# LUXFER HOLDINGS PLC (LXFR) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from LUXFER HOLDINGS PLC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1096056/000109605623000009/lxfr-20221231.htm
Accession: 0001096056-23-000009
Filing date: 2023-03-01
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/LXFR/
All MD&A years: /company/LXFR/mda/
Previous year: /company/LXFR/mda/fy2021/ (FY 2021)
Next year: /company/LXFR/mda/fy2023/ (FY 2023)

Item 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations

Information regarding forward-looking statements

This Annual Report on Form 10-K contains certain statements, statistics and projections that are, or may be, forward-looking. These forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that could cause our actual results of operations, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results, as well as those of the markets we serve or intend to serve, to differ materially from those expressed in, or suggested by, these forward-looking statements. The accuracy and completeness of all such statements, including, without limitation, statements regarding our future financial position, strategy, plans and objectives for the management of future operations, is not warranted or guaranteed. These statements typically contain words such as "believes," "intends," "expects," "anticipates," "estimates," "may," "will," "should" and words of similar import. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations reflected in such statements are reasonable, no assurance can be given that such expectations will prove to be correct. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. These factors include, but are not limited to, factors identified in "Business," "Risk factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," or elsewhere in this Annual Report, as well as:

•general economic conditions, or conditions affecting demand for the services offered by us in the markets in which we operate, both domestically and internationally, being less favorable than expected;

•worldwide economic and business conditions and conditions in the industries in which we operate;

•post-pandemic impact of COVID-19 and future pandemics;

•fluctuations in the cost and / or availability of raw materials, labor and energy, as well as the ability to pass on cost increases to customers;

•currency fluctuations and other financial risks;

•our ability to protect our intellectual property;

•the amount of indebtedness we have incurred and may incur, and the obligations to service such indebtedness and to comply with the covenants contained therein;

•relationships with our customers and suppliers;

•increased competition from other companies in the industries in which we operate;

•changing technology;

•our ability to execute and integrate new acquisitions;

•claims for personal injury, death or property damage arising from the use of products produced by us;

•the occurrence of accidents or other interruptions to our production processes;

•changes in our business strategy or development plans, and our expected level of capital expenditure;

•our ability to attract and retain qualified personnel;

•restrictions on the ability of Luxfer Holdings PLC to receive dividends or loans from certain of its subsidiaries;

•climate change regulations and the potential impact on energy costs;

•regulatory, environmental, legislative and judicial developments; and

•our intention to pay dividends.

Please read the sections "Business," "Risk factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K for a more complete discussion of the factors that could affect our performance and the industries in which we operate, as well as those discussed in other documents we file or furnish with the SEC.

27

About Luxfer

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

Key trends and uncertainties regarding our existing business

Update on ongoing challenging global macro environment and related impact on supply chain disruption

Demand from most end-markets we serve has continued to improve following the adverse impact of COVID-19 on volumes, notably in 2020. This sharp recovery in demand across the global macro environment has resulted in supply chain challenges characterized by significant increases in material cost inflation on key inputs (including magnesium, aluminum and carbon fiber), labor availability issues and energy and transport cost increases. Additionally, during 2022, we were faced with two critical suppliers of magnesium and zirconium respectively declaring force majeure, of which the former remains in place. The continuing conflict in Ukraine which has resulted in punitive sanctions against the Russian Federation has further exacerbated the availability and price of certain raw materials and energy supplies. In response to the supply chain disruption, we have been successful in securing alternative sources of supply for key material inputs affected by force majeure. Furthermore, in the majority of cases, we are able to pass through inflation to our customers. Currently, our expectation is that the impact of material availability / inflation and energy cost inflation and labor and transport constraints will continue into 2023; that we will be able to source sufficient material to meet demand and that in the majority of cases we expect to be able to pass on cost increases. However the outlook remains highly uncertain with both the size and timing of future cost increases difficult to predict.

Impact of conflict in Ukraine

The Russian invasion of Ukraine and ongoing military conflict which commenced on February 24, 2022, has resulted in massive displacement of the Ukrainian population and huge disruption to its economy. Wide ranging sanctions have been imposed on the Russian Federation by the international community, targeting individuals, banks, businesses, funds transfers and imports and exports and are expected to have a significant adverse impact on Russia's economy as well as on international businesses active in the region. The impact on Luxfer is not expected to be significant as we have no direct operations in the region, and our sales to Russia and Ukraine combined typically represent less than one percent of total revenue by destination. Furthermore, neither country is a critical supplier of our raw material needs, and while Russia is a major global exporter of magnesium, we are able to source the metal from various alternative locations, including China, Israel, Turkey and the United States.

