The in-depth customer training and education provided by our sales associates to our customers is critical to ensuring proper use of many of our products, such as SCBA and gas detection instruments. As a result of our sales associates working closely with end-users, they gain valuable insight into customer preferences and needs. To better serve our customers and to ensure that our sales associates are among the most knowledgeable and professional in the industry, we place significant emphasis on training our sales associates in product application, industry standards and regulations.
We believe our sales and distribution strategy allows us to deliver a customer value proposition that differentiates our products and services from those of our competitors, resulting in increased customer loyalty and demand.
In areas where we use indirect selling, we promote, distribute and service our products to general industry through authorized national, regional and local distributors. Some of our key distributors include W.W. Grainger Inc., Airgas, Casco Industries, Witmer Public Safety Group, Vallen Distribution, Ten-8 Fire Equipment, Essendant and Fastenal. We distribute fire service products primarily through specially trained local and regional distributors who provide advanced training and service capabilities to volunteer and paid municipal fire departments. Because of our broad and diverse product line and our desire to reach as many markets and market segments as possible, we have over 3,1002,200 authorized distributor locations worldwide.
The safety products market is highly competitive, with participants ranging in size from small companies focusing on a single type of PPE to several large multinational corporations that manufacture and supply many types of sophisticated safety products. Our main competitors vary by region and product. We believe that participants in this industry compete primarily on the basis of product characteristics (such as functional performance, technology, cost of ownership, comfort, design and style), brand name recognition and after-market service support.
We believe we compete favorably within each of our operating segments as a result of our high quality, innovative offerings and strong brand trust and recognition.
We believe another important aspect of our approach to new product development is that our engineers and technical associates work closely with the safety industry’s leading standards-setting groups and trade associations. These organizations include the National Institute for Occupational Safety and Health ("NIOSH"), the National Fire Protection Association ("NFPA"), American National Standards Institute ("ANSI"), International Safety Equipment Association ("ISEA") and their overseas counterparts. Key members of our management team understand the impact that these standard-setting organizations have on our new product development pipeline. As such, management devotes significant time and attention to anticipating a new standard’sstandard's impact on our sales and operating results. Because of our understanding of customer needs, membership on global standards-setting bodies, investment in research and development and our unique new product development process, we believe we are well positioned to anticipate and adapt to changing product standards. While the length of the approval process can be unpredictable, we believe that we are well positioned to gain the approvals and certifications necessary to meet new government and multinational product regulations.
Item 1A. Risk Factors
RISKS RELATED TO LEGAL AND REGULATORY CHALLENGES
Claims of injuries fromor potential safety issues or quality concerns could be made against our various subsidiaries.
Our products product defects or recalls ofand solutions are often used in high-risk and unpredictable environments and our products could have a material adverse effectmission, reputation and business success rely on our business, operating results, financial conditionability to design and liquidity.
MSAprovide safe, high quality and its subsidiaries face an inherent business risk of exposure to product liability claims arising from the alleged failure of ourreliable products to prevent the types of personal injury or death against which they are designed to protect.that earn and maintain customer trust. In the event the parties using our products are injured, or if any of our products proveare alleged to be defective,have contributed, we could be subject to claims with respect to such injuries.or suffer reputational harm. In addition, we may be required to or may voluntarily recall or redesign certain products or components due to concern about product safety, quality, ease of use or customer confidence. Any significant claims, recalls or field actions that could potentially be harmful to end users. Any claim or product recall that resultsresult in significant expense or negative publicity against us could have a material adverse effect on our business, operating results, financial condition and liquidity, including any successful claim brought against us in excess or outside of available insurance coverage.
Our subsidiary, Mine Safety Appliances Company, LLC,subsidiaries, may experience losses from cumulative trauma product liability claims. The inability to collect insurance receivables and the transition to becoming largely self-insured for cumulative trauma product liability claims, which could have a material adverse effect on our business, operating results, financial condition and liquidity.
Our subsidiary, Mine Safety Appliances Company, LLC (“MSA LLC”) was named as a defendant in 1,605 cumulative trauma lawsuits comprisedsubsidiaries face an inherent business risk of 2,456 claims at December 31, 2019. Cumulative traumaexposure to product liability or other legal claims involve exposuresor penalties related to harmful substances (e.g., silica, asbestosthe design, manufacture, marketing, or sale of any of our current or former products and coal dust) that occurred years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, mesotheliomasolutions. Our subsidiaries are named periodically in single incident lawsuits, or, coal worker’s pneumoconiosis. The products at issue were manufactured many years ago and are not currently offered by MSA LLC. A reserve has been established with respect to estimated amounts fortimes, in cumulative trauma product liability lawsuits which may be numerous, and the number of claims currentlynewly asserted but not yet resolvedin any given period is difficult to predict and incurred but not reported (“IBNR”) cumulative traumamay aggregate or escalate suddenly. Any type of product liability claims. Because our cumulative trauma product liability risk is subject to inherent uncertainties, including unfavorable trial rulings or developments, an increaseinjury claim may result in newly filed claims, or more aggressive settlement demands, and since MSA LLC is largely self-insured, there can be no certainty that MSA LLC may not ultimately incur losses in excess of presently recorded liabilities. These losses couldavailable insurance coverage and have a material adverse effect on our business, operating results, financial condition and liquidity.
We will adjust
On January 5, 2023, the reserve from timeCompany divested MSA LLC, a wholly owned subsidiary that holds legacy product liability claims relating to time based on whethercoal dust, asbestos, silica, and other exposures, to a joint venture between R&Q Insurance Holdings Ltd. and Obra Capital, Inc. (the "Purchaser") The transaction is subject to risks related to counterparty commercial risk as well as agreement enforcement and interpretation. Third parties also could seek to assert claims against us for which MSA LLC is the actual numbers, typeslegally responsible party, and settlement values ofwe may be required to incur fees and expenses to enforce that wrongly asserted claims asserted differ from current projections and estimates or there are significant changes in the facts underlying the assumptions used in establishing the reserve. Each of these factors may increase or decrease significantly within an individual period depending on, among other things, the timing of claims filings or settlements, or litigation outcomes during a particular period that are especially favorable or unfavorableproperly redirected to MSA LLC. We accordingly consider MSA LLC’s claims experience over multiple periods and/or whether there are changes in MSA LLC’s claims experience and trends that are likely to continue for a significant time into the future in determining whether to make an adjustment to the reserve, rather than evaluating such factors solely in the short term. Any future adjustments to the reserve may be material and could materially impact future periods in which the reserve is adjusted.
In the normal course of business,The divested subsidiary MSA LLC makes paymentsand the Purchaser have indemnified us with respect to settle these types ofMSA LLC’s cumulative trauma product liability claimslosses and for related defense costs, and records receivables for the amounts believed to be recoverable under insurance.other defined exposures. The ability of MSA LLC has recorded insurance receivables totaling $63.8 million and notes receivablesthe Purchaser to honor their indemnity obligations is subject to commercial risk and, in addition, in the event of $56.0 million at December 31, 2019. Since MSA LLC is now largely self-insured for cumulative trauma claims, additional amounts recorded as insurance receivables will be limited and based on calculatinga dispute, the amounts to be reimbursed pursuant totransaction, negotiated Coverage-in-Place Agreements. Various factors could affect the timing and amount of recovery of the insurance receivables, including assumptions regarding claims composition (which are relevant to calculating reimbursement under the terms of certain Coverage-In-Place Agreements)indemnities, and the extent of other legally-available protections may be subject to future judicial interpretation. MSA and its remaining subsidiaries continue to be responsible for claims relating to any current or former products and solutions that were not transferred as part of the divestiture.
Our ability to market and sell our products is subject to existing government laws, regulations and standards. Changes in such laws, regulations and standards or our failure to comply with them could materially and adversely affect our results of operations.
Most of our products are required to meet performance and test standards designed to protect the safety of people and infrastructures around the world. Our inability to comply with these standards could result in declines in revenue, profitability and cash flow. Changes in laws and regulations could reduce the demand for our products or require us to re-engineer our products, thereby creating opportunities for our competitors. Regulatory approvals for our products may be delayed or denied for a variety of reasons that are outside of our control. Additionally, market anticipation of significant new standards can cause customers to accelerate or delay buying decisions.
We are subject to various federal, state and local laws and regulations across our global organization and any violation of these laws and regulations could adversely affect our results of operations.
We are subject to numerous, and sometimes conflicting, laws and regulations on matters as diverse as anti-corruption, import/export controls, product content requirements, trade restrictions, tariffs, taxation, sanctions, internal and disclosure control obligations, securities regulation, anti-competition, data privacy, Brexit changes and labor relations, among others. This includes laws and regulations in emerging markets where legal systems may be less developed or familiar to us. Compliance with diverse legal requirements is costly, time consuming and requires significant resources. Violations of one or more of these laws or regulations in the conduct of our business could result in significant fines, criminal sanctions against us or our officers, prohibitions on doing business and damage to our reputation. These actions could result in liability for significant monetary damages, fines and/or criminal prosecution, unfavorable publicity and other reputational damage and have a material adverse effect on our business, consolidated results of operations and financial condition.
We are subject to various environmental laws and any violation of these laws could adversely affect our results of operations.
Included in the extensive laws, regulations and ordinances to which we are subject, are those relating to the issuing insurersprotection of the environment. Examples include those governing discharges to water, discharges to air (including greenhouse gas emissions), handling and disposal practices for solid and hazardous wastes and the maintenance of a safe workplace. These laws impose penalties for noncompliance and liability for response costs and certain damages resulting from past and current spills, disposals, other releases of hazardous materials and other noncompliance with such laws. These environmental laws may become insolventcontinue to change in the future due to a variety of factors, such as government focus on climate change. We could incur substantial costs as a result of noncompliance with or liability for cleanup pursuant to these environmental laws. Such laws continue to change, and we may be subject to more stringent environmental laws in the future. If more stringent environmental laws are enacted, these future laws could have a material adverse effect on our business, consolidated results of operations and financial condition.
We are subject to risks related to our environmental, social and governance activities and disclosures.
Environmental social and governance, often referred to as ESG, reporting and disclosure requirements continue to evolve, with increasing investor expectations and additional regulatory requirements anticipated. Failure to accurately and timely meet these expectations and requirements may result in reputational damage, regulatory penalties and litigation among other consequences.
We are subject to various U.S and foreign tax laws and any changes in these laws related to the taxation of businesses and resolutions of tax disputes could adversely affect our results of operations.
The U.S. Congress, the Organization for Economic Co-operation and Development (or, OECD) and other government agencies in jurisdictions in which we and our affiliates invest or do business have maintained a focus on issues related to the taxation of multinational companies. The OECD has changed numerous long-standing tax principles through its base erosion and profit shifting project which could adversely impact our effective tax rate.
We are subject to regular review and audit by both foreign and domestic tax authorities. While we believe our tax positions will be sustained, the final outcome of tax audits and related litigation may differ materially from the tax amounts recorded in our consolidated financial statements, which could have a material adverse effect on our consolidated results of operations, financial condition and cash flows.
RISKS RELATED TO SUPPLY AND MANUFACTURING
Our future results are subject to the risk that purchased components and materials are unavailable or available at excessive cost due to material shortages, excessive demand, currency fluctuation, inflationary pressure and other factors.
We depend on various components, materials and services from supply chain partners to manufacture our products. It is possible that any of our supplier relationships could be terminated or otherwise disrupted, or that our suppliers may be unable to timely deliver to us. Any sustained interruption in our receipt of adequate supplies or services could have a material adverse effect on our business, results of operations and financial condition. Our inability to successfully manage price fluctuations due to market demand, currency risks or material shortages, or future price fluctuations (whether due to inflationary pressures or otherwise) could have a material adverse effect on our business and our consolidated results of operations and financial condition.
Our plans to continue to improve productivity and reduce complexity may not be successful, which could adversely affect our ability to compete.
MSA has integrated parts of its European operating segment that have historically been individually managed entities, into a centrally managed organization model. We plan to continue to leverage the benefits of scale created from this approach and are in the process of implementing a more efficient and cost-effective enterprise resource planning system in additional locations across the International Segment. MSA runs the risk that these and similar initiatives may not be completed substantially as planned, may be more costly to implement than expected, or may not result in the efficiencies or cost savings anticipated. In addition, if not properly managed, these initiatives could cause disruptions in our day-to-day operations and have a negative impact on MSA's financial results. It is also possible that other major productivity and streamlining programs may be required in the future.
Unfavorable economic and market conditions could materially and adversely affect our business, results of operations and financial condition.
We are subject to risks arising from adverse changes in global economic conditions. We have significant operations in a number of countries outside the U.S., including some in emerging markets. Long-term economic uncertainty in some of the regions of the world in which we operate, such as Asia, Latin America, the Middle East and Europe, could result in declines in revenue, profitability and cash flow due to reduced orders, payment delays, supply chain disruptions or other factors caused by the economic challenges faced by our customers and suppliers.
A portion of MSA's sales are made to customers in the oil, gas and petrochemical market. We estimate that between approximately 25% - 30% of our global business is sold into the energy market vertical with the most significant exposure in industrial head protection, portable gas detection and FGFD. Approximately 10% - 15% of consolidated revenue, primarily in industrial head protection and portable gas detection, is more exposed to a pullback in employment trends across the energy market. Another 5% - 10% of consolidated revenue, primarily in FGFD is more exposed to a pullback in capital equipment spending within the energy market. It is possible that the volatility in the oil, gas and petrochemical industry, whether related to economic, climate-related energy policy, or other conditions, could negatively impact our business and could result in declines in our consolidated results of operations and cash flow.
Pandemics or disease outbreaks, such as COVID-19, may cause unfavorable economic or market conditions which could impact demand patterns and/or disrupt global supply chains and manufacturing operations. Collectively, these outcomes could materially and adversely affect our business, results of operations and financial condition.
Pandemics or disease outbreaks such as COVID-19 could result in a widespread health crisis that could adversely affect the economies of developed and emerging markets, potentially resulting in an economic downturn that could affect customers’ demand for our products in certain industrial-based end-markets. The spread of pandemics or disease outbreaks may also disrupt the Company’s manufacturing operations, supply chain, or logistics necessary to import, export and deliver products to our customers. During a pandemic or crisis, applicable laws and response directives such as vaccine mandates or occupational safety and health requirements, could, in some circumstances, result in skilled labor impacts including voluntary attrition or difficulty finding labor, or otherwise adversely affect our ability to operate our plants, obtain inputs from suppliers, or to deliver our products in a timely manner. Some laws and directives may also hinder our ability to move certain products across borders. Economic conditions can also influence order patterns. These factors could negatively impact our consolidated results of operations and cash flow.
