Luxfer Holdings PLC is a global manufacturer of highly-engineered materials, which focuses on using its broad array of technical know-how and propriety technologies. Luxfer's high-performance materials, components and high-pressure gas containment devices are used in defense and emergency response, healthcare, transportation and general industrial applications. It comprises two reportable segments being Gas Cylinders and Elektron.

The consolidated financial statements comprise the financial statements of Luxfer Holdings PLC and its subsidiaries (collectively "we," "our," "Luxfer" or "the Company" ) that we control. Investments in unconsolidated affiliates, where we have the ability to exercise significant influence over the operating and financial policies, are accounted for using the equity method. All inter-company balances and transactions, including unrealized profits arising from intra-company transactions, have been eliminated in full.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and are presented in U.S. dollars ("USD"). The books of the Company's non-U.S. entities are converted to USD at each reporting period date in accordance with the accounting policy below. The functional currency of the holding company Luxfer Holdings PLC and its U.K. subsidiaries is pounds sterling (GBP), being the most appropriate currency for those particular operations.

In March 2020, the World Health Organization characterized the coronavirus ("COVID-19") a pandemic. The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy. At this time, Luxfer is operating all of its facilities, following earlier temporary closures and / or output restrictions at a small number of locations. However, due to weaker demand resulting from uncertain economic conditions, potential supply constraints, and the continued impact of COVID-19, Luxfer has implemented additional cost saving programs, including headcount reductions. As the situation evolves and if warranted, the Company may again suspend or reduce operations at certain facilities. In view of the rapidly changing business environment, unprecedented market volatility and heightened degree of uncertainty resulting from COVID-19, we are currently unable to fully determine its future impact on our business. However, we are monitoring the progression of the pandemic and its potential effect on our financial position, results of operations and cash flows.

The Company recognized that the COVID-19 pandemic constituted a triggering event in accordance with ASC 350 Intangibles - Goodwill and Other, during the first quarter of 2020 and therefore performed an impairment assessment of its goodwill and other intangible assets. Based on the forecast at that time, we did not identify any impairments, nor marginal outcomes. During the year, quarterly re-forecasts were performed to assess the impact COVID-19 was having on our results and liquidity, and in the fourth quarter we carried out our annual goodwill and other intangibles impairment test using cash flows from the annual and strategic plan budgeting exercise. Neither the in-year re-forecasts nor outcomes of the 2021 budget, changed our assessment of fair value, with no impairments nor marginal outcomes identified. Assumptions and judgments are required in calculating the fair value of the reporting units. In developing our discounted cash flow analysis, assumptions about future revenues and expenses, capital expenditures and changes in working capital are based on our annual operating plan and long-term business plan for each of our reporting units. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions, changes in raw material prices and growth expectations for the industries and end markets we participate in. These assumptions and judgments may change as we learn more about the impact of the COVID-19 pandemic.

The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include our accounting for valuation of goodwill, estimated losses on accounts receivable, estimated realizable value on excess and obsolete inventory, assets acquired and liabilities assumed in acquisitions, estimated selling proceeds from assets held for sale, contingent liabilities, measurement of contingent consideration, income taxes and pension benefits. Actual results could differ from our estimates.

Business combinations are accounted for using the purchase method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any non-controlling interest in the acquiree. The measurement of non-controlling interest is at fair value and is determined on a transaction by transaction basis. Acquisition costs are expensed as incurred.

Goodwill is tested at least annually for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. In 2020, the Company has adopted Accounting Standard Update ("ASU") 2017-04) - intangibles - goodwill and other (Topic 350): Simplifying the test for goodwill impairment.. 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. In 2020, management have chosen to bypass the qualitative evaluation.

For the quantitative impairment test, the fair value of each reporting unit is determined using a discounted cash flow analysis. Projecting discounted future cash flows requires us to make significant estimates regarding future revenue growth rates including the perpetual growth rate; anticipated operating margins; and the discount rates applied to the estimated future cash flows. Actual results may differ from those used in our valuations. This non-recurring fair value measurement is a "Level 3" measurement under the fair value hierarchy described in Note 12.

