures in the U.S., we have operating subsidiaries located in the U.K., Canada, China and Australia, as well as a joint venture in Japan, each of whose revenue, costs, assets and liabilities are denominated in local currencies. As our consolidated financial statements are reported in U.S. dollars, we are exposed to fluctuations in those currencies when those amounts are translated to U.S. dollars for purposes of reporting our consolidated financial statements, which may cause declines in results of operations. The largest risk is from our operations in the U.K., which in 2020 generated an operating profit of $12.4 million and net sales of $153.5 million. Fluctuations in exchange rates, particularly between the U.S. dollar and GBP sterling (which has been subject to significant fluctuations, as described above), can have a material effect on our consolidated income statement and consolidated balance sheet. In 2020, movements in the average U.S. dollar exchange rate had a positive impact on net sales of $0.3 million; in 2019 movements in the average U.S. dollar exchange rate had a negative impact on net sales of $7.0 million. Changes in translation exchange rates increased net assets by $4.2 million in 2020, compared to a increase of $8.9 million in 2019.
These foreign exchange risks could have a material adverse effect on our results of operations, financial position and cash flows. For additional information on these risks, and the historical impact on our results, see ITEM 7A.
Our defined benefit pension plans have funding deficits and are exposed to market forces that could require us to make increased ongoing cash contributions in response to changes in market conditions, actuarial assumptions and investment decisions These market forces could expose us to significant short-term liabilities if a wind-up trigger occurred in relation to such plans, each of which could have a material adverse impact on our results of operations and financial position.
We have defined benefit pension arrangements in the U.K. and in the U.S., see ITEM 8, Note 14. Our largest defined benefit plan, the Luxfer Group Pension Plan, which closed to new members in 1998, remained open for accrual of future benefits based on career-average salary until April 5, 2016. However, following a consultation, it was agreed with the trustees and plan members to close the Luxfer Group Pension Plan in the U.K. to future accrual of benefits, effective from April 5, 2016. Moreover, for the purpose of increasing pensions in payment, it was agreed to use the CPI as the reference index, in place of the RPI where applicable. The Luxfer Group Pension Plan is funded according to the regulations in effect in the U.K. and, as of December 31, 2020, and December 31, 2019, had an accounting deficit of $45.1 million and $30.5 million, respectively. Luxfer Group Limited is the principal employer under the Luxfer Group Pension Plan, and other U.K. subsidiaries also participate under the plan. Our other defined benefit plans are less significant than the Luxfer Group Pension Plan and, as of December 31, 2020, and December 31, 2019, had aggregate accounting deficits of $5.7 million and $4.7 million, respectively. The largest of these additional plans is the BA Holdings, Inc. Pension Plan in the U.S., which was closed to further benefit accruals in December 2005, and merged with the much smaller Luxfer Hourly Pension Plan, effective January 1, 2016. According to the actuarial valuation of the Luxfer Group Pension Plan as of April 5, 2018, being the date of the last triennial valuation, the Luxfer Group Pension Plan had a deficit of £26.5 million on a plan-specific basis. Should a wind-up trigger occur in relation to the Luxfer Group Pension Plan, the buy-out deficit of that plan will become due and payable by the employers. The aggregate deficit of the Luxfer Group Pension Plan on a buy-out basis was estimated at £145 million as of April 5, 2018. The trustees have the power to wind-up the Luxfer Group Pension Plan if they consider that in the best interests of members there is no reasonable purpose in continuing the Luxfer Group Pension Plan.
As a result of the actuarial valuation as of April 5, 2018, we are required to continue to make ongoing cash contributions, over and above normal contributions required to meet the cost of future accrual, to the Luxfer Group Pension Plan. These additional payments are intended to reduce the funding deficit. We have agreed with the trustees to a schedule of annual payments of £4.1 million ($5.3 million at current exchange rates) to reduce the deficit. These contributions are to apply until the deficit is eliminated, but in practice the schedule will be reviewed and may be revised following the next triennial actuarial valuation in April 2021. Regulatory burdens have also proved to be a significant risk, such as the U.K.'s Pension Protection Fund Levy, which was £0.4 million in 2020.
We are exposed to various risks related to our defined benefit plans, including the risk of loss of market value of the plan assets, the risk of actual investment returns being less than assumed rates of return, the trustees of the Luxfer Group Pension Plan switching investment strategy (which does require consultation with the employer) and the risk of actual experience deviating from actuarial assumptions for such things as mortality of plan participants. In addition, fluctuations in interest rates cause changes in the annual cost and benefit obligations. Any of these risks could have a material adverse impact on our results of operations, financial position and cash flows.
Environmental and regulatory risks
The Pensions Regulator in the U.K. has the power in certain circumstances to issue contribution notices or financial support directions that, if issued, could result in significant liabilities arising for us.
The Pensions Regulator may issue a contribution notice to the employers that participate in the Luxfer Group Pension Plan, or any person who is connected with, or is an associate of, these employers where the Pensions Regulator is of the opinion that the relevant person has been a party to an act, or a deliberate failure to act, which had as its main purpose (or one of its main purposes) the avoidance of pension liabilities or where such act has a materially detrimental effect on the likelihood of payment of accrued benefits under the Luxfer Group Pension Plan being received. A person holding alone or together with his or her associates, directly or indirectly, one-third or more of our voting power, could be the subject of a contribution notice. The terms "associate" and "connected person," which are taken from the Insolvency Act 1986, are widely defined and could cover our significant shareholders and others deemed to be shadow directors. If the Pensions Regulator considers that a plan employer is "insufficiently resourced" or a "service company" (which terms have statutory definitions), it may impose a financial support direction requiring such plan's employer or any member of the Group, or any person associated or connected with an employer, to put in place financial support in relation to the Luxfer Group Pension Plan. Liabilities imposed under a contribution notice or financial support direction may be up to the difference between the value of the assets of the Luxfer Group Pension Plan and the cost of buying out the benefits of members and other beneficiaries of the Luxfer Group Pension Plan. In practice, the risk of a contribution notice being imposed may restrict our ability to restructure or undertake certain corporate activities. Additional security may also need to be provided to the trustees of the Luxfer Group Pension Plan before certain corporate activities can be undertaken (such as the payment of an unusual dividend), and any additional funding of the Luxfer Group Pension Plan may have a material adverse effect on our financial position and cash flows.
Our operations may prove harmful to the environment resulting in reputational damage and clean-up or other related costs.
We are exposed to substantial environmental costs and liabilities, including liabilities associated with divested assets and prior activities performed on sites before we acquired an interest in them. Our operations, including the production and delivery of our products, are subject to a broad range of continually changing environmental laws and regulations in each of the jurisdictions in which we operate. These laws and regulations increasingly impose more stringent environmental protection standards on us with respect to, among other things, air emissions, wastewater discharges, the use and handling of hazardous materials, noise levels, waste disposal practices, soil and groundwater contamination and environmental clean-up. Complying with these regulations involves significant and recurring costs.
We cannot predict our future environmental liabilities and cannot assure investors that our management is aware of every fact or circumstance regarding potential liabilities, or that the amounts provided and budgeted to address such liabilities will be adequate for all purposes. In addition, future developments, such as changes in regulations, laws or environmental conditions, may result in reputational damage or increase environmental costs and liabilities that could have a material adverse effect on our results of operations, financial position and cash flows.
The health and safety of our employees and the safe operation of our business is subject to various health and safety regulations in each of the jurisdictions in which we operate. These regulations impose various obligations on us, including the provision of safe working environments and employee training on health and safety matters. Complying with these regulations involves recurring costs.
Certain of our operations are highly regulated by different agencies that require products to comply with their rules and procedures and can subject our operations to penalties or adversely affect production.
Certain of our operations are in highly regulated industries that require us to maintain regulatory approvals and, from time to time, obtain new regulatory approvals from various countries. This can involve substantial time and expense. In turn, higher costs of compliance reduce our cash flows from operations. For example, manufacturers of gas cylinders throughout the world must comply with high local safety and health standards and obtain regulatory approvals in the markets in which they sell their products. Furthermore, military organizations require us to comply with applicable government regulations and specifications when providing products or services to them directly or as subcontractors. In addition, we are required to comply with U.S. and other export regulations with respect to certain products and materials. The E.U. has also passed legislation governing the registration, evaluation and authorization of chemicals, known as REACH, pursuant to which we are required to register chemicals and gain authorization for the use of certain substances. Following the U.K.’s withdrawal from the E.U. and the subsequent transition period, the E.U. REACH Regulation has been brought into U.K. law and REACH, and related legislation, have therefore been replicated in the U.K. In the U.S. there is similar legislation under the Toxic Substance Control Act 1976 ("TSCA") which was substantially amended in 2016. Although we make reasonable efforts to obtain all licenses and certifications that are required by countries in which we operate, there is always a risk that we may be found not to comply with certain required procedures. This risk grows with
increased complexity and variance in regulations across the globe. As regulatory schemes vary by country, we may also be subject to regulations of which we are not presently aware and could be subject to sanctions by a foreign government that could materially and adversely affect our operations in the relevant country.
Governments and their agencies have considerable discretion to determine whether regulations have been satisfied. They may also revoke or limit existing licenses and certifications or change the laws and regulations to which we are subject at any time. If our operations fail to obtain, experience delays in obtaining or lose a needed certification or approval, we may not be able to sell our products to our customers, expand into new geographic markets or expand into new product lines. In addition, new or more stringent regulations, if imposed, could result in us incurring significant costs in connection with compliance. Non-compliance with these regulations could result in administrative, civil, financial, criminal or other sanctions against us, which could have negative consequences on our business and financial position. Furthermore, if we begin to operate in new countries, we may need to obtain new licenses, certifications and approvals.
Our customers are also often subject to similar regulations and risks. We therefore face the risk that our customers may have the demand for their products reduced as a result of regulatory matters that fall outside our direct control. This would in turn reduce demand for our products and have a negative financial impact on our operating results.
Any of these factors could have a material adverse impact on our results of operations, financial position and cash flows.
We are subject to legislation and regulations to reduce carbon dioxide and other greenhouse gas emissions.
