LUXFER HOLDINGS PLC (LXFR) FY 2023 MD&A

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;

•our ability to execute our strategic review, including our Graphic Arts business, to safeguard margins and reduce costs;

•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 our 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.

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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.

Luxfer 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

Margin pressure resulting from supply chain challenges easing

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. In recent months however, 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 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.

Operating objectives and trends

In 2024, we expect the following operating objectives and trends to impact our business:

•Addressing general macro uncertainty and building resilience into the outlook, especially in our General Industrial end-market;

•Execution of actions identified upon completion of the recently-announced expanded and accelerated strategic review, including the divestiture of Graphic Arts;

•Completion of long-term agreement renewals in Gas Cylinders enabling pass through of inflationary costs;

•Ongoing focus on cost control, new product launches and productivity improvements across the business;

•Execution of selected capital investment projects to support our strategy of profitable growth while maintaining our infrastructure;

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

•Further improvements in ESG standing through focus on sustainability and on our values of teamworking and accountability; and

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

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CONSOLIDATED RESULTS OF OPERATIONS

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

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Net sales

Adjusting for foreign exchange headwinds of $0.3 million, consolidated net sales have decreased by 4.3% in 2023 from 2022. The adverse impact of volume and mix has accounted for a $43.1 million reduction in sales, while the passing through of material cost inflation, where not constrained by contract, has partially offset this decrease by $25.0 million.

While sales in our General Industrial and Transportation end markets have decreased by 23.9% and 10.2% respectively, our sales in our Defense, First Response and Healthcare end market has increased by 23.9%.

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.

Gross profit

The 3.5 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.

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

SG&A costs as a percentage of sales have increased by 1.8 percentage points in 2023 from 2022, largely due to the $5.9 million of legal costs expensed in the Elektron Division. These predominantly relate to the case described in Note 19 and are not expected to recur in 2024.

Research and development costs

Research and development costs as a percentage of sales declined marginally in 2023 when compared to 2022 although overall spend of $4.6 million continues to show our commitment to new product development.

Restructuring charges

The $6.4 million restructuring charges in 2023 includes:

•$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;

•An additional $0.4 million in relation to the closure of Luxfer Gas Cylinders France;

•$0.2 million of further redundancies within our Gas Cylinders division;

•$0.5 million of waste clean up costs and $0.2 million of asset impairments in the Elektron division in relation to the consolidation of production facilities in the Magnesium Powders operations; and

•$0.2 million credit in relation to the closure of our Elektron Division's Canadian facility.

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Acquisition and disposals costs

There were no acquisition or disposals costs in 2023.

Impairment charges

The $12.7 million impairment charges incurred in 2023 arose from fully writing down property, plant and equipment and right of use assets from operating leases within our Graphic Arts division as a result of our annual impairment and strategic review.

Net interest expense

Net interest expense of $6.3 million in 2023 increased from $3.9 million in 2022 due to the continued combination of increased interest rates and higher drawings on the revolving credit facility.

Defined benefit pension credit

The defined benefit pension charge of $7.6 million in 2023 was predominantly the result of the sale of the U.S. pension plan liability to an insurer. In the first quarter of 2023, there was a $9.2 million charge in relation to the sale, which included $2.3 million cash and $6.9 million in relation to the derecognition of the U.S. pension liability and reallocation of accumulated actuarial losses from other comprehensive income. In the second quarter of 2023, we received a $0.2 million contribution refund, resulting in a net cash outflow of $2.1 million and a charge of $9.0 million in 2023 in relation to the settlement. An additional $0.3 million interest cost has been recognized in relation to the U.S. plan in the year.

This charge was partially offset by a $1.7 million credit on the U.K. plan as expected return on assets outweighed the interest cost and net actuarial loss.

Provision for income taxes

The 51.2 percentage point increase in the effective tax rate in 2023 from 2022 was primarily due to the impact of increase tax credits in relation to U.K. incentives and the U.K. rate change from 19% to 25%, partially offset by the jurisdictional mix of income.

2022 compared with 2021

For a discussion comparing our consolidated operating results for the year ended December 31, 2022, with the year ended December 31, 2021, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Discussion and Analysis - Consolidated Operating Results in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the U.S. Securities and Exchange Commission on March 01, 2023. This section is incorporated by reference into this Annual Report on Form 10-K for the year ended December 31, 2023.

