Luxfer : 2023 U.K. Report and Accounts (1.43MB)

Registered No. 03690830

LUXFER HOLDINGS PLC

Annual Report and Financial Statements

31 December, 2023

LUXFER HOLDINGS PLC ¦ Lumns Lane ¦ Manchester ¦ M27 8LN

LUXFER HOLDINGS PLC
Contents
STRATEGIC REPORT	3
Principal Activities and Review of the Business	3
Strategy and Business Model	4
Key Performance Indicators ("KPIs")	5
Review of the Year Ended 31 December, 2023	6
Principal Risks and Uncertainties	9
GOVERNANCE	14
The Board of Directors	14
Corporate Governance	18
Executive Leadership Team	24
Environment, Social and Governance ("ESG") Matters	27
Directors' Report	34
Directors' Interests and Related Party Transactions	35
Directors' Remuneration Report	38
Remuneration Report	43
Statement of Directors' Responsibilities in Respect of the Financial Statements	78
INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF LUXFER HOLDINGS PLC	79
FINANCIAL STATEMENTS	86
Consolidated Income Statement	86
Consolidated Statement of Comprehensive Income	87
Consolidated Balance Sheet	88
Consolidated Statement of Cash Flows	89
Consolidated Statement of Changes in Equity	90
Notes to the Consolidated Financial Statements	91
Company Balance Sheet	138
Company Statement of Changes in Equity	139
Notes to the Company Financial Statements	140

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LUXFER HOLDINGS PLC

Glossary of Terms

Unless the context in which we use the terms indicates otherwise, the following terms used in this report have the following meanings:

AGM	Annual General Meeting of the Company.
	The Articles of Association of Luxfer Holdings PLC adopted by special resolution of the
Articles	Company on 26 October 2011, effective from the date of the I.P.O. (and subsequently
	updated).
Companies Act	U.K. Companies Act 2006.
FPI	Foreign Private Issuer under the SEC registration rules.
GAAP	Generally Accepted Accounting Principles is an accounting standard adopted by the U.S.
Securities and Exchange Commission.
Group	Luxfer Holdings PLC and its subsidiaries.
IFRS	International Accounting Standards in conformity with the requirements of Companies Act
2006
I.P.O.	The Initial Public Offering in the U.S. completed by Luxfer Holdings PLC on 9 October,
2012.
NYSE	New York Stock Exchange.
£0.50 Ordinary	The Company's ordinary shares of £0.50 each.
Shares
SEC	Securities and Exchange Commission of the U.S.
Year	1 January, 2023, to 31 December, 2023.
LTIP	Long-Term Umbrella Incentive Plan.

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LUXFER HOLDINGS PLC

STRATEGIC REPORT

Principal Activities and Review of the Business

Luxfer Holdings PLC ("Luxfer," "the Company," "we," "our") is a global industrial company innovating niche applications in materials engineering. Luxfer focuses on value creation by using its broad array of technical know-how and proprietary technologies to help create a safe, clean and energy-efficient world. Luxfer's high- performance materials, components and high pressure gas containment devices are used in defense, first response and healthcare, transportation and general industrial applications. It comprises three reportable segments being Gas Cylinders, Elektron and Graphic Arts.

The principal activity of Luxfer Holdings PLC is that of the holding company for the Luxfer Group.

We focus primarily on product lines related to magnesium alloys, zirconium chemicals and carbon composites. We have a long history of innovation derived from our strong technical expertise, and we work closely with customers to apply solutions to their most demanding product needs. Our proprietary technologies and technical expertise, coupled with strong customer service and global presence, provide competitive advantages and have established us as leaders in the global markets we serve. We believe that we have leading positions in key product areas, including magnesium alloys and powders for aerospace, military, and commercial applications, zirconium chemicals for automotive catalytic converters and industrial catalysis, high-pressure composite cylinders for self-contained breathing apparatus, as well as transport and storage of compressed natural gas ("CNG") and hydrogen, photo-engraving plates, and a wide variety of other uses.

We have a global presence, operating 12 manufacturing plants in the U.S., the U.K., Canada and China, one of which relates to discontinued operations, and we also have a joint venture in Japan. We employ approximately 1,400 people, including temporary staff, of which fewer than 50 support our discontinued operations

Our Elektron Segment focuses on specialty materials based primarily on magnesium and zirconium. Our key product lines under the Elektron Segment includes:

• Advanced lightweight, corrosion-resistant and heat-and-flame-resistant magnesium alloys for use in aerospace, healthcare and oil and gas applications.
• Magnesium powders used in countermeasure flares that protect aircraft from heat-seeking missiles and also for heating pads for self-heating meals used by the military and emergency-relief agencies.
• High-performancezirconium-based materials and oxides used as catalysts and in the manufacture of advanced ceramics, fiber-optic fuel cells, pharmaceuticals and many other performance products.