Although we are working to improve our energy efficiency, our manufacturing processes and the manufacturing processes of many of our suppliers and customers are still energy-intensive and use or generate, directly or indirectly, greenhouse gases ("GHGs"). In recent years, current regulatory programs impacting GHG emissions from large industrial plants and other sources include the E.U. Emissions Trading Scheme, the CRC Energy Efficiency Scheme in the U.K. and certain federal and state programs in the U.S., including GHG reporting and permitting rules issued by the U.S.E.P.A and the California Cap and Trade Program. Moreover, in December 2015, 195 countries participating in the United Nations Framework Convention on Climate Change, at its 21st Conference of the Parties meeting held in Paris, adopted a new global agreement on the reduction of climate change (the "Paris Agreement"). The Paris Agreement sets a goal of holding the increase in global average temperature to well below 2 degrees Celsius and pursuing efforts to limit the increase to 1.5 degrees Celsius, to be achieved by commitments by the participating countries to set emissions reduction targets, referred to as "nationally determined contributions." The Paris Agreement came into effect on November 4, 2016, after it was ratified the previous month, with implementation efforts beginning from 2018 with reassessment every five years. As it is implemented, the Paris Agreement is anticipated to result in more stringent requirements relating to greenhouse gas emissions. Due to the costs of compliance and the potential impact on our energy costs, these programs and additional future legislation and regulations aimed at reducing GHG emissions could have a material adverse effect on our results of operations, financial position and cash flows.
Due to the nature and use of the products that we manufacture, we may in the future face large liability claims.
We are subject to litigation in the ordinary course of our business, which could be costly to us and which may arise in the future. We are exposed to possible claims for personal injury, death or property damage, which could result from a failure of a product manufactured by us or of a product integrating one of our products. For example, improperly manufactured gas cylinders could explode at high pressure, which can cause substantial personal and property damage. This risk may be increased through the use of new technologies, materials and innovations. We also supply many components into aerospace applications in which the potential for significant liability exposures necessitates additional insurance costs.
Many factors beyond our control could lead to liability claims, including:
•the failure of a product manufactured by a third party that incorporated components manufactured by us;
•the reliability and skills of persons using our products or the products of our customers; and
•the use by customers of materials or products that we produced for applications for which the material or product was not designed.
If we cannot successfully defend ourselves against claims, we may incur substantial liabilities. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
•decreased demand for our products;
•initiation of investigation by regulators;
•costs to defend related litigation;
•diversion of management time and resources;
•compensatory damages and fines;
•product recalls, withdrawals or labeling, marketing or promotional restrictions;
•loss of revenue;
•exhaustion of any available insurance and our capital resources; and
•a decline in our stock price.
We could be required to pay a material amount if a claim is made against us that is not covered by insurance or otherwise subject to indemnification or that exceeds the insurance coverage that we maintain. Moreover, we do not currently carry insurance to cover the expense of product recalls, and litigation involving significant product recalls or product liability could have a material adverse effect on our results of operations, financial position and cash flows.
We are exposed to risks related to cybersecurity threats and general information security incidents which may also expose us to liability under data protection laws including the GDPR.
In the conduct of our business, we increasingly collect, use, transmit and store data on information technology systems. This data includes confidential information belonging to us, our customers and other business partners, as well as personally identifiable information of individuals, including our employees. Like other global companies, we have experienced, and expect to continue to be subject to, cybersecurity threats and incidents, ranging from employee error or misuse to individual attempts to gain unauthorized access to information technology systems, to sophisticated and targeted measures known as advanced persistent threats, none of which have been material to the Company to date.
Although we devote significant resources to network security, data encryption and other measures to protect our information technology systems and data from unauthorized access or misuse, including those measures necessary to meet certain information security standards that may be required by our customers, there can be no assurance that these measures will be successful in preventing a cybersecurity or general information security incident. We also rely in part on the reliability of certain tested third parties' cybersecurity measures, including firewalls, virus solutions and backup solutions, and our business may be affected if these third-party resources are compromised.
Cybersecurity incidents may result in business disruption, the misappropriation, corruption or loss of confidential information (including personally identifiable information) and critical data (ours or that of third parties), reputational damage, litigation with third parties, regulatory fines, diminution in the value of our investment in research and development and data privacy issues and increased information security protection and remediation costs. As these cybersecurity threats, and government and regulatory oversight of associated risks
continue to evolve, we may be required to expend additional resources to remediate, enhance or expand upon the cybersecurity protection and security measures we currently maintain. For example, we are subject to the European Union’s General Data Protection Regulation ("GDPR"), which became enforceable from May 25, 2018 and, following the U.K.'s exit from the E.U on January 31, 2020, our U.K. based businesses are subject to UK-GDPR which enshrines equivalent requirements in U.K. law. The GDPR introduced a number of new obligations for subject companies resulting in the need to continue dedicating financial resources and management time to GDPR compliance. Among other things, the GDPR places subject companies under obligations relating to the security of the personally identifiable information they process; while we have taken steps to ensure compliance with the GDPR, there can be no assurance that the measures we have taken will be successful in preventing an incident, including a cybersecurity incident or other data breach, which results in a breach of the GDPR. Fines for non-compliance with the GDPR may be levied up to a maximum of €20,000,000 or 4% of the subject company’s annual, group-wide turnover (whichever is higher). Individuals who have suffered damage as a result of a subject company’s non-compliance with the GDPR also have the right to seek compensation from such a company.
Future cybersecurity breaches, general information security incidents, further increases in data protection costs or failure to comply with relevant legal obligations regarding protection of data could therefore have a material adverse effect on our results of operations, financial position and cash flows.
We could incur future liability claims arising from previous businesses now closed or sold.
We have sold or closed a number of businesses over the years, but the products or services provided when the businesses were open and under our ownership could still result in potential liabilities which could have a material adverse effect on our operations, financial position and cash flows.
Risks associated to new and existing products
Our ability to remain profitable depends on our ability to protect and enforce our intellectual property, and any failure to protect and enforce such intellectual property could have a material adverse impact on our results of operations and financial position.
We cannot ensure that we will always have the ability to protect proprietary information and our intellectual property rights. We protect our intellectual property rights (within the U.S., Europe and other countries) through various means, including patents and trade secrets. Due to the difference in foreign trademark, patent and other laws concerning proprietary rights, our intellectual property rights may not receive the same degree of protection in other countries as they would in the U.S. or the U.K. The patents we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Further, competitors may infringe our patents and the costs of protecting our patents could be significant. We cannot assure you that we will have adequate resources to enforce our patents. Our patents will only be protected for the duration of the patent. Some of our older key patents have expired, and others will expire over the next few years. As a result, our competitors may introduce products using the technology previously protected, and these products may have lower prices than our products, which may negatively affect our market share. To compete, we may need to reduce our prices for those products. Additionally, the expiry of certain of those patents has reduced, or will reduce, barriers to entry to possible competitors for certain products and end-markets. With respect to our unpatented proprietary technology, it is possible that others will independently develop the same or similar technology or obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. Nevertheless, we cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. We rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, and we have registered or applied to register many of these trademarks. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing new brands. Further, we cannot assure you that competitors will not infringe our trademarks or that we will have adequate resources to enforce our trademarks.
Any failure to maintain, protect and enforce our intellectual property or the expiry of patent protection could have a material adverse impact on our results of operations, financial position and cash flows.
Expiration or termination of our right to use certain intellectual property granted by third parties, the right of those third parties to grant the right to use the same intellectual property to our competitors, and the right of certain third parties to use certain intellectual property used as part of our business, could have a material adverse impact on our results of operations, financial position and cash flows.
We have negotiated, and may from time to time in the future negotiate, licenses with third parties with respect to third party proprietary technologies used in certain of our manufacturing processes and products. If any of these licenses expire or terminate, we will no longer retain the rights to use the relevant third party proprietary technologies in our manufacturing processes and products, which could have a material adverse effect on our results of operations, financial position and cash flows. Further, the rights granted to us might be non-exclusive, which could result in our competitors gaining access to the same intellectual property.
Some of our patents may cover inventions that were conceived or first reduced to practice under, or in connection with, government contracts or other government funding agreements or grants. With respect to inventions conceived or first reduced to practice under such government funding agreements, a government may retain a non-exclusive, irrevocable, royalty-free license to practice, or have practiced for or on behalf of the relevant country, the invention throughout the world. In addition, if we fail to comply with our reporting obligations, or to adequately exploit the developed intellectual property under these government funding agreements, the relevant country may obtain additional rights to the developed intellectual property, including the right to take title to any patents related to government funded inventions or to license the same to our competitors. Furthermore, our ability to exclusively license or assign the intellectual property developed under these government funding agreements to third parties may be limited or subject to the relevant government's approval or oversight. These limitations could have a significant impact on the commercial value of the developed intellectual property.
We often enter into research and development agreements with academic institutions whereby they generally retain certain rights to the developed intellectual property. The academic institutions generally retain rights over the technology for use in non-commercial academic and research fields, including in some cases the right to license the technology to third parties for use in those fields. It is difficult to monitor and enforce such non-commercial academic and research uses, and we cannot predict whether the third party licensees would comply
with the use restrictions of these licenses. We could incur substantial expenses to enforce our rights against such licensees. In addition, even though the rights that academic institutions obtain are generally limited to the non-commercial academic and research fields, they may obtain rights to commercially exploit developed intellectual property in certain instances. Under research and development agreements with academic institutions, our rights to intellectual property developed thereunder are not always certain, but instead may be in the form of an option to obtain license rights to such intellectual property. If we fail to exercise our option rights in a timely way and / or we are unable to negotiate a license agreement, the academic institution may offer a license to the developed intellectual property to third parties for commercial purposes. Any such commercial exploitation could adversely affect our competitive position and have a material adverse effect on our business.
If third parties claim that intellectual property used by us infringes upon their intellectual property, our operating profits could be adversely affected.