A reduction in the spending patterns of government agencies or delays in obtaining government approval for our products could materially and adversely affect our net sales, earnings and cash flow.
The demand for our products sold to the fire service market, the homeland security market and other government agencies is, in large part, driven by available government funding. Government budgets are set annually, and we cannot assure that government funding will be sustained at the same levelsimilar levels in the future. A significant reduction in available government funding could result in declines in our consolidated results of operations and cash flow.
Our future results are subject to the risk that purchased components and materials are unavailable or available at excessive cost due to material shortages, excessive demand, currency fluctuation, inflationary pressure and other factors.
We depend on various components and materials to manufacture our products. Although we have not experienced any substantial difficulty in obtaining components and materials, it is possible that any of our supplier relationships could be terminated or otherwise disrupted. Any sustained interruption in our receipt of adequate supplies could have a material adverse effect on our business, results of operations and financial condition. Our inability to successfully manage price fluctuations due to market demand, currency risks or material shortages, or future price fluctuations could have a material adverse effect on our business and our consolidated results of operations and financial condition.
Our plans to continue to improve productivity and reduce complexity may not be successful, which could adversely affect our ability to compete.
MSA has integrated parts of its European operating segment that have historically been individually managed entities, into a centrally managed organization model. We have begun to and plan to continue to leverage the benefits of scale created from this approach and are in the process of implementing a more efficient and cost-effective enterprise resource planning system in additional locations across the International Segment. MSA runs the risk that these and similar initiatives may not be completed substantially as planned, may be more costly to implement than expected, or may not result in the efficiencies or cost savings anticipated. In addition, these various initiatives require MSA to implement a significant amount of organizational change which could divert management’s attention from other concerns, and if not properly managed, could cause disruptions in our day-to-day operations and have a negative impact on MSA's financial results. It is also possible that other major productivity and streamlining programs may be required in the future.
Our plans to improve future profitability through restructuring programs may not be successful and could lead to unintended consequences.
We have incurred and may incur restructuring charges primarily related to severance costs for staff reductions associated with our ongoing initiatives to drive profitable growth and right size our operations. For example in 2016, certain employees in the Americas segment were offered a voluntary retirement incentive package (“VRIP”). Non-cash special termination benefit expense of approximately $11.4 million was recorded in the first quarter of 2017 related to elections under the VRIP. Our cost structure in future periods is somewhat dependent upon our ability to maintain increased productivity without backfilling certain positions. If our programs are not successful, there could be a material adverse effect on our business and consolidated results of operations.
Our inability to successfully identify, consummate and integrate current and future acquisitions or to realize anticipated cost savings and other benefits could adversely affect our business.
One of our operating strategies is to selectively pursue acquisitions. On May 20, 2019, we completed the acquisition of Sierra Monitor Corporation ("SMC"), which is a leading provider of fixed gas and flame detection instruments and Industrial Internet of Things solutions that connect and help protect high-value infrastructure assets. Please refer to Note 13 of the consolidated financial statements in Part II Item 8 of this Form 10-K for further details. Any future acquisitions will depend on our ability to identify suitable acquisition candidates and successfully consummate such acquisitions. Acquisitions involve a number of risks including:
failure of the acquired businesses to achieve the results we expect;
diversion of our management’s attention from operational matters;
our inability to retain key personnel of the acquired businesses;
risks associated with unanticipated events or liabilities;
potential disruption of our existing business; and
customer dissatisfaction or performance problems at the acquired businesses.
If we are unable to integrate or successfully manage businesses that we have recently acquired, including SMC, or may acquire in the future, we may not realize anticipated cost savings, improved manufacturing efficiencies and increased revenue, which may result in material adverse short- and long-term effects on our consolidated operating results, financial condition and liquidity. Even if we are able to integrate the operations of our acquired businesses into our operations, we may not realize the full benefits of the cost savings, revenue enhancements or other benefits that we may have expected at the time of acquisition. In addition, even if we achieve the expected benefits, we may not be able to achieve them within the anticipated time frame, and such benefits may be offset by costs incurred in integrating the acquired companies and increases in other expenses.
A failure of our information systems or a cybersecurity breach could materially and adversely affect our business, results of operations and financial condition.
The proper functioning and security of our information systems is critical to the operation and reputation of our business. Our information systems may be vulnerable to damage or disruption from natural or man-made disasters, computer viruses, power losses or other system or network failures. In addition, hackers, cyber-criminals and other persons could attempt to gain unauthorized access to our information systems with the intent of harming the Company, harming our information systems or obtaining sensitive information such as intellectual property, trade secrets, financial and business development information, and customer and vendor related information. If our information systems or security fail, or if there is any compromise or breach of our security, it could result in a violation of applicable privacy and other laws, legal and financial exposure, remediation costs, negative impacts on our customers' willingness to transact business with us, or a loss of confidence in our security measures, which could have an adverse effect on our business, our reputation and our consolidated results of operations and financial condition.
Like many companies, from time to time, we have experienced attacks on our computer systems by unauthorized outside parties. Because the techniques used by computer hackers and others to access or sabotage networks continually evolve and generally are not recognized until launched against a target, we may be unable to anticipate, prevent or detect these attacks. As a result, the impact of any future incident cannot be predicted, including the failure of our information systems or misappropriation of our technologies and/or processes. Any such system failure or loss of such information could harm our competitive position, or cause us to incur significant costs to remedy the damages caused by the incident. We routinely implement improvements to our network security safeguards as well as cybersecurity initiatives. We also maintain a robust cyber response plan, including an assessment of triggers for internal and external reporting of cyber incidents. We expect to continue devoting substantial resources to the security of our information technology systems. We cannot assure that such system improvements will be sufficient to prevent or limit the damage from any future cyber-attack or disruption to our information systems.
If we lose any of our key personnel or are unable to attract, train and/or retain qualified personnel or plan the succession of senior management, our ability to manage our business and continue our growth could be negatively impacted.
Our success depends in large part on the continued contributions of our key management, engineering and sales and marketing personnel, many of whom are highly skilled and would be difficult to replace. Our success also depends on the abilities of new personnel to function effectively, both individually and as a group. If we are unable to attract, effectively integrate and retain management, engineering or sales and marketing personnel, then the execution of our growth strategy and our ability to react to changing market requirements may be impeded, and our business could suffer as a result.
In addition, hiring, training, and successfully integrating replacement critical personnel could be time consuming, may cause additional disruptions to our operations, and may be unsuccessful, which could negatively impact future revenues. Competition for personnel is intense, and we cannot assure that we will be successful in attracting and retaining qualified personnel. The hiring of new personnel may also result in increased costs and we do not currently maintain key person life insurance.
Our success also depends on effective succession planning. Failure to ensure effective transfer of knowledge and smooth transitions involving senior management could hinder our strategic planning and execution. From time to time, senior management or other key employees may leave the Company. While we strive to reduce the negative impact of such changes, the loss of any key employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of company initiatives, the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, and the results of our operations.
If we fail to introduce successful new products or extend our existing product lines, we could lose our market position and our financial performance could be materially and adversely affected.
In the safety products market, there are frequent introductions of new products and product line extensions. If we are unable to identify emerging consumer and technological trends, maintain and improve the competitiveness of our products and introduce new products, we may lose our market position, which could have a material adverse effect on our business, financial condition and results of operations. We continue to invest significant resources in research and development and market research. However, continued product development and marketing efforts are subject to the risks inherent in the development process. These risks include delays, the failure of new products and product line extensions to achieve anticipated levels of market acceptance and the risk of failed product introductions.
Damage to the reputation of MSA or to one or more of our product brands could adversely affect our business.
Developing and maintaining our reputation, as well as the reputation of our brands, is a critical factor in our relationship with customers, distributors and others. Our inability to address negative publicity or other issues, including concerns about product safety or quality, real or perceived, could negatively impact our business which could have a material adverse effect on our business, consolidated results of operations and financial condition.
Our ability to market and sell our products is subject to existing government regulations and standards. Changes in such regulations and standards or our failure to comply with them could materially and adversely affect our results of operations.
Most of our products are required to meet performance and test standards designed to protect the safety of people and infrastructures around the world. Our inability to comply with these standards could result in declines in revenue, profitability and cash flow. Changes in regulations could reduce the demand for our products or require us to re-engineer our products, thereby creating opportunities for our competitors. Regulatory approvals for our products may be delayed or denied for a variety of reasons that are outside of our control. Additionally, market anticipation of significant new standards can cause customers to accelerate or delay buying decisions.
The markets in which we compete are highly competitive, and some of our competitors have greater financial and other resources than we do. The competitive pressures faced by us could materially and adversely affect our business, results of operations and financial condition.
The safety products market is highly competitive, with participants ranging in size from small companies focusing on single types of safety products, to large multinational corporations that manufacture and supply many types of safety products. Our main competitors vary by region and product. We believe that participants in this industry compete primarily on the basis of product characteristics (such as functional performance, technology, cost of ownership, comfort, design and style), price, service and delivery, customer support, the ability to meet the special requirements of customers, brand name trust and recognition, and e-business capabilities. Some of our competitors have greater financial and other resources than we do and our business could be adversely affected by competitors’ new product innovations, technological advances made to competing products and pricing changes made by us in response to competition from existing or new competitors. We may not be able to compete successfully against current and future competitors, and the competitive pressures faced by us could have a material adverse effect our business, consolidated results of operations and financial condition. In addition, e-business is a rapidly developing area, and the execution of a successful e-business strategy involves significant time, investment and resources. If we are unable to successfully expand e-business capabilities in support of our customer needs, our brands may lose market share, which could negatively impact revenue and profitability.
We are subjectRISKS RELATED TO NEW AND ADJACENT INITIATIVES
Our plans to various federal, stateimprove future profitability through restructuring programs may not be successful and local laws and regulations across our global organization and any violation of these laws and regulations could adversely affect our results of operations.lead to unintended consequences.
We have incurred and may incur restructuring charges primarily related to severance costs for staff reductions associated with our ongoing initiatives to drive profitable growth and right size our operations as well as programs to adjust our operations in response to current business conditions. For example, in 2022, 151 positions were eliminated in response to the changing business environment. Our cost structure in future periods is somewhat dependent upon our ability to maintain increased productivity without backfilling certain positions. If our programs are subject to numerous, and sometimes conflicting, laws and regulations on matters as diverse as anti-corruption, import/export controls, product content requirements, trade restrictions, tariffs, taxation, sanctions, internal and disclosure control obligations, securities regulation, anti-competition, data privacy and labor relations, among others. This includes laws and regulations in emerging markets where legal systems maynot successful, there could be less developed or familiar to us. Compliance with diverse legal requirements is costly, time consuming and requires significant resources. Violations of one or more of these laws or regulations in the conduct of our business could result in significant fines, criminal sanctions against us or our officers, prohibitions on doing business and damage to our reputation. These actions could result in liability for significant monetary damages, fines and/or criminal prosecution, unfavorable publicity and other reputational damage and have a material adverse effect on our business and consolidated results of operations.
Our inability to successfully identify, consummate and integrate current and future acquisitions or to realize anticipated cost savings and other benefits could adversely affect our business. Additionally, divestitures may expose us to alleged potential liabilities which could adversely affect our business.
One of our operating strategies is to selectively pursue acquisitions. Any future acquisitions will depend on our ability to identify suitable acquisition candidates and successfully consummate such acquisitions. Acquisitions involve a number of risks including:
•failure of the acquired businesses to achieve the results we expect;
•diversion of our management’s attention from operational matters;
•our inability to retain key personnel of the acquired businesses;
•risks associated with unanticipated events or liabilities;
•potential disruption of our existing business; and
•customer dissatisfaction or performance problems at the acquired businesses.
If we are unable to integrate or successfully manage businesses that we have recently acquired or may acquire in the future, we may not realize anticipated cost savings, improved manufacturing efficiencies and increased revenue, which may result in material adverse short and long-term effects on our consolidated operating results, financial condition and liquidity. Even if we are able to integrate the operations of our acquired businesses into our operations, we may not realize the full benefits of the cost savings, revenue enhancements or other benefits that we may have expected at the time of acquisition. In addition, even if we achieve the expected benefits, we may not be able to achieve them within the anticipated time frame, and such benefits may be offset by costs incurred in integrating the acquired companies and increases in other expenses.
We have also divested businesses and may consider divesting businesses in the future. Divestiture risks relate to our ability to find appropriate purchasers, execute transactions on favorable terms, separate divested business operations with minimal impact to our remaining operations, and effectively manage any transitional service arrangements. Any of these factors could materially and adversely affect our consolidated results of operations and financial condition.
WeIf we fail to introduce successful new products or extend our existing product line, we could lose our market position and our financial performance could be materially and adversely affected.
In the safety products market, there are subject to various environmental lawsfrequent introductions of new products and any violation of these laws could adversely affect our results of operations.
Included in the extensive laws, regulations and ordinances, to whichproduct line extensions. If we are subject, are those relatingunable to identify emerging customer and technological trends, maintain and improve the protectioncompetitiveness of the environment. Examples include those governing discharges to airour products and water, handling and disposal practices for solid and hazardous wastes and the maintenance of a safe workplace. These laws impose penalties for noncompliance and liability for response costs and certain damages resulting from past and current spills, disposals, or other releases of hazardous materials. We could incur substantial costs as a result of noncompliance with or liability for cleanup pursuant to these environmental laws. Such laws continue to change, andintroduce new products, we may be subject to more stringent environmental laws in the future. If more stringent environmental laws are enacted, these future lawslose our market position, which could have a material adverse effect on our business, financial condition and results of operations. We continue to invest significant resources in research and development and market research, which includes the development of software platforms for our connected products. However, continued product and/or service development and marketing efforts are subject to the risks inherent in the development process. These risks include delays, the failure of new products and product line extensions to achieve anticipated levels of market acceptance and the risk of failed product introductions.
RISKS RELATED TO CYBERSECURITY OR MISAPPROPRIATION OF OUR CRITICAL INFORMATION
A failure of our information systems or a cybersecurity breach could materially and adversely affect our business, results of operations and financial condition.
The proper functioning and security of our information systems is critical to the operation and reputation of our business. This includes the systems that support and operate our Safety io and MSA+™ platforms. Our information systems may be vulnerable to damage or disruption from natural or man-made disasters, computer viruses, power losses or other system or network failures. In addition, hackers, cyber-criminals and other persons could attempt to gain unauthorized access to our information systems with the intent of harming the Company, harming our information systems or obtaining sensitive information such as intellectual property, trade secrets, financial and business development information, and customer and vendor related information. To date, we have not experienced any material breaches or material losses related to cyber-attacks. If our information systems or security fail, or if there is any compromise or breach of our security, it could disrupt our operations and/or result in a violation of applicable privacy and other laws, legal and financial exposure, remediation costs, negative impacts on our customers' willingness to transact business with us, or a loss of confidence in our security measures, which could have an adverse effect on our business, our reputation and our consolidated results of operations and financial condition.