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO GAAP MEASURES

The following tables of non-GAAP summary financial data presents a reconciliation of net income from continuing operations and diluted earnings per ordinary share from continuing operations to adjusted net income from continuing operations, adjusted EBITA from continuing operations, adjusted income from continuing operations before income taxes, adjusted EBITDA from continuing operations, adjusted earnings per ordinary share from continuing operations, adjusted provision for income taxes and adjusted effective tax rate from continuing operations, for the periods presented, being the most comparable GAAP measures. 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 from continuing operations, adjusted earnings per share from continuing operations, adjusted EBITA from continuing operations and adjusted EBITDA from continuing operations in isolation as an alternative to net income and earnings per share when evaluating Luxfer's operating performance or measuring Luxfer's profitability.

(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.

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SEGMENT RESULTS OF OPERATIONS

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

During 2023, the Graphic Arts reporting segment has been disaggregated from the Elektron segment and is being reported separately as the Graphic Arts segment. The Elektron segment's results for 2022 and 2021 have been adjusted to strip out Graphic Arts' results.

Adjusted EBITDA, which is our segment income metric, represents net income from continuing operations adjusted for share-based compensation charges, restructuring charges, impairment charges, other charges, acquisitions and disposals costs, net interest expenses, defined benefits pension credit, provision for taxes and depreciation and amortization.. A reconciliation to net income 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:

Net sales

The 1.5% increase in Gas Cylinders sales in 2023 from 2022 was primarily the result of:

•Higher sales of SCBA cylinders;

•Increased volume of our medical cylinders; and

•Price increases throughout the segment as contracts are renegotiated.

These increases have been partially offset by:

•Reduced sales of industrial and AF cylinders.

Net sales in Gas Cylinders continued to be impacted throughout the year by the fixed-price contracts in place across the segment, although we have been able to renegotiate some of our fixed-price contracts to offset inflation.

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Adjusted EBITDA

The 2.0 percentage point increase in adjusted EBITDA for Gas Cylinders as a percentage of net sales in 2023 from 2022 is the result of the renegotiation of fixed price contracts, as price more than offset inflation during the year.

ELEKTRON

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

Net sales

The 6.9% decrease in Elektron sales in 2023 from 2022 was negatively impacted by adverse volume and mix, while price increase contributed an additional $9.6 million. Primary movements were:

•Lower sales of SoluMag® in the Oil and Gas industry; and

•Reduction in sales of magnesium powders for commercial use.

These decreases were partially offset by increased sales of chemical response kits and flameless ration heaters. There has also been continued increase in demand for zirconium products, particularly those used in pharmaceutical applications, as well as increases in our industrial end-market.

Adjusted EBITDA

The 6.9 percentage point decrease in adjusted EBITDA for Elektron as a percentage of net sales in 2023 from 2022 was primarily the result of adverse product mix across the segment and increased legal fees, coupled with $1.0 million FX headwind. Price increases throughout the year more than offset inflation.

GRAPHIC ARTS

The net sales and adjusted EBITDA for Graphic Arts were as follows:

Net sales

The 18.6% decrease in Graphic Arts sales in 2023 from 2022 was a result of decreased demand for photo-engraving plates, particularly outside the North American market as competition has increased as a result of recent inflation, especially the high cost of magnesium.

Adjusted EBITDA

The loss in 2023 for Graphic Arts was a result of lower volumes coupled with the increased cost of magnesium filtering through. High fixed costs and the lowering of pricing to slow sales decline had a negative impact on margins.

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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 Note due 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, 2023.

In January 2023, the Company increased the capacity of its existing RCF to $125.0 million, an increase of $25.0 million. In June 2023, the Company repaid the $25.0 million loan note due in 2023.

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

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

Cash Flows from Continuing Operations

Operating activities

Cash provided by operating activities was $26.2 million and $15.8 million in 2023 and 2022 respectively, which includes approximately $3.6 million and $10.0 million of cash spent on restructuring activities in those years. Cash was primarily related to the net loss / net income from operating activities, net of the following non-cash items: (i) depreciation and amortization; (ii) share-based compensation charges; (iii) pension adjustments (iv) impairment charges and (v) net changes to assets and liabilities. In 2022, the Company had increased its working capital balances, predominantly as a result of inventory build to try and reduce inflationary price rises, 2023 saw a corresponding reduction in those balances.

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Investing activities

Net cash used for investing activities was $9.4 million in 2023, compared to $5.6 million in 2022. The following investing activities impacted our cash flow:

Capital expenditures

Capital expenditures in 2023 was $9.4 million compared to $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.