We may, from time to time, be notified of claims that we are infringing upon patents, copyrights, or other intellectual property rights owned by third parties, and we cannot provide assurances that other companies will not in the future pursue such infringement claims against us or any third party proprietary technologies we have licensed. If we were found to infringe upon a patent or other intellectual property right, or if we failed to obtain or renew a license under a patent or other intellectual property right from a third party, or if a third party from whom we are licensing technologies was found to infringe upon a patent or other intellectual property rights of another third party, we may be required to pay damages, suspend the manufacture of certain products or re-engineer or rebrand our products, if feasible, or we may be unable to enter certain new product markets. Any such claims could also be expensive and time consuming to defend and could divert management's attention and resources. In addition, if we have omitted to enter into a valid non-disclosure or assignment agreement for any reason, we may not own the invention or our intellectual property and may not be adequately protected. Our competitive position could suffer as a result of any of these events and have a material adverse impact on our results of operations, financial position and cash flows.
Any failure of our research and development activity to improve our existing products and develop new products could cause us to lose market share.
Our products are highly technical in nature, and in order to maintain and improve our market position, we depend on successful research and development activity to continue to improve our existing products and develop new products. We cannot be certain that we will have sufficient research and development capability to respond to changes in the industries in which we operate. These changes could include changes in the technological environment in which we currently operate, increased demand for new products or the development of alternatives to our products. For example, the development of lighter weight steel alloys has made the use of steel in gas cylinders a more competitive alternative to aluminum than it had been previously. We may also experience delays in completing development of, enhancements to or new versions of our products and product innovations may not achieve the market penetration or price stability necessary for profitability. In addition to benefiting from our research collaboration with universities, we spent $3.3 million, $5.7 million and $6.4 million in 2020, 2019 and 2018 respectively, on our own research and development activities. We expect to fund our future research and development expenditure requirements through operating cash flows and restricted levels of indebtedness, but if operating profit decreases, we may not be able to invest in research and development or continue to develop new products or enhancements.
Without the timely introduction of new products or enhancements to existing products, our products could become obsolete over time, in which case our results of operations, financial position and cash flows could be adversely affected.
We may not be able to consummate, finance or successfully integrate future acquisitions into our business, which could hinder our strategy or result in unanticipated expenses, losses or charges.
As part of our strategy, we have supplemented and may continue to supplement organic growth by acquiring companies or operations engaged in similar or complementary businesses. If the consummation of future acquisitions, together with integration of acquired companies and businesses excessively diverts management's attention from the operations of our existing businesses, operating results could suffer. Any acquisition made could be subject to a number of risks, including:
•failing to discover liabilities of the acquired company or business for which we may be responsible as a successor owner or operator, including litigation or environmental costs and liabilities;
•difficulties associated with the assimilation of operations and personnel of the acquired company or business, creating uncertainty for employees, customers and suppliers;
•increased debt service requirements as a result of increased indebtedness to complete acquisitions;
•the loss of key personnel in the acquired company or business;
•a negative effect on our financial results resulting from an impairment of acquired intangible assets, the creation of provisions, or write downs; and / or
•potential adverse effects on our stock price and dividend amount due to the issuance of additional stock.
We cannot ensure that every acquisition will ultimately provide the benefits originally anticipated, which could ultimately have a material adverse impact on our results of operations, financial position and cash flows.
Our failure to perform under purchase or sale contracts could result in the payment of penalties to customers or suppliers, which could have a negative impact on our results of operations, financial position or cash flows.
A failure to perform under purchase or sale contracts could result in the payment of penalties to suppliers and / or customers, which could have a negative impact on our results of operations, financial position or cash flows. Certain contracts with suppliers could also obligate us to purchase a minimum product volume (clauses known as "take or pay") or contracts with customers may impose firm commitments for the delivery of certain quantities of products within certain time periods. The risk of incurring liability under a take or pay supply contract would increase during an economic crisis, which in turn would increase the likelihood of a sharp drop in demand for our products, which could have a material adverse effect on our results of operations, financial position and cash flows.
Our businesses could suffer if we lose certain employees or cannot attract and retain qualified employees.
We rely upon a number of key executives and employees, particularly members of the Executive Leadership Team. If these and certain other employees ceased to work for us, we would lose valuable expertise and industry experience and could become less profitable. We do not carry key person insurance covering the loss of any of our executives or employees.
In addition, future operating results depend in part upon our ability to attract and retain qualified engineering and technical personnel. As a result of intense competition for talent in the market, we cannot ensure that we will be able to continue to attract and retain such personnel. While our key employees are generally subject to non-competition agreements for a limited period of time following the end of their employment, if we were to lose the services of key executives or employees, it could adversely impact our ability to maintain our technological position, and / or have a material adverse effect on our results of operations, financial position and cash flows.
We could suffer a material interruption in our operations as a result of unforeseen events or operating hazards.
Our production facilities are located in a number of different locations around the world. Any of our facilities could suffer an interruption in production, either at separate times or at the same time, because of various and unavoidable occurrences, such as severe weather events (for example, hurricanes and floods), earthquakes, casualty events (for example, explosions, fires or material equipment breakdowns), acts of terrorism, pandemic disease, labor disruptions or other events (for example, required maintenance shutdowns). For example, our operations in California are subject to risks related to earthquakes. Further disruption occurred during 2015 at our Riverside, California, facility when an electrical arc caused damage to electrical equipment which triggered a power outage at the facility. In addition, some of our products are highly flammable, and there is a risk of fire inherent in their production process. Such hazards could cause personal injury or death, serious damage to, or destruction of, property and equipment, suspension of operations, substantial damage to the environment and / or reputational harm. The risk is particularly high in the production of ultra-fine magnesium powders, which are highly flammable and explosive in certain situations. Similar disruptions in the operations of our suppliers and / or customers could materially affect our business and operations. Although we carry certain levels of business interruption insurance, the coverage on certain catastrophic events or natural disasters, a failure of energy supplies and certain other events, is limited, and it is possible that the occurrence of such events may have a significant adverse impact on our results of operations, financial position and cash flows.
Employee strikes and other labor-related disruptions may adversely affect our operations.
Several of our production facilities depend on employees who are members of various trade union organizations. Strikes by, or labor disputes with, our employees may adversely affect our ability to conduct business.
We cannot assure you that there will not be any strike, lock-out or material labor dispute in the future. Work interruptions or stoppages could have a material adverse effect on our results of operations, financial position and cash flows.
As a holding company, Luxfer Holdings PLC's main source of cash is distributions from our operating subsidiaries.
Our ultimate parent company, Luxfer Holdings PLC, conducts all of its operations through the subsidiaries of Luxfer Group. Accordingly, its main cash source is dividends from these subsidiaries. The ability of each subsidiary to make distributions depends on the funds that a subsidiary receives from its operations in excess of the funds necessary for its operations, obligations or other business plans. Since Luxfer Group subsidiaries are wholly-owned, claims of Luxfer Holdings PLC will generally rank junior to all other obligations of the subsidiaries. If Luxfer Group operating subsidiaries are unable to make distributions, Luxfer Group's growth may slow, unless we are able to obtain additional debt or equity financing. In the event of a subsidiary's liquidation, there may not be assets sufficient for us to recoup our investment in the subsidiary.
We have a level of indebtedness which has reduced over time, but could adversely affect our cash flows and our ability to operate our business, remain in compliance with debt covenants, make payments on our indebtedness, pay dividends and respond to changes in our business or take certain actions.
As of December 31, 2020, we had $50.0 million of indebtedness under our senior notes (the "Loan Notes") divided into two equal tranches of $25.0 million due in 2023 and 2026, respectively. There was also a $4.1 million balance on the revolving credit facility ("RCF") as of December 31, 2020.
Our indebtedness could have important consequences. For example, it could make it more difficult for us to satisfy obligations with respect to indebtedness, and any failure to comply with the obligations of any of our debt instruments, including financial and other restrictive covenants, could result in an event of default under agreements governing our indebtedness. Further, our indebtedness could require us to dedicate a substantial portion of available cash flows to pay principal and interest on our outstanding debt, which would reduce the funds available for working capital, capital expenditures, dividends, acquisitions and other general corporate purposes. Our indebtedness could also limit our ability to operate our business, including the ability to engage in strategic transactions or implement business strategies. Factors related to our indebtedness could materially and adversely affect our business and our results of operations. Furthermore, our interest expense could increase if interest rates rise, because certain portions of our debt facilities bear interest at floating rates. If we do not have sufficient cash flows to service our debt, we may be required to refinance all or part of our existing debt, sell assets, incur further indebtedness or sell securities, none of which we can guarantee we will be able to do.
In addition, the agreements that govern the terms of our indebtedness contain, and any future indebtedness would likely contain, a number of restrictive covenants imposing significant operating and financial restrictions on us, including restrictions that may limit our ability to engage in acts that may be in our long-term best interests, including:
•incurring or guaranteeing additional indebtedness;
•paying dividends (including to fund cash interest payments at different entity levels) or making redemptions, repurchases or distributions with respect to ordinary shares or capital stock;
•creating or incurring certain security interests;
•making certain loans or investments;
•engaging in mergers, acquisitions, investment in joint ventures, amalgamations, asset sales and sale and leaseback transactions; and
•engaging in transactions with affiliates.
These restrictive covenants are subject to a number of qualifications and exceptions. The operating and financial restrictions and covenants in our existing debt agreements and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities.
We may be able to incur significant additional indebtedness in the future. Although the agreements governing our indebtedness contain restrictions on the incurrence of certain additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. If we incur new indebtedness, the related risks, including those described above, could intensify.
Any of these factors could have a material adverse impact on our results of operations, financial position and cash flows.
Our ability to pay regular dividends on our ordinary shares is subject to the discretion of our Board of Directors and will depend on many factors, including our results of operations, cash requirements, financial position, contractual restrictions, applicable laws and other factors, and may be limited by our structure and statutory restrictions and restrictions imposed by the Revolving Credit Facility and the Loan Notes, as well as any future debt facilities.
We may declare cash dividends on our ordinary shares as described in ITEM 8. However, the payment of future dividends will be at the discretion of our Board of Directors. Any recommendation by our Board to pay dividends will depend on many factors, including our results of operations, cash requirements, financial position, contractual restrictions, applicable laws and other factors, including availability of future debt facilities. Under English law, any payment of dividends would be subject to the Companies Act 2006 of England and Wales (the "Companies Act"), which requires, among other things, that we can only pay dividends on ordinary shares out of profits available for distribution determined in accordance with the Companies Act. Additionally, any change in the level of our dividends or the suspension of the payment thereof could adversely affect the market price of our ordinary shares.