We benefitLike many companies, from free trade laws and regulations, such as the United States-Mexico-Canada Agreement and any changestime to these laws and regulations could adversely affect our results of operations.
Existing free trade laws and regulations, such as the United States-Mexico-Canada Agreement, provide certain beneficial duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and other requirements. Changes in laws or policies governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries wheretime, we manufacture products, such as China and Mexico, could have a material adverse effectexperienced attempts on our business, consolidated resultscomputer systems by unauthorized outside parties. Because the techniques used by computer hackers and others to access or sabotage networks continually evolve and generally are not recognized until launched against a target, we may be unable to anticipate, prevent or detect these attacks. As a result, the impact of operationsany future incident cannot be predicted, including the failure of our information systems or misappropriation of our technologies and/or processes. Any such system failure or loss of such information could harm our competitive position or cause us to incur significant costs to remedy the damages caused by the incident. We have taken steps and financial condition.
We are subjectour computer systems and continue to various U.Sassess, maintain and foreign tax laws and any changes in these laws related toenhance the taxationongoing effectiveness of businesses and resolutions of tax disputes could adversely affect our results of operations.
The U.S. Congress, the Organization for Economic Co-operation and Development (or, OECD) and other government agencies in jurisdictions in which we and our affiliates invest or do business have maintained a focus on issues related to the taxation of multinational companies. The OECD has changed numerous long-standing tax principles through its base erosion and profit shifting (“BEPS”) project which could adversely impact our effective tax rate.
We are subject to regular review and audit by both foreign and domestic tax authorities.information security systems. While we believeattempt to mitigate these risks by employing a number of measures, including employee training, comprehensive monitoring of our tax positionsnetworks and systems, and maintenance of backup and protective systems, our systems, networks remain potentially vulnerable to advanced persistent threats. We cannot assure that ongoing improvements to our infrastructure and cybersecurity programs will be sustained,sufficient to prevent or limit the final outcome of tax audits and related litigationdamage from any future cyber-attack or disruption to our information systems. It is therefore possible that in the future we may differ materially from the tax amounts recordedsuffer an attack, unauthorized parties may gain access to personal information in our consolidated financial statements, which could havepossession and we may not be able to identify any such incident in a material adverse effect on our consolidated results of operations, financial condition and cash flows.
We have significant international operations and are subject to the risks of doing business in foreign countries.
We have business operations in approximately 40 foreign countries. In 2019, approximately half of our net sales were made by operations located outside the United States. Those operations are subject to various political, economic and other risks and uncertainties, which could have a material adverse effect on our business. These risks include the following:
unexpected changes in regulatory requirements;
changes in trade policy or tariff regulations;
changes in tax laws and regulations;
unintended consequences due to changes to the Company's legal structure;
additional valuation allowances on deferred tax assets due to an inability to generate sufficient profit in certain foreign jurisdictions;
intellectual property protection difficulties or intellectual property theft;
difficulty in collecting accounts receivable;
complications in complying with a variety of foreign laws and regulations, some of which may conflict with U.S. laws;
foreign privacy laws and regulations;
trade protection measures and price controls;
trade sanctions and embargoes;
nationalization and expropriation;
increased international instability or potential instability of foreign governments;
effectiveness of worldwide compliance with MSA's anti-bribery policy, the U.S. Foreign Corrupt Practices Act, and similar local laws;
difficulty in hiring and retaining qualified employees;
the ability to effectively negotiate with labor unions in foreign countries;
the need to take extra security precautions for our international operations;
costs and difficulties in managing culturally and geographically diverse international operations;
pandemics and similar disasters; and
risks associated with the United Kingdom's decision to exit the European Union, including disruptions to trade and free movement of goods, services and people to and from the United Kingdom; increased foreign exchange volatility with respect to the British pound; and additional legal and economic uncertainty.
Any one or more of these risks could have a negative impact on the success of our international operations and, thereby, have a material adverse effect our business, consolidated results of operations and financial condition.
Because we derive a significant portion of our sales from the operations of our foreign subsidiaries, future currency exchange rate fluctuations could adversely affect our results of operations and financial condition, and could affect the comparability of our results between financial periods.
In 2019, our operations outside of the United States accounted for approximately one-half of our net sales. The results of our foreign operations are generally reported in local currency and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements. The exchange rates between some of these currencies and the U.S. dollar have fluctuated significantly in recent years and may continue to do so in the future. A weakening of the currencies in which sales are generated relative to the currencies in which costs are denominated would decrease our results of operations and cash flow. Although the Company uses instruments to hedge certain foreign currency risks, these hedges only offset a portion of the Company’s exposure to foreign currency fluctuations.
In addition, because our consolidated financial statements are stated in U.S. dollars, such fluctuations may affect our consolidated results of operations and financial position, and may affect the comparability of our results between financial periods. Our inability to effectively manage our exchange rate risks or any volatility in currency exchange rates could have a material adverse effect on our business, consolidated results of operations and financial condition.timely manner.
Our continued success depends on our ability to protect our intellectual property. If we are unable to protect our intellectual property, our business could be materially and adversely affected.
Our success depends, in part, on our ability to obtain and enforce patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. We have been issued patents and have registered trademarks with respect to many of our products, but our competitors could independently develop similar or superior products or technologies, duplicate any of our designs, trademarks, processes or other intellectual property or design around any processes or designs on which we have or may obtain patents or trademark protection. In addition, it is possible that third parties may have, or will acquire, licenses for patents or trademarks that we may use or desire to use, so that we may need to acquire licenses to, or to contest the validity of, such patents or trademarks of third parties. Such licenses may not be made available to us on acceptable terms, if at all, and we may not prevail in contesting the validity of third party rights.
We also protect trade secrets, know-how and other confidential information against unauthorized use by others or disclosure by persons who have access to them, such as our employees, through contractual arrangements.arrangements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. Our inability to maintain the proprietary nature of our technologies could have a material adverse effect on our consolidated results of operations and financial condition.
RISKS RELATED TO HUMAN CAPITAL MANAGEMENT
If we lose any of our key personnel or are unable to attract, train and/or retain qualified personnel or plan the succession of senior management, our ability to manage our business and continue our growth could be negatively impacted.
Our success depends in large part on the continued contributions of our key management, engineering and sales and marketing personnel, many of whom are highly skilled and would be difficult to replace. Our success also depends on the abilities of new personnel to function effectively, both individually and as a group. If we are unable to attract, effectively integrate and retain management, engineering, sales and marketing or other key personnel, then the execution of our growth strategy and our ability to react to changing market requirements may be impeded, and our business could suffer as a result.
In addition, hiring, training, and successfully integrating replacement critical personnel could be time consuming, may cause additional disruptions to our operations, and may be unsuccessful, which could negatively impact future revenues. Competition for personnel is intense, and we cannot assure that we will be successful in attracting and retaining qualified personnel. The hiring of new personnel may also result in increased costs and we do not currently maintain key person life insurance.
Our success also depends on effective succession planning. Failure to ensure effective transfer of knowledge and smooth transitions involving senior management could hinder our strategic planning and execution. From time to time, senior management or other key employees may leave the Company. While we strive to reduce the negative impact of such changes, the loss of any key employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of company initiatives, the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, and the results of our operations.
We may be unable to hire or retain and develop a highly skilled and diverse global workforce or effectively manage changes in our workforce and respond to shifts in labor availability.
It it important to our business to hire, retain and develop a highly skilled and diverse global workforce. We compete to hire new personnel with a variety of capabilities in the many countries in which we manufacture and market our products. We also invest resources and time to develop and retain our employees' skills and competencies. We could experience unplanned or increased turnover of employees with key capabilities, or fail to develop adequate succession plans for leadership positions or hire and retain a workforce with the skills and in the locations we need to operate and grow our business. We could also fail to attract and develop personnel with key emerging capabilities that we need to continue to respond to changing consumer and customer needs and grow our business, including skills in the areas of manufacturing, engineering, sales, service, and various functional support areas. Occurrence of any of these conditions could deplete our institutional knowledge base and erode our competitiveness.
We are experiencing continuing a tight and competitive labor market and could face unforeseen challenges in the availability of labor. A sustained labor shortage or increased turnover rates within our employee base have led and could lead to increased costs such as increased overtime to meet demand and increased wages to attract and retain employees. We have also been negatively affected and could continue to be negatively affected by labor shortages or constraints experienced by our partners, including our external manufacturing partners and freight providers. Failure to achieve and maintain a diverse workforce, compensate our employees competitively and fairly, maintain a safe and inclusive environment or promote the well-being of our employees could affect our reputation and also result in lower performance and an inability to retain valuable employees.
RISKS RELATED TO DOING BUSINESS INTERNATIONALLY
We have significant international operations and are subject to the risks of doing business in foreign countries and global supply chains.
We have business operations in more than 40 international locations. In 2022, approximately one-half of our net sales were made by operations located outside the United States. We also rely on global supply chains or otherwise source critical components and raw materials from suppliers based in foreign countries, which at times are used in manufacturing operations across our global footprint. In certain cases, components could be sole sourced or otherwise not easily substituted due to the highly regulated nature of our products. Therefore, our operations and sourcing strategies are subject to supply shortages, sourcing delays, or disruption due to various geopolitical, economic, disasters, and other risks and uncertainties, which could have a material adverse effect on our business. These risks include the following:
•Scarcity of parts and components necessary to manufacture our products;
•unexpected changes in regulatory requirements;
•changes in trade policy or tariff regulations;
•changes in tax laws and regulations;
•unintended consequences due to changes to the Company's legal structure;
•additional valuation allowances on deferred tax assets due to an inability to generate sufficient profit in certain foreign jurisdictions;
•intellectual property protection difficulties or intellectual property theft;
•difficulty in collecting accounts receivable;
•complications in complying with a variety of foreign laws and regulations, some of which may conflict with U.S. laws;
•foreign privacy laws and regulations;
•trade protection measures and price controls;
•trade sanctions and embargoes;
•nationalization and expropriation;
•increased international instability, potential instability of foreign governments or impacts from geopolitical conflict such as supplier or transportation disruptions;
•effectiveness of worldwide compliance with MSA's anti-bribery policy, the U.S. Foreign Corrupt Practices Act, and similar local laws;
•difficulty in hiring and retaining qualified employees;
•the ability to effectively negotiate with labor unions in foreign countries;
•the need to take extra security precautions for our international operations;
•costs and difficulties in managing culturally and geographically diverse international operations;
•pandemics, severe weather events, or other disasters; and
•risks associated with the United Kingdom's decision to exit the European Union, including disruptions to trade and free movement of goods, services and people to and from the United Kingdom; increased foreign exchange volatility with respect to the British pound; and additional legal and economic uncertainty.
Any one or more of these risks could have a negative impact on the success of our international operations and, thereby, have a material adverse effect on our business, consolidated results of operations and financial condition.
Because we derive a significant portion of our sales from the operations of our foreign subsidiaries, future currency exchange rate fluctuations could adversely affect our results of operations and financial condition, and could affect the comparability of our results between financial periods.
Our operations outside of the United States account for a significant portion of our net sales. The results of our foreign operations are generally reported in local currency and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements. The exchange rates between some of these currencies and the U.S. dollar have fluctuated significantly in recent years and may continue to do so in the future. A weakening of the currencies in which sales are generated relative to the currencies in which costs are denominated would decrease our results of operations and cash flow. Although the Company uses instruments to hedge certain foreign currency risks, these hedges only offset a portion of the Company’s exposure to foreign currency fluctuations.
In addition, because our consolidated financial statements are stated in U.S. dollars, such fluctuations may affect our consolidated results of operations and financial position, and may affect the comparability of our results between financial periods. Our inability to effectively manage our exchange rate risks or any volatility in currency exchange rates could have a material adverse effect on our business, consolidated results of operations and financial condition.
We benefit from free trade laws and regulations, such as the United States-Mexico-Canada Agreement and any changes to these laws and regulations could adversely affect our results of operations.
Existing free trade laws and regulations, such as the United States-Mexico-Canada Agreement, provide certain beneficial duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and other requirements. Changes in laws or policies governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where we manufacture products, such as China and Mexico, could have a material adverse effect on our business, consolidated results of operations and financial condition.
GENERAL RISK FACTORS
Damage to the reputation of MSA or to one or more of our product brands could adversely affect our business.
Developing and maintaining our reputation, as well as the reputation of our brands, is a critical factor in our relationship with customers, distributors and others. Our inability to address negative publicity or other issues, including concerns about product safety or quality, real or perceived, could negatively impact our business which could have a material adverse effect on our business, consolidated results of operations and financial condition.
If our goodwill, other intangible assets and long-lived assets become impaired, we may be required to record significant charges to earnings.
We review our long-lived assets for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Goodwill and indefinite-lived intangible assets are required to be assessed for impairment at least annually. Factors that may be considered a change in circumstances, indicating that the carrying amount of our goodwill, indefinite-lived intangible assets or long-lived assets may not be recoverable, include slower growth rates in our markets, reduced expected future cash flows, increased country risk premiums as a result of political uncertainty and a decline in stock price and market capitalization. We consider available current information when calculating our impairment charge. If there are indicators of impairment, our long-term cash flow forecasts for our operations deteriorate or discount rates increase, we may be required to recognize additional impairment charges in later periods. See Note 1213—Goodwill and Intangible Assets of the consolidated financial statements in Part II Item 8 of this Form 10-K for the carrying amounts of goodwill in each of our reporting segments and details on indefinite-lived intangible assets that we hold.
Risks related to our defined benefit pension and other post-retirement plans could adversely affect our results of operations and cash flow.
Significant changes in actual investment return on pension assets, discount rates, and other factors could adversely affect our results of operations and pension contributions in future periods. U.S. generally accepted accounting principles require that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions about financial markets and interest rates, which may change based on economic conditions. Funding requirements for our pension plans may become more significant. However, the ultimate amounts to be contributed are dependent upon, among other things, interest rates, underlying asset returns and the impact of legislative or regulatory changes related to pension funding obligations. For further information regarding our pension plans, refer to "PensionsNote 15—Pensions and Other Post-retirement Benefits" in Note 14Benefits of the consolidated financial statements in Part II Item 8 of this Form 10-K.
18
If we fail to meet our debt service requirements or the restrictive covenants in our debt agreements or if interest rates increase, our results of operations and financial condition could be materially and adversely affected.