Our Gas Cylinders Segment manufactures and markets specialized, highly-engineered cylinders using carbon composites and aluminum. Our key product lines under the Gas Cylinders Segment include:

• Carbon fiber composite cylinders for self-contained breathing apparatus (SCBA), used by firefighters and other emergency-responders. Our products are also used by scuba divers and personnel in potentially hazardous environments, such as mines.
• Carbon fiber composite cylinders for compressed natural gas (CNG) and hydrogen containment in alternative fuel (AF) vehicles.
• Cylinders used for the containment of oxygen and other medical gases used by patients, healthcare facilities and laboratories.

Our Graphic Arts Segment is a global leader in magnesium photo-engraving plates, engraving metals and etching chemicals. Our key product lines under the Graphic Arts Segment include:

• Magnesium, copper, and zinc photo-engraving plates for graphic arts and luxury packaging.
• Developer solutions to aide the engraving process.
• Solid wrought magnesium slab and sheet.

We are currently in the process of executing an accelerated and expanded strategic review process, the initial conclusions of which have determined that the Graphic Arts business no longer aligns with Luxfer's value proposition, hence we are initiating a sales process with the intention of divesting this business in 2024.

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LUXFER HOLDINGS PLC

Strategy and Business Model

Over the past few years, we have worked to generate long-term shareholder value by simplifying the Company's structure, generating significant cost savings, and instilling a high-performance growth culture. We substantially simplified our operations through divesture of most of our aluminum operations. We also expanded our investor base, streamlined our financial reporting, and enhanced our corporate governance practices.

More recently, we began driving growth by focusing on our customers and rebuilding our new product pipeline. Each year, we invest in the development of new products and processes directed towards our end-markets. Our product development projects also include utilizing skills of our wider commercial technical sales staff, manufacturing engineers and general management, many of whom are highly qualified scientists and engineers.

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-lightweightlarge composite cylinders, branded G-StorTM, for containment of CNG, hydrogen, helium and other gases;
• AF systems solutions for buses, trucks and bulk gas transportation;
• Zirconium catalysts for automotive end-use, including advances in gasoline particulate filtration used in hybrid vehicles;
• L7X® high-strength aluminum alloy and carbon composite gas cylinders;
• Luxfer ECLIPSE, a new carbon composite cylinders for firefighter self-contained breathing apparatus (SCBA);
• Unitized Group Ration - Express (UGR-E) heater meals developed to deliver hot meals to multiple soldiers in a combat or training environment; and
• Improved performance magnesium photoengraving plates including the recently-launched OptiMag®

With Luxfer well positioned for value creation, we are benefiting from our positioning in attractive end markets, aligned with secular growth, especially in areas of Clean Energy, Light Weighting, and Safety, Health & Technology.

Our growth strategy is underpinned by the Luxfer Business System. This business model serves as a tool to realize the growth potential embedded in our business. The system places emphasis on serving the customer and profitable growth, and consists of the following key themes:

• Strategy Deployment
• Commercial Excellence
• Lean Operations
• Innovation
• Sustainability
• People Excellence

By executing actions identified through our expanded and accelerated strategic review, including the divestiture of our Graphic Arts business we believe that we have a clear path to driving stronger performance and generating greater value.

Having built a strong foundation, through portfolio simplification and cost transformation, Luxfer is now well positioned to take advantage of both organic and inorganic growth in future years.

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LUXFER HOLDINGS PLC

Key Performance Indicators ("KPIs")

Luxfer used the following performance indicators to assess its development against its strategic and financial objectives in 2023.

Since 2018, KPIs were monitored under U.S. GAAP. and these reconciliations to non-GAAP measures can be found in our Form 10-K filed with the SEC on February 27, 2024.

All years have been restated for discontinued operations.