Operating objectives and trends

In 2023, we expect the following operating objectives and trends to impact our business:

•Continuing high activity on revenue growth initiatives with particular focus on increasing volumes;

•Actions to ensure continuity of supply of critical materials and services while safeguarding margins;

•Execution of productivity improvements and increases in selling prices to mitigate and pass through current cost pressure;

•Further improvements in ESG standing through investment in new projects;

•Focus on recruiting, developing and maintaining talent, through our new leadership development programs, while driving a high-performance culture; and

•Continued emphasis on operating cash generation and maintaining strong working capital performance.

28

CONSOLIDATED RESULTS OF OPERATIONS

The consolidated results of operations from continuing operations of Luxfer were as follows:

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[[/GREPCENT_TABLE]]

29

Net sales

Adjusting for foreign exchange headwinds of $13.9 million, consolidated net sales have increased by 16.9% in 2022 from 2021. The passing through of material cost inflation, where not constrained by contract, accounted for approximately 75.0% of this increase. Furthermore, there was benefit in the year from:

•Increased sales of magnesium powders used in commercial and military applications;

•Higher demand for composite cylinders used in aerospace and medical applications, although constrained by historical contractual prices;

•Increased sales of magnesium alloys, especially those used in the aerospace market;

•Higher demand for our zirconium products, particularly in industrial applications; and

•An additional contribution to net sales in Luxfer Gas Cylinders of $7.1 million due to the acquisition of Structural Composites Industries LLP ("SCI") at the end of the first quarter 2021, which primarily impacted sales of cylinders used in aerospace and alternative fuels applications.

These increases were partially offset by:

•Unfavorable foreign exchange variances as highlighted above;

•Softening sales of flameless ration heaters ("FRH") due to lower levels of troop deployment and of Chemical detection kits due to supply chain constraints, and

•Reduced sales of CNG alternative fuel cylinders.

The 15.2% increase in consolidated net sales across most major product groups in 2021 from 2020 was primarily due to the acquisition of SCI, as well as the recovery in volumes adversely impacted by COVID-19 in the prior year. The most significant factors were:

•An additional contribution of $24.9 million due to the acquisition of SCI;

•Increased sales of SCBA cylinders used by first responders and of cylinders used for gas calibration and other industrial applications;

•Increased sales in Luxfer MEL Technologies of zirconium automotive catalysis products;

•Increased sales of military powders used in countermeasure flares;

•Increased sales of Luxfer Graphic Arts magnesium photo-engraving plates; and

•Favorable foreign exchange variances of $10.3 million or 3.2%.

These increases were partially offset by decreased sales of heater meals and chemical response kits in our Luxfer Magtech business.

Gross profit

The 3.3 percentage point decrease in gross profit as a percentage of sales in 2022 from 2021 was primarily the result of increased material and labor costs and other supply chain investments to overcome disruption, not fully covered by price increases, particularly in the Gas Cylinders Division.

The 0.8 percentage point increase in gross profit as a percentage of sales in 2021 from 2020 was primarily the result of production efficiency linked to increased volumes as we recovered from the prior year impact of COVID-19. This was partially offset by the impact of material cost inflation not fully covered by price increases primarily in the fourth quarter.

30

Selling, general and administrative expenses ("SG&A")

SG&A costs as a percentage of sales have decreased by 2.4 percentage points in 2022 from 2021, largely due to the impact of price increases on revenue, as well as cost reduction programs effected in the prior year. We also benefited from foreign currency translation of $2.3 million.

SG&A costs as a percentage of sales increased marginally by 0.3 percentage points in 2021 from 2020.

Research and development costs

Research and development costs as a percentage of sales has increased by 0.2 percentage points in 2022 when compared to 2021, with actual expenditure increasing by 25.6%, reflecting increased investment in new products and future growth capability.

Research and development costs as a percentage of sales were flat in 2021 when compared to 2020, with actual expenditure increasing by 18.2% as activity levels picked up as we recovered from the COVID-19 economic downturn.

Restructuring charges

The $1.9 million restructuring charges in 2022 includes:

•A further $1.7 million in relation to the closure of Luxfer Gas Cylinders France; and

•$0.2 million relating to one-time employee termination benefits in the Elektron division in relation to the consolidation of production facilities in the Magnesium Powders operations.