We have a substantial amount of debt upon which we are required to make scheduled interest and principal payments and we may incur additional debt in the future. A significant portion of our debt bears interest at variable rates that may increase in the future.
The potential discontinuance of LIBOR is one such risk that could cause market volatility or disruption. In July 2017, the chief executive of the United Kingdom Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unknown whether any banks will continue to voluntarily submit rates for the calculation of LIBOR after 2021 or whether LIBOR will continue to be published by its administrator based on these submissions or on any other basis. It is not possible to predict the effect of these changes, other reforms, or the establishment of alternative reference rates, but the potential discontinuance of LIBOR could adversely affect our access to the debt and its cost of funding.
Our debt agreements require us to comply with certain restrictive covenants. If we are unable to generate sufficient cash to service our debt or if interest rates increase, our consolidated results of operations and financial condition could be materially and adversely affected. Additionally, a failure to comply with the restrictive covenants contained in our debt agreements could result in a default, which if not waived by our lenders, could substantially increase borrowing costs and require accelerated repayment of our debt. Please refer to Note 1112—Long-Term Debt of the consolidated financial statements in Part II Item 8 of this Form 10-K for commentary on our compliance with the restrictive covenants.
Any period of interest rate increases may adversely affect our ability to obtain new financing or to refinance existing debt on terms the Company deems attractive, the cost of such financing, exchange-rates, and our profitability, which in turn may have a material adverse effect on our liquidity and capital resources. As of December 31, 2022, we had $308.6 million of variable rate borrowings under our revolving credit facility. A 50 basis point increase or decrease in interest rates could result in $1.4 million of additional interest expense. When the $315.0 million of variable rate debt undertaken to complete the MSA, LLC divestiture is taken into account, a 50 basis point increase or decrease in interest rates could result in $3.0 million of additional interest expense. Please refer to Note 20—Contingencies of the consolidated financial statements in Part II Item 8 of this Form 10-K for additional information regarding the divestiture.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal executive offices are located at 1000 Cranberry Woods Drive, Cranberry Township, PA, United States. We own or lease our primary facilities. Our primary manufacturing locations in the Americas segment are located in Cranberry Township, PA; Jacksonville, NC; Murrysville, PA; New Kensington, PA; and Jacksonville, NC,Pittsfield, NH, and our primary distribution center is located in New Galilee, PA. The primary manufacturing locations in the International segment are located in Berlin, Germany; Suzhou, China;Bristol, United Kingdom; Châtillon-sur-Chalaronne, France, Devizes, United Kingdom; Galway, Ireland; and Châtillon-sur-Chalaronne, France.Suzhou, China. Our primary research and development centers are located in Berlin, Germany; Cranberry Township, PA; Berlin, Germany; and Suzhou, China.
We believe that all of our facilities, including the manufacturing facilities, are in good repair and in suitable condition for the purposes for which they are used.
Item 3. Legal Proceedings
Please refer to Note 1920—Contingencies to the consolidated financial statements in Part II Item 8 of this Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
Information about our Executive Officers
The following sets forth the names and ages of our executive officers as of February 20, 2020:16, 2023:
|
| | | | | | | | | | | | | |
| Name | | Age |
| | Title |
Nishan J. Vartanian(a) | | 6063 |
| | Chairman, President and Chief Executive Officer since May 2018.2020. |
Steven C. Blanco(b) | | 5356 |
| | Sr. Vice President and President, MSA Americas segment since August 2017.June 2022. |
Kenneth D. KrauseBob Leenen(c)
| | 4549 |
| | SeniorSr. Vice President and President, MSA International segment since June 2022. |
Lee B. McChesney(d) | | 51 | | | Sr. Vice President, Chief Financial Officer and Treasurer since February 2018. |
Bob LeenenOctober 2022.(d)
| | 46 |
| | Vice President and President, MSA International segment since September 2017. |
Stephanie L. Sciullo(e) | | 3538 |
| | Sr. Vice President and Chief Legal Officer, Corporate Social Responsibility & Public Affairs since January 2020.June 2022. |
(a)Prior to his present position, Mr. Vartanian was President and Chief Executive Officer since May 2018.
| |
(a) | Prior to his present position, Mr. Vartanian was President and Chief Operating Officer since June 2017; Senior Vice President and President, MSA Americas since July 2015; and prior thereto served as Vice President and President, MSA North America. |
| |
(b) | Prior to his present position, Mr. Blanco served as Vice President and General Manager, Northern North America since August 2015 and prior thereto was Vice President, Global Operational Excellence. |
| |
(c) | Prior to his present position, Mr. Krause was Vice President, Chief Financial Officer and Treasurer since December 2015; Vice President, Strategic Finance since August 2015; and prior thereto served as Treasurer and Executive Director, Global Finance and Assistant Treasurer. |
| |
(d) | Prior to his present position, Mr. Leenen was Regional Chief Financial Officer, MSA International and Finance Director, Europe. |
| |
(e) | Prior to her present position, Ms. Sciullo served as Deputy General Counsel since 2016 and prior thereto was Associate General Counsel. |
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange under the symbol “MSA.” On February 17, 2020,10, 2023, there were 177153 registered holders of our shares of common stock.
Issuer Purchases of Equity Securities |
| | | | | | | | | | | | |
| Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| October 1 — October 31, 2019 | — |
| | $ | — |
| | — |
| | 647,687 |
|
| November 1 — November 30, 2019 | — |
| | — |
| | — |
| | 627,514 |
|
| December 1 — December 31, 2019 | 12,528 |
| | 126.80 |
| | — |
| | 615,447 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced
Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased
Under the Plans or Programs |
| October 1 — October 31, 2022 | — | | | $ | — | | | — | | | 203,214 | |
| November 1 — November 30, 2022 | — | | | $ | — | | | — | | | 193,458 | |
| December 1 — December 31, 2022 | 231 | | | $ | 134.47 | | | — | | | 189,191 | |
The share repurchase program authorizes up to $100.0 million in repurchases of MSA common stock in the open market and in private transactions. The share purchase program has no expiration date. The maximum number of shares that may be purchased is calculated based on the dollars remaining under the program and the respective month-end closing share price. We have purchased a total of 352,406778,814 shares, or $22.2$72.7 million, since this program's inception.
The above shares purchased during the quarter relaterelated to stockstock-based compensation transactions.
We do not have any other share repurchase programs.
Comparison of Five-Year Cumulative Total Return
The following paragraph compares the most recent five yearfive-year performance of MSA stock with (1) the Standard & Poor’s 500 Composite Index, (2) S&P Midcap 400 Index and (2) the Russell 2000 Index.(3) S&P Midcap 400 Industrials. Because our competitors are principally privately held concerns or subsidiaries or divisions of corporations engaged in multiple lines of business, we do not believe it feasible to construct a peer group comparison on an industry or line-of-business basis. The Russell 2000S&P 500 Composite Index, S&P Midcap 400 Index and the S&P Midcap 400 Industrials, while including corporations both larger and smaller than MSA in terms of market capitalization, is composed of corporations with an average market capitalization similar to us.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
ASSUMES INITIAL INVESTMENT OF $100
Among MSA Safety Incorporated, the S&P 500 Index, S&P Midcap 400, and the Russell 2000 Index
Assumes $100 invested on December 31, 20142017 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
| | | | Value at December 31, | | Value at December 31, |
| | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| MSA Safety Incorporated | $ | 100.00 |
| | $ | 84.15 |
| | $ | 137.84 |
| | $ | 157.06 |
| | $ | 194.10 |
| | $ | 264.15 |
| MSA Safety Incorporated | $ | 100.00 | | | $ | 123.58 | | | $ | 168.18 | | | $ | 201.44 | | | $ | 205.77 | | | $ | 199.25 | |
| S&P 500 Index | 100.00 |
| | 101.38 |
| | 113.51 |
| | 138.29 |
| | 132.23 |
| | 173.86 |
| S&P 500 Index | 100.00 | | | 95.62 | | | 125.72 | | | 148.85 | | | 191.58 | | | 156.88 | |
| Russell 2000 Index | 100.00 |
| | 95.59 |
| | 115.95 |
| | 132.94 |
| | 118.30 |
| | 148.49 |
| |
| S&P Midcap 400 | | S&P Midcap 400 | 100.00 | | | 88.92 | | | 112.21 | | | 127.54 | | | 159.12 | | | 138.34 | |
| S&P Midcap 400 Industrials | | S&P Midcap 400 Industrials | 100.00 | | | 85.11 | | | 113.67 | | | 132.41 | | | 170.07 | | | 150.52 | |
Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2020.1980-2023.
Index Data: Copyright Standard and Poor’s, Inc. Used with permission. All rights reserved.
Index Data: Copyright Russell Investments. Used with permission. All rights reserved.
Item 6. Selected Financial Data[Reserved]
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands, except as noted) | 2019(a) | | 2018 | | 2017(b) | | 2016(c) | | 2015(d) |
| Statement of Income Data: | | | | | | | | | |
| Net sales | $ | 1,401,981 |
| | $ | 1,358,104 |
| | $ | 1,196,809 |
| | $ | 1,149,530 |
| | $ | 1,130,783 |
|
| Income from continuing operations | 137,649 |
| | 125,115 |
| | 26,956 |
| | 94,107 |
| | 69,590 |
|
| (Loss) income from discontinued operations | — |
| | — |
| | — |
| | (755 | ) | | 1,217 |
|
| Net income attributable to MSA Safety Incorporated | 136,440 |
| | 124,150 |
| | 26,027 |
| | 91,936 |
| | 70,807 |
|
| Earnings per share attributable to MSA common shareholders: | | | | | | | | | |
| Basic per common share (in dollars): | | | | | | | | | |
| Income from continuing operations | $ | 3.52 |
| | $ | 3.23 |
| | $ | 0.68 |
| | $ | 2.47 |
| | $ | 1.86 |
|
| (Loss) income from discontinued operations | — |
| | — |
| | — |
| | (0.02 | ) | | 0.03 |
|
| Net income | 3.52 |
| | 3.23 |
| | 0.68 |
| | 2.45 |
| | 1.89 |
|
| Diluted per common share (in dollars): | | | | | | | | | |
| Income from continuing operations | $ | 3.48 |
| | $ | 3.18 |
| | $ | 0.67 |
| | $ | 2.44 |
| | $ | 1.84 |
|
| (Loss) income from discontinued operations | — |
| | — |
| | — |
| | (0.02 | ) | | 0.03 |
|
| Net income | 3.48 |
| | 3.18 |
| | 0.67 |
| | 2.42 |
| | 1.87 |
|
| Dividends paid per common share (in dollars) | 1.64 |
| | 1.49 |
| | 1.38 |
| | 1.31 |
| | 1.27 |
|
| Weighted average common shares outstanding—basic | 38,653 |
| | 38,362 |
| | 37,997 |
| | 37,456 |
| | 37,293 |
|
| Weighted average common shares outstanding—diluted | 39,189 |
| | 38,961 |
| | 38,697 |
| | 37,986 |
| | 37,710 |
|
| Balance Sheet Data: | | | | | | | | | |
| Total assets | $ | 1,739,693 |
| (e) | $ | 1,608,012 |
| | $ | 1,684,826 |
| | $ | 1,353,920 |
| (f) | $ | 1,422,863 |
|
| Long-term debt, net | 328,394 |
| | 341,311 |
| | 447,832 |
| | 363,836 |
| (f) | 458,022 |
|
| Total MSA Safety Incorporated shareholders’ equity | 725,800 |
| | 633,882 |
| | 597,601 |
| | 558,165 |
| | 516,496 |
|
(a) Includes SMC from the date of acquisition on May 20, 2019.
(b) Includes Globe from the date of acquisition on July 31, 2017. In addition, we were able to reasonably estimate the potential liability for IBNR cumulative trauma product liability claims in the fourth quarter of 2017 and recognized a significant charge which reduced net income by approximately $85 million as compared to prior years as we became substantially self insured for cumulative trauma product liability claims during 2017. See Note 19 to the consolidated financial statements in Part II Item 8 of this Form 10-K for additional information.
(c) Includes Senscient from the date of acquisition on September 19, 2016.
(d) Includes Latchways from the date of acquisition on October 21, 2015.
(e) The Company adopted Accounting Standards Update (ASU) 2016-02, Leases, on January 1, 2019,whichrequires lessees to record a right-of-use asset and a liability for virtually all leases. The adoption of this ASU increased total assets by $54 million. This ASU was adopted using the modified retrospective transition method and all prior periods were reported in accordance with ASC 840, Leases.
(f) The Company adopted ASU No. 2015-03, Interest - Imputation of Interest and ASU No. 2015-15, Interest - Imputation of Interest on January 1, 2016, which requires an entity to present the debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. December 31, 2015 financial information was recast to apply this change in accounting principle retrospectively.
The data presented in the Selected Financial Data table should be read in conjunction with comments provided in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II Item 7 and the consolidated financial statements in Part II Item 8 of this Form 10-K.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the historical financial statements and other financial information included elsewhere in this annual report on Form 10-K. This discussion may contain forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this annual report entitled “Forward-Looking Statements” and “Risk Factors.”
This section generally discusses the results of our operations for the year ended December 31, 2022 compared to the year ended December 31, 2021. For a discussion on the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on February 19, 2021.
MSA Safety Incorporated ("MSA") is organized into sixfour geographical operating segments that are aggregated into three reportable geographic segments: Americas, International and Corporate. The Americas segment is comprised of our operations in North America and Latin America geographies. The International segment is comprised of our operations of all geographies outside of the Americas. Certain global expenses are allocated to each segment in a manner consistent with where the benefits from the expenses are derived. Please refer to Note 7—8—Segment Information of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information.
On July 31, 2017,January 5, 2023, the Company acquired 100% ofdivested Mine Safety Appliances LLC ("MSA LLC") a wholly owned subsidiary that holds legacy product liability claims relating to coal dust, asbestos, silica, and other exposures, to a joint venture between R&Q Insurance Holdings Ltd. and Obra Capital, Inc. In connection with the common stock of Globe Holding Company, LLC ("Globe") for $215closing, MSA contributed $341 million in cash plusand cash equivalents, while R&Q and Obra contributed an additional $35 million. As a working capital adjustmentresult of $1.4 million. Based in Pittsfield, NH, Globe is a leading innovatorthe transaction, MSA will derecognize all legacy cumulative trauma product liability reserves, related insurance assets, and providerassociated deferred tax assets of firefighter protective clothing and boots. This acquisition aligns with the Company's corporate strategy in that it strengthened our leading positiondivested subsidiary from its balance sheet in the North American fire service market. The transaction was funded through borrowings on our unsecured senior revolving credit facility. The data presentedfirst quarter of 2023. R&Q and Obra have assumed management of the divested subsidiary, including the management of its claims. Refer to Note 20—Contingencies of the consolidated financial statements in Part II Item 68 of this Form 10-K should be readfor further information.