In developing our discounted cash flow analysis, assumptions about future revenue growth rates and anticipated operating margins are based on our annual operating plan and long-term business plan for each of our reporting units. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions, changes in raw material prices and growth expectations for the industries and end markets we participate in. These assumptions are determined over a three year long-term planning period. The three year growth rates for revenues and operating profits vary for each reporting unit being evaluated. Revenues and operating profit beyond 2022 are projected to grow at a perpetual growth rate of 1.8%.

Discount rate assumptions for each reporting unit take into consideration our assessment of risks inherent in the future cash flows of the respective reporting unit and our weighted-average cost of capital. We utilized discount rates ranging from 8.0% to 9.0% in determining the discounted cash flows in our fair value analysis.

We completed our quantitative goodwill impairment evaluation as of the last day of the third quarter of 2020, 2019 and 2018 with each of our reporting units' fair value being substantially in excess of its carrying value apart from our Superform business unit within the Gas Cylinders segment. This resulted in an impairment in full of $1.3 million, previously disclosed within impairment costs on the income statement in 2018, now reclassified to discontinued operations.

We have had interests in certain joint venture entities that were variable interest entities ("VIEs"). Determining whether to consolidate a VIE may require judgment in assessing (i) whether an entity is a VIE and (ii) if we are the entity's primary beneficiary and thus required to consolidate the entity. To determine if we are the primary beneficiary of a VIE, we evaluate whether we have (i) the power to direct the activities that most significantly impact the VIE's economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our evaluation includes identification of significant activities and an assessment of our ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology, product supply, operations services, equity funding and financing and other applicable agreements and circumstances. Our assessment of whether we are a primary beneficiary of a VIE requires the application of significant assumptions and judgment.

Sub161 Pty Limited, our Australian associate (VIE) in which we held a 26% interest, was liquidated and deregistered as a legal entity in November 2020. We were not the primary beneficiary of the VIE and so did not consolidate it and used the equity method to account for its results. We had previously fully impaired our investment and there was no gain or loss resulting from the liquidation.

Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight-line basis over the estimated useful life of the particular asset. The depreciation expense during 2020, 2019 and 2018 was $12.6 million, $12.0 million and $15.8 million, respectively. The estimated useful lives is summarized as follows:


			Freehold buildings			10 - 33 years
			Leasehold land and buildings			The lesser of life of lease or freehold rate
			Machinery and equipment			3 - 25 years
			Including:
			Heavy production equipment (including casting, rolling, extrusion and press equipment)			20 - 25 years
			Chemical production plant and robotics			7 - 10 years
			Other production machinery			5 - 10 years
			Furniture, fittings, storage and equipment			3 - 10 years
			Computer software			4 - 7 years

We review the carrying value for any individual asset for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying value exceeds the estimated recoverable amount, the asset is written-down to its estimated recoverable amount. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset or asset group, an impairment loss is recognized for the difference between estimated fair value and carrying value. Impairment losses on long-lived assets held for sale are determined in a similar manner, except that fair values are reduced for the cost to dispose of the assets. The measurement of impairment requires us to estimate future cash flows and the fair value of long-lived assets. During 2020 we did not record any impairment (2019: $4.6 million) in relation to restructuring activities. There was also a $5.2 million impairment charge in 2019, recorded within impairment charges, relating to plant and equipment held in our Superform business, following the downturn in the European luxury automotive market. This amount has been reclassified into discontinued operations. In 2018, the $3.4 million charge arose from the fair value adjustment in relation to the sale of the Czech business, recorded in impairment charges.

The Company will recognize impairments in relation to property, plant and equipment, investments and goodwill, other identifiable intangible assets and other long-lived assets in accordance with the above policies. Impairments relating to restructuring activities, incurred to exit an activity or location, will be recorded within the restructuring line on the Statement of Income. Other impairments will be recorded within impairment charges line on the Statement of Income.

Impairment in 2019 relates to: a $5.2 million charge relating to plant and equipment held in our Superform business (now included in discontinued operations); partially offset by a true-up upon the final sale of the Czech business, $0.2 million credit, (2018: $3.4 million charge). In 2018 there was also a $2.4 million write-off in relation to the acquisition of Luxfer Holdings NA LLC and $1.3 million of goodwill impairment within the Superform business unit (now included in discontinued operations).