The $6.2 million restructuring charges in 2021 includes:

•A further $5.0 million in relation to the closure of Luxfer Gas Cylinders France;

•$0.9 million of one-time employee termination costs in the Elektron division, largely in relation to the divestiture of our small Luxfer Magtech production facility in Ontario, Canada; and

•$0.3 million of miscellaneous restructuring project costs in the Gas Cylinders division.

Acquisition and disposals costs

Net costs of $0.3 million and $1.5 million in 2022 and 2021 respectively, primarily relate to the 2021 acquisition of SCI.

Other charges

The $1.1 million other charges incurred in 2021 relates to the settlement of a class action lawsuit in the Gas Cylinders segment from an alleged historic violation of the California Labor Code, concerning a Human Resources administration matter.

Net interest expense

Net interest expense of $3.9 million in 2022 increased from $3.1 million in 2021 due to a combination of increased interest rates and higher drawings.

Net interest expense of $3.1 million in 2021 decreased from $5.0 million in 2020 largely due to the $25 million early repayment in December 2020 of the Loan Notes due in 2021.

Defined benefit pension credit

The defined benefit pension credit of $0.1 million in 2022, includes a credit on the U.K. plan of $3.0 million, partially offset by the recognition of $2.9 million of unamortized losses on the U.S. plan as a result of the settlement triggered by the lump sum exercise in 2022, ahead of the buyout of the U.S. pension plan which we expect to be completed in early 2023.

The defined benefit pension credit of $2.3 million has decreased by $2.0 million in 2021 from 2020. This was primarily due to the combined effect on the U.K. plan of lower projected asset returns and a higher post-2030 inflation projection in the U.K., partially offset by a fall in the discount rate.

31

Provision for income taxes

The 6.7 percentage point increase in the effective tax rate in 2022 from 2021 was primarily due to the impact in the prior year of the U.K. tax rate change enacted (from 19% to 25%) which increased the valuation of the U.K. related net deferred tax asset (largely related to the U.K. defined benefit pension plan).

The 9.5 percentage point decrease in the effective tax rate in 2021 from 2020 was primarily due to the impact of the above mentioned change in the U.K. tax rate. In addition, a deferred tax credit of $2.6 million has been recognized in the income statement in respect of future tax relief available as a result of a special one-off pension contribution made to the U.K. plan in December 2021.

32

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.

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[[/GREPCENT_TABLE]]

(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.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

33

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.

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[[/GREPCENT_TABLE]]

SEGMENT RESULTS OF OPERATIONS

The summary that follows provides a discussion of the results of operations of each of our two reportable segments (Gas Cylinders and Elektron). Both segments comprise various product offerings that serve multiple end-markets.

Adjusted EBITDA, which is our segment income metric, represents operating income adjusted for restructuring charges, other charges, acquisitions and disposals cost, depreciation and amortization, and share-based compensation charges. A reconciliation to net income and taxes can be found in ITEM 8, Note 17.

GAS CYLINDERS

The results of operations from the Gas Cylinders segment are for continuing operations only.

The net sales and adjusted EBITDA for Gas Cylinders were as follows:

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[[/GREPCENT_TABLE]]

Net sales

The 3.0% increase in Gas Cylinders sales in 2022 from 2021 was primarily the result of increased demand for composite cylinders used in aerospace, partially offset by $7.8 million of foreign exchange headwind and a reduction in CNG alternative fuel and SCBA cylinder sales. The segment has benefited from $7.1 million of sales due to the acquisition of SCI at the end of the first quarter in 2021, which has positively impacted sales of cylinders in aerospace and alternative fuels.

Net sales in Gas Cylinders have been impacted throughout the year by the fixed-price contracts in place across the segment.

The 25.7% increase in Gas Cylinders sales in 2021 from 2020 was primarily the result of the recovery of our markets following COVID-19 related disruption in the prior year, as well as the acquisition of SCI which generated $24.9 million of additional revenues. Revenues increased across all significant product lines except for medical oxygen cylinders, sales of which had held up relatively well in the prior year.

34

Adjusted EBITDA

The 5.7 percentage point decrease in adjusted EBITDA for Gas Cylinders as a percentage of net sales in 2022 from 2021 is a result of the segment being impacted by timing of contractually constrained cost pass-through. Cost reduction effort activities more than offset adverse foreign exchange impact in the year.