On July 1, 2021, the Company acquired Bacharach, Inc. and its affiliated companies ("Bacharach") in conjunctiona transaction valued at $329.4 million, net of cash acquired. Headquartered near Pittsburgh in New Kensington, Pa., Bacharach is a leader in gas detection technologies used in the heating, ventilation, air conditioning and refrigeration ("HVAC-R") markets. Bacharach’s advanced instrumentation technologies help protect lives and the environment, while also increasing operational efficiency for its diversified customer base. Bacharach's portfolio of gas detection and analysis products are used to detect, measure and analyze leaks of various gases that are commonly found in both commercial and industrial settings. Bacharach has strong expertise in the refrigerant leak detection market with customers in the following comments. Additionally, please referHVAC-R, food retail, automotive, commercial and industrial refrigeration, and military markets. Refer to Note 13—14—Acquisitions of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information.
During July 2021, the Company purchased the remaining 10% noncontrolling interest in MSA (China) Safety Equipment Co., Ltd. from our former China partner for $19.0 million, inclusive of a $5.6 million distribution.
On May 20, 2019,January 25, 2021, the Company acquired 100% of the common stock of Sierra Monitor CorporationB T Q Limited, including Bristol Uniforms and Bell Apparel ("SMC"Bristol") in an all-cash transaction valued at $33.2$63.0 million, net of cash acquired. Based in Milpitas, California,Bristol, which is headquartered in the heart of Silicon Valley, SMCUnited Kingdom ("U.K."), is a leading innovator and provider of fixed gasprotective apparel to the fire, rescue services, and flame detection instruments and Industrial Internet of Things solutions that connect and help protect high-value infrastructure assets.utility sectors. The acquisition enablesstrengthens MSA's position as a global market leader in fire service personal protective equipment ("PPE") products, which include breathing apparatus, firefighter helmets, thermal imaging cameras, and firefighter protective apparel, while providing an avenue to expand its business in the U.K. and key European markets. The fire service equipment brands of MSA, to accelerate its strategy to enhance workerwhich include Gallet Firefighter Helmets, the M1 and G1 Self-Contained Breathing Apparatus range, Cairns Helmets, Globe Manufacturing, and now Bristol, represent more than 460 combined years of innovation in the fire service industry, with a common mission: protecting the health and safety of firefighters. Bristol is also a leading manufacturer of flame-retardant, waterproof, and accountability throughother protective work wear for the useutility industry. Marketed under the Bell Apparel brand, this line complements MSA's existing and broad range of cloud technology and wireless connectivity. This acquisition enhances a key focus ofofferings for the Company's Safety io subsidiary, launched in 2018 primarily to leverage the capabilities of its portable gas detection portfolio as it relates to cloud connectivity. The transaction was funded through borrowings on our unsecured senior revolving credit facility. The data presented in Part II Item 6 of this Form 10-K should be read in conjunction with the following comments. Additionally, please referglobal utilities market. Refer to Note 13—14—Acquisitions of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Discussion of our results; liquidity and capital resources; and cumulative translation adjustments for the year ended December 31, 2018 compared to the year ended December 31, 2017 can be found under Part II Item 7 of our Form 10-K for the year ended December 31, 2018 as filed with the SEC.
BUSINESS OVERVIEW
We areMSA is a global leader in the development, manufacture and supply of safety products that protect people and facility infrastructures. Recognized for their market leading innovation, many MSA products integrate a combination of electronics, mechanical systems and advanced materials to protect users against hazardous or life-threatening situations. The Company's comprehensive product line, which is governed by rigorous safety standards across highly regulated industries, is used by workers around the world in a broad range of markets, including thefire service, oil, gas and petrochemical industry, fire service, construction, industrial manufacturing applications, utilities, mining and the military. MSA's core products include breathing apparatus, where self-contained breathing apparatus ("SCBA") is the principal product, fixed gas and flame detection systems, portable gas detection instruments, industrial head protection products, firefighter helmets and protective apparel, and fall protection devices. We are committed to providing our customers with service unmatched in the safety industry and, in the process, enhancing our ability to provide a growing line of safety solutions for customers in key global markets.
We tailor our product offerings and distribution strategy to satisfy distinct customer preferences that vary across geographic regions. To best serve these customer preferences, we have organized our business into sixfour geographical operating segments that are aggregated into three reportable geographic segments: Americas, International and Corporate. In 2019, 65%2022, 68% and 35%32% of our net sales were made by our Americas and International segments, respectively.
Americas. Our largest manufacturing and research and development facilities are located in the United States. We serve our markets across the Americas with manufacturing facilities in the U.S., Mexico and Brazil. Operations in the other countries within the Americas segment focus primarily on sales and distribution in their respective home country markets.
International. Our International segment includes companies in Europe, the Middle East and Africa ("EMEA") and the Asia Pacific region. In our largest International affiliatessubsidiaries (in Germany, France, United Kingdom (U.K.)U.K., Ireland and China), we develop, manufacture and sell a wide variety of products. In China, the products manufactured are sold primarily in China as well as in regional markets. Operations in other International segment countries focus primarily on sales and distribution in their respective home country markets. Although some of these companies may perform limited production, most of their sales are of products manufactured in our plants in Germany, France, the U.S., U.K., Ireland and China or are purchased from third partythird-party vendors.
Corporate. The Corporate segment primarily consists of general and administrative expenses incurred in our corporate headquarters, costs associated with corporate development initiatives, legal expense, interest expense, foreign exchange gains or losses and other centrally-managed costs. Corporate general and administrative costs comprise the majority of the expense in the Corporate segment. During the years ended December 31, 2019, 20182022, 2021 and 20172020 corporate general and administrative costs were $37.3$40.3 million, $31.2$37.6 million, and $37.6$28.5 million, respectively. These increases primarily reflect an increase in centrally managed functions.
Year Ended December 31, 20192022 Compared to Year Ended December 31, 20182021
| | | Net Sales | 2019 | | 2018 | | Dollar Increase (Decrease) | | Percent Increase (Decrease) | Net Sales | 2022 | | 2021 | | Dollar
Increase
(Decrease) | | Percent
Increase
(Decrease) |
| (In millions) | (In millions) |
| Consolidated | $1,402.0 | | $1,358.1 | | $43.9 | | 3.2% | Consolidated | $1,527.9 | | $1,400.2 | | $127.7 | | 9.1% |
| Americas | 915.1 | | 854.3 | | 60.8 | | 7.1% | Americas | 1,043.2 | | 908.1 | | 135.1 | | 14.9% |
| International | 486.9 | | 503.8 | | (16.9) | | (3.4)% | International | 484.7 | | 492.1 | | (7.4) | | (1.5)% |
Net Sales. Net sales for the year ended December 31, 2019,2022, were $1.40$1.53 billion, an increase of $43.9$127.7 million, from $1.36$1.40 billion for the year ended December 31, 2018.2021, driven by strategic price increases, volume growth, and acquisitions, partially offset by foreign currency translation. We saw strong growth across most of our core products and across both reporting segments. Constant currency sales increased by 5%12.2% for the year ended December 31, 2019.2022. Please refer to the Net Sales table below for a reconciliation of the year over year sales change.
| | | | | | | | | | | |
| Net Sales | Year Ended December 31, 2022 versus December 31, 2021 |
| (Percent Change) | Americas | International | Consolidated |
| GAAP reported sales change | 14.9% | (1.5)% | 9.1% |
| Currency translation effects | 0.2% | 8.5% | 3.1% |
| Constant currency sales change | 15.1% | 7.0% | 12.2% |
| Less: Acquisitions | (2.8)% | (1.6)% | (2.3)% |
| Organic constant currency change | 12.3% | 5.4% | 9.9% |
| | | |
| | | |
|
| | | |
| Net Sales | Year Ended December 31, 2019 versus December 31, 2018 |
| (Percent Change) | Americas | International | Consolidated |
| GAAP reported sales change | 7.1% | (3.4)% | 3.2% |
| Currency translation effects | 0.7% | 4.2% | 2.0% |
| Constant currency sales change | 7.8% | 0.8% | 5.2% |
is aand Organic constant currency sales change are non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance. Constant currency sales change is calculated by removingdeducting the percentage impact from currency translation effects from the overall percentage change in net sales. Organic constant currency sales change is calculated by deducting the percentage impact from acquisitions and currency translation effects from the overall percentage change in net sales.Net sales for the Americas segment were $915.1$1,043.2 million for the year ended December 31, 2019,2022, an increase of $60.8$135.1 million, or 7%14.9%, compared to $854.3$908.1 million for the year ended December 31, 2018.2021. During 2019,2022, constant currency sales in the Americas segment increased 8% compared to15.1% or on an organic constant currency basis increased 12.3%, excluding acquisitions. Growth was driven by favorable unit growth, new products, pricing and this volume growth was across most product categories. The inclusion of Bacharach drove the prior year period, driven primarily by growth across the portfolio.acquisition related sales.
Net sales for the International segment were $486.9$484.7 million for the year ended December 31, 2019,2022, a decrease of $16.9$7.4 million, or 3%1.5%, compared to $503.8$492.1 million for the year ended December 31, 2018.2021. Constant currency sales in the International segment increased 1% during 2019, as we recognized higher sales throughout our industrial and gas detection product portfolio partially offset by lower breathing apparatus sales and weaker non-core sales primarily in Europe on lower ballistic helmet sales. The decline in breathing apparatus sales year-over-year7.0% compared to the prior year period with organic constant currency growth of 5.4%. Growth was driven by favorable unit growth, new products, pricing and this volume growth was across most product categories; however, the unfavorable impact of foreign currency translation offset this growth on a large non-recurring orderreported basis. The inclusion of Bacharach drove acquisition related sales.
Looking ahead, we continue to operate in a very dynamic environment. There are a number of other evolving factors that will continue to influence our Pacific Asia region during 2018.revenue and earnings outlook. These factors include, among other things, supply chain constraints, raw material or semiconductor availability, the risk of additional COVID lockdowns, industrial employment rates, interest rate changes, military conflict, currency exchange volatility, the pace of economic recovery, as well as geopolitical risk, particularly as it relates to energy uncertainty which could affect operations and suppliers based in Germany and broader Europe. These or other conditions could impact our future results and growth expectations well into 2023.
Refer to Note 7—8—Segment Information to the consolidated financial statements in Part II Item 8 of this Form 10-K, for information regarding sales by product group.
We are planning for mid-single digit revenue growth on a constant currency basis for the full year of 2020.
Gross profit. Gross profit for the year ended December 31, 20192022 was $636.6$673.8 million, an increase of $24.7$58.5 million, or 4.0%9.5%, compared to $611.9$615.3 million for the year ended December 31, 2018.2021. The ratio of gross profit to net sales was 45.4%44.1% in 20192022 compared to 45.1%43.9% in 2018. The higher gross profit ratio during 2019 is primarily attributable to new product launches2021. Pricing and pricing initiatives,productivity efforts were partially offset by higher non-cash charges associated with LIFO accountinginflation, inventory and costs associated with our acquisitionproduct warranty charges.
Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses were $330.5$338.9 million for the year ended December 31, 2019,2022, an increase of $5.7$6.0 million, or 1.8%, compared to $324.8$332.9 million for the year ended December 31, 2018.2021. Overall, selling, general and administrative expenses were 22.2% of net sales in 2022 compared to 23.8% of net sales in 2021. Organic constant currency SG&A increased $13 million or 4.0%, demonstrating leverage on revenue growth. This increase was driven by wage inflation and strategic investments to support revenue growth. Areas of savings included lower acquisition related costs and savings from our restructuring programs in our International segment. Please refer to the Selling, general and administrative expenses were 23.6% of net sales in 2019 compared to 23.9% of net sales in 2018. The decrease was the result of ongoing productivity improvements in the Americas segment and savings from restructuring programs in the International Segment, partially offset by higher costs associated with our SMC acquisition. The following table presentsfor a reconciliation of the year-over-year expense change for selling, general, and administrative expenses.change.
| | | | | |
| Selling, general, and administrative expenses | Year Ended
December 31, 2022 versus December 31, 2021 |
| (Percent Change) | Consolidated |
| GAAP reported change | 1.8% |
| Currency translation effects | 2.9% |
| Constant currency change | 4.7% |
| Less: Acquisitions and strategic transaction costs | (0.7)% |
| Organic constant currency change | 4.0% |
| |
Selling, general, and administrative expenses | Year Ended
December 31, 2019 versus December 31, 2018 |
(Percent Change) | Consolidated |
GAAP reported change | 1.8% |
Currency translation effects | 2.0% |
Constant currency change | 3.8% |
Less: Acquisitions and related strategic transaction costs | (3.0)% |
Organic constant currency change | 0.8% |
Note: Constant currency SG&A change and Organic constant currency SG&A change is aare non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance. Constant currency SG&A change is calculated by deducting the percentage impact from currency translation effects from the overall percentage change in SG&A. Organic constant currency SG&A change in selling, general, and administrative expenses is calculated by removingdeducting the percentage impact from acquisitions and related strategic transaction costs as well asand currency translation effects from the overall percentage change in GAAP selling, general, and administrative expense. Management believes excluding acquisitions and currency translation effects provide investors with a greater level of clarity into spending levels on a year-over-year basis.
Research and development expense. Research and development ("R&D") expense was $57.0 million for the year ended December 31, 2022, a decrease of $0.8 million, or 1.4%, compared to $57.8 million for the year ended December 31, 2019, an increase of $5.1 million, or 9.8%, compared to $52.7 million for the year ended December 31, 2018.2021. Research and development expense was 3.7% of net sales in 2022, compared to 4.1% of net sales in 2019, compared to 3.9% of net sales in 2018. We continue to develop new products for global safety markets, including the recently launched V-Gard H1 Safety Helmet and V-Series family of fall protection products. In 2020, MSA plans to launch its connected firefighter ecosystem powered by LUNAR as well as the Altair io 360 Gas Detector, an area monitor that operates with the simplicity of a smart-home device. 2021.
We capitalized approximately $5.0$8.7 million and $1.6$8.1 million of software development costs during the years ended December 31, 20192022 and 2018,2021, respectively. Depreciation expense for capitalized software development cost of $7.9 million and $4.9 million during the years ended December 31, 2022 and 2021, was recorded in costs of products sold on the Consolidated Statements of Income. Refer to Note 1—Significant Accounting Policies of the consolidated financial statements in Part II Item 8 of this Form 10-K for further details regarding our software development costs.