If we fail to establish or maintain an effective system of internal controls, we may be unable to accurately
report our financial results or prevent fraud, and investor confidence and the market price of our
ordinary shares may, therefore, be adversely impacted.
We are subject to reporting obligations under U.S. securities laws. Our reporting obligations as a public company
place a significant strain on our management, operational and financial resources and systems for the
foreseeable future. Our management is required to report on the effectiveness of our internal control over
financial reporting as required annually by Section 404(a), and quarterly by Section 302 of
the Sarbanes-Oxley Act, for which we perform system and process evaluation and testing of our internal control
over financial reporting.
Over time we may identify and correct deficiencies or weaknesses in our internal controls and, where and when
appropriate, report on the identification and correction of these deficiencies or weaknesses. However, the
internal control procedures can provide only reasonable, and not absolute, assurance that deficiencies or
weaknesses are identified. Deficiencies or weaknesses that have not been identified by us could emerge, and
the identification and correction of these deficiencies or weaknesses could have a material adverse impact on
our results of operations. If our internal control over financial reporting are not considered adequate, this may
adversely affect our ability to report our financial results on a timely and accurate basis, which may result in a
loss of public confidence or have an adverse effect on the market price of our ordinary shares, which could
adversely impact our ability to access equity markets and could have a material adverse impact on our results of
operations, financial position and cash flows.
It may be difficult to effect service of U.S. process and enforce U.S. legal process against the directors of Luxfer.
Luxfer is a public limited company incorporated under the laws of England and Wales. A number of our directors and officers reside outside of the U.S., principally in the U.K. A substantial portion of our assets, and the assets of such persons, are located outside of the U.S. Therefore, it may not be possible to effect service of process within the U.S. upon Luxfer or these persons in order to enforce judgments of U.S. courts against Luxfer or these persons based on the civil liability provisions of the U.S. federal securities laws. There is doubt as to the enforceability in England and Wales, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities solely based on the U.S. federal securities laws.
Item 1B. Unresolved Staff Comments
Item 2. Properties
Our principal office is located in owned premises in Manchester, United Kingdom, and our management office in the United States is located in leased premises in Milwaukee, Wisconsin. Our operations are conducted in facilities throughout the world. These facilities house manufacturing and distribution operations, as well as sales and distribution offices.
We carry out Elektron manufacturing operations at six plants in the United States and single plants in each of the United Kingdom and Canada.
We carry out Gas Cylinders manufacturing operations at three plants in the United States, three plants in the United Kingdom and single plants in each of Canada and China. Two of the plants in the United States and two in the United Kingdom are classified as discontinued operations. In addition, Gas Cylinders also has a sales and distribution office in both Australia and Italy.
Our manufacturing plants comprise both owned and leased properties. We believe that our production facilities are suitable for their purpose and are adequate to support our businesses.
|Division||Property / Plant||Principal products|
|Ownership||Approximate area (square feet)|
|Manchester, England||Magnesium alloys / zirconium chemicals||Split Lease / Own||561,264 |
|Madison, IL||Magnesium sheet||Lease||803,795 |
|Tamaqua, PA||Magnesium powders||Own||64,304 |
|Lakehurst, NJ||Magnesium powders||Own||78,926 |
|Flemington, NJ||Zirconium chemicals||Own||65,000 |
|Hamilton, Canada||Magnesium powders||Lease||16,335 |
|Cincinnati, OH||Magnesium heating pads||Lease||150,000 |
|Saxonburg, PA||Magnesium powders||Own||68,000|
|Gas Cylinders|| || || || |
|Nottingham, England||Composite and aluminum cylinders||Lease||143,222 |
|Calgary, Canada||Composite cylinders||Lease||65,500 |
|Worcester, England*||Aluminum panels||Lease||97,315 |
|Kidderminster, England*||Aluminum panels||Lease||60,200 |
|Riverside, CA||Composite cylinders||Lease / Own||125,738 |
|Graham, NC*||Aluminum cylinders||Own||121,509 |
|Riverside, CA*||Aluminum panels||Lease||68,240 |
|Shanghai, China||Cylinders||Lease||15,383 |
*Properties relate to discontinued operations.
Item 3. Legal Proceedings
The Company is a defendant in various lawsuits and is subject to various claims that arise in the normal course of business, the most significant of which are summarized in Note 19 (commitments and contingencies) to the consolidate financial statements in ITEM 8. In the opinion of management, the likelihood that the ultimate disposition of these matters will have a material adverse impact is remote.
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange and is traded under the symbol "LXFR." As of December 31, 2020, the Company had 17 shareholders of record.
During the years ended December 31, 2020, 2019 and 2018 the Company paid quarterly dividends of $0.125 per ordinary share which equated to $13.6 million, $13.6 million and $13.4 million in 2020, 2019 and 2018 respectively. A further dividend of $3.4 million was declared and paid in the first quarter of 2021. The declaration and payment of any future dividends will be at the discretion of our Board of Directors and will depend upon our results of operations, cash requirements, financial position, contractual restrictions, restrictions imposed by our indebtedness, any future debt agreements or applicable laws and other factors that our Board of Directors may deem relevant. As with all dividends declared to date, we expect future dividends to be paid out of our earnings.
Any payment of dividends is also subject to the provisions of the U.K. Companies Act, according to which dividends may only be paid out of profits available for distribution determined by reference to financial statements prepared in accordance with the Companies Act and the International Accounting Standards Board, which differ in some respects from U.S. GAAP. In the event that dividends are paid in the future, holders of the ordinary shares will be entitled to receive payments in U.S. dollars in respect of dividends on the underlying ordinary shares in accordance with the deposit agreement. Furthermore, because we are a holding company, any dividend payments would depend on cash flows from our subsidiaries.
United Kingdom tax consequences for holders of common stock
The United Kingdom tax consequences discussed below do not reflect a complete analysis or listing of all the possible United Kingdom tax consequences that may be relevant to holders of our common stock. Furthermore, the statements below only apply to holders of our common stock who are resident for tax purposes outside of the United Kingdom.
Investors should consult their own tax advisers in respect of the tax consequences related to receipt, ownership, purchase or sale or other disposition of our common stock.
United Kingdom withholding tax
Under current law, the Company is not required to make any deduction or withholding for or on account of United Kingdom tax from dividends distributed on our common stock, irrespective of the tax residence or individual circumstances of the recipient shareholder.
United Kingdom income tax on dividends
A non-United Kingdom tax resident holder of our common stock will not be subject to United Kingdom income taxes on dividend income and similar distributions in respect of our shares, unless the shares are attributable to a permanent establishment or a fixed place of business maintained in the United Kingdom by such non-U.K. holder.
Stamp duty and stamp duty reserve tax ("SDRT")
While the ordinary shares are held within a depositary trust company ("DTC"), provided that DTC satisfies various conditions specified in U.K. legislation, electronic book-entry transfers of such shares should not be subject to U.K. stamp duty and agreements to transfer such shares should not be subject to U.K. stamp duty reserve tax (“SDRT”). The parties have obtained confirmation of this position by way of formal clearance by HMRC. Likewise, transfers of, or agreements to transfer, the ordinary shares from the DTC clearance service into another clearance service or into a depositary receipt system should not, provided that the other clearance service or depositary receipt system satisfies various conditions specified in U.K. legislation, be subject to U.K. stamp duty or SDRT.
In the event that the ordinary shares have left the DTC clearance service otherwise than into another clearance service or depositary receipt system, any subsequent transfer of, or agreement to transfer, such ordinary shares may, subject to any available exemption or relief, be subject to U.K. stamp duty or SDRT at a rate of 0.5% of the consideration for such transfer or agreement. Any such U.K. stamp duty or SDRT will generally be payable by the transferee and must be paid (and any relevant transfer document stamped by HMRC) before the transfer can be registered in the books of Luxfer Holdings PLC.
In the event that ordinary shares which have left the DTC clearance service otherwise than into another clearance service or depositary receipt system are subsequently transferred back into a clearance service or depositary receipt system, such transfer, or agreement to transfer, may, subject to any available exemption or relief, be subject to U.K. stamp duty or SDRT at a rate of 1.5% of the consideration for such transfer (or, where there is no such consideration, 1.5% of the value of such ordinary shares). In practice this liability for stamp duty or SDRT is in general borne by the person depositing the relevant shares in the clearance service or depositary receipt system.
Share performance graph
The following information under the caption "Share Performance Graph" in this ITEM 5 of this Annual Report on Form 10-K is not deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or to the liabilities of Section 18 of the Exchange Act and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent we specifically incorporate it by reference into such a filing.
The following graph sets forth the cumulative total shareholder return on our ordinary shares for the last five years, assuming the investment of $100 on December 31, 2015, and the reinvestment of all dividends since that date to December 31, 2020. The graph also contains for comparison purposes the Russell 2000 Index, assuming the same investment level and reinvestment of dividends.
By virtue of our market capitalization and characteristics, we believe the Russell 2000 Index is an appropriate published industry index for comparison purposes.
Purchase of Equity Securities
During the fourth quarter and entire fiscal year of 2020, we made no purchases of our ordinary shares.
Item 6. Selected Financial Data
The below selected financial data is derived from our audited consolidated financial statements and reflects financial information related to continuing activities and should be read in conjunction with the audited financial statements for the year ended December 31, 2020, included within ITEM 8 this document.
The results of operations for any period are not necessarily indicative of the results to be expected for any future period. The consolidated financial statements, from which the historical financial information for the periods set forth below have been derived, were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The selected historical consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes thereto appearing elsewhere in this annual report on Form 10-K for the years ended December 31, 2020 and 2019.