The 2.3 percentage point decrease in adjusted EBITDA for Gas Cylinders as a percentage of net sales in 2021 from 2020 was primarily the result of losses suffered by the newly acquired SCI business from the end of the first quarter, as well as material cost inflation in excess of price increases primarily in the fourth quarter. This was partially offset by productivity improvements as volumes recovered from the Covid-19 affected prior year.

ELEKTRON

The net sales and adjusted EBITDA for Elektron were as follows:

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[[/GREPCENT_TABLE]]

Net sales

The 22.4% increase in Elektron sales in 2022 from 2021 was heavily impacted by the passing through of material cost-inflation. Furthermore, there was benefit in the year from:

•Increased sales of magnesium powders used in commercial and military applications;

•Improved sales of magnesium alloys, especially those used in the aerospace market; and

•Higher demand for our zirconium products, particularly in industrial applications.

These increases were partially offset by a decrease in sales of FRHs and chemical kits supplied by Luxfer Magtech. Net sales were also adversely impacted by $6.1 million of foreign exchange.

The 7.1% increase in Elektron sales in 2021 from 2020 was primarily the result of the recovery from COVID-19 related disruption affecting the prior year, especially:

•Increased sales of zirconium-based industrial catalysts;

•Increased sales of magnesium photo-engraving plates;

•Increased sales of military powders used in countermeasure flares; and

•Increased sales of wrought magnesium alloys, especially those used in our transportation end markets.

This was partially offset by decreased revenues from Luxfer Magtech chemical detection kits and from heater meals.

Adjusted EBITDA

The 0.2 percentage point increase in adjusted EBITDA for Elektron as a percentage of net sales in 2022 from 2021 was primarily the result of the segment's ability to pass on the inflationary cost increases, as well as the benefit of positive foreign exchange variances.

The 3.0 percentage point increase in adjusted EBITDA for Elektron as a percentage of net sales in 2021 from 2020 was primarily the result of productivity improvements as volumes recovered from the Covid-19 affected prior year, as well as favorable product sales mix.

35

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity requirements arise primarily from obligations under our indebtedness, capital expenditures, acquisitions, the funding of working capital and the funding of hedging facilities to manage foreign exchange and commodity purchase price risks. We meet these requirements primarily through cash flows from operating activities, cash deposits and borrowings under the Revolving Credit Facility ("RCF") and accompanying ancillary hedging facilities and the Loan Notes due 2023 and 2026. Our principal liquidity needs are:

•funding acquisitions;

•capital expenditure requirements;

•payment of shareholder dividends;

•servicing interest on the Loan Notes, which is payable at each quarter end, in addition to interest and / or commitment fees on the RCF;

•working capital requirements, particularly in the short term as we aim to achieve organic sales growth; and

•hedging facilities used to manage our foreign exchange and aluminum purchase price risks.

We believe that, in the long term, cash generated from our operations will be adequate to meet our anticipated requirements for working capital, capital expenditures and interest payments on our indebtedness. In the short term, we believe we have sufficient credit facilities to cover any variation in our cash flow generation. However, any major repayments of indebtedness will be dependent on our ability to raise alternative financing or to realize substantial returns from operational sales. Also, our ability to expand operations through sales development and capital expenditures could be constrained by the availability of liquidity, which, in turn, could impact the profitability of our operations.

We have been in compliance with the covenants under the Loan Notes and the RCF throughout all of the quarterly measurement dates from and including September 30, 2011, to December 31, 2022.

In October 2021, the Company completed a refinancing of its existing RCF, extending its tenure to October 2026, while providing increased flexibility to incur additional indebtedness outside of this agreement if required and reducing the covenant burden. In January 2023, the Company has increased the capacity of its existing RCF to $125.0 million, an increase of $25.0 million.

Luxfer conducts all of its operations through its subsidiaries, joint ventures and affiliates. Accordingly, Luxfer's main cash source is dividends from its subsidiaries. The ability of each subsidiary to make distributions depends on the funds that a subsidiary receives from its operations in excess of the funds necessary for its operations, obligations or other business plans. We have not historically experienced any material impediment to these distributions, and we do not expect any local legal or regulatory regimes to have any impact on our ability to meet our liquidity requirements in the future. In addition, since our subsidiaries are wholly-owned, our claims will generally rank junior to all other obligations of the subsidiaries. If our operating subsidiaries are unable to make distributions, our growth may slow, unless we are able to obtain additional debt or equity financing. In the event of a subsidiary's liquidation, there may not be assets sufficient for us to recoup our investment in the subsidiary.