MSA remains committed to dedicating significant resources to research and development activities, including the development of technology-based safety solutions. As we continue to invest a significant portion of our new product development into technology-based safety solutions, we anticipate that the historical relationship of research and development expense to net sales will continue to evolve; however, we do not anticipate reductions in the relative level of total spend on research and development activities on an annual basis. Total spend on both software development and research and development activities was $65.7 million and $65.9 million during the years ended December 31, 2022 and 2021.
Restructuring charges. During the year ended December 31, 2019,2022, the Company recorded restructuring charges of $13.8$8.0 million primarily related to footprint rationalizationour ongoing international initiatives to drive profitable growth and otherright size operations. This compared to restructuring programs associated withcharges of $16.4 million during the year ended December 31, 2021, primarily related to our ongoing initiatives to drive profitable growth inand acquisition integration activities. We remain focused on executing programs to optimize our International segment. Included as part of restructuring charges in 2019, we recognized a non-cash settlement charge of $2.5 million for the termination of our pension plan in the United Kingdom. This compared to charges of $13.2 million during the year ended December 31, 2018, primarily related to severance costs for staff reductions associated with our ongoing initiatives to drive profitable growth in Europe and the legal and operational realignment of our U.S. and Canadian operations.cost structure.
Currency exchange. Currency exchange losses were $19.8$10.3 million during the year ended December 31, 2019,2022, compared to $2.3$0.2 million during the year ended December 31, 2018.2021. The increase in currency exchange losses wasfor the current period related primarily due to foreign currency exposure on unsettled inter-company balances and the recognition of non-cash cumulative translation losses of approximately $15.3 million as a result of the approval of our plan to close our South Africa affiliates during the first quarter of 2019. This charge is related to the historical translation of the elements of the financial statements for the business from the functional currency to the U.S. Dollar. The translation impact has been historically recorded as currency translation adjustment, a separate component of accumulated other comprehensive loss within the shareholders' equity section of the Consolidated Balance Sheet. The remaining currencyforeign subsidiary. Currency exchange losses in both periods were2021 related to foreign currency exposure on unsettled inter-company balances.
Refer to Note 17—18—Derivative Financial Instruments of the consolidated financial statements in Part II Item 8 of this Form 10-K for information regarding our currency exchange rate risk management strategy.
Product liability and other operating expense. Product liability and other operating expense during the year ended December 31, 20192022 was $28.4$20.6 million compared to $45.3$185.3 million for the year ended December 31, 2018. The2021. Product liability expense infor both periods primarily relates to an increaseincreases in ourMSA LLC's reserve for cumulative trauma product liability claims resulting fromand defense costs incurred for these claims. Adjustments to the Company’s revisionreserve for the year ended December 31, 2022 totaled $8.4 million net of its estimatesinsurance receivable of potential$1.6 million. The reserve includes estimated amounts for claims expected to be resolved through the year 2075. On January 5, 2023, the Company divested MSA LLC, a wholly owned subsidiary that holds legacy product liability forclaims relating to coal dust, asbestos, silica, and other exposures. As a result of the transaction, we will derecognize in the first quarter of 2023 all legacy cumulative trauma product liability claims as partreserves, related insurance assets, and associated deferred tax assets of its annual review process, as well as defense costs incurred for uninsured asserted cumulative trauma product liability claims.the divested subsidiary from our balance sheet and recognize a loss of approximately $200 million. Please refer to Note 19—20—Contingencies of the consolidated financial statements in Part II Item 8 of this Form 10-K for additional information.
GAAP operating income. Consolidated operating income for the year ended December 31, 20192022 was $186.2$239.1 million compared to $173.5$22.8 million for the year ended December 31, 2018.2021. The increase in operating results was driven by higher sales volumes and lower product liability and other operating expense partially offset by higher currency exchange losses, as well as higher R&D costs related to new product launches.the factors described in the preceding sections.
Adjusted operating income. Americas adjusted operating income for the year ended December 31, 20192022 was $226.6$267.4 million, an increase of $19.8$64.9 million or 10%32%, compared to $206.8$202.5 million for the year ended December 31, 2018.2021. The increase was relatedin adjusted operating income is primarily attributable to the higher level of sales and margin expansionvolumes driven by new product launchesthe full year impact of the Bacharach acquisition and pricing initiatives as well as savings realized from previously executed restructuring programs.organic business activity, partially offset by higher SG&A expenses to support business growth.
International adjusted operating income for the year ended December 31, 20192022 was $59.9$60.9 million, consistent witha decrease of $12.4 million, or 17%, compared to adjusted operating income of $59.9$73.3 million for the year ended December 31, 2018. Despite realizing a lower level of sales, cost reduction programs helped to maintain2021. The decrease in adjusted operating income is primarily attributable to lower revenue and improved adjusted operating margin.gross margins as a result of unfavorable currency translation and transactional impact, inflationary pressures, partially offset by lower SG&A expenses.
Corporate segment adjusted operating loss for the year ended December 31, 20192022 was $35.6$37.9 million, an increase of $3.7$2.7 million, or 12%8%, compared to an adjusted operating loss of $31.9$35.2 million for the year ended December 31, 2018,2021 due primarily due to increased costs to support higher professional service expenses partially offset by lower legal expenses.
The following tables represent a reconciliation from GAAP operating income to adjusted operating income (loss) and adjusted EBITDA. Adjusted operating margin % is calculated as adjusted operating income (loss) divided by net sales and adjusted EBITDA margin % is calculated as adjusted EBITDA divided by net sales.
| | | | | | | | | | | | | | |
| Adjusted operating income | Year Ended December 31, 2022 |
| (In thousands) | Americas | International | Corporate | Consolidated |
| Net sales | $ | 1,043,238 | | $ | 484,715 | | $ | — | | $ | 1,527,953 | |
| GAAP operating income | | | | 239,137 | |
| Restructuring charges (Note 3) | | | | 7,965 | |
| Currency exchange losses, net | | | | 10,255 | |
| Product liability expense (Note 20) | | | | 20,590 | |
Acquisition related costs (Note 14)(a) | | | | 12,440 | |
| Adjusted operating income (loss) | 267,392 | | 60,923 | | (37,928) | | 290,387 | |
| Adjusted operating margin % | 25.6 | % | 12.6 | % | | |
Depreciation and amortization(a) | 34,334 | | 12,256 | | 520 | | 47,110 | |
| Adjusted EBITDA | 301,726 | | 73,179 | | (37,408) | | 337,497 | |
| Adjusted EBITDA % | 28.9 | % | 15.1 | % | | |
| | | | Year Ended December 31, 2019 | |
| Adjusted operating income | | Adjusted operating income | Year Ended December 31, 2021 |
| (In thousands) | Americas | International | Corporate | Consolidated | (In thousands) | Americas | International | Corporate | Consolidated |
| Net sales | $ | 915,118 |
| $ | 486,863 |
| $ | — |
| $ | 1,401,981 |
| Net sales | $ | 908,068 | | $ | 492,114 | | $ | — | | $ | 1,400,182 | |
| GAAP operating income | | 186,230 |
| GAAP operating income | | 22,780 | |
| Restructuring charges (Note 2) | | 13,846 |
| |
| Restructuring charges (Note 3) | | Restructuring charges (Note 3) | | 16,433 | |
| Currency exchange losses, net | | 19,814 |
| Currency exchange losses, net | | 216 | |
| Product liability expense (Note 19) | | 26,619 |
| |
| Strategic transaction costs (Note 13) | | 4,400 |
| |
| Product liability expense (Note 20) | | Product liability expense (Note 20) | | 185,264 | |
Acquisition related costs (Note 14)(a) | | Acquisition related costs (Note 14)(a) | | 15,884 | |
| | Adjusted operating income (loss) | 226,596 |
| 59,910 |
| (35,597 | ) | 250,909 |
| Adjusted operating income (loss) | 202,496 | | 73,279 | | (35,198) | | 240,577 | |
| Adjusted operating margin % | 24.8 | % | 12.3 | % | |
|
| Adjusted operating margin % | 22.3 | % | 14.9 | % | |
Depreciation and amortization | 24,691 |
| 12,938 |
| 391 |
| 38,020 |
| 31,236 | | 13,718 | | 463 | | 45,417 | |
| Adjusted EBITDA | 251,287 |
| 72,848 |
| (35,206 | ) | 288,929 |
| Adjusted EBITDA | 233,732 | | 86,997 | | (34,735) | | 285,994 | |
| Adjusted EBITDA % | 27.5 | % | 15.0 | % | |
|
| Adjusted EBITDA % | 25.7 | % | 17.7 | % | |
|
| | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| (In thousands) | Americas | International | Corporate | Consolidated |
| Net sales | $ | 854,287 |
| $ | 503,817 |
| $ | — |
| $ | 1,358,104 |
|
| GAAP operating income | | | | 173,479 |
|
| Restructuring charges (Note 2) | | | | 13,247 |
|
| Currency exchange losses, net | | | | 2,330 |
|
| Product liability expense (Note 19) | | | | 45,327 |
|
| Strategic transaction costs (Note 13) | | | | 421 |
|
| Adjusted operating income (loss) | 206,839 |
| 59,866 |
| (31,901 | ) | 234,804 |
|
| Adjusted operating margin % | 24.2 | % | 11.9 | % | |
|
|
| Depreciation and amortization | 24,143 |
| 13,303 |
| 406 |
| 37,852 |
|
| Adjusted EBITDA | 230,982 |
| 73,169 |
| (31,495 | ) | 272,656 |
|
| Adjusted EBITDA % | 27.0 | % | 14.5 | % | | |
Note: Adjusted operating income (loss) and adjusted EBITDA are a non-GAAP financial measures used by the chief operating decision maker to evaluate segment performance and allocate resources.measures. Adjusted operating income (loss) is reconciled above to the nearest GAAP financial measure, Operating income (loss), and excludes restructuring, currency exchange, product liability expense, and strategic transactionacquisition related costs. Adjusted EBITDA is reconciled above to the nearest GAAP financial measure, Operating income (loss) and excludes depreciation and amortization expense. Adjusted operating margin % and Adjusted EBITDA % are operating ratios derived from non-GAAP financial measures.
Total other expense (income), net. OtherTotal other expense, net, for the year ended December 31, 20192022, was $2.5$0.6 million, a decrease of $8.6$1.4 million or 77.6%, compared to $11.1other income, net, of $0.8 million for the year ended December 31, 2018 due to lower2021, driven primarily by higher interest expense, primarily as a result of a favorable adjustment related to rising interest rate environment, and a foreign uncertain tax position for which the statutewrite-down of limitations has expired,an equity investment, partially offset by higher pension income, resulting from higher expected rate of return on plan assets. We expect total interest expense for 2023 to be between $48 million and $50 million, this increase is primarily related to the absenceadditional long-term debt to divest MSA LLC as of the loss on extinguishment of debt recognized in 2018. Lower discount rates are expectedJanuary 5, 2023. We expect non-cash pension income to drive andecline by $8 million unfavorable swing in pension expense in 2020, compared to 2019. The majority of this impact will be reflected in the Other income, net line on our Consolidated Statement of Income. The increase in expense is non-cash. Our U.S. qualified plan remains overfunded and our funding status is expected to improve in 2020 based on higher returns on our investments in 2019.2022.
Income taxes.The reported effective tax rate for the year ended December 31, 20192022 was 25.1%24.7%, which includedincludes a benefit of 2.6%0.8% for share-based payments, expense of 0.1% related to higher profits in foreign jurisdictions, and an expense of 1.8% due to non-deductible foreign currency exchange losses on entity closures, an expense of 1.9%1.2% due to nondeductible compensation and expense related to an increase in profitability in higher tax jurisdictions.compensation. This compared to a reported effective tax rate for the year ended December 31, 2018,2021 of 22.9%7.7%, which included a benefit of 1.6%18.3% for certain share-based payments, and a chargebenefit of 1.1% associated with exit taxes10.9% related to our U.S., Canadian,higher profits in foreign jurisdictions and European realignment.settlement of a foreign audit, and an expense of 15.3% due to nondeductible compensation.
We are subject to regular review and audit by both foreign and domestic tax authorities. While we believe our tax positions will be sustained, the final outcome of tax audits and related litigation may differ materially from the tax amounts recorded in our consolidated financial statements.
During 2018, the Company recorded $1.8 million of foreign income tax reserves related to legal and operational realignment of our U.S., Canadian and European operations.
As of December 31, 2018, the Company had completed its accounting for all of the enactment-date income tax effects of the Tax Cuts and Jobs Act of 2017 (the "Act"). Accordingly, we reduced our estimate for the one-time transition tax by $2.0 million and increased our estimate for the revaluation of U.S. deferred tax assets and liabilities by $2.5 million and a $2.0 million increase associated with prepaid taxes for updated regulations related to the Act.
Net income attributable to MSA Safety Incorporated. Net income was $136.4$179.6 million for the year ended December 31, 2019,2022, or $3.48$4.56 per diluted share, compared to $124.2$21.3 million, or $3.18$0.54 per diluted share, for the year ended December 31, 2018, as a result2021.
Non-GAAP Financial Information
We may provide information regardingTo supplement our Consolidated Financial Statements presented in accordance with generally accepted accounting principles (“GAAP”), we use, and this report includes, certain non-GAAP financial measures. These financial measures such asinclude organic constant currency changes, financial measures excluding the impact of acquisitions and related strategic transactionacquisition related costs (including acquisition related amortization), adjusted operating income, adjusted operating margin percentage, adjusted EBITDA and adjusted EBITDA margin percentage, which are not recognized terms under U.S. GAAP and do not purport to be alternatives to net sales, selling, general and administrative expense, operating income or net income as a measure of operating performance.percentage. We believe that the use of these non-GAAP financial measures provide investors with additional useful information and provide a more complete understanding of our operating performance and trends, and facilitate comparisons with the performance of our peers. Management also uses these measures internally to assess and better understand our underlying results. Because not all companiesbusiness performance and trends related to core business activities. The non-GAAP financial measures and key performance indicators we use, identical calculations, these presentationsand computational methods with respect thereto, may not be comparablediffer from the non-GAAP financial measures and key performance indicators, and computational methods, that our peers use to similarly titled measures from other companies. For more information aboutassess their performance and trends.
The presentation of these non-GAAP financial measures does not comply with U.S. GAAP. These non-GAAP financial measures should be viewed as supplemental in nature, and not as a substitute for, or superior to, our reported results prepared in accordance with GAAP. When non-GAAP financial measures are disclosed, the Securities and Exchange Commission's Regulation G requires: (i) the presentation of the most directly comparable financial measure calculated and presented in accordance with GAAP and (ii) a reconciliation of the differences between the non-GAAP financial measure presented and the most directly comparable financial measure calculated and presented in accordance with GAAP. For an explanation of these measures, together with a reconciliation to the nearest U.S.most directly comparable GAAP financial measure, please refer to the reconciliations referenced above in Management's Discussion & Analysis section and in Note 7—Segment Information of the consolidated financial statements in Part II Item 8 of this Form 10-K.Analysis.