Operating performance		2023	2022	2021	2020	2019
Revenue	$m	405.0	423.4	374.1	324.8	373.4
Adjusted net income1	$m	16.4	37.4	36.2	28.9	40.9
Basic earnings per share	$	0.07	1.00	0.90	0.61	0.15
Adjusted diluted earnings per ordinary share1	$	0.61	1.36	1.29	1.03	1.47
Adjusted EBITA2	$m	26.9	50.2	48.7	51.2	54.9
Adjusted EBITDA3	$m	38.8	63.1	63.4	53.9	67.1
Revenue per employee4	$'000s	283	313	285	256	279
Financial performance
Net cash flow from operating activities	$m	36.9	22.6	30.6	56.9	10.2
Net debt to adjusted EBITDA5	times	1.8	1.1	0.8	1.0	1.2
Non-financial performance
Number of work-related accidents causing lost days6	LTAs	4	8	15	8	5
ISO 14001 environmental management system certification7	%	68.6	67.0	65.9	69.2	86.4
Economic indicators
Average U.S. dollar to GBP sterling exchange rate	$:£	1.25	1.23	1.38	1.28	1.28
Average Euro to GBP sterling exchange rate	€:£	1.15	1.17	1.17	1.13	1.12

1. A non-GAAP measure for net income after tax, excluding certain non-trading items. Reconciliation to GAAP measure is disclosed in our Form 10-K, filed with the SEC ('Securities and Exchange Commission of the U.S.') on February 27, 2024.
2. A non-GAAP measure for earnings before interest, tax and amortization and other items. Reconciliation to GAAP measure is disclosed in Form 10-K filed with the SEC on February 27, 2024.
3. A non-GAAP measure for earnings before interest, tax, depreciation and amortization and other items. Reconciliation to GAAP measure is disclosed in Form 10-K filed with the SEC on February 27, 2024.
4. Revenue per employee is defined as revenue from continuing operations divided by the average number of monthly employees for the year.
5. Net debt is defined as cash and cash equivalents less non-current bank and other loans.
6. Under regulations issued by the Occupational Safety & Health Administration of the U.S. Department of Labor, Lost Time Accidents ("LTAs") are defined as the number of work-related accidents resulting in an absence from the workplace for a minimum of one full work day.
7. Percentage of revenue originating from ISO14001-certified businesses.

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LUXFER HOLDINGS PLC

Review of the Year Ended 31 December, 2023

Luxfer's performance was hampered in 2023 by challenging high raw material prices, primarily related to magnesium and carbon fiber, coupled with continued weakness in global industrial demand which primarily impacted the second half of the year. Even with these headwinds, the Luxfer team executed effective cost mitigation and cash conservation programs to deliver strong free cash flow in the second half and achieved sequentially lower net debt. In addition, we finished the year and entered 2024 on several notable highs, including signing new agreements with major SCBA customers, confirming insurance coverage for our ongoing legal matter, and anticipating benefit from improved magnesium supply. We initiated our strategic review process in October and have identified key actions, including the initiation of a sale process for Graphic Arts.

We will continue to proactively pursue opportunities to improve profitability and liquidity while delivering a compelling customer value proposition across our markets. While we do not believe the current demand landscape will change immediately for our Elektron business, we expect some gradual improvement, and we feel good about the outlook of our key end markets as we are positioned to capture opportunities linked to the demand for clean energy applications.

We have recently experienced supply chain challenges, which resulted in higher cost of certain raw materials. In our supply chain, previously described challenges caused by the disruption in our U.S. domestic magnesium supply continued, and overall competitive cost pressures persisted. These issues have been particularly acute in our Graphic Arts segment, where the ability to pass through higher costs to our customers has proved to be constrained. However, towards the end of 2023 the purchase price of Magnesium has been falling, which will result in lower input cost in 2024. We have implemented elements of our strategic review in Graphic Arts to reduce costs, including a headcount reduction program. We are also pursuing further actions to improve margins and maintain strong cash flow across the business.

In the majority of cases we are and have been able to pass through inflationary costs to our customers, although we are still constrained by a small number of contracts, particularly in the Gas Cylinders segment, the longest running of which is not subject to renewal until mid-2024. However, our expectation is that the adverse impact of material availability / inflation, energy cost inflation and labor and transport constraints will lessen in 2024 and when costs fall we will look to share cost savings with customers through lower pricing. However the outlook remains highly uncertain with both the size and timing of future cost increases difficult to predict.

We ended 2023 with a strong balance sheet, although our net debt increased to $69.6 million, and our net debt to adjusted EBITDA ratio increased to 1.8x compared to 1.1x at the end of 2022. We generated $27.5 million in free cash flow over the year, (2022: $14.3 million). Profit from continuing operations for 2023 was $1.1 million compared to $32.3 million in 2022. We continued to return funds to shareholders in the form of regular dividends each quarter throughout 2023 and $2.7 million (2022: $11.1 million) in the form of share buybacks.