Our ability to maintain or increase the generation of cash from our operations in the future will depend significantly on the competitiveness of and demand for our products, including our success in launching new products. Achieving such success is a key objective of our business strategy. Due to commercial, competitive and external economic factors, however, we cannot guarantee that we will generate sufficient cash flows from operations or that future working capital will be available in an amount sufficient to enable us to service our indebtedness or make necessary capital expenditures.

36

Cash Flows from Continuing Operations

Operating activities

Cash provided by operating activities was $15.8 million and $26.0 million in 2022 and 2021 respectively, which includes approximately $10.0 million and $4.0 million of cash spent on restructuring activities in those years. It was primarily related to net income from operating activities, net of the following non-cash items: (i) depreciation and amortization; (ii) share-based compensation charges; (iii) pension adjustments and (iv) net changes to assets and liabilities. In 2022, the Company has increased its working capital balances, predominantly as a result of inventory build to try and reduce inflationary price rises. In 2021, the Company also made an additional, special one-off deficit reduction payment in the U.K. for $12.7 million.

Investing activities

Net cash used for investing activities was $5.6 million in 2022, compared to net cash used for investing activities of $5.0 million in 2021. The following investing activities impacted our cash flow:

Capital expenditures

Capital expenditures in 2022 was $8.3 million compared to $9.1 million in 2021. 2021 included additional spend as we delayed some projects in the prior year in response to COVID-19. We anticipate capital expenditures for 2023 to be around $15 million as we increase investment in order to grow the business.

Proceeds from sale of property, plant and equipment

In May 2022, the Company sold a previously held-for-sale building in the Elektron segment for $3.7 million. Consideration was paid in full upon sale.

Proceeds from sale of business

In March 2021, the Company sold its U.S. aluminum gas cylinder business for net cash proceeds of $20.2 million. In September 2021, the Company sold its Superform U.K. business for net consideration of $4.0 million, of which $3.0 million was received in 2021 and $1.0 million deferred until 2022. The deferred consideration, while still due to the Company, the payment has not yet been received so has been fully impaired in 2022.

In July 2020, the Company sold its 51% investment in Luxfer Uttam India Private Limited for net cash proceeds of $1.5 million. In September 2021, the Company received deferred consideration of $0.3 million for this sale.

Settlements from sale of business

In October 2022, the Company agreed a final settlement of $1.0 million to the purchasers of the previously disposed aluminum gas cylinder business. The settlement was a reduction to the original consideration paid.

Acquisitions, net of cash acquired

In March 2021, the Company completed the acquisition of the SCI business of Worthington Industries, Inc., based in Pomona, California, for $19.3 million cash consideration.

Financing activities

In 2022, net cash used for financing activities was $2.0 million, (2021: $16.1 million). We made net drawdowns on our borrowing facilities of $24.8 million (2021: net drawdowns of $6.4 million) and dividend payments of $14.2 million (2021: $13.6 million), equating to $0.515 per ordinary share (2021: $0.50 per ordinary share). In 2022, the Company spent $11.1 million repurchasing approximately 700,000 shares, (2021: $6.4 million repurchasing approximately 300,000 shares).

Loan Notes 2023 and 2026

The Note Purchase Agreement contains customary covenants and events of default, in each case with customary and appropriate grace periods and thresholds. In addition, the Note Purchase Agreement requires us to maintain compliance with a minimum interest coverage ratio and a leverage ratio. The interest coverage ratio measures our EBITDA (as defined in the Note Purchase Agreement) to Net Finance Charges (as defined in the Note Purchase Agreement). We are required to maintain an interest coverage ratio of 4.0:1. The leverage ratio measures our Total Net Debt (as defined in the Note Purchase Agreement) to Adjusted Acquisition EBITDA (as defined in the Note Purchase Agreement). We are required to maintain a leverage ratio of no more than 3.0:1. We have been in compliance with the covenants under the Note Purchase Agreement throughout all of the quarterly measurement dates from and including September 30, 2011, to December 31, 2022.

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The Loan Notes due 2023 and 2026 and the Note Purchase Agreement are governed by the law of the State of New York.

The Loan Notes due 2023 and 2026 are denominated in U.S. dollars, which creates a natural partial offset between the dollar-denominated net assets and earnings of our U.S. operations and the dollar-denominated debt and related interest expense of the notes. We have included the Note Purchase Agreement and a form of the Loan Notes due 2023 and 2026 as exhibits to this Annual Report and refer you to the exhibits for more information on the Note Purchase Agreement and the Loan Notes due 2023 and 2026.