We may also provide financial information on a constant currency basis, which is a non-GAAP financial measure. These references to a constant currency basis do not include operational impacts that could result from fluctuations in foreign currency rates, which are outside of management's control. To provide information on a constant currency basis, the applicable financial results are adjusted by translating current and prior period results in local currency to a fixed foreign exchange rate. This approach is used for countries where the functional currency is the local country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance. Constant currency information is not recognized under U.S. GAAP and it is not intended as an alternative to U.S. GAAP measures.
LIQUIDITY AND CAPITAL RESOURCES
Our main source of liquidity is operating cash flows, supplemented by borrowings. Our principal liquidity requirements are for working capital, capital expenditures, principal and interest payments on debt, declared dividend payments and acquisitions. At December 31, 2019,2022, approximately 32%46% of our long-term debt is at fixed interest rates with repayment schedules through 2031.2036. The remainder of our long-term debt is at variable rates on an unsecured revolving credit facility that is due in 2023.2026. At December 31, 2019,2022, approximately 78%82% of our borrowings are denominated in US dollars, which limits our exposure to currency exchange rate fluctuations.
At December 31, 2019, we2022, the Company had cash and cash equivalents, andincluding restricted cash, totaling $152.5$164.4 million, which included $117.6 million of cash, cash equivalents and restricted cash held by our foreign subsidiaries. Cash, cash equivalentsaccess to sufficient capital, providing ample liquidity and restricted cash increased $11.9 million during the year ended December 31, 2019 comparedflexibility to an increase of $2.7 million during 2018. We continue to employ amaintain our balanced capital allocation strategy that prioritizes growth investments, funding our dividend and servicing debt obligations.
Our unsecured senior revolving credit facility provides for borrowings up to $600.0 million through 2023 and is subject to certain commitment fees. This credit facility has sub-limits for the issuance of letters of credit, swingline borrowings and foreign currency denominated borrowings; and may be used for general corporate purposes, including working capital, permitted acquisitions, capital expenditures and repayment of existing indebtedness. Loans under the revolving facility will bear interest at a variable rate based on LIBOR or the federal funds rate at the Company's option. Our weighted average interest rate was 2.77% in 2019.strategy. At December 31, 2019, $361.32022, $589.9 million of the $600.0existing $900.0 million senior revolving credit facility was unused, including letters of credit.
credit issued under the facility. The facility also provides an accordion feature that allows the Company to access an additional $400.0 million of capacity pending approval by MSA’s board of directors and from the bank group. The Company currently hasbelieves our healthy balance sheet and access to approximately $663.0 million ofsignificant capital at the year ended December 31, 2019. Refer2022, positions us well to navigate through challenging business conditions.
Operating activities. Operating activities provided cash of $157.5 million in 2022, compared to providing cash of $199.1 million in 2021. The reduced operating cash flow as compared to the same period in 2021 was primarily related to increased working capital requirements, notably increased inventory balances at year-end 2022 to support the higher backlog and accounts receivable related to stronger fourth quarter 2022 revenue. Payments for subsidiary MSA LLC's product liability claims exceeded collections from insurance companies by $27.2 million in the year ended December 31, 2022, compared to $24.1 million in 2021. On January 5, 2023, the Company divested MSA LLC and as a result, will derecognize all legacy cumulative trauma product liability reserves, related insurance assets, and associated deferred tax assets of the divested subsidiary from our balance sheet and will recognize a loss of approximately $200 million in the first quarter of 2023 and expect related cash outflows to be recognized within operating activities in the consolidated statements of cash flows. R&Q and Obra have assumed management of the divested subsidiary, including the management of its claims. The divestiture enhances operating cash flow predictability by eliminating costs associated with defending and settling the transferred claims.
Please refer to Note 11—Short and Long-Term Debt to20—Contingencies of the consolidated financial statements in Part II Item 8 of this Form 10-K.10-K for additional information.
Operating activities. Operating activities provided cash of $165.0 million in 2019, compared to providing cash of $263.9 million in 2018. The decrease in operating cash flows during the period was primarily attributable lower collections on insurance receivables and a higher use of cash for working capital to support our higher level of sales and backlog. We made product liability payments of $33.5 million, net of collections on insurance receivables, in the year ended December 31, 2019, while we collected $40.1 million from insurance companies, net of product liability settlements paid, in the same period of 2018 largely the result of resolving a long outstanding carrier. Historically, cumulative trauma liability payments were funded with the Company's operating cash flow, pending resolution of disputed insurance coverage. For more than a decade, we have funded product liability settlements from operating cash flow. The vast majority of the insurance receivables and notes receivables - insurance companies balances at December 31, 2019, is attributable to reimbursement believed to be due under the terms of signed agreements with insurers and are not currently subject to litigation. While the timing of cash flows for product liability and insurance receivables can and do vary from quarter to quarter, we have been successful in establishing cash flow streams that have allowed us to fund these liabilities without a material impact on our capital allocation priorities.
Investing activities. Investing activities used cash of $64.2$4.5 million for the year ended December 31, 2019,2022, compared to using $84.4$415.5 million in 2018.2021. The acquisition of Sierra Monitor Corporation, purchase of short-term investments, net of proceeds from maturities and capital expenditures drovedecrease in cash outflows fromused in investing activities during the year ended December 31, 2019. Purchases of short-term investments and capital expenditures drove cash outflows from investing inas compared to the same period in 2018. During 2019 we spent $36.6 million on capital expenditures including approximately $5.0 million associated with software development, which2021 was a $3.4 million increase comparedprimarily related to 2018.the absence of acquisitions. We expect capital expendituresremain active in evaluating additional acquisition opportunities that will allow us to approximate $45 millioncontinue to grow in 2020, within the Company’s annual capital expenditure expectations of 2.5% - 3.5% of revenue.key end markets and geographies.
Financing activities. Financing activities used cash of $84.6$113.4 million for the year ended December 31, 2019,2022, compared to usingproviding cash of $163.3$203.9 million in 2018.2021. During 2019,2022, we had net payments on long-term debt of $16.5$13.0 million as compared to net paymentsproceeds on long-term debt of $107.7$293.2 million induring the same period in 2018.2021 to fund the acquisitions of Bacharach and Bristol and buy-out our minority partner in our China business. We paid cash dividends of $71.5 million during 2022, compared to $68.6 million, exclusive of a $5.6 million dividend to our former noncontrolling interest partner in China as part of the buy-out, during 2021. We also used cash of $34.4 million during 2022 to repurchase shares, compared to using $6.2 million during the same period in 2021. In August 2018, we repaid2022, $30.4 million of our 5.41% 2006 Senior Notes in the amount of $28.0 million, which included $1.5 millionrepurchase activity was related to a make-whole provision and accrued interest through the date of repayment.purchases under our 2015 stock repurchase program.
We made dividend paymentsIn January 2023, we entered into a new $250 million term loan and $65 million was drawn down from our revolving credit facility to fund the divestiture of $63.5MSA LLC, a wholly owned subsidiary that, at the time of divestiture held legacy product liability claims relating to coal dust, asbestos, silica, and other exposures. Subsequent to this transaction, we have more than $500 million during 2019, compared to $57.2 million during 2018. Dividends paidof availability remaining on our common stock during 2019 were $1.64 per share. Dividends paid on our common stock in 2018 were $1.49.revolving credit facility.
Restricted cash balances were $0.3 million at December 31, 2019 compared to $0.5 million at December 31, 2018 and were primarily used to support letter of credit balances.
The MSA Board of Directors has authorized the Company to repurchase up to $100.0 million in shares of MSA common stock. There were $3.3 million in repurchases made in 2019 and no share repurchases in 2018. The program seeks to offset equity dilution associated with employee stock compensation. The Board of Directors did not set a time limitation on the repurchase program.
CUMULATIVE TRANSLATION ADJUSTMENTS
The year-end position of the U.S. dollar relative to international currencies at December 31, 2022, resulted in a translation loss of $1.6$19.5 million being recorded to cumulative translation adjustments shareholders' equity account for the year ended December 31, 20192022, compared to a translation loss of $29.8$25.4 million in 2018. The translation loss during 2019 was primarily relatedbeing recorded to the strengthening of the U.S. dollar relative to the euro. Thecumulative translation loss in 2018 was primarily related to the strengthening of the U.S. dollar relative to the euro and British pound.adjustments account during 2021.
During the year ended December 31, 2019, we recognized approximately $19.8 million of currency exchange losses, net, in our Consolidated Statement of Income of which $15.3 million relates to non-cash currency exchange losses due primarily to an approved plan to close our South Africa affiliates. This charge is related to the historical translation of the elements of the financial statements for the business from the functional currency to the U.S. Dollar. The translation impact has been
historically recorded as currency translation adjustment, a separate component of accumulated other comprehensive loss within the shareholders' equity section of the Consolidated Balance Sheet.
Brexit has caused, and may continue to create, volatility in global stock markets and regional and global economic uncertainty particularly in the U.K. financial and banking markets. Weakening of economic conditions or economic uncertainties tend to harm our business, and if such conditions worsen in the U.K. or in the rest of Europe, it may have an adverse effect on our consolidated operations and sales. The Company continues to monitor the economic situation related to Brexit and current analysis indicates that exposure in our supply chain related to additional duties and sourcing costs is not material. We have approximately $45 million of annual sales denominated in the British pound which are subject to exchange rate risk associated with any volatility in the British pound. We have long-term debt of $78.4 million at December 31, 2019 that is denominated in British pounds. Because the debt is denominated in local currency, the value of the debt and local cash flows are aligned with respect to movements in the exchange rate between the British pound and U.S. dollar.
COMMITMENTS AND CONTINGENCIES
We are obligated to make future payments under various contracts, including debt and lease agreements. Our significant cash obligations as of December 31, 2019,2022, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
| Long-term debt | | $ | 349.9 |
| | $ | 20.0 |
| | $ | 20.0 |
| | $ | — |
| | $ | 245.2 |
| | $ | 8.1 |
| | $ | 56.6 |
|
| Operating leases | | 65.0 |
| | 11.0 |
| | 9.1 |
| | 6.0 |
| | 4.7 |
| | 3.6 |
| | 30.6 |
|
| Transition tax | | 6.7 |
| | 0.1 |
| | 0.8 |
| | 1.5 |
| | 1.9 |
| | 2.4 |
| | — |
|
| Totals | | $ | 421.6 |
| | $ | 31.1 |
| | $ | 29.9 |
| | $ | 7.5 |
| | $ | 251.8 |
| | $ | 14.1 |
| | $ | 87.2 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Total | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| Long-term debt | | $ | 575.2 | | | $ | 7.4 | | | $ | 7.4 | | | $ | 7.4 | | | $ | 316.0 | | | $ | 7.4 | | | $ | 229.6 | |
| Operating leases | | 52.2 | | | 10.0 | | | 7.5 | | | 5.2 | | | 4.1 | | | 3.4 | | | 22.0 | |
| Inventory costing method change tax | | 8.0 | | | 2.7 | | | 2.7 | | | 2.6 | | | — | | | — | | | — | |
| Transition tax | | 2.0 | | | 0.7 | | | 1.3 | | | — | | | — | | | — | | | — | |
| Totals | | $ | 637.4 | | | $ | 20.8 | | | $ | 18.9 | | | $ | 15.2 | | | $ | 320.1 | | | $ | 10.8 | | | $ | 251.6 | |
The significant obligations table does not include obligations to taxing authorities due to uncertainty surrounding the ultimate settlement of amounts and timing of these obligations. It also does not include $315 million of variable rate debt related to the January 5, 2023, divestiture of MSA LLC.
We expect to meet our 2020 and 2021future debt service obligations through cash provided by operations. Approximately $237.1$308.6 million of debt payable in 20232026, included in the table above, relates to our unsecured senior revolving credit facility.facility that has a weighted average interest rate of 5.13% as of December 31, 2022. We expect to generate sufficient operating cash flow to make payments against this amount each year. To the extent that a balance remains when the facility matures in 2023,2026, we expect to refinance the remaining balance through new borrowing facilities. Interest expense on fixed rate debt over the next five years is expected to be approximately $3.7 million in 2020, $2.9 million in 2021, $2.2 million in 2022, $2.1$7.5 million in 2023, and $1.8$7.3 million in 2024.2024, $7.0 million in 2025, $6.8 million in 2026 and $6.6 million in 2027. We expect total interest expense for 20202023 to be between $12$48 million - $14and $50 million.
The Company had outstanding bank guarantees and standby letters of credit with banks as of December 31, 20192022 totaling $8.6$9.3 million, of which $1.9$1.5 million relate to the senior revolving credit facility. These letters of credit serve to cover customer requirements in connection with certain sales orders and insurance companies. No amounts were drawn on these arrangements at December 31, 2019. The Company is also required to provide cash collateral in connection with certain arrangements. At December 31, 2019,2022, the Company has $0.3$1.5 million of restricted cash in support of these arrangements.
We expect to make net contributions of $7.6$8.2 million to our pension plans in 20202023 which are primarily associated with our International segment. We have not been required to make contributions to our U.S. based qualified defined benefit pension plan in many years.
We have purchase commitments for materials, supplies, services and property, plant and equipment as part of our ordinary conduct of business.
Please refer to Note 1920—Contingencies to the consolidated financial statements in Part II Item 8 of this Form 10-K for further discussion on the Company's product liabilities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP)(U.S. GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. We evaluate these estimates and judgments on an on-going basis based on historical experience and various assumptions that we believe to be reasonable under the circumstances. However, different amounts could be reported if we had used different assumptions and in light of different facts and circumstances. Actual amounts could differ from the estimates and judgments reflected in our consolidated financial statements. A summary of the Company's significant accounting policies is included in Note 1—Significant Accounting Policies to the consolidated financial statements in Part II, Item 8 of this Form 10-K.
We believe that the following are theThe more critical judgments and estimates used in the preparation of our consolidated financial statements.statements are discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for the year ended December 31, 2022. During 2021, the Company made acquisitions that raised business combinations to a critical accounting policy and estimate. There were no business combinations during 2022.
Business combinations. In accordance with the accounting guidance for business combinations, the Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed will be recognized as goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. In addition to using management estimates and negotiated amounts, the Company uses a variety of information sources to determine the estimated fair values of acquired assets and liabilities including: third-party appraisals for the estimated value and lives of identifiable intangible assets and property, plant and equipment; third-party actuaries for the estimated obligations of defined benefit pension plans and similar benefit obligations; and legal counsel or other experts to assess the obligations associated with legal, environmental and other contingent liabilities.