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.

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.

Financing activities

In 2023, net cash used for financing activities was $27.5 million, (2022: $2.0 million). We repaid $25.0 million of short term borrowings, partially offset by a $4.3 million increase in our bank overdraft. We made net drawdowns on our borrowing facilities of $10.2 million (2022: net drawdowns of $24.8 million) and 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, the Company spent $2.7 million repurchasing approximately 200,000 shares, (2022: $11.1 million repurchasing approximately 700,000 shares).

Loan Note 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, 2023.

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

The Loan Note due 2026 is 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 Note due 2026 as exhibits to this Annual Report and refer you to the exhibits for more information on the Note Purchase Agreement and the Loan Note due 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, 2023 the Senior Facilities Agreement provided $125 million of committed debt facilities in the form of a multi-currency (GBP sterling, U.S. dollars or euros) RCF and an additional $25 million of uncommitted facilities through an accordion clause. The facilities mature in October 2026. As of December 31, 2023, we had drawn down $43.1 million under the Revolving Credit Facility (December 31, 2022: $31.9 million).

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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, 2023, we had drawn down $2.2 million under the ancillary facilities (December 31, 2022: $1.8 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, 2023, $81.9 million (net of $43.1 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, 2023.

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.

As of December 31, 2023, we had drawn down $43.1 million under the RCF (December 31, 2022: $31.9 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, 2023.

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

Dividends

We paid dividends in 2023 of $14.0 million (2022: $14.2 million), or $0.52 (2022: $0.515) 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.

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Contractual obligations

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

2022 compared with 2021

For a discussion comparing our net cash activities (operating, investing and financing) for the year ended December 31, 2022, with the year ended December 31, 2021, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Discussion and Analysis - Consolidated Operating Results in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the U.S. Securities and Exchange Commission on March 01, 2023. This section is incorporated by reference into this Annual Report on Form 10-K for the year ended December 31, 2023.

Off-balance sheet measures

At December 31, 2023, we had no off-balance sheet arrangements other than the three bonding facilities as described above.

COMMITMENTS AND CONTINGENCIES

Capital commitments

At December 31, 2023, the Company had capital expenditure commitments of $2.3 million (2022: $1.4 million and 2021: $1.5 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, 2023 the Company had committed banking facilities of $125.0 million with an additional $25.0 million of uncommitted facilities through an accordion provision. Of these committed facilities, $43.1 million was drawn at December 31, 2023. The banking facilities expire in October 2026.

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 the committed facilities, $31.9 million was drawn at December 31, 2022.

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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. The Company had contracted with a service company for removal and disposal of certain waste resulting from the magnesium powder manufacturing operations at the Reade facility in Manchester, New Jersey. The Company believes 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. The three lawsuits were administratively consolidated and, to date, two lawsuits remain ongoing. The Company believes that we are not liable for the incident, have asserted such, and, in conjunction with our insurers, 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.

In December 2023, it was established that any potential liability arising from the lawsuits and reasonable defense costs related thereto are covered by insurance. Negotiations as to recovery of historic defense costs are ongoing, and therefore the Company has not recognized any asset with respect to said recovery as of December 31, 2023.

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 identifiable intangible assets

Goodwill

Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable net 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 in 2023 and 2022. Our qualitative review showed no indicators of impairment in segments carrying goodwill. As a result, the Company concluded its review and was not required to perform a quantitative review.

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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, although we sold our significant U.S. defined pension plan in 2023. 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 4.50% in 2023, 4.80% in 2022 and 1.90% in 2021. The discount rate on our U.S. plans was 5.10% in 2022 and 2.70% in 2021. There are no known or anticipated changes in our discount rate assumption that will impact our pension expense in 2024.

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 $2.0 million and increase the projected 2023 income statement credit by approximately $0.2 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 $1.0 million and increase the projected 2024 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 2023 are assumed to be 21.2 and 23.1 years, respectively, with the life expectancies of male and female members aged 65 on 31 December 2043 assumed to be 22.5 and 24.6 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, 2023 by approximately $8.0 million.

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Expected rate of return

Our expected rate of return on plan assets for our U.K. plans was 4.80% in 2023, 5.60% in 2022 and 3.30% in 2021. The expected rate of return on our U.S. plans was 4.70% in 2022 and 2.50% in 2021. 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 $3.0 million, for which we have engaged with external experts to assist with the valuation of these liabilities.

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