Prior year figures have been restated to reflect discontinued operations in the current year.
|Years ended December 31,|
|In millions except share and per-share data||2020||2019||2018||2017||2016|
|Consolidated statements of operations and comprehensive income from continuing activities data|
|Net sales||$||324.8 ||$||373.4 ||$||401.9 ||$||348.0 ||$||324.2 |
|Operating income||28.5 ||18.7 ||33.6 ||21.8 ||34.1 |
|Net income||20.8 ||8.7 ||27.7 ||17.3 ||15.2 |
|Earnings / (loss) per ordinary share|
| Basic ||0.75 ||0.32 ||1.04 ||0.65 ||0.57 |
| Diluted||0.74 ||0.31 ||1.00 ||0.65 ||0.57 |
|Weighted average ordinary shares outstanding|
| Basic||27,557,219 ||27,289,042 ||26,708,469 ||26,460,947 ||26,443,662 |
| Diluted||27,971,382 ||27,882,864 ||27,692,262 ||26,723,981 ||26,654,638 |
Cash dividends declared and paid1
|$||13.6 ||$||13.6 ||$||13.4 ||$||13.3 ||$||13.3 |
Cash dividends declared and paid after December 311
|3.4 ||3.4 ||3.4 ||3.4 ||3.3 |
|Consolidated balance sheets data|
|$||346.4 ||$||390.3 ||$||408.8 ||$||415.8 ||$||399.8 |
Total long-term obligations2
|113.9 ||138.4 ||133.3 ||157.3 ||196.2 |
|Total shareholders' equity||167.1 ||174.4 ||184.3 ||174.5 ||150.4 |
1In 2020, 2019, 2018, 2017 and 2016 the Company paid quarterly dividends of $0.125 per ordinary share.
2Includes assets and liabilities held-for-sale.
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;
•ongoing impact of COVID-19 and future pandemics;
•fluctuations in the cost of raw materials and utilities;
•currency fluctuations and other financial risks;
•our ability to protect our intellectual property;
•the significant amount of indebtedness we have incurred and may incur, and the obligations to service such indebtedness and to comply with the covenants contained therein;
•relationships with our customers and suppliers;
•increased competition from other companies in the industries in which we operate;
•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;
•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.
Luxfer Holdings PLC ("Luxfer," "the Company," "we") is a global producer of highly-engineered industrial materials focused on sustained value creation using its broad array of technical knowhow and proprietary materials technologies. The Company specializes in the design and manufacture of high-performance products for transportation, defense and emergency response, healthcare, and general industrial purposes. Luxfer customers include both end-users of its products and manufacturers that incorporate Luxfer products into finished goods.
Key trends and uncertainties regarding our existing business
Impact of COVID-19 on operations
Luxfer’s top priority during this global pandemic is the health and well-being of our employees, customers, shareholders, and the communities in which we operate. The Company continues to monitor the COVID-19 situation closely, while simultaneously executing business continuity plans. These business continuity plans include, but are not limited to, (i) retooling operations to maintain social distance and maximize employee safety; (ii) increasing resources and efforts to satisfy demand from the most impactful parts of our business; (iii) expanding flexible work arrangements and policies, where practical, to maximize employee safety; (iv) increased monitoring of short-term cash flow, including measures to reduce costs and generate cash; and (v) providing regular updates to our shareholders, employees, customers, and suppliers in a transparent and timely manner.
At this time, Luxfer continues to operate all of its facilities, following temporary closures at a small number of locations earlier in 2020. However, due to weaker demand resulting from uncertain economic conditions, potential supply constraints, and the continued impact of COVID-19, Luxfer has implemented additional cost saving programs, including headcount reductions.
Luxfer’s results continue to reflect the global macro environment resulting from the COVID-19 pandemic, including broad-based market weakness, which has been especially evident in our general industrial and transportation end-markets in 2020 with full year decline of 18.0% and 14.7% respectively. However, while general industrial has continued to decline in the fourth quarter by 12.5% relative to prior year, transportation has experienced a recovery with growth of 20.1%, largely on the back of the return to growth of sales of alternative fuel products. Despite the adverse macro trends, the Company has a strong balance sheet and access to an existing $150 million credit facility, of which only $4.1 million was drawn down at the end of the year following continued strong cash generation which allowed the early repayment in the fourth quarter of $25 million of Loan Notes due 2021. Furthermore, as our net debt to EBITDA ratio has fallen to 1.0x at the end of 2020 (from 1.2x at the end of 2019), we have identified no issues in relation to financial covenants nor availability of funding for continued operations.
Operating objectives and trends
In 2021, we expect the following operating objectives and trends to impact our business:
•Continuing proactive response to COVID-19 pandemic, including the health and well-being actions highlighted above, in addition to initiatives to stimulate demand for products, ensure continuity of supply and action, focused cost saving programs;
•Divestiture of non-strategic aluminum businesses (identified as discontinued operations) in the Gas Cylinders segment.
•Refocus on productivity acceleration and growth recovery post COVID-19 as we capitalize on lean manufacturing initiatives and pursue faster product innovation;
•Continued focus on developing global talent and implementing a high-performance culture; and
•Continued focus on improved operating cash generation with lower restructuring activity and maintaining strong working capital performance.
CONSOLIDATED RESULTS OF OPERATIONS
The consolidated results of operations from, continuing operations of Luxfer were as follows:
|Years ended December 31,||% / point change|
|In millions||2020||2019||2018||2020 v 2019||2019 v 2018|
|Net sales||$||324.8 ||$||373.4 ||$||401.9 ||(13.0)||%||(7.1)||%|
|Cost of goods sold||(243.9)||(269.7)||(284.0)||(9.6)||%||(5.0)||%|
|Gross profit||80.9 ||103.7 ||117.9 ||(22.0)||%||(12.0)||%|
| % of net sales||24.9 ||%||27.8 ||%||29.3 ||%||(2.9)||(1.5)|
|Selling, general and administrative expenses||(39.8)||(49.7)||(54.6)||(19.9)||%||(9.0)||%|
| % of net sales||12.3 ||%||13.3 ||%||13.6 ||%||(1.0)||(0.3)|
|Research and development||(3.3)||(5.7)||(6.3)||(42.1)||%||(9.5)||%|
| % of net sales||1.0 ||%||1.5 ||%||1.6 ||%||(0.5)||(0.1)|
|Restructuring charges||(8.9)||(25.9)||(13.2)||(65.6)||%||96.2 ||%|
| % of net sales||2.7 ||%||6.9 ||%||3.3 ||%||(4.2)||3.6 |
|Impairment charges / (credits)||— ||0.2 ||(5.9)||(100.0)||%||(30.6)||%|
| % of net sales||— ||%||(0.1)||%||1.5 ||%||0.1 ||(1.6)|
|Acquisition related costs||— ||(1.4)||(4.3)||(100.0)||%||(67.4)||%|
| % of net sales||— ||%||0.4 ||%||(1.1)||%||(0.4)||(0.6)|
|Other charges||(0.4)||(2.5)||— ||(84.0)||%||n/a|
| % of net sales||0.1 ||%||0.7 ||%||— ||%||(0.6)||n/a|
|Operating income||28.5 ||18.7 ||33.6 ||52.4 ||%||(44.3)||%|
| % of net sales||8.8 ||%||5.0 ||%||8.4 ||%||3.8 ||(3.4)|
|Net interest expense||(5.0)||(4.4)||(4.5)||13.6 ||%||(2.2)||%|
| % of net sales||1.5 ||%||1.2 ||%||1.1 ||%||0.3 ||0.1 |
|Defined benefit pension credit||4.3 ||1.3 ||4.7 ||230.8 ||%||(72.3)||%|
| % of net sales||1.3 ||%||0.3 ||%||1.2 ||%||1.0 ||(0.9)|
|Income before income taxes and equity in net income of affiliates||27.8 ||15.6 ||33.8 ||78.2 ||%||(53.8)||%|
| % of net sales||8.6 ||%||4.2 ||%||8.4 ||%||4.4 ||(4.2)|
|Provision for income taxes||(6.9)||(7.6)||(6.5)||(9.2)||%||16.9 ||%|
| Effective tax rate||24.8 ||%||48.7 ||%||19.2 ||%||(23.9)||29.5 |
|Income before equity in net income of affiliates||20.9 ||8.0 ||27.3 ||161.3 ||%||(70.7)||%|
| % of net sales||6.4 ||%||2.1 ||%||6.8 ||%||4.3 ||(4.7)|
|Equity in income of unconsolidated affiliates (net of tax)||(0.1)||0.7 ||0.4 ||(114.3)||%||75.0 ||%|
| % of net sales||— ||%||0.2 ||%||0.1 ||%||(0.2)||0.1 |
|Net income ||$||20.8 ||$||8.7 ||$||27.7 ||139.1 ||%||(68.6)||%|
| % of net sales||6.4 ||%||2.3 ||%||6.9 ||%||4.1 ||(4.6)|
The 13.0% decrease in consolidated net sales in 2020 from 2019 was heavily influenced by the global economic downturn resulting from the COVID-19 pandemic across all end markets with the adverse impact most pronounced across the industrial and transportation end markets, including:
•Lower sales of photoengraving plates;
•Lower sales of zirconium-based chemical products used in industrial catalysis;
•Lower sales of SCBA cylinders used by first responders; and
•$7.6 million revenue decline as a result of the divestiture of Elektron's magnesium Czech recycling business in 2019.
•These decreases were partially offset by:
◦Continued growth of alternative fuel (AF) systems despite COVID-19 headwinds affecting transportation end markets; and
◦Increased revenues from Luxfer Magtech chemical kit products.
The 7.1% decrease in consolidated net sales in 2019 from 2018 was primarily the result of:
•$8.3 million revenue decline as a result of the divestiture of Elektron's magnesium Czech recycling business at the end of the second quarter. Excluding this divestiture, underlying business declined 5.1%;
•Significantly lower sales of our proprietary SoluMag® alloy as a result of continuing destocking amid budgetary pressures affecting North American shale producers;
•Adverse foreign currency effects of $8.4 million.
•These decreases were partially offset by:
◦Continued recovery in sales of alternative fuel (AF) systems;
◦Increased revenues from zirconium-based automotive and industrial catalysis materials.
The 2.9 percentage point decrease in gross profit as a percentage of sales in 2020 from 2019 was primarily the result of adverse sales mix and inefficiency from the impact of COVID-19.
These adverse factors were partially offset by the impact of productivity improvements in Luxfer Gas Cylinders Europe, following closure of the French operation in 2019 and transfer of production to the U.K. and U.S.A.
The 1.5 percentage point decrease in gross profit as a percentage of sales in 2019 from 2018 was primarily the result of:
•Adverse sales mix;
•Unfavorable foreign exchange variances; and
•Impact of short-term process inefficiency following plant consolidation exercises.
