Item 1. Business
Background and business overview
Luxfer Holdings ("Luxfer," "the Company," "we") is a global producer of highly-engineered industrial materials focused on sustained value creation using its broad array of technical knowhow and proprietary materials technologies. The company specializes in the design and manufacture of high-performance products for transportation, defense and emergency response, healthcare, and general industrial purposes. Luxfer customers include both end-users of its products and manufacturers that incorporate Luxfer products into finished goods.
We focus primarily on innovations related to magnesium alloys, zirconium chemicals, aluminum alloys and carbon composites. For example, we were the first to develop and patent a rare-earth-containing magnesium alloy (EZ33A) for use in high-temperature aerospace applications, including helicopter gearboxes; we were at the forefront of the commercial development of zirconia-rich mixed oxides for use in automotive catalysis; we were the first to manufacture a high-pressure gas cylinder out of a single piece of aluminum using cold-impact extrusion; and we developed and patented the superforming process and the first superplastic aluminum alloy (AA2004). We have a long history of innovation derived from our strong technical expertise, and we work closely with customers to apply innovative solutions to their most demanding product needs. Our proprietary technologies and technical expertise, coupled with strong customer service and global presence, provide competitive advantages and have established us as leaders in the global markets we serve. We believe that we have leading positions in key product areas, including magnesium aerospace alloys, photo-engraving plates, zirconium chemicals for automotive catalytic converters and high-pressure aluminum and composite cylinders for breathing applications and a wide variety of other uses.
We have a global presence, operating 19 manufacturing plants in the U.S., the U.K., Canada, France, the Czech Republic and China, and employ approximately 1,600 people, including temporary staff. We also have joint ventures in Japan and India. In 2018, our net sales were $487.9 million (2017: $441.3 million, 2016: $414.8 million) and our net income was $25.0 million, (2017: $16.6 million, 2016: $17.8 million). In 2018, we manufactured and sold approximately 14,600 metric tons of our magnesium products, approximately 2,600 metric tons of our zirconium products (excluding water weight as sold as a solution) and approximately 1.8 million high-pressure gas cylinders.
The original Luxfer Group was formed in 1996 in connection with the management buy-in (the "Management Buy-in") of certain downstream assets of British Alcan. The Management Buy-in was financed by a syndicate of private equity investors. Largely through a leveraged reorganization in 1999, and finally a capital reorganization in 2007, these investors fully exited their original investments in the business.
In October 2012, Luxfer Holdings PLC successfully listed its shares (in the form of American Depositary Shares ("ADSs") evidenced by American Depositary Receipts or "ADRs") on the New York Stock Exchange. On December 11, 2017, we terminated the ADR facility and arranged for the exchange of outstanding ADSs for the underlying ordinary shares. The exchange allows Luxfer shareholders to directly own and publicly trade ordinary shares on the New York Stock Exchange under the symbol "LXFR."
On June 30, 2018, Luxfer Holdings PLC determined that the Company did not meet the criteria to continue as a Foreign Private Issuer, or "FPI." The result of which means, that as of January 1, 2019, the Company is now a Domestic Issuer, and will need to conform with the full listing rules of the New York Stock Exchange and be in full compliance with applicable SEC regulations.
On December 18, 2018, Luxfer Holdings PLC announced the signing of an agreement under which Luxfer would acquire Neo Performance Materials ("Neo,") for US$612 million* in cash and stock. We subsequently announced on March 10, 2019 that we had executed a termination agreement, under which we will make a payment to Neo of up to $3.5 million.
* Transaction value based on share price at close of business on December 14, 2018.
Luxfer operates in two business segments - Elektron and Gas Cylinders.
Elektron Segment
Our Elektron Segment focuses on specialty materials based primarily on magnesium and zirconium. In 2018, revenues from our Elektron Segment represented approximately 51% (2017: 50%, 2016: 46%) of our consolidated net sales. Our top ten customers represented 36% of segment sales. No customer represented 10% or more of our Elektron Segment sales.