Translation Exchange Rates

The consolidated financial statements are presented in U.S. dollars, the reporting currency of the Group. The principal currencies used to translate the results of non-U.S. operations is GBP sterling. In 2023, GBP sterling fluctuations relative to the U.S. dollar resulted in net unfavorable movements when translating the operating results of U.K. operations into U.S. dollars.

Revenue

On an IFRS reported basis, revenue from operations was $405.0 million in 2023, a decrease from $423.4 million in 2022. Overall sales have been negatively impacted by:

• Decreased demand for photo-engraving plates, particularly outside the North American market due to competitive pressure from increased raw material costs;
• Lower sales of SoluMag® in the Oil and Gas industry;
• Reduction in sales of magnesium powders for commercial use; and
• Lower demand for AF cylinders, coupled with industrial cylinders' sales being weaker in the year.

These decreases were partially offset by:

• Increased sales of our SCBA and medical cylinders;
• Increase in demand for zirconium products, particularly those used in pharmaceutical applications;
• Significant increase in sales of chemical response kits; and
• Strong demand for our new unitized ration product ("UGR-E") in quarter two.

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LUXFER HOLDINGS PLC

Cost of Sales and Gross Profit

Gross profit of $84.5 million also decreased year on year, 2022 ($107.1 million). The 4.4 percentage point decrease in gross profit as a percentage of sales in 2023 from 2022 was primarily the result of adverse sales mix and higher materials costs relative to price increases. These issues have been particularly acute in our Graphic Arts Division where the ability to pass through higher costs to our customers has proved to be constrained with the emergence of lower cost competition. However, cost recovery and margin has improved throughout the year in the Gas Cylinders Division as fixed-priced contracts continue to be renegotiated.

Operating Profit

Operating profit of $5.5 million decreased 87.0% from $45.8 million in 2022. Operating profited was impacted by a lower gross profit and increased administration costs largely due to the $5.9 million of legal costs expensed in the Elektron Division and are not expected to recur in 2024. Other operating expenses of $19.1 million included $12.7 million impairment charges arising from fully writing down property, plant and equipment at $11.1 million, and fully writing down right of use assets from operating leases at $1.6 million, both within our Graphic Arts division as a result of our annual impairment and strategic review. There was also $3.0 million of asset impairments and $2.3 million asset relocation, restructuring and other costs in relation to the rationalization of our North American Gas Cylinders businesses to reduce our fixed cost base included in 2023.

Taxation

In 2023, we reported a tax credit of $2.5 million on a loss before tax of $1.4 million, representing an effective tax rate of 178.6%. The credit of $2.5 million was made up of a current income tax charge of $1.3 million and a deferred income tax credit of $3.8 million. The 2023 effective tax rate was impacted due to the tax impact of the settlement of our U.S. pension scheme.

In 2022, we reported a tax charge of $6.6 million on profit before tax of $38.9 million, representing an effective tax rate of 17.0%. The tax charge was made up of a current income tax credit of $1.2 million and a deferred tax charge of $7.8 million. The 2022 effective tax rate was significantly impacted due to prior year adjustments impacting the current year tax charge.

Net Income for the Year

Net income for the year from continuing operations was $1.1 million, compared to $32.3 million in 2022. The decrease can be attributed to the factors mentioned above.

Cash Flow

In 2023, net cash flows from continuing operating activities increased by $14.3 million to $36.9 million from $22.6 million in 2022.

Net cash used in continuing investing activities increased to $9.4 million compared to $5.6 million in 2022. Capital expenditure in 2023 was $9.4 million, a $1.1 million increase compared with $8.3 million in 2022. We anticipate capital expenditures for 2024 to be between $11 million and $14 million as we increase investment in order to grow the business. In May 2022, the Company sold a previously held-for-sale building in the Elektron segment for $3.7 million. Consideration was paid in full upon sale. In addition, in October 2022, the Company agreed a final settlement of $1.0 million to the purchasers of the previously disposed aluminum gas cylinder business. The settlement was a reduction to the original consideration paid.