These decreases were partially offset by cost savings resulting from our continued effort to reduce production-based costs, partially derived from our transformation plan.
Selling, general and administrative expenses ("SG&A")
SG&A costs as a percentage of sales have decreased by 1.0 percentage points in 2020 from 2019. The $9.9 million or 19.9% decline in costs was primarily the result of continued cost savings derived from our transformation plan, as well as specific cost reduction actions taken in response to the COVID-19 pandemic.
SG&A costs as a percentage of sales was flat in 2019 and 2018. The $4.9 million or 9.0% decline in costs was primarily the result of continued cost savings derived from our transformation plan, as well as lower management incentive awards in 2019. This was partially offset by $1.5 million of non-recurring litigation expense incurred in 2019.
Research and development costs
Research and development costs as a percentage of sales reduced by 0.5% in 2020 from 2019, largely as a result of COVID-19 led project delays.
Research and development costs as a percentage of sales was virtually flat at 1.5% in 2019 versus 1.6% in 2018.
The $8.9 million restructuring charges in 2020 includes:
•A further $7.5 million in relation to the closure of Luxfer Gas Cylinders France;
•$1.4 million in one-time severance costs as a result of actions taken in response to the COVID-19 pandemic.
The $25.9 million restructuring charges in 2019 was the result of:
•$20.1 million in relation to the closure of Luxfer Gas Cylinders France;
•$4.6 million related to asset write-downs and one-time employee benefits following the decision to scale down production at one of our Luxfer Magtech sites; and
•$1.2 million of other simplification costs.
Impairment charges / (credits)
Impairment credits of $0.2 million in 2019 relates to a $0.2 million true-up of the 2018 impairment of the assets of the Czech magnesium recycling business prior to its eventual divestiture in Q2, 2019.
Acquisition-related costs which were net $nil in 2020 related to $0.4 million costs incurred in relation to merger and acquisition ("M&A") exploration activities offset by deferred consideration adjustments and profit on previously written-down inventory. In July 2020 we sold our 51% investment in Luxfer Uttam India Private Limited to the joint venture ("JV") partner. Allowing for legal costs, we generated a profit on disposal of less than $0.1 million.
Acquisition-related costs of $1.4 million in 2019 related to :
•$3.5 million reimbursement payment and $0.9 million of professional and legal fees incurred in connection with the terminated acquisition of Neo Performance Materials; offset by
•$2.9 million gain on disposal of Elektron's magnesium recycling business in the Czech Republic; and
•$0.1 million credit in relation to the revaluation of deferred contingent consideration, arising from the acquisition of the legacy businesses of Luxfer Magtech Inc. which was acquired in 2014.
The $0.4 million other charges incurred in 2020, is the result of further costs incurred in relation to the remediation of the legacy environmental issue outlined below.
The $2.5 million other charges incurred in 2019, is the result of the Company's decision to commence a project to remove low-level naturally occurring radioactive material (NORM) from a redundant building at Elektron's Manchester, UK site. The work represents remediation of a legacy environmental issue and is expected to complete in the first quarter of 2021.
Net interest expense
Net interest expense of $5.0 million in 2020 increased from $4.4 million in 2019 largely as a result of an additional finance charge following the $25 million voluntary early repayment of 3.67% Loan notes due 2021, at the end of the fourth quarter.
Net interest expense of $4.6 million in 2019 was flat compared to 2018.
Defined benefit pension credit
The defined benefit pension credit of $4.3 million has increased by $3.0 million in 2020 from 2019. This was primarily due to the combined effect on the U.K. plan of a reduction in the discount rate and lower inflation, partially offset by lower projected asset returns.
The $3.4 million decrease in defined benefit pension credit in 2019 from 2018 was primarily due to:
•Lower projected asset returns; and
•Loss of $0.8 million resulting from a settlement affecting the U.S. plan in the final quarter of 2019.
Provision for income taxes
The 23.9 percentage point decrease in the effective tax rate in 2020 from 2019 was primarily due to significantly lower non-deductible expenses of a non-recurring nature in the current year.
The 29.5 percentage point increase in the effective tax rate in 2019 from 2018 was primarily due to significant non-deductible expenses incurred in relation to the closure of Luxfer Gas Cylinders France and the terminated acquisition of Neo Performance Materials.
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,|
|In millions except per share data||2020||2019||2018|
|Net income from continuing operations||20.8 ||8.7 ||27.7 |
|Accounting charges / (credits) relating to acquisitions and disposals of businesses:|
| Unwind of discount on deferred consideration||— ||0.2 ||0.2 |
| Amortization on acquired intangibles||0.7 ||1.2 ||1.2 |
| Acquisitions and disposals cost||— ||1.4 ||4.3 |
|Defined benefit pension credit||(4.3)||(1.3)||(4.7)|
|Restructuring charges||8.9 ||25.9 ||13.2 |
|Impairment charges||— ||(0.2)||5.9 |
|Other charges||0.4 ||2.5 ||— |
|Share-based compensation charges||2.8 ||4.5 ||4.8 |
|Other non-recurring tax items||— ||— ||(2.9)|
|Income tax on adjusted items||(0.4)||(2.0)||(1.7)|
|Adjusted net income from continuing operations||28.9 ||40.9 ||48.0 |
|Adjusted earnings per ordinary share from continuing operations|
|Diluted earnings per ordinary share||0.74 ||0.31 ||1.00 |
|Impact of adjusted items||0.29 ||1.16 ||0.73 |
Adjusted diluted earnings per ordinary share(1)
|1.03 ||1.47 ||1.73 |
(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,|
|In millions except per share data||2020||2019||2018|
|Adjusted net income from continuing operations||28.9 ||40.9 ||48.0 |
|Add back / (deduct):|
| Other non-recurring tax items ||— ||— ||2.9 |
| Income tax on adjusted items||0.4 ||2.0 ||1.7 |
| Income tax expense||6.9 ||7.6 ||6.5 |
| Net finance costs||5.0 ||4.4 ||4.5 |
|Adjusted EBITA from continuing operations||41.2 ||54.9 ||63.6 |
| Loss on disposal of PPE||0.1 ||0.2 ||0.3 |
| Depreciation||12.6 ||12.0 ||15.7 |
|Adjusted EBITDA from continuing operations||53.9 ||67.1 ||79.6 |
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,|
|In millions ||2020||2019||2018|
|Adjusted net income from continuing activities||$||28.9 ||$||40.9 ||$||48.0 |
| Income tax on adjusted items||0.4 ||2.0 ||1.7 |
| Provision for income taxes||6.9 ||7.6 ||6.5 |
|Adjusted income from continuing activities before income taxes||$||36.2 ||$||50.5 ||$||56.2 |
|Adjusted provision for income taxes||7.3 ||9.6 ||8.2 |
|Adjusted effective tax rate from continuing activities||20.2 ||%||19.0 ||%||14.6 ||%|
SEGMENT RESULTS OF OPERATIONS
The summary that follows provides a discussion of the results of operations of each of our two reportable segments (Gas Cylinders and Elektron). Both segments comprise various product offerings that serve multiple end markets.
Adjusted EBITDA represents operating income adjusted for restructuring charges; impairment charges; other charges; acquisition and disposals cost; loss on disposal of property, plant and equipment; depreciation and amortization; share based compensation charges; and unwind of discount on deferred consideration. A reconciliation to net income and taxes can be found in ITEM 8, Note 17.
The results of operations from the Gas Cylinders segment are for continuing activities only, therefore numbers and commentary has been adjusted for the previous years.
The net sales and adjusted EBITDA for Gas Cylinders were as follows:
|Years ended December 31,||% / point change|
2020 v 2019
2019 v 2018
|Net sales||$||141.9 ||$||153.5 ||$||152.1 ||(7.6)||%||0.9 ||%|
|Adjusted EBITDA||21.3 ||22.3 ||23.4 ||(4.5)||%||(4.7)||%|
| % of net sales||15.0 ||%||14.5 ||%||15.4 ||%||0.5 ||(0.9)|
The 7.6% decrease in Gas Cylinders sales in 2020 from 2019 was primarily the result of COVID-19 related disruption marked by temporary customer shutdowns, especially reduced sales of SCBA composite cylinders used by first responders. This was partially offset by continued growth in alternative fuel cylinder sales.
The 0.9% increase in Gas Cylinders sales in 2019 from 2018 was primarily the result of the continued strength in alternative fuel cylinder sales, partially offset by adverse foreign currency effects of $3.9 million.
The 0.5 percentage point increase in adjusted EBITDA for Gas Cylinders as a percentage of net sales in 2020 from 2019 was primarily the result of productivity improvements and cost savings following the integration of the Luxfer Gas Cylinders France operation into other sites. This was partially offset by adverse sales mix.
The 0.9 percentage point decrease in adjusted EBITDA for Gas Cylinders as a percentage of net sales in 2019 from 2018 was primarily the result of adverse foreign currency effects partially offset by the impact of favorable cost reduction initiatives.
The net sales and adjusted EBITDA for Elektron were as follows:
|Years ended December 31,||% / point change|
2020 v 2019
2019 v 2018
|Net sales||$||182.9 ||$||219.9 ||$||249.8 ||(16.8)||%||(12.0)||%|
|Adjusted EBITDA||32.6 ||44.8 ||56.2 ||(27.2)||%||(20.3)||%|
| % of net sales||17.8 ||%||20.4 ||%||22.5 ||%||(2.6)||(2.1)|
The 16.8% decrease in Elektron sales in 2020 from 2019 was primarily the result of COVID-19 related disruption especially to the industrial and transportation end markets, including:
•Decreased sales of zirconium-based industrial catalysts;
•Lower sales of photo-engraving plates and magnesium countermeasure flares;
•Lower sales of magnesium aerospace alloys;
•$7.6 million revenue decline as a result of the divestiture of Elektron's magnesium Czech recycling business in 2019.
This was partially offset by increased revenues from Luxfer Magtech chemical detection kits.
The 12.0% decrease in Elektron sales in 2019 from 2018 was primarily the result of:
•$8.3 million revenue decline as a result of the divestiture of Elektron's magnesium Czech recycling business at the end of Q2, with underlying business excluding the divestiture declining 8.9%;
•Significantly lower sales of our proprietary SoluMag® alloy ;
•Lower sales of other industrial products; and
•Adverse foreign currency effects of $4.5 million.