Senior Facilities Agreement

A new Senior Facilities Agreement was signed in October 2021, for more information see ITEM 8 Note 11.

Structure.    At December 31, 2022 the Senior Facilities Agreement provided $100 million of committed debt facilities in the form of a multi-currency (GBP sterling, U.S. dollars or euros) RCF and an additional $50 million of uncommitted facilities through an accordion clause. In January 2023, we increased the RCF to $125 million and a subsequent reduction in the uncommitted facility to $25 million. The facilities mature in October 2026. As of December 31, 2022, we had drawn down $31.9 million under the Revolving Credit Facility (December 31, 2021: $10.8 million).

Availability.    The facility is used for loans and overdrafts. Amounts unutilized under the RCF (or, if the case, under the revolving portion of the accordion) are allocated to ancillary facilities available under the Senior Facilities Agreement in connection with overdraft facilities, bilateral loan facilities and letter of credit facilities. As of December 31, 2022, we had drawn down $1.8 million under the ancillary facilities (December 31, 2021: $2.2 million). We may use amounts drawn under the RCF for our general corporate purposes and certain capital expenditures, as well as for the financing of permitted acquisitions and reorganizations. As of December 31, 2022, $68.1 million (net of $31.9 million drawn down) was available under the RCF. The last month in which we may draw funds from the RCF is September 2026.

The Company also had a separate (uncommitted) bonding facility for bank guarantees; denominated in GBP sterling totaling £0.5 million ($0.6 million) and £0.1 million ($0.2 million) was utilized at December 31, 2022.

Interest rates and fees.    Borrowings under the facility bear an interest rate equal to an applicable margin plus either EURIBOR, in the case of amounts drawn in euros, or SONIA (Sterling Overnight Index Average), in the case of amounts drawn in GBP sterling or U.S. dollars.

The tables below sets out the range of ratios and the related margin percentage currently in effect.

[[GREPCENT_TABLE]]
[["Leverage","","Margin"],["","(% per annum)"],["Greater than 2.5:1","2.75"],["Less than or equal to 2.5:1, but greater than 2.0:1","2.50"],["Less than or equal to 2.0:1, but greater than 1.5:1","2.25"],["Less than or equal to 1.5:1, but greater than 1.0:1","2.00"],["Less than or equal to 1.0:1","1.75"]]
[[/GREPCENT_TABLE]]

As of December 31, 2022, we had drawn down $31.9 million under the RCF (December 31, 2021: $10.8 million). A commitment fee is levied each quarter against any unutilized element of the RCF, excluding overdraft or ancillary facilities.

In the event of a sale of all or substantially all of our business and / or assets, or if any person or group of persons acting in concert gains direct or indirect control (as defined in the Senior Facilities Agreement) of Luxfer Holdings PLC, we will be required to immediately repay all outstanding amounts under the RCF (and, if the case, the accordion) and the ancillary facilities under the Senior Facilities Agreement.

In addition, the Senior Facilities Agreement requires us to maintain compliance with an interest coverage ratio and a leverage ratio. The interest coverage ratio measures our EBITDA (as defined in the Senior Facilities Agreement) to Net Finance Charges (as defined in the Senior Facilities Agreement). We are required to maintain a minimum interest coverage ratio of 4.0:1. The leverage ratio measures our Total Net Debt (as defined in the Senior Facilities Agreement) to the Relevant Period Adjusted Acquisition EBITDA (as defined in the Senior Facilities Agreement). We are required to maintain a leverage ratio of no more than 3.0:1.

We have been in compliance with the covenants under the Senior Facilities Agreement throughout all of the quarterly measurement dates from and including September 30, 2011, to December 31, 2022.

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The Senior Facilities Agreement is governed by English law. For more information see ITEM 8, Note 11.

Dividends

We paid dividends in 2022 of $14.2 million (2021: $13.6 million), or $0.515 (2021: $0.50) per ordinary share.

Any payment of dividends is also subject to the provisions of the U.K. Companies Act, according to which dividends may only be paid out of profits available for distribution determined by reference to financial statements prepared in accordance with the Companies Act and the International Accounting Standards Board, which differ in some respects from U.S. GAAP. In the event that dividends are paid in the future, holders of the ordinary shares will be entitled to receive payments in U.S. dollars in respect of dividends on the underlying ordinary shares in accordance with the deposit agreement. Furthermore, because we are a holding company, any dividend payments would depend on cash flows from our subsidiaries.