The Company had net cash outflows from financing activities of $42.8 million compared to $8.8 million in 2022. We repaid $25.0 million of short term borrowings, partially offset by a $4.6 million increase in our bank overdraft and net drawdowns on our borrowing facilities of $10.2 million (2022: net drawdowns of $24.8 million). We made dividend payments of $14.0 million (2022: $14.2 million), equating to $0.52 per ordinary share (2022: $0.515 per ordinary share) in 2023 and also spent $2.7 million repurchasing approximately 200,000 shares, (2022: $11.1 million repurchasing approximately 700,000 shares).

Shareholder Equity and Borrowings

Shareholder equity as at December 31, 2023, was $200.0 million, compared to $197.9 million at December 31, 2022. The movement is primarily attributable to currency translation differences and a favorable movement on the defined benefit pension plans. The Company had gross debt of $72.2 million and net debt of $69.6 million as at December 31, 2023. Invested capital, defined as total shareholder equity plus net debt, was $269.6 million as at December 31, 2023; this compares to an equivalent figure of $266.2 million in 2022.

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LUXFER HOLDINGS PLC

Future Developments

In October, the Company announced an acceleration and expansion of its annual strategic review process, with the goal of driving improved financial performance and identifying opportunities to maximize value. For this comprehensive review process the Board of Directors engaged Deutsche Bank. This review reached three notable initial decisions:

• Firstly, Graphic Arts no longer aligns with Luxfer's value proposition, hence we are initiating a sale process with the intention of divesting this business in 2024.
• Secondly, we determined that both Gas Cylinders and Elektron can deliver attractive long-term profitable growth driven by increasing end market demand, lower costs, and further improved competitive positioning. We are committed to executing our plan for these businesses and delivering improved operating performance.
• Thirdly, at an overall Luxfer level, the review concluded that there are no material strategic synergies between Gas Cylinders and Elektron. Although the current market environment may limit separation alternatives to deliver appropriate value commensurate with the expected improved operating performance in both businesses, we will continue to monitor market conditions and evaluate alternatives to drive shareholder value.

Essential Contracts or Arrangements

Apart from our financing agreements, we do not have any individual contracts or other arrangements that are fundamental to the ability of the business to operate effectively.

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LUXFER HOLDINGS PLC

Principal Risks and Uncertainties

Internal Controls and Risk Management

Luxfer has a comprehensive, enterprise-wide risk management program designed to assess, monitor, and mitigate risks that arise in the course of business. Consistent with our leadership structure, management has the day-to-day responsibility for assessing and managing the Company's risk exposure, while the Board of Directors provides oversight in connection with those efforts.

In general, the Board oversees the management of risks in the operation of the Company's business; the implementation of its strategic plan; its acquisitions and divestitures; its capital structure, allocation and liquidity; its risk management controls; and its organizational structure. The Board fulfills its risk oversight function both directly and through delegation to the Board Committees. Each of our Board Committees has historically focused and continues to focus on specific risks within their respective areas of responsibility. The Board performs its risk oversight role in several ways. Board meetings regularly include strategic overviews by the Chief Executive Officer and Chief Financial Officer that describe the most significant issues and risks affecting the Company. Additionally, the Board is regularly provided with business updates from our business unit leaders, General Counsel, and other functional leaders. Reviewing and assessing any identified risks on a regular basis, the Board manages such risks in accordance with Luxfer's Enterprise Risk Management process.

As a global, multi-industrial company, Luxfer faces a range of risks, including general economic, credit and capital market conditions risks, regulatory risks, global climate change risk, and several other risks, which are fully listed and explained in our annual Form 10-K filed with the SEC.

Internal Financial Controls

Management'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 accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements due to error or fraud.

Management has performed an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2023, based on the framework and criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on its evaluation, due to the material weakness described below, management concluded that the Company's internal control over financial reporting was not effective as of December 31, 2023.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements may not be prevented or detected on a timely basis.

In conjunction with the preparation of the Company's financial statements for the year ended December 31, 2023 management identified a lack of controls related to the Company's accounting for inventory in transit. As a result, management concluded it did not properly design or maintain effective risk assessment control activities to allow for timely reassessment of the material risk of misstatement in financial reporting. Management has thus identified a material weakness in internal control over financial reporting. This material weakness could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. However, this material weakness did not result in a misstatement to the annual or interim consolidated financial statements previously filed or filed with the 10-K to the SEC.

Treasury and Financial Risk

The Group operates a central treasury function that controls all borrowing facilities, investment of surplus funds and management of financial risks. The Group also has a number of financial risks. The management of these financial risks and mitigating actions are explained further in Note 28 of the Group consolidated financial statements.

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