This was partially offset by increased revenues from zirconium-based automotive and industrial catalysis materials.
The 2.6 percentage point decrease in adjusted EBITDA for Elektron as a percentage of net sales in 2020 from 2019 was primarily the result of the impact of COVID-19 related reduction in volumes more than offsetting associated cost saving measures. This was further impacted by adverse product sales mix.
The 2.1 percentage point decrease in adjusted EBITDA for Elektron as a percentage of net sales in 2019 from 2018 was primarily the result of:
•Adverse mix, predominantly the impact of lower SoluMag® sales;
•Impact of short term inefficiency following plant consolidation and a flood affecting Graphic Arts;
These decreases were partially offset by the favorable impact of cost saving initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements arise primarily from obligations under our indebtedness, capital expenditures, acquisitions, the funding of working capital and the funding of hedging facilities to manage foreign exchange and commodity purchase price risks. We meet these requirements primarily through cash flows from operating activities, cash deposits and borrowings under the Revolving Credit Facility and accompanying ancillary hedging facilities and the Loan Notes due 2023 and 2026. Our principal liquidity needs are:
•capital expenditure requirements;
•payment of shareholder dividends;
•servicing interest on the Loan Notes, which is payable at each quarter end, in addition to interest and / or commitment fees on the Senior Facilities Agreement;
•working capital requirements, particularly in the short term as we aim to 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 Senior Facilities Agreement throughout all of the quarterly measurement dates from and including September 30, 2011, to December 31, 2020.
Luxfer conducts all of its operations through its subsidiaries, joint ventures and affiliates. Accordingly, Luxfer's main cash source is dividends from its subsidiaries. The ability of each subsidiary to make distributions depends on the funds that a subsidiary receives from its operations in excess of the funds necessary for its operations, obligations or other business plans. We have not historically experienced any material impediment to these distributions, and we do not expect any local legal or regulatory regimes to have any impact on our ability to meet our liquidity requirements in the future. In addition, since our subsidiaries are wholly-owned, our claims will generally rank junior to all other obligations of the subsidiaries. If our operating subsidiaries are unable to make distributions, our growth may slow, unless we are able to obtain additional debt or equity financing. In the event of a subsidiary's liquidation, there may not be assets sufficient for us to recoup our investment in the subsidiary.
Our ability to maintain or increase the generation of cash from our operations in the future will depend significantly on the competitiveness of and demand for our products, including our success in launching new products. Achieving such success is a key objective of our business strategy. Due to commercial, competitive and external economic factors, however, we cannot guarantee that we will generate sufficient cash flows from operations or that future working capital will be available in an amount sufficient to enable us to service our indebtedness or make necessary capital expenditures.
Cash Flows from Continuing Operations
Cash provided by operating activities was $49.3 million in 2020 which includes approximately $7 million of cash spent on restructuring activities. It was primarily related to net income from operating activities, net of the following non-cash items: depreciation and amortization; asset impairment charges, pension adjustments and net changes to assets and liabilities.
Cash provided by operating activities was $5.0 million in 2019 which includes approximately $20 million of cash spent on restructuring activities. It was primarily related to net income from operating activities, net of the following non-cash items: depreciation and amortization; asset impairment charges, pension adjustments and net changes to assets and liabilities.
Net cash used for investing activities was $6.5 million in 2020, compared to net cash used for investing activities of $7.5 million in 2019. The following investing activities impacted our cash flow:
Capital expenditures in 2020 was $8.0 million compared to $13.1 million in 2019 as we delayed some projects in response to COVID-19. We anticipate capital expenditures for 2021 to be around $15 million.
Proceeds from sale of business
In July 2020, the Company sold its 51% investment in Luxfer Uttam India Private Limited for net cash proceeds of $1.5 million.
In June 2019, the Company sold its Czech recycling business, for net cash proceeds of $4.4 million.
In 2020, net cash used for financing activities was $52.5 million (2019: $1.0 million). We made net repayments on our borrowing facilities of $38.2 million (2019: net drawdowns of $14.0 million) and dividend payments of $13.6 million 2019: $13.6 million), equating to $0.50 per ordinary share.
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, 2020.
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.
Loan Notes due 2021 and Shelf Facility
The Loan Notes due 2021 were due to mature on September 15, 2021, however we voluntarily chose to repay the notes early, on December 31, 2020 largely using surplus cash generated from operations, plus a small drawing on the Senior Facilities Agreement. In addition to the repayment of the $25 million principal, we incurred an early repayment charge of $0.5 million.
The Note Purchase and Private Shelf Agreement contains the same customary covenants and events of default as for the Note Purchase Agreement. The Note Purchase and Private Shelf Agreement also requires us to maintain compliance with the same, interest and leverage ratios as for the Note Purchase Agreement.
We have been in compliance with the covenants under the Note Purchase and Private Shelf Agreement throughout all of the quarterly measurement dates from and including September 30, 2014, to the eventual repayment on December 31, 2020.
The Loan Notes due 2021 and Shelf Facility and the Note Purchase and Private Shelf Agreement are governed by the law of the State of New York.
Senior Facilities Agreement
Structure. The current Senior Facilities Agreement provides $150 million of committed debt facilities, in the form of a multi-currency (GBP sterling, U.S. dollars or euros) Revolving Credit Facility and an additional $50 million of uncommitted facilities through an accordion clause. The facilities mature on July 31, 2022 and we are about to embark on negotiating a new facility which we expect to conclude in the first half of 2021. As of December 31, 2020, we had drawn down $4.1 million under the Revolving Credit Facility (December 31, 2019: $17.5 million).
Availability. The facility is used for loans and overdrafts. Amounts unutilized under the Revolving Credit Facility (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, 2020, we had drawn down $nil under the ancillary facilities (December 31, 2019: $nil). We may use amounts drawn under the Revolving Credit Facility for our general corporate purposes and certain capital expenditures, as well as for the financing of permitted acquisitions and reorganizations. As of December 31, 2020, $145.9 million (net of $4.1 million drawn down) was available under the Revolving Credit Facility. The last day we may draw funds from the Revolving Credit Facility is June 30, 2022.
The Company also has two separate (uncommitted) bonding facilities for bank guarantees; one denominated in GBP sterling of £4.5 million (2020: $6.1 million, 2019: $5.9 million), and one denominated in USD of $1.5 million (2019: $0.4 million). Of that dominated in GBP, £1.0 million ($1.4 million) was utilized at December 31, 2020 (2019: £1.6 million / $2.3 million). Of that denominated in USD, $0.8 million was utilized in December 31, 2020 (2019: fully utilized).
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 LIBOR, in the case of amounts drawn in GBP sterling or U.S. dollars. Note that GBP sterling drawings will be subject to interest rates based on SONIA (Sterling Overnight Index Average) once LIBOR is phased out, before the end of 2021. We do not expect this change to have a significant effect on our interest expense.
The tables below sets out the range of ratios and the related margin percentage currently in effect.
| ||(% per annum)|
|Greater than 3.0:1||2.90 |
|Less than or equal to 3.0:1, but greater than 2.5:1||2.50 |
|Less than or equal to 2.5:1, but greater than 2.0:1||2.25 |
|Less than or equal to 2.0:1, but greater than 1.5:1||2.00 |
|Less than or equal to 1.5:1, but greater than 1.0:1||1.75 |
|Less than or equal to 1.0:1||1.50 |
As of December 31, 2020, we had drawn down $4.1 million under the Revolving Credit Facility (December 31, 2019: $17.5 million). A commitment fee is levied each quarter against any unutilized element of the Revolving Credit Facility, 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 Revolving Credit Facility (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, 2020.
The Senior Facilities Agreement is governed by English law.
For more information see ITEM 8, Note 11.
We paid dividends in 2020 of $13.6 million (2019: $13.6 million), or $0.50 per ordinary share.
Any payment of dividends is also subject to the provisions of the U.K. Companies Act, according to which dividends may only be paid out of profits available for distribution determined by reference to financial statements prepared in accordance with the Companies Act and the International Accounting Standards Board, which differ in some respects from U.S. GAAP. In the event that dividends are paid in the future, holders of the ordinary shares will be entitled to receive payments in U.S. dollars in respect of dividends on the underlying ordinary shares in accordance with the deposit agreement. Furthermore, because we are a holding company, any dividend payments would depend on cash flows from our subsidiaries.
Our authorized share capital consists of 40.0 million ordinary shares with a par value of £0.50 per share.
The following summarizes our significant contractual obligations that impact our liquidity:
| ||Payments Due by Period|
|In millions||Total||Less than|
|1 – 3|
|3 – 5|
|Contractual cash obligations|| || || || || |
|Loan Notes due 2023||25.0 ||— ||25.0 ||— ||— |
|Loan Notes due 2026||25.0 ||— ||— ||— ||25.0 |
|Revolving Credit Facility||4.1 ||— ||4.1 ||— ||— |
|Obligations under operating leases||15.9 ||2.4 ||3.2 ||1.8 ||8.5 |
|Capital commitments||1.1 ||1.1 ||— ||— ||— |
|Interest payments||16.2 ||2.9 ||4.8 ||2.9 ||5.6 |
|Total contractual cash obligations||$||87.3 ||$||6.4 ||$||37.1 ||$||4.7 ||$||39.1 |
Off-balance sheet measures
At December 31, 2020, we had no off-balance sheet arrangements.
COMMTIMENTS AND CONTINGENCIES
At December 31, 2020, the Company had capital expenditure commitments of $1.1 million (2019: $1.0 million and 2018: $2.5 million) for the purchase of new plant and equipment.
Committed banking facilities
At December 31, 2020, the Company had committed banking facilities of $150.0 million. The facilities were for providing loans, with a separate facility for letters of credit which at December 31, 2020, was £1.0 million ($1.3 million). Of the committed facilities, $4.1 million was drawn, no loans were drawn and no letters of credit were utilized. The Company also had two separate bonding facilities for bank guarantees, one denominated in GBP sterling of £4.5 million ($6.1 million), of which £1.2 million ($1.6 million) was utilized at December 31, 2020 and one denominated in USD of $1.5 million of which $0.8 million was utilized at December 31, 2020.