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The majority of the Company’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. There is no variable consideration or obligations for returns, refunds, and no other related obligations in the Company’s contracts.

We recognize revenue when it is realized or realizable and has been earned. Revenue is recognized when persuasive evidence of an arrangement exists, shipment or delivery has occurred (depending on the terms of the sale), which is when the transfer of product or control occurs, our price to the buyer is fixed or determinable, and the ability to collect is reasonably assured.

Revenue from certain long-term tooling contracts is recognized over the contractual period under the cost-to-cost measure of progress as this is when the benefit is received by the customer. Incremental direct costs associated with the contract include, direct labor hours, direct raw material costs and other associated costs. Under this method, sales and gross profit are recognized as work is performed either based on the relationship between the actual costs incurred and the total estimated costs at completion (“the cost-to-cost method”) or based on efforts for measuring progress towards completion in situations in which this approach is more representative of the progress on the contract than the cost-to-cost method. We record costs and earnings in excess of billings on uncompleted contracts within Other current assets and billings in excess of costs and earnings on uncompleted contracts within Other current liabilities in the Consolidated Balance Sheets. Where customer acceptance is on final completion and handover of the tool, revenue is recognized at the point the customer accepts ownership of the tool. All tooling revenue relates to discontinued operations resulting in all related activity included in discontinued operations and associated balances included in assets and liabilities held-for-sale.

Restricted cash is recognized separately in the Consolidated Balance Sheets. Restricted cash balances were less than $0.1 million at December 31, 2020 and $0.1 million at December 31, 2019. The amounts were held in escrow to disburse environmental liabilities recognized as a result of the acquisition of the Specialty Metals division of ESM Inc in 2017.

Inventories are stated at the lower of cost or net realizable value. Raw materials are valued on a first-in, first-out basis. Strategic purchases of inventories in order to secure supply and reduce the impact of price volatility on the cost of inventories are valued on a weighted-average cost basis. Work in progress and finished goods costs comprise direct materials and, where applicable, direct labor costs, an apportionment of production overheads and any other costs that have been incurred in bringing the inventories to their present location and condition. Inventories are reviewed on a regular basis, and we will make allowance for excess or obsolete inventories and write-down to net realizable value based primarily on committed sales prices and our estimates of expected and future product demand and related pricing.

Transactions in currencies other than an operation's functional currency are initially recorded in the functional currency at the rate of exchange prevailing on the dates of transactions. At each balance sheet date, the foreign currency monetary assets and liabilities of each operation are translated into the functional currency of that operation at the rates prevailing on the balance sheet date.

All differences are taken to the consolidated statement of income / (loss), with the exception of differences on foreign currency borrowings that provide a hedge against a net investment in a foreign entity. These differences on foreign currency borrowings are taken directly to equity until the disposal of the net investment, at which time they are recognized in the consolidated statement of income / (loss). Tax charges and credits attributable to exchange differences on those borrowings are also included in equity.

On consolidation, the assets and liabilities of the Company's foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences that arise, if any, are included in Accumulated other comprehensive income / (loss) (“AOCI”), a separate component of equity. Such translation differences are recognized in the consolidated statements of income / (loss) in the period in which the Company loses control of the operation or liquidation.

During 2020, the average USD/GBP sterling exchange rate was £0.7805 compared to the 2019 average of £0.7820. This change resulted in a positive impact of $0.3 million on revenue and a negative impact of $0.2 million on operating income. Based on the 2020 level of revenue and income, a weakening in GBP sterling leading to a £0.05 increase in the USD/GBP sterling exchange rate would result in a decrease of $8.5 million in revenue and $0.7 million in operating net income.

During 2020, the average USD/Euro exchange rate was €0.8888, compared to the 2019 average of €0.8943. This change resulted in a negative impact of $0.1 million on revenue and $0.3 million on operating profit. Based on the 2020 level of revenue and income, a weakening in the Euro leading to a €0.05 increase in the Euro to U.S. dollar exchange rate would result in a decrease of less than $0.1 million in revenue and $0.3 million decrease to operating profit.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When the Company does not believe that, on the basis of available information, it is more likely than not that deferred tax assets will be fully recovered, it recognizes a valuation allowance against its deferred tax assets to reduce the deferred tax assets to the amount more likely than not to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactments date.

