Luxfer PLC(LXFR) - 2023 Q4 - Annual Report

Part I Business Luxfer Holdings PLC is a global materials engineering company with three segments, reporting $405.0 million net sales and a $2.6 million net loss in 2023, with Graphic Arts targeted for divestiture Financial Performance Overview (Continuing Operations) | Metric | 2023 ($M) | 2022 ($M) | 2021 ($M) | | :--- | :--- | :--- | :--- | | Net Sales | $405.0 | $423.4 | $374.1 | | Net (Loss)/Income | ($2.6) | $32.0 | $30.0 | - The company operates through three business segments: Elektron (46% of 2023 sales), Gas Cylinders (46% of 2023 sales), and Graphic Arts (8% of 2023 sales)[11][12][17] - Luxfer is initiating a sales process to divest the Graphic Arts business in 2024 due to a strategic misalignment[17] - The company faces supply chain challenges and higher raw material costs, particularly for magnesium, but expects falling magnesium prices to lower input costs in 2024[20] 2023 Sales by End-Market | End-Market | Percentage of 2023 Sales (%) | | :--- | :--- | | Defense, First Response & Healthcare | 41% | | Transportation | 29% | | General Industrial | 29% | Risk Factors The company faces significant risks from cyclical markets, supply chain disruptions, raw material volatility, pension liabilities, cybersecurity threats, and indebtedness - Exposure to cyclical end-markets such as automotive, aerospace, and defense poses a risk of reduced sales and profit during downturns[62][63] - Reliance on major suppliers for raw materials like aluminum, zirconium, and carbon fiber, including a force majeure from a key U.S. magnesium supplier, could negatively impact financial performance[70][71] - Defined benefit pension plans, especially the U.K. Luxfer Group Pension Plan, expose the company to market volatility and potential funding deficits, possibly requiring increased cash contributions[81][82] - Cybersecurity threats and data protection laws like GDPR present risks of business disruption, reputational damage, and significant fines from a breach[100][103] - As of December 31, 2023, total indebtedness included $25.0 million in senior notes, $43.1 million on the revolving credit facility, and a $4.6 million bank overdraft, potentially impacting cash flows and operational flexibility[128] - A material weakness in internal control over financial reporting was identified concerning inventory in transit accounting, potentially affecting financial reporting accuracy[136][138] Unresolved Staff Comments The company reports no unresolved staff comments - None[142] Cybersecurity Luxfer maintains a Board-overseen cybersecurity program focused on business continuity, cyber-resiliency, and compliance, with no material incidents reported to date - The Board of Directors oversees cybersecurity risk, receiving quarterly reports from the senior leadership team[145] - The company's IT controls align with the DFARS / NIST 800-171 IT Security Standard for US Government Contractors[148] - Risk management strategies encompass technical defenses, mandatory annual employee training, phishing simulations, and regular third-party security audits[150][151][152] - As of the filing date, no cybersecurity attempts have had or are reasonably likely to have a material effect on the business[144] Properties Luxfer operates manufacturing facilities across the U.S., U.K., Canada, and China for its Elektron, Gas Cylinders, and Graphic Arts segments, with principal offices in Milwaukee and Manchester - Elektron manufacturing operations are conducted at four plants in the U.S. and one in the U.K.[153] - Gas Cylinders manufacturing takes place at two plants in the U.S. and one each in the U.K., Canada, and China[154] - Graphic Arts manufacturing is carried out at one plant in the U.S. and one in the U.K.[154] Legal Proceedings The company is involved in various lawsuits and claims arising in the normal course of business, with significant details in Note 19 - The company is a defendant in various lawsuits arising from normal business operations, with significant details in Note 19 of the financial statements[157] Mine Safety Disclosures This item is not applicable to the company - Not applicable[158] 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, with $0.13 per share quarterly dividends and 210,000 shares repurchased in 2023 - The company paid quarterly dividends of $0.13 per ordinary share in 2023, totaling $14.0 million[161] 2023 Share Repurchases | Quarter | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | Q1 (Jan 1 - Apr 2) | 48,000 | $16.15 | | Q2 (Apr 3 - Jul 2) | 52,000 | $15.48 | | Q3 (Jul 3 - Oct 1) | 52,000 | $12.69 | | Q4 (Oct 2 - Dec 31) | 58,000 | $9.47 | | Total | 210,000 | - | - In January 2024, the Board authorized the repurchase of an additional 50,000 ordinary shares in Q1 2024[173] Reserved This item is not applicable - Not applicable[174] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, Luxfer's net sales decreased to $405.0 million, resulting in a $2.6 million net loss due to lower gross profit, restructuring, and impairment charges, with 2024 objectives focused on divestiture and cost control Consolidated Results of Operations (Continuing) | Metric | 2023 ($M) | 2022 ($M) | | :--- | :--- | | Net sales | $405.0 | $423.4 | | Gross profit | $76.6 | $95.0 | | Operating income | $4.2 | $44.8 | | Net (loss) / income | ($2.6) | $32.0 | - The 2023 results include a $12.7 million impairment charge for Graphic Arts and $6.4 million in restructuring charges for North American Gas Cylinders[187][191] - Cash provided by operating activities increased to $26.2 million in 2023 from $15.8 million in 2022, primarily due to reduced working capital[220] - Total debt was $72.2 million as of December 31, 2023, down from $81.2 million in 2022, following a $25.0 million loan note repayment in June 2023[217][369] - Key 2024 operating objectives include divesting Graphic Arts, renewing Gas Cylinders' long-term agreements, and focusing on cost control and productivity[181] Quantitative and Qualitative Disclosures About Market Risk Luxfer faces market risks from foreign currency, commodity prices, and interest rates, managed through hedging, fixed-price contracts, and cost pass-through - The company uses short-duration currency contracts to hedge foreign currency risks on sales and purchases, primarily against GBP sterling[267][268] - No financial market exists to hedge magnesium, zirconium, or carbon fiber, so the company relies on fixed-price supply contracts and customer price pass-through[271] - The company has exposure to variable interest rates on its revolving credit facility, with no interest rate hedge agreements in place as of December 31, 2023[273][274] Financial Statements and Supplementary Data This section presents Luxfer's consolidated financial statements, with an unqualified auditor's opinion on the financials but an adverse opinion on internal controls due to a material weakness in inventory accounting - PricewaterhouseCoopers LLP identified a material weakness in internal control over financial reporting for inventory in-transit, resulting in an adverse opinion on internal controls[278][279] - The auditor issued an unqualified opinion on the consolidated financial statements, affirming fair presentation in conformity with U.S. GAAP[278] - Pension benefit obligation valuation was a Critical Audit Matter due to significant judgment and assumptions in actuarial valuations[287][288] - As of December 31, 2023, the U.K. defined benefit pension plan had a $40.3 million surplus, while other plans had a $0.1 million net obligation[401] - In 2023, a $12.7 million impairment charge was recognized for Graphic Arts segment assets, which is being prepared for divestiture[316] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure This item is not applicable - Not applicable[459] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of December 31, 2023, due to a material weakness in inventory in-transit accounting, with a remediation plan underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2023[460] - A material weakness was identified due to a lack of controls over inventory in transit accounting, which did not result in a financial statement misstatement in this report[464] - A remediation plan is underway to design enhanced risk assessment procedures and implement new controls over inventory in-transit[466][467] Other Information No directors or Section 16 officers adopted or terminated Rule 10b5-1 trading arrangements in Q4 2023 - No directors or Section 16 officers adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement in Q4 2023[470] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Not applicable[471] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[474] Executive Compensation Information on executive and director compensation is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[475] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[475] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[476] Principal Accountant Fees and Services Information on fees paid to the principal accountant is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the 2024 Proxy Statement[476] Part IV Exhibits and Financial Statement Schedules This section lists filed financial statements and exhibits, including governance documents, debt agreements, and certifications, with schedules omitted - The financial statements listed in Item 8 are filed as part of this annual report[479] - A list of exhibits, including governance documents, material contracts, and required certifications, is filed with the report[481][484] Form 10-K Summary No Form 10-K summary is provided - None[483]