At December 31, 2019, the Company had committed banking facilities of $150.0 million. The facilities were for providing loans, with a separate facility for letters of credit which at December 31, 2019, was £1.0 million ($1.3 million). Of the committed facilities, $17.5 million was drawn, no loans were drawn and no letters of credit were utilized. The Company also had two separate bonding facilities for bank guarantees, one denominated in GBP sterling of £4.5 million ($5.9 million), of which £1.5 million ($2.3 million) was utilized at December 31, 2019 and one denominated in USD of $0.4 million which was fully utilized at December 31,2019.
In February 2014, a cylinder was sold to a long-term customer and ruptured at one of their gas facilities. As a result of this rupture, three people were noted to have minor injuries such as loss of hearing. There was no major damage to assets of the customer. A claim has been launched by the three people who were injured in the incident. We reviewed our quality control checks from around the time which the cylinder was produced and no instances of failures have been noted. It has also been noted by the investigator that the customer has poor quality and safety checks. As a result we do not believe that we are liable for the incident, and therefore, do not currently expect this case to have a material impact on the Company's financial position or results of operations.
In November 2018, an alleged explosion occurred at a third-party waste disposal and treatment site in Boise, Idaho, reportedly causing property damage, personal injury, and one fatality. We had contracted with a service company for removal and disposal of certain waste resulting from the magnesium powder manufacturing operations at the Reade facility in Manchester, New Jersey. We believe this service company, in turn, apparently contracted with the third-party disposal company, at whose facility the explosion occurred, for treatment and disposal of the waste. In November 2020, we were named as a defendant in 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. At present, we have received insufficient information on the cause of the explosion. We do not believe that we are liable for the incident, have asserted such, and, therefore, do not currently expect this matter to have a material impact on the Company’s financial position or results of operations.
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
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. In 2020, the Company has adopted ASU 2017-04. 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.In 2020, management have chosen to bypass the qualitative evaluation.
For the quantitative impairment test, the fair value of each reporting unit is determined using a discounted cash flow analysis. Projecting discounted future cash flows requires us to make significant estimates regarding future revenue growth rates including the perpetual growth rate; anticipated operating margins; and the discount rates applied to the estimated future cash flows. Actual results may differ from those used in our valuations. This non-recurring fair value measurement is a "Level 3" measurement under the fair value hierarchy described in ITEM 8 - Note 12.
In developing our discounted cash flow analysis, assumptions about future revenue growth rates and anticipated operating margins are based on our annual operating plan and long-term business plan for each of our reporting units. These plans take into consideration numerous factors including historical experience, anticipated future
economic conditions, changes in raw material prices and growth expectations for the industries and end markets we participate in. These assumptions are determined over a three year long-term planning period. The three year growth rates for revenues and operating profits vary for each reporting unit being evaluated. Revenues and operating profit beyond 2022 are projected to grow at a perpetual growth rate of 1.8%.
Discount rate assumptions for each reporting unit take into consideration our assessment of risks inherent in the future cash flows of the respective reporting unit and our weighted-average cost of capital. We utilized discount rates ranging from 8.0% to 9.0% in determining the discounted cash flows in our fair value analysis.
We completed our quantitative goodwill impairment evaluation as of the last day of the third quarter of 2020, 2019 and 2018 with each of our reporting units' fair value being substantially in excess of its carrying value apart from our Superform business unit within the Gas Cylinders segment. This resulted in an impairment in full of $1.3 million, previously disclosed within impairment costs on the income statement in 2018, now reclassified to discontinued operations.
Identifiable intangible assets
Our primary identifiable intangible assets include: customer relationships and technology and traded related assets. Identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. 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. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. We complete our annual impairment test during the fourth quarter each year for those identifiable assets not subject to amortization.
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: expected return on plan assets, discount rates, rate of increase in future compensation levels and health care cost trend rates. 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 may affect our 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 (1) changes in the discount rate used to value pension and other post-retirement benefit obligations as of the measurement date and (2) 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.
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 1.40% for 2020, 2.10% in 2019 and 2.90% in 2018. The discount rate on our U.S. plans was 2.30% in 2020, 3.10% in 2019 and 4.20% in 2018. There are no known or anticipated changes in our discount rate assumption that will impact our pension expense in 2020.
Expected rate of return
Our expected rate of return on plan assets for our U.K. plans was 3.00% for 2020, 4.10% in 2019 and 4.90% in 2018. The expected rate of return on our U.S. plans was 5.00% in 2020, 6.20% in 2019 and 6.20% in 2018. 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.
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 actuarially determined estimates. Additionally, we record receivables from third party insurers when recovery has been determined to be probable.
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.
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 subsequently recognized in the Consolidated Statements of Income and Comprehensive Statements of Income when the hedged item affects earnings.
|December 31, 2020|
|Sales hedges||U.S. dollars||Euros||Japanese Yen||Canadian dollars|
|Contract totals/£m||3.0 ||11.1 ||0.1 ||0.1 |
|Maturity dates||01/21 to 03/21||01/21 to 04/21||01/21||01/21|
|Exchange rates||$1.3045 to $1.3667||€1.0917 to €1.1181||JPY ||136.891 ||$||1.7409 |
|Purchase hedges||U.S. dollars||Euros||Canadian dollars||Australian dollars||Chinese yuan|
|Contract totals/£m||4.8 ||1.7 ||9.4 ||0.9||0.9|
|Maturity dates||01/21 to 04/21||01/21 to 02/21||01/21||01/21||03/21|
|Exchange rates||$1.3046 to $1.3667||€1.1065 to €1.0944||$1.7409 to $1.7201||$||1.7729 ||¥8.9184|
|December 31, 2019|
|Sales hedges||U.S. dollars||Euros||Japanese Yen|
|Contract totals/£m||0.1 ||7.6 ||0.1 |
|Maturity dates||01/20||01/20 to 03/20||01/20|
€1.1551 to €1.1750
|Purchase hedges||U.S. dollars||Euros||Canadian dollars|
|Contract totals/£m||1.3 ||0.8 ||7.0 |
$1.7137 to $1.7664
Commodity price risk
We are exposed to commodity price risks in relation to the purchases of our raw materials. 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 and 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.
There is no similar financial market to hedge magnesium, zirconium raw materials or carbon fiber, and prices for these raw materials have been volatile in recent years with some increasing substantially. To help mitigate these risks, we have a number of fixed-price supply contracts for these raw materials, which limit 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 for 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.
Interest rate risk
As of December 31, 2020, 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, 2020, and December 31, 2019.
The Group has exposure to variable interest rates when it draws down on the revolving credit facilities. As a result of this exposure, the Group 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.
Item 8. Financial Statements and Supplementary Data
Luxfer Holdings PLC
Index to Consolidated Financial Statements
|Report of Independent Registered Public Accounting Firm||47 |
|Consolidated Statements of Income||49 |
|Consolidated Statements of Comprehensive Income ||50 |
|Consolidated Balance Sheets||51 |
|Consolidated Statements of Cash Flows||52 |
|Consolidated Statements of Changes in Equity||53 |
|Notes to Consolidated Financial Statements||54 |
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, 2020 and 2019, 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, 2020, 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, 2020, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in 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, 2020, 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 consolidated financial 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.
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.
Goodwill Impairment Assessment
As described in Notes 1 and 8 to the consolidated financial statements, the Company’s goodwill balance was $70.2 million as of December 31, 2020. Goodwill is tested at least annually for impairment, or more frequently if events or circumstances indicate that the asset might be impaired. The Company performs its annual goodwill impairment test by comparing the fair value of a reporting unit to its carrying value. A goodwill impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. The fair value of each reporting unit is determined by the Company using a discounted cash flow analysis. Projecting discounted future cash flows requires the Company to make significant estimates regarding future revenue growth rates including: (i) future revenue growth rates including the perpetual growth rate; (ii) anticipated operating margins; and (iii) the discount rates applied to the estimated future cash flows.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are the significant judgments and assumptions made by management when developing the fair value of the reporting units. This in turn resulted in a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate management's discounted future cash flow analysis and significant assumptions for future revenue growth rates including the perpetual growth rate; anticipated operating margins; and the discount rates applied to the estimated future cash flows. 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 fair value of the reporting units. These procedures also included, among others, (i) testing management’s process for estimating fair value; (ii) evaluating the appropriateness of the discounted cash flow models; (iii) testing the completeness, accuracy and relevance of underlying data used in the models; (iv) evaluating the significant assumptions used by management related to estimates of future revenue growth rates including the perpetual growth rate, anticipated operating margins and the discount rates applied to the estimated future cash flows. Evaluating management’s assumptions related to the future revenue growth rates including the perpetual growth rate, and anticipated operating margins involved evaluating (i) current and past performance of the reporting units; (ii) consistency of expectations with external market and industry data; (iii) management’s historical forecasting accuracy; and (iv) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in performing procedures relating to the perpetual growth rate and the discount rates applied to future cash flows.
PricewaterhouseCoopers LLP (signed)
Manchester, United Kingdom
March 2, 2021
We have served as the Company’s auditor since 2015.
LUXFER HOLDINGS PLC
CONSOLIDATED STATEMENTS OF INCOME
|Years Ended December 31,|
|In millions, except share and per-share data||2020||2019||2018|
|Net sales||$||324.8 ||$||373.4 ||$||401.9 |
|Cost of sales||(243.9)||(269.7)||(284.0)|
|Gross profit||80.9 ||103.7 ||117.9 |
|Selling, general and administrative expenses||(39.8)||(49.7)||(54.6)|
|Research and development||(3.3)||(5.7)||(6.3)|
|Impairment credit / (charges)||— ||0.2 ||(5.9)|
|Acquisition related costs||— ||(1.4)||(4.3)|
|Other charges||(0.4)||(2.5)||— |
|Operating income||28.5 ||18.7 ||33.6 |
|Interest income||— ||0.1 ||0.4 |
|Defined benefit pension credit ||4.3 ||1.3 ||4.7 |
|Income before income taxes and equity in net (loss) / income of affiliates||27.8 ||15.6 ||33.8 |
|Provision for income taxes||(6.9)||(7.6)||(6.5)|
|Income before equity in net (loss) / income of affiliates||20.9 ||8.0 ||27.3 |