Furthermore, a tax benefit from a tax position may be recognized in the financial statements only if it is more-likely-than-not that the position is sustainable, based solely on its technical merits and consideration of the relevant tax authority’s widely understood administrative practices and precedents. The tax benefit recognized, when the likelihood of realization is more likely-than-not (i.e. greater than 50 percent), is measured at the largest amount that is greater than 50 percent likely of being realized upon settlement.

The Company operates funded defined benefit pension plans in the U.K., the U.S. and France. The levels of funding are determined by periodic actuarial valuations that take into account changes in actuarial assumptions, including discount rates and expected returns on plan assets. The assets of the plans are generally held in separate trustee-administered funds. The Company also operates defined contribution plans in the U.K., the U.S., Australia and Canada.

Actuarial assumptions are updated annually and are disclosed in Note 14. 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 remaining components of pension expense, including service and interest costs and estimated return on plan assets, are recorded on a quarterly basis.

We account for share-based compensation awards on a fair value basis. The estimated grant date fair value of each option award is recognized in income on an accelerated basis over the requisite service period (generally the vesting period). The estimated fair value of each option award is calculated using either the Black-Scholes option-pricing model, or using a Monte-Carlo simulation, both of which are subjective and involves the application of significant estimates and assumptions, including the expected term of the award, implied volatility, expected dividend yield and the risk-free interest rate. Restricted share awards and units are recorded as compensation cost on an accelerated basis over the requisite service periods based on the market value on the date of the grant.

Performance share units ("PSU") are stock awards where the ultimate number of shares issued will be contingent on the Company's performance against certain financial performance targets. The fair value of each PSU is based on the market value on the date of grant. We recognize expense based upon the fair value of the awards on the grant date and the estimated vesting of the PSUs granted. The estimated vesting of the performance share units is based on the probability of achieving certain financial performance thresholds over the specified performance period.

The Company is exposed to credit losses primarily through sales of products. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimate of accounts receivable amounts that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined that the estimate of credit losses was not significantly impacted.

We are exposed to credit risk in the event of nonpayment by customers. However we mitigate our exposure to credit risk by performing ongoing credit evaluations and, when deemed necessary, utilizing credit insurance, prepayments or guarantees. No individual customer represented more than 10% of our revenue or accounts receivable. The concentration of credit risks from financial instruments related to the markets we serve is not expected to have a material adverse effect on our consolidated financial position, cash flows or future results of operations.

We recognize all derivatives as either assets or liabilities (within accounts and other receivables or accounts payable) at fair value in our Consolidated Balance Sheets. If the derivative is designated and is effective as a cash-flow hedge, changes in the fair value of the derivative are recorded in AOCI as a separate component of equity in the Consolidated Statements of Changes in Equity and are recognized in cost of goods sold in the Consolidated Statements of Income when the hedged item affects earnings. If the underlying hedged transaction ceases to exist or if the hedge becomes ineffective, all changes in fair value of the related derivatives that have not been settled are recognized in current earnings in cost of goods sold. For a derivative that is not designated as or does not qualify as a hedge, changes in fair value are reported in income immediately, again in cost of goods sold. We use derivative instruments for the purpose of hedging commodity price risk and currency exposures, which exist as part of ongoing business operations.

On January 1, 2020, the Company adopted ASU 2016-13, financial instruments - Credit Losses (Topic 326): Measurement of credit losses on Financial Instruments prospectively. The ASU replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables.

•When using historical loss rates in a provision matrix, the Company is required to consider whether and, if so, how the historical loss rates differ from what is currently expected over the life of the trade receivables (on the basis of current conditions and reasonable and supportable forecasts about the future).

On January 1, 2020, the Company adopted ASU 2017-04 which simplifies the goodwill impairment test. The update removes the requirement to determine the fair value of individual assets and liabilities in order to calculate a reporting unit’s “implied” goodwill under current GAAP. Specifically, the amendments in ASU 2017-04 eliminate Step 2 of the goodwill impairment test. As such, the Company will perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. A goodwill impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value. If fair value exceeds the carrying amount, no impairment should be recorded. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Impairment losses on goodwill cannot be reversed once recognized.