Authorized shares

Our authorized share capital consists of 40.0 million ordinary shares with a par value of £0.50 per share.

Contractual obligations

The following summarizes our significant contractual obligations that impact our liquidity:

[[GREPCENT_TABLE]]
[["","Payments Due by Period"],["In millions","Total","","Less than 1 year","","1 \u2013 3 years","","3 \u2013 5 years","","After 5 years"],["Contractual cash obligations"],["Loan Notes due 2023","25.0","","","25.0","","","\u2014","","","\u2014","","","\u2014"],["Loan Notes due 2026","25.0","","","\u2014","","","\u2014","","","25.0","","","\u2014"],["Revolving Credit Facility","31.9","","","\u2014","","","\u2014","","","31.9","","","\u2014"],["Obligations under operating leases","29.9","","","5.1","","","10.1","","","5.3","","","9.4"],["Capital commitments","1.4","","","1.4","","","\u2014","","","\u2014","","","\u2014"],["Interest payments","13.2","","","4.0","","","6.6","","","2.6","","","\u2014"],["Total contractual cash obligations","$","126.4","","","$","35.5","","","$","16.7","","","$","64.8","","","$","9.4"]]
[[/GREPCENT_TABLE]]

Off-balance sheet measures

At December 31, 2022, we had no off-balance sheet arrangements other than the three bonding facilities as described above.

COMMITMENTS AND CONTINGENCIES

Capital commitments

At December 31, 2022, the Company had capital expenditure commitments of $1.4 million (2021: $1.5 million and 2020: $1.1 million) for the purchase of new plant and equipment.

Committed banking facilities

The Company refinanced in October 2021, see Note 11 for details of the refinance.

At December 31, 2022 the Company had committed banking facilities of $100.0 million with an additional $50.0 million of uncommitted facilities through an accordion provision. Of these committed facilities, $31.9 million was drawn at December 31, 2022.

At December 31, 2021, the Company had committed banking facilities of $100.0 million with an additional $50.0 million of uncommitted facilities through an accordion provision. Of the committed facilities, $10.8 million was drawn at December 31, 2021.

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Contingencies

In November 2018, an alleged explosion occurred at a third-party waste disposal and treatment site in Grand View, Idaho, reportedly causing property damage, personal injury, and one fatality. We contracted with a service company for removal and disposal of certain waste resulting from the magnesium powder manufacturing operations at the Reade facility in Manchester, New Jersey. We believe this service company, in turn, contracted with the third-party disposal company, at whose facility the explosion occurred, for treatment and disposal of the waste. In November 2020, we were named as a defendant in three lawsuits in relation to the incident – one by the third-party disposal company, one by the estate of the decedent, and one by an injured employee of the third-party disposal company. We believe that we are not liable for the incident, have asserted such, and continue to fully defend the Company against these lawsuits. Therefore, we do not currently expect any eventual outcome in these matters to have a material impact on the Company's financial position or results of operations.

NEW ACCOUNTING STANDARDS

See ITEM 8, Note 1 of the notes to the Consolidated Financial Statements, included in this Form 10-K, for information pertaining to recently adopted accounting standards or accounting standards to be adopted in the future.

CRITICAL ACCOUNTING ESTIMATES    

We have adopted various accounting policies to prepare the consolidated financial statements in accordance with GAAP. Our significant accounting policies are more fully described in ITEM 8, Note 1 of the Notes to Consolidated Financial Statements. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry and information available from other outside sources, as appropriate. We consider an accounting estimate to be critical if:

•it requires us to make assumptions about matters that were uncertain at the time we were making the estimate; and

•changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.

Our critical accounting estimates include the following:

Impairment of goodwill and other identifiable intangible assets

Goodwill

Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible net assets and identifiable intangible assets purchased and liabilities assumed.

Goodwill is tested at least annually for impairment and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill is tested for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may elect not to perform the qualitative assessment for some or all reporting units and perform a quantitative impairment test. Management carried out its qualitative review on the last day of the third quarter of 2022 and 2021, which showed no indicators of impairment. As a result, the Company concluded its review and was not required to perform a quantitative review.

Identifiable intangible assets

Our primary identifiable intangible assets include: (i) customer relationships and technology; and (ii) traded related assets. All our identifiable intangible assets have finite lives and are amortized over that period. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. No such events occurred during the year ended December 31, 2022.