Key product lines include:
Gas Cylinders Segment
Our Gas Cylinders Segment manufactures and markets specialized products using aluminum, titanium and carbon composites. In 2018, sales from our Gas Cylinders Segment represented approximately 49% (2017: 50%, 2016: 54%) of our consolidated sales. Our top ten customers represented 44% of segment sales. No customer represented 10% or more of our Gas Cylinders Segment sales.
Financial Information about Segments and Geographic Areas
See Note 15 ("Segmental Information") to our consolidated financial statements for further information regarding our operating segments and our geographic areas.
Suppliers and raw materials
Key raw materials used by our Elektron Segment are magnesium, zircon sand and rare earths.
The world demand for magnesium is around one million metric tons per year. China provides about 70% of the world supply. Western primary production is, however, significant, from North American suppliers, Dead Sea Magnesium in Israel, RIMA Industrial in Brazil and two smelters in Russia. We purchase approximately half of our magnesium needs from China. We use only U.S.-sourced materials for our products sold to the U.S. military, for which U.S. and Canadian sourcing is mandatory.
We generally purchase raw materials from suppliers on a spot basis under standard terms and conditions. In 2017, we entered into a three-year supply contract with Rio Tinto Alcan for a substantial portion of our aluminum requirements. In addition, we have supply contracts in place with U.S. Magnesium for raw material purchases of magnesium ingot for both military and commercial applications. The military contract covers magnesium purchases through December 31, 2020, whereas the commercial contract covers through December 31, 2019.
We purchase and process zircon sand, which is found in heavy-minerals sand, titanium dioxide and other products. Global production of zircon is estimated at approximately 1.6 million metric tons. We source premium-grade zircon sand from suppliers in South Africa and Australia. We also purchase intermediate zirconium chemicals from suppliers in China; the level of these purchases is based on a number of factors, including required properties and relative market prices.
There are 17 rare earth metals that are reasonably common in nature. Usually found mixed together with other mineral deposits, these rare earths have magnetic and light-emitting properties that make them invaluable to high-technology manufacturers. As they are ingredients in our zirconium chemical and magnesium alloy products, our use of rare earths has expanded over the last few years. Our main requirement is for cerium, which we use in automotive catalysis compounds because of its unique oxygen-storage capabilities.
The largest single raw material purchased by the Gas Cylinders Segment is aluminum. In 2018, we purchased approximately 70% of our aluminum from Rio Tinto Alcan and its associated companies, and aluminum represented approximately 50% of the segment's raw material costs in the year.
The price of aluminum has been somewhat volatile and while we pass on most price movements to our customers, sometimes through contractual cost-sharing formulas, doing so can be more difficult or time consuming with our higher-value products. Consequently, we have historically hedged a portion of our exposure to fluctuations in aluminum pricing.
As a means of hedging against aluminum price increases, we use LME derivative contracts. During 2018, such contracts covered approximately 30% of our estimated primary aluminum needs for the year.
Another key material is high-strength carbon fiber used in our composite products. Our main suppliers are Toray and Mitsubishi. In recent years, carbon fiber shortages have occurred from increased demand for commercial aerospace and military applications. Over time, we have built relationships with our suppliers, providing them predictable requirements and fixed-price annual contracts to encourage successful procurement of our required quota of carbon fiber.
Our end-markets
Key end-markets for Luxfer products fall into four categories:
Transportation (31% of 2018 sales): Many Luxfer products serve a growing need to improve and safeguard the environment in the field of transportation, including our zirconium-based products that reduce automotive emissions; our lightweight magnesium alloys used in fuel-efficient aerospace and automotive designs; and our lightweight, high-pressure carbon composite alternative fuel cylinders that contain clean-burning compressed natural gas and hydrogen. We also superform single sheets of aluminum, magnesium or titanium to create complex, three-dimensional components used in automotive, aerospace and rail components.