Luxfer PLC(LXFR) - 2020 Q4 - Annual Report

Part I Business Luxfer Holdings PLC manufactures highly-engineered industrial materials through Elektron and Gas Cylinders segments, serving diverse end-markets with 2020 net sales of $324.8 million Financial Performance from Continuing Operations (2018-2020) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Sales | $324.8 million | $373.4 million | $401.9 million | | Net Income | $20.8 million | $8.7 million | $27.7 million | 2020 Sales Breakdown by Segment | Segment | % of Consolidated Net Sales | | :--- | :--- | | Elektron | 56% | | Gas Cylinders | 44% | 2020 Sales Breakdown by End-Market | End-Market | % of 2020 Sales | | :--- | :--- | | Defense, First Response & Healthcare | 37% | | General Industrial | 35% | | Transportation | 28% | - As of December 31, 2020, the company employed approximately 1,400 people worldwide, with about 1,200 in continuing operations (700 in the United States and 500 internationally)[40] - In fiscal year 2020, the company reported a Total Recordable Incident Rate (TRIR) of 1.85, 8 Lost Time Accidents (LTA), and zero work-related fatalities[43] Risk Factors The company faces significant risks from the COVID-19 pandemic, cyclical markets, global operations, supply chain dependencies, raw material volatility, pension deficits, and stringent regulations - The COVID-19 pandemic has negatively impacted the global economy, resulting in a decline in the company's revenues and profitability, with future impact remaining uncertain[48] - The company's top 10 customers accounted for approximately 35% of net sales in 2020, indicating a significant concentration risk[55] - There is a reliance on major suppliers for key raw materials, with approximately 40% of aluminum obtained from Rio Tinto Alcan and its associated companies in 2020[56] - The company's largest defined benefit pension plan, the Luxfer Group Pension Plan in the U.K., had an accounting deficit of $45.1 million as of December 31, 2020, an increase from $30.5 million in 2019[67] - The company is subject to the European Union's General Data Protection Regulation (GDPR) and UK-GDPR, with potential fines for non-compliance up to €20 million or 4% of annual group-wide turnover, whichever is higher[86] Properties Luxfer operates globally with its principal office in Manchester, UK, and 16 manufacturing plants across the U.S., U.K., Canada, and China - The Elektron segment operates from six plants in the United States and one each in the United Kingdom and Canada[123] - The Gas Cylinders segment has manufacturing operations at three plants in the U.S., three in the U.K., and one each in Canada and China, with four plants classified as discontinued operations[124] Legal Proceedings The company is involved in various lawsuits and claims, with management assessing no material adverse impact from their ultimate resolution - Management's opinion is that the likelihood of any material adverse impact from current legal proceedings is remote[127] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Luxfer's common stock trades on the NYSE under "LXFR", with quarterly dividends of $0.125 per share paid in 2020, and no equity repurchases made - The company's common stock is listed on the New York Stock Exchange under the symbol "LXFR"[130] Annual Dividend Payments | Year | Total Dividends Paid | | :--- | :--- | | 2020 | $13.6 million | | 2019 | $13.6 million | | 2018 | $13.4 million | - The company did not purchase any of its ordinary shares during the fourth quarter and entire fiscal year of 2020[143] Selected Financial Data This section presents selected financial data for continuing operations for the five fiscal years ended December 31, 2020, derived from U.S. GAAP audited statements Selected Financial Data from Continuing Operations (2016-2020) | In millions (except per-share data) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | 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 | | Diluted EPS | $0.74 | $0.31 | $1.00 | $0.65 | $0.57 | | Total assets | $346.4 | $390.3 | $408.8 | $415.8 | $399.8 | | Total long-term obligations | $113.9 | $138.4 | $133.3 | $157.3 | $196.2 | | Total shareholders' equity | $167.1 | $174.4 | $184.3 | $174.5 | $150.4 | Management's Discussion and Analysis of Financial Condition and Results of Operations Luxfer's 2020 financial performance was significantly impacted by COVID-19, with a 13.0% sales decrease to $324.8 million, yet operating income rose to $28.5 million due to lower charges Consolidated Results of Operations Consolidated net sales decreased by 13.0% to $324.8 million in 2020, while operating income increased by 52.4% to $28.5 million due to reduced charges Consolidated Results of Operations (2019 vs 2020) | In millions | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $324.8 | $373.4 | (13.0)% | | Gross profit | $80.9 | $103.7 | (22.0)% | | Operating income | $28.5 | $18.7 | 52.4% | | Net income | $20.8 | $8.7 | 139.1% | - The decrease in 2020 net sales was heavily influenced by the COVID-19 pandemic, with the most pronounced adverse impact across industrial and transportation end markets[156] - Restructuring charges decreased significantly to $8.9 million in 2020 from $25.9 million in 2019, including $7.5 million for the closure of Luxfer Gas Cylinders France[163] Segment Results of Operations Gas Cylinders sales decreased by 7.6% to $141.9 million, while Elektron sales declined by 16.8% to $182.9 million, both impacted by COVID-19 Gas Cylinders Segment Performance | In millions | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $141.9 | $153.5 | (7.6)% | | Adjusted EBITDA | $21.3 | $22.3 | (4.5)% | | Adjusted EBITDA % | 15.0% | 14.5% | +0.5 pts | Elektron Segment Performance | In millions | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $182.9 | $219.9 | (16.8)% | | Adjusted EBITDA | $32.6 | $44.8 | (27.2)% | | Adjusted EBITDA % | 17.8% | 20.4% | -2.6 pts | Liquidity and Capital Resources Strong liquidity in 2020 saw $49.3 million cash from operations, enabling early debt repayment and leaving $145.9 million available on the revolving credit facility - Cash provided by operating activities from continuing operations was $49.3 million in 2020, which included approximately $7 million of cash spent on restructuring activities[198] - The company voluntarily repaid its $25 million Loan Notes due 2021 early on December 31, 2020, incurring an early repayment charge of $0.5 million[206] - As of December 31, 2020, the company had a $150 million revolving credit facility maturing in July 2022, with $145.9 million available for drawdown[211][212] Contractual Cash Obligations | In millions | Total | Less than 1 year | 1 – 3 years | 3 – 5 years | After 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Loan Notes due 2023 | $25.0 | — | $25.0 | — | — | | Loan Notes due 2026 | $25.0 | — | — | — | $25.0 | | Revolving Credit Facility | $4.1 | — | $4.1 | — | — | | Operating leases | $15.9 | $2.4 | $3.2 | $1.8 | $8.5 | | Interest payments | $16.2 | $2.9 | $4.8 | $2.9 | $5.6 | | Total | $87.3 | $6.4 | $37.1 | $4.7 | $39.1 | Critical Accounting Estimates Critical accounting estimates involve significant judgment for goodwill impairment, pension plan valuations, and income taxes, requiring estimates of future growth and discount rates - Goodwill is tested for impairment annually using a quantitative discounted cash flow analysis, bypassing the optional qualitative evaluation in 2020[235][296] - The 2020 goodwill impairment test utilized discount rates ranging from 8.0% to 9.0% and a perpetual growth rate of 1.8% for cash flows beyond the three-year planning period[238][239] Key Pension Plan Assumptions (2020) | Plan Location | Discount Rate | Expected Return on Assets | | :--- | :--- | :--- | | U.K. | 1.40% | 3.00% | | U.S. | 2.30% | 5.00% | Quantitative and Qualitative Disclosures About Market Risk Luxfer faces market risks from foreign currency, commodity prices (especially aluminum), and interest rates, managed through derivatives and impacting costs - The company uses derivative financial instruments, including short-duration currency contracts, to hedge foreign currency risks on sales and purchases[254] - The company is exposed to aluminum price volatility; a $100 increase in the LME price would increase the Gas Cylinders segment's costs by approximately $0.7 million based on 2020 purchase levels[391] - The company has exposure to variable interest rates through its revolving credit facility, with no interest rate hedge agreements in place as of December 31, 2020[258][259] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2018-2020, including an unqualified opinion from PricewaterhouseCoopers LLP on financial statements and internal controls Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued unqualified opinions on financial statements and internal controls, identifying Goodwill Impairment Assessment as a critical audit matter - The auditor, PricewaterhouseCoopers LLP, issued an unqualified (clean) opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting[265] - The Goodwill Impairment Assessment was identified as a Critical Audit Matter due to the significant management judgments required for estimating the fair value of reporting units using a discounted cash flow analysis[273][274] Consolidated Financial Statements Consolidated financial statements show 2020 net income of $20.0 million, total assets of $346.4 million, and $49.6 million cash from operating activities Consolidated Statement of Income Highlights (2020) | In millions | Amount | | :--- | :--- | | Net sales (continuing ops) | $324.8 | | Gross profit (continuing ops) | $80.9 | | Operating income (continuing ops) | $28.5 | | Net income from continuing ops | $20.8 | | Net loss from discontinued ops | ($0.8) | | Net income | $20.0 | Consolidated Balance Sheet Highlights (as of Dec 31, 2020) | In millions | Amount | | :--- | :--- | | Total current assets | $150.9 | | Total assets | $346.4 | | Total current liabilities | $65.4 | | Total liabilities | $179.3 | | Total shareholders' equity | $167.1 | Consolidated Statement of Cash Flows Highlights (2020) | In millions | Amount | | :--- | :--- | | Net cash provided by operating activities | $49.6 | | Net cash used for investing activities | ($6.8) | | Net cash used for financing activities | ($52.5) | | Net decrease in cash | ($8.8) | Notes to Consolidated Financial Statements Notes detail accounting policies, discontinued operations ($53.2 million sales), goodwill ($70.2 million), debt ($53.4 million), and a pension deficit of $50.8 million - The Superform aluminum business and U.S. aluminum gas cylinder business were classified as discontinued operations, generating $53.2 million in net sales in 2020 and holding $32.3 million in assets held-for-sale at year-end[362][364] - As of December 31, 2020, the company had a goodwill balance of $70.2 million, with $27.9 million allocated to Gas Cylinders and $42.3 million to Elektron[366] - Total debt outstanding was $53.4 million as of December 31, 2020, comprising $50.0 million in Loan Notes and $4.1 million drawn on the revolving credit facility[381] - The company's defined benefit pension plans had a total deficit of $50.8 million at December 31, 2020, a significant increase from the $35.2 million deficit at the end of 2019[418] Controls and Procedures Management concluded disclosure controls were effective as of December 31, 2020, with a prior material weakness in ERP implementation successfully remediated - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[488] - A material weakness identified in 2019 related to a new ERP system implementation was remediated as of December 31, 2020[489][491] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Information for Items 10-14, covering governance, compensation, and related matters, is incorporated by reference from the 2021 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Registrant's definitive proxy statement for its annual general meeting to be held on June 9, 2021[6][498][499] Part IV Exhibits and Financial Statement Schedules This section lists financial statements and a comprehensive set of exhibits filed with the Form 10-K, including corporate documents and certifications - This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including debt agreements, incentive plans, and executive certifications[504][505]