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Pension and other post-retirement plans

We sponsor U.S. and non-U.S. defined-benefit pension and other post-retirement plans. The amounts recognized in our consolidated financial statements related to our defined-benefit pension and other post-retirement plans are determined from actuarial valuations. Inherent in these valuations are assumptions, including: (i) discount rates; (ii) inflation rates; (iii) pension increases; and (iv) life expectancy. These assumptions are updated annually and are disclosed in ITEM 8, Note 14 to the Notes to Consolidated Financial Statements. Differences in actual experience or changes in assumptions can have a material impact on the pension and other post-retirement obligations and future expense.

We recognize changes in the fair value of plan assets and net actuarial gains or losses for pension and other post-retirement benefits annually in the fourth quarter each year ("mark-to-market adjustment") and, if applicable, in any quarter in which an interim remeasurement is triggered. Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension and other post-retirement plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses each year are (i) changes in the discount rate used to value pension and other post-retirement benefit obligations as of the measurement date and (ii) differences between the expected and the actual return on plan assets. This accounting method also results in the potential for volatile and difficult to forecast mark-to-market adjustments. The remaining components of pension expense, including service and interest costs and the expected return on plan assets, are recorded on a quarterly basis as ongoing pension expense.

Discount rate

The discount rate used represents the annualized yield based on a cash flow matched methodology with reference to an AA corporate bond spot curve and having regard to the duration of the Plan’s liabilities. This yield produced a weighted-average discount rate for our U.K. plans of 4.80% in 2022, 1.90% in 2021 and 1.40% in 2020. The discount rate on our U.S. plans was 5.10% in 2022, 2.70% in 2021 and 2.30% in 2020. There are no known or anticipated changes in our discount rate assumption that will impact our pension expense in 2023.

To indicate the sensitivity of results to this assumption, a 0.1% per annum increase in the discount rate for our U.K. plans would reduce the value of the liabilities and therefore increase the pension surplus by approximately $2.4 million and increase the projected 2023 income statement credit by approximately $0.1 million.

Inflation rate

In September 2019, the UK Statistics Authority announced plans to reform the RPI inflation index. On November 25, 2020, the government and UK Statistics Authority confirmed these plans to reform the RPI index to bring it into line with the CPIH index from 2030, with no compensation for the holders of index-linked gilts. Inflation measured by the CPIH is consistently significantly lower than that measured by RPI, and therefore, these plans imply a significant expected reduction in RPI inflation from 2030 onwards. As a result we have taken a stepped approach and used different inflation rates pre and post 2030.

To indicate the sensitivity of results to the CPI assumption, a 0.1% per annum decrease in all CPI-linked assumptions, (including pension increases) for our U.K. plan, would reduce the value of the liabilities and therefore increase the pension surplus at December 31, 2022 by approximately $2.4 million and increase the projected 2023 income statement credit by approximately $0.1 million.

Pension increases

The pension increase assumptions have been set with reference to the corresponding CPI inflation assumption and take account of the caps and floors applicable to the various components of pension indexation.

Life expectancy

The life expectancies of male and female members aged 65 on 31 December 2022 are assumed to be 21.2 and 23.0 years, respectively, with the life expectancies of male and female members aged 65 on 31 December 2042 assumed to be 22.5 and 24.5 years, respectively.

To indicate the sensitivity of results to the life expectancy assumption, a one year increase in assumed life expectancy on the U.K. plan could increase the value of the liabilities and therefore decrease the pension surplus at December 31, 2022 by approximately $7.2 million.

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Expected rate of return

Our expected rate of return on plan assets for our U.K. plans was 5.60% in 2022, 3.30% in 2021 and 3.00% in 2020. The expected rate of return on our U.S. plans was 4.70% in 2022, 2.50% in 2021 and 5.00% in 2020. The expected rate of return is designed to be a long-term assumption that may be subject to considerable year-to-year variance from actual returns. In developing the expected long-term rate of return, we considered our historical returns, with consideration given to forecast economic conditions, our asset allocations, input from external consultants and broader longer-term market indices.

See ITEM 8, Note 14 of the Notes to Consolidated Financial Statements for further information regarding pension and other post-retirement plans.

Loss contingencies

Accruals are recorded for various contingencies, including legal proceedings, self-insurance and other claims that arise in the normal course of business. The accruals are based on judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarial determined estimates. Additionally, we record receivables from third party insurers when recovery has been determined to be probable.

Our critical judgment revolves around the recognition of litigation and environmental liabilities in relation to the closure of our French site. We have recognized a loss contingency of $3.3 million, for which we have engaged with external experts to assist with the valuation of these liabilities.

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