| Summary of Significant Accounting Policies | Summary of Significant Accounting Policies Business description Luxfer Holdings PLC is a global materials technology company specializing in the innovation and manufacture of high-performance materials, components and devices for transportation, defense and emergency response, healthcare and general industrial applications. It comprises two reportable segments being Gas Cylinders and Elektron. Principles of consolidation The consolidated financial statements comprise the financial statements of Luxfer Holdings PLC and its subsidiaries (collectively "we," "our," "Luxfer" ) 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. Fiscal year Our fiscal year ends on December 31. Beginning in the first quarter of 2018, we began reporting our interim quarterly periods on a 13-week basis ending on a Sunday. Prior to the first quarter of 2018 we reported our interim quarterly periods on a calendar quarter basis. Use of estimates 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. These estimates include our accounting for valuation of goodwill, estimated losses on accounts receivable, estimated realizable value on excess and obsolete inventory, cost-to-cost revenue recognition, 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. Goodwill and other long-lived assets 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 initially measured at cost, being the excess of the aggregate of the acquisition-date fair value of the consideration transferred and the amount recognized for the non-controlling interest over the net identifiable amounts of the assets acquired and the liabilities assumed in exchange for the business combination. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested annually for impairment and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is performed using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. If the estimated fair value is less than the carrying amount of the reporting unit there is an indication that goodwill impairment exists and a second step must be completed in order to determine the amount of the goodwill impairment, if any, that should be recorded. In the second step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to the Company's reporting units that are expected to benefit from the combination. 1. Summary of Significant Accounting Policies (continued) Goodwill and other long-lived assets (continued) 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 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 2.2% . 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 6.4% to 9.1% in determining the discounted cash flows in our fair value analysis. The fair value of the reporting units substantially exceeded the carrying value for all reporting units that have goodwill allocated, except Superform, where an impairment to goodwill has been recognized for the full amount, $1.3 million . A bargain purchase is measured at cost being the excess of the net identifiable amounts of the assets acquired and the liabilities assumed in exchange for the business combination over the aggregate of the acquisition-date fair value of the consideration transferred and the amount recognized for the non-controlling interest, if any. If after reassessing the fair values the conclusion remains that there has been a bargain purchase gain, then any amount of a bargain purchase is recognized immediately as income. Contingent consideration arising as a result of a business combination is recognized at fair value at the acquisition date. Subsequent changes in the fair value of contingent consideration classified as an asset or liability are recorded as either a gain or a loss within acquisition related costs / credits in the consolidated statements of income. Other intangible assets are measured initially at cost, or where acquired in a business combination at fair value, and are amortized on a straight-line basis over their estimated useful lives as shown in the table below. Customer relationships 10 – 15 years Technology and trading related 5 – 25 years The carrying values are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Reviews are made annually of the estimated remaining lives and residual values of the patents and trademarks. Variable interest entities We have interests in certain joint venture entities that are 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 our VIEs requires the application of significant assumptions and judgment. 1. Summary of Significant Accounting Policies (continued) Investments in affiliates The company owns interests in the following affiliates: Name of company Country of incorporation Holding Proportion of voting rights and shares held Classification Consolidation method Luxfer Uttam India Private Limited India Ordinary shares 51% Joint venture (VIE) Equity method Nikkei-MEL Co. Limited Japan Ordinary shares 50% Joint venture Equity method Sub161 Pty Limited Australia Ordinary shares 26.4% Associate (VIE) Equity method We acquired the remaining 51% of the equity of Luxfer Holdings NA, LLC on December 28, 2018, which was previously classified as a 49% owned VIE joint venture. The 100% owned entity is no longer classified as a VIE and is consequently fully consolidated in the closing balance sheet at December 31, 2018. We are not the primary beneficiary for any of the above noted VIEs, and therefore do not consolidate these and use the equity method to account for their results. Property, plant and equipment, net Property, plant and equipment is stated at historic cost less accumulated depreciation and any impairment in value. Depreciation is initially calculated on a straight-line basis over the estimated useful life of the particular asset. The depreciation expense during 2018 , 2017 and 2016 was $17.8 million , $17.0 million and $17.0 million , respectively. As a result of the complexity of our manufacturing process, there is a wide range of plant and equipment in operation. 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 Freehold land is not depreciated. Reviews are made annually of the estimated remaining lives and residual values of individual productive assets, taking account of commercial and technological obsolescence as well as normal wear and tear. 1. Summary of Significant Accounting Policies (continued) Property, plant and equipment, net (continued) 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 2018 we recorded an impairment of $6.6 million (2017: $1.3 million ) in relation to restructuring activities and $3.4 million (2017: $ nil ) from the fair value adjustment in relation to the sale of the Czech business, recorded in impairment charges. In 2017 we recorded an impairment of $1.5 million as part of an annual exercise to review the use of our long-lived assets. There was no impairment in relation to 2016. Impairments The Company will recognize impairments in relation to property, plant and equipment, investments and goodwill 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. The impairment charges line item predominantly relates to: a fair value adjustment in relation to the sale of the Czech business, $3.4 million ; $ 2.4 m write-off in relation to the acquisition of GTM and $1.3 million of goodwill impairment within the Superform business unit. Revenue Recognition The Company has adopted ASU 2014-09, "Revenue from Contracts with Customers" (Topic 606), and all subsequent amendments using the full retrospective method for all periods presented. The impact to our fiscal quarters and year-ended 2018 , 2017 and 2016 , net income and basic and diluted earnings per share (EPS) was not material. In addition, there was no cumulative impact to our retained earnings at January 1, 2016 . 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. Payment terms and conditions vary by contract type and may include a requirement of payment in advance. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts do not include a significant financing component. The Company’s revenue is primarily derived from the following sources and are recognized when or as the Company satisfies a performance obligation by transferring a good or service to a customer. Product revenues 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. 1. Summary of Significant Accounting Policies (continued) Revenue Recognition (continued) Royalties Royalty revenue is recognized on an accrual basis in accordance with the substance of the relevant agreements, provided that it is probable that the economic benefits will flow to the Company and the amount of revenue can be measured reliably. Tooling revenue 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. Practical Expedients The Company has applied the transition practical expedient and does not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the Company expects to recognize that amount as revenue for the fiscal year beginning January 1, 2016. In addition, the Company applies the practical expedient and does not disclose information about remaining performance obligations for contracts that have original expected durations of one year or less. Cash and Cash Equivalents We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash is recognized separately in the Consolidated Balance Sheets. Restricted cash balances were $0.3 million at December 31, 2018 and $0.7 million at December 31, 2017 . The $0.3 million in 2018 (2017: $0.4 million ) is held in escrow to disburse environmental liabilities recognized as a result of the acquisition of the Specialty Metals division of ESM Inc in 2017. A further $0.3 million was held in relation to deferred consideration for the same acquisition in 2017. Inventories 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. Research and Development Included within research and development costs are directly attributable salaries, materials and consumables, as well as third-party contractor fees and research costs. These costs are expensed as incurred. 1. Summary of Significant Accounting Policies (continued) Foreign currencies 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 2018 , the average USD/GBP sterling exchange rate was £0.7509 compared to the 2017 average of £0.7682 . This change resulted in a positive impact of $2.5 million on revenue and $0.2 million on operating income. Based on the 2018 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 $6.4 million in revenue and $0.5 million in operating net income. During 2018 , the average USD/Euro exchange rate was €0.8472 , compared to the 2017 average of €0.8788 . This change resulted in a positive impact of $0.8 million on revenue and $0.1 million on operating profit. Based on the 2018 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 $1.1 million in revenue and no change to operating profit. Income taxes 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. Employee benefit plans 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. 1. Summary of Significant Accounting Policies (continued) Employee benefit plans (continued) Actuarial assumptions are updated annually and are disclosed in Note 12. 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. Payments to defined contribution plans are charged as an expense as they fall due. Commitments and contingencies Loss contingencies are recognized when the Company has a present obligation as a result of a past event, it is probable that a transfer of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Share-based compensation 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 the Black-Scholes option-pricing model, which is 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. Trade receivables and concentration of credit risk We record an allowance for doubtful accounts, reducing our receivables balance to an amount we estimate is collectible from our customers. Estimates used in determining the allowance for doubtful accounts are based on current trends, aging of accounts receivable, periodic credit evaluations of our customers’ financial condition, and historical collection experience. 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. 1. Summary of Significant Accounting Policies (continued) Derivative financial instruments We recognize all derivatives as either assets or liabilities (within accounts and other receivables, accounts payable, other non-current assets and other non-current liabilities) 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 / (loss) 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. New accounting standards The Company adopted ASU 2017-07 (Topic 715), "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost," on January 1, 2017. The standard was amended to include guidance on the presentation of net periodic pension and post-retirement benefit cost (net benefit cost) and (ii) requires the service cost component to be presented with other employee compensation costs in net income / (loss) or when eligible capitalized in assets. As no service costs were capitalized as part of the net benefit cost, we adopted the new standard on a retrospective basis. The Company adopted ASU 2014-09 "Revenue from Contracts with Customers" ASC Topic 606, and all subsequent amendments on January 1, 2016. The standard outlines a five-step model whereby revenue is recognized as performance obligations within a contract are satisfied. The standard also requires new, expanded disclosures regarding revenue recognition. We adopted the new standard using the full retrospective transition method for all periods presented. Accounting standards which have been early adopted Under U.S. GAAP, shares withheld by the company to pay the employees statutory minimum tax can still be classified as equity awards if all other criteria for such classification are met. Upon adoption of ASU 2016-09, an award containing a net settled tax withholding clause could be equity-classified so long as the arrangement limits tax withholding to the maximum individual statutory tax rate in a given jurisdiction. If tax withholding is permitted at some higher rate, then the whole award would be classified as a liability. Accounting standards issued but not yet effective In June 2016, the Financial Accounting Standards Board ("FASB") issued new accounting requirements regarding the measurement of credit losses on financial instruments, along with additional qualitative and quantitative disclosures. The new standard is effective for fiscal years beginning after December 15, 2019. The Company anticipates that the timing of the recognition of impairments to accounts, notes and other receivables will change rather than the size of the balance. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ASU 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additionally, ASU 2016-02 modifies current guidance for lessors' accounting. ASU 2016-02 is effective for interim and annual reporting periods beginning on or after January 1, 2019, with early adoption permitted. Upon adoption, the Company recognized lease liabilities and the corresponding right-of-use assets (at the present value of future payments) for predominantly all of its future minimum commitments under operating leases in place at that time. At January 1, 2019, adoption of ASU 2016-02 resulted in an increase of $15.6 million on its assets and liabilities in its statement of financial position. ASU 2016-02 did not have a material impact on its results of operations or cash flows. In addition to the guidance in ASU 2016-02, the Company has evaluated ASU 2018-11, which was issued in July 2018, and provides an optional transitional method. As a result of this evaluation, the Company elected to use the optional transitional method, which allows companies to use the effective date as the date of initial application on transition and not adjust comparative period financial information or make the new required disclosures for periods prior to the effective date. Additionally, the Company elected to use the package of practical expedients permitted under the transition guidance within the new standard. |