The business and technical judgment of management was used in determining which intangible assets have indefinite lives and in determining the useful lives of finite-lived intangible assets in accordance with the accounting guidance for goodwill and other intangible assets.
Cumulative trauma product liability. WeThe Company and its subsidiaries face an inherent business risk of exposure to product liability claims arising from the alleged failure of our products to prevent the types of personal injury or death against which they are designed to protect. Product liability claims are categorized as either single incident or cumulative trauma.
Single incident product liability claims involve incidents of short duration that are typically known when they occur and involve observable injuries, which provide ana more objective basis for quantifying damages. The Company estimates its subsidiaries' liability for single incident product liability claims based on expected settlement costs for asserted single incident product liability claims and an estimate of costs for single incident product liability claims incurred but not reported ("IBNR"). Single incident product liability exposures are evaluated on an annual basis, or more frequently if changing circumstances warrant. Adjustments are made to the reserve as appropriate.
Cumulative trauma product liability claims involve exposures to harmful substances (e.g., silica, asbestos and coal dust) that occurred over many years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, mesothelioma, or coal worker’s pneumoconiosis.diseases. In the case of MSA LLC'sLLC, the subsidiary's combined cumulative trauma product liability reserve is based upon estimates of its liability for asserted cumulative trauma product liability claims not yet resolved and for IBNR cumulative trauma product liability claims. In addition, in connection with finalizing and reporting the Company's results of operations, management works annually (unless significant changes in trends or new developments warrant an earlier review) with an outside valuation consultant and outside legal counsel to review MSA LLC's potential exposure to all cumulative trauma product liability claims, including asserted cumulative trauma product liability claims not yet resolved and IBNR cumulative trauma product liability claims. The process for estimating asserted cumulative trauma product liability claims not yet resolved takes into account available facts for those claims including the number and composition of such claims, outcomes of matters resolved during current and prior periods, and variances associated with different groups of claims, plaintiffs' counsel, and venues, as well as any other relevant information. The process for estimating IBNR claims involves a number of key judgments and assumptions, including as to the number and types of claims that may be asserted, the period in which claims may be asserted and resolved, the percentage of claims that may be dismissed without payment, the average cost to resolve claims on which a payment is made, the manner in which MSA LLC will defend claims, and the medical and legal environments that will be applicable to the assertion, evaluation, and resolution of claims in the future. Each of these factors may increase or decrease significantly within an individual period depending on, among other things, the timing of claims filings or settlements, or litigation outcomes during a particular period that are especially favorable or unfavorable to MSA LLC. We accordingly consider MSA LLC’s claims experience over multiple periods and/or whether there are changes in MSA LLC’s claims experience and trends that are likely to continue for a significant time into the future in determining whether to make an adjustment to the reserve, rather than evaluating such factors solely in the short term.
Please refer to Note 20—Contingencies to the consolidated financial statements in Part II Item 8 of this Form 10-K for further discussion on the Company's product liabilities and divestiture of MSA LLC on January 5, 2023.
Income taxes. We recognize deferred tax assets and liabilities using enacted tax rates to record the tax effect of temporary differences between the book and tax basis of recorded assets and liabilities. We record valuation allowances to reduce deferred tax assets to the amounts that we estimate are probable to be realized. When assessing the need for valuation allowances, we consider projected future taxable income and prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in our judgments about the realizability of deferred tax assets in future years, we adjust the related valuation allowances in the period that the change in circumstances occurs.
We record an estimated income tax liability based on our best judgment of the amounts likely to be paid in the various tax jurisdictions in which we operate. We record tax benefits related to uncertain tax positions taken or expected to be taken on a tax return when such benefits meet a more likely than not threshold. We recognize interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The tax liabilities ultimately paid are dependent on a number of factors, including the resolution of tax audits, and may differ from the amounts recorded. Tax liabilities are adjusted through income when it becomes probable that the actual liability differs from the amount recorded.
Pensions and other post-retirement benefits. We sponsor certain pension and other post-retirement benefit plans. Accounting for the net periodic benefit costs and credits for these plans requires us to estimate the cost of benefits to be provided well into the future and to attribute these costs over the expected work life of the employees participating in these plans. These estimates require our judgment about discount rates used to determine these obligations, expected returns on plan assets, rates of future compensation increases, rates of increase in future health care costs, participant withdrawal and mortality rates and participant retirement ages. Differences between our estimates and actual results may significantly affect the cost of our obligations under these plans and could cause net periodic benefit costs and credits to change materially from year-to-year. Discount rates and plan asset valuations are point-in-time measures. The discount rate assumptions used in determining projected benefit obligations for our U.S. and foreign plans were based on the spot rate method at December 31, 2019.2022.
Expected returns on plan assets are based on our historical returnscapital market expectations by asset class.
The following table summarizes the impact of changes in significant actuarial assumptions on our December 31, 20192022 actuarial valuations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impact of Changes in Actuarial Assumptions |
| Change in Discount
Rate | | Change in Expected
Return | | Change in Market Value of Assets |
| (In thousands) | 1% | | (1)% | | 1% | | (1)% | | 5% | | (5)% |
| (Decrease) increase in net benefit cost | $ | (7,875) | | | $ | 9,942 | | | $ | (5,682) | | | $ | 5,682 | | | $ | (1,482) | | | $ | 1,333 | |
| (Decrease) increase in projected benefit obligation | (61,274) | | | 77,324 | | | — | | | — | | | — | | | — | |
| Increase (decrease) in funded status | 61,274 | | | (77,324) | | | — | | | — | | | 25,853 | | | (25,853) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Impact of Changes in Actuarial Assumptions |
| | Change in Discount Rate | | Change in Expected Return | | Change in Market Value of Assets |
| (In thousands) | 1% | | (1)% | | 1% | | (1)% | | 5% | | (5)% |
| (Decrease) increase in net benefit cost | $ | (6,076 | ) | | $ | 7,656 |
| | $ | (4,578 | ) | | $ | 4,578 |
| | $ | (824 | ) | | $ | 824 |
|
| (Decrease) increase in projected benefit obligation | (79,403 | ) | | 99,473 |
| | — |
| | — |
| | — |
| | — |
|
| Increase (decrease) in funded status | 79,403 |
| | (99,473 | ) | | — |
| | — |
| | 25,793 |
| | (25,793 | ) |
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Amounts billed and due from our customers are classified as receivables on the Consolidated Balance Sheet. We make appropriate provisions for uncollectible accounts receivable which have historically been insignificant in relation to our net sales. Certain contracts with customers, primarily distributor customers, have an element of variable consideration that is estimated when revenue is recognized under the contract to the extent that it is material to the individual contract. Variable consideration includes volume incentive rebates, performance guarantees, price concessions and returns. Rebates are based on achieving a certain level of purchases and other performance criteria that are documented in established distributor programs. These rebates are estimated based on projected sales to the customer and accrued as a reduction of net sales as they are earned by the customer. The rebate accrual is reviewed monthly and adjustments are made as the estimate of projected sales changes. Product returns, including an adjustment for restocking fees if it is material, are estimated based on historical return experience and revenue is adjusted. Sales, value add and other taxes collected with revenue-producing activities and remitted to governmental authorities are excluded from revenue.
Depending on the terms of the arrangement, we may defer revenue for which we have a future obligation, including training and extended warranty and technical services, until such time that the obligation has been satisfied. We use an observable price, or a cost plus margin approach when one is not available, to determine the stand-alone selling price for separate performance obligations. We have elected to recognize the cost for shipping and handling as an expense when control of the product has passed to the customer. These costs are included within the Cost of Products Sold line on the Consolidated Statement of Income. Amounts billed to customers for shipping and handling are included in net sales.
We typically receive interim milestone payments under certain contracts, including our fixed gas and flame detection projects, as work progresses. For some of these contracts, we may be entitled to receive an advance payment. Revenue for these contracts is generally recognized as control passes to the customer, which is a point in time upon shipment of the product, and if applicable, acceptance by the customer. We recognize a liability for these advance payments in excess of revenue recognized and present it as contract liabilities on the Consolidated Balance Sheet. The advance payment is typically not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract. In some cases, the customer retains a small portion of the contract price, typically 10%, until completion of the contract, which we present as contract assets on the Consolidated Balance Sheet. Accordingly, during the period of contract performance, billings and costs are accumulated on the Consolidated Balance Sheet as contract assets or contract liabilities, but no income is recognized until completion of the project and control has passed to the customer. As of December 31, 2019, there were no material contract assets or contract liabilities recorded on the Consolidated Balance Sheet.
Goodwill and Indefinite-lived Intangible Assets. On October 1st of each year, or more frequently if indicators of impairment exist or if a decision is made to sell a business, we evaluate goodwill for impairment. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a decline in expected cash flows, a significant adverse change in the business climate, unanticipated competition, slower growth rates, or negative developments in equity and credit markets, among others.
All goodwill is assigned to and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. For goodwill impairment testing purposes, we consider our operating segments to be our reporting units. The evaluation of impairment involves using either a qualitative or quantitative approach as outlined in Accounting Standards Codification (ASC)("ASC") Topic 350. 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 value, including goodwill. Factors considered as part of the qualitative assessment include entity-specific industry, market and general economic conditions. In 2019,2022, we elected to bypass the qualitative evaluation for all of our reporting units and performed a two-step quantitative test at October 1, 2019.2022. Quantitative testing involves comparing the estimated fair value of each reporting unit to its carrying value. We estimate reporting unit fair value using a weighted average of fair values determined by discounted cash flow (DCF)("DCF") and market approach methodologies, as we believe both are equally important indicators of fair value. A number of significant assumptions and estimates are involved in the application of the DCF model, including sales volumes and prices, costs to produce, tax rates, capital spending, discount rates, and working capital changes. Cash flow forecasts are generally based on approved business unit operating plans for the early years and historical relationships in later years. The betas used in calculating the individual reporting units’ weighted average cost of capital (WACC) rate are estimated for each reporting unit based on peer data. The market approach methodology measures value through an analysis of peer companies. The analysis entails measuring the multiples of EBITDA at which peer companies are trading.
In the event the carrying value is in excess of the estimated fair value of a reporting unit per the weighted average of the DCF and market approach models, an impairment loss equal to such excess would be recognized, which could materially and adversely affect reported consolidated results of operations and shareholders’ equity. At October 1, 2019,2022, based on our quantitative test, the fair values of alleach of our reporting units exceeded their respective carrying value by at least 93%42%.
Intangible assetsThe intangible asset with an indefinite lives arelife is also subject to impairment testing on October 1st of each year, or more frequently if indicators of impairment exist. The impairment test compares the fair value of the intangible assetsasset with theirits carrying amounts.amount. We performedperform a quantitative assessment of the indefinite lived trade name intangible asset as outlined in ASC 350 by comparing the estimated fair value of the trade name intangible asset to its carrying value. We estimate the fair value using the relief from royalty income approach. A number of significant assumptions and estimates are involved in the application of the relief from royalty model, including sales volumes and prices, royalty rates and tax rates. Forecasts are based on sales generated by the underlying trade name assets and are generally based on approved business unit operating plans for the early years and historical relationships in later years. At October 1, 2019,2022, based on our quantitative test, the fair value of the trade name asset exceeded theirits carrying value by approximately 25%37%.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 1—Significant Accounting Policies of the consolidated financial statements in Part II Item 8 of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of adverse changes in the value of a financial instrument caused by changes in currency exchange rates, interest rates and equity prices. We are exposed to market risks related to currency exchange rates and interest rates.
Currency exchange rates. We are subject to the effects of fluctuations in currency exchange rates on various transactions and on the translation of the reported financial position and operating results of our non-U.S. companies from local currencies to U.S. dollars. A hypothetical 10% strengthening or weakening of the U.S. dollar would increase or decrease our reported sales and net income for the year ended December 31, 20192022 by approximately $62.8 million and $5.5$6.5 million, or 4.5%4.1% and 4.2%3.6%, respectively.
When appropriate, we may attempt to limit our transactional exposure to changes in currency exchange rates through forward contracts or other actions intended to reduce existing exposures by creating offsetting currency exposures. At December 31, 2019,2022, we had open foreign currency forward contracts with a U.S. dollar notional value of $74.9$103.0 million. A hypothetical 10% increase in December 31, 20192022 forward exchange rates would result in a $7.5$10.3 million increase in the fair value of these contracts.
Interest rates. We are exposed to changes in interest rates primarily as a result of borrowing and investing activities used to maintain liquidity and fund business operations. Because of the relatively short maturities of temporary investments and the variable rate nature of our revolving credit facility, these financial instruments are reported at carrying values which approximate fair values.
At December 31, 2019,2022, we had $112.9$266.5 million of fixed rate debt which matures at various dates through 2031.2036. The incremental increase in the fair value of fixed rate long-term debt resulting from a hypothetical 10% decrease in interest rates would be approximately $10$8.0 million. However, our sensitivity to interest rate declines and the corresponding increase in the fair value of our debt portfolio would unfavorably affect earnings and cash flows only to the extent that we elected to repurchase or retire all or a portion of our fixed rate debt portfolio at prices above carrying values.
At December 31, 2019,2022, we had $237.1$308.6 million of variable rate borrowings under our revolving credit facility. A 10050 basis point increase or decrease in interest rates could have ana $1.4 million impact on future pre-tax earnings under our current capital structure.
Item 8. Financial Statements and Supplementary Data
Management’s Reports to Shareholders
Management’s Report on Responsibility for Financial Reporting
Management of MSA Safety Incorporated (the Company) is responsible for the preparation of the consolidated financial statements included in this annual report. The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on the best estimates and judgments of management. The other financial information contained in this annual report is consistent with the consolidated financial statements.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019.2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on our assessment and those criteria, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2019.
The Company acquired Sierra Monitor Corporation ("SMC") on May 20, 2019, which represented approximately 2% and 4% of the Company's total assets and net assets as of December 31, 2019 and 1% and (2%) of total sales and net income for the year ended December 31, 2019. As the SMC acquisition was completed during the second quarter of 2019, the scope of the Company's 2019 assessment of the effectiveness of its internal control over financial reporting does not include the SMC acquisition. This exclusion is pursuant to the SEC's general guidance that an assessment of a recently acquired business' internal control over financial reporting may be omitted from the scope of the Company's assessment of its internal control over financial reporting for twelve months following the date of acquisition.2022.
The Company's independent registered public accounting firm that audited the consolidated financial statements included in this annual report issued an attestation report on the Company's internal control over financial reporting.
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| /s/ NISHAN J. VARTANIAN |
Nishan J. Vartanian
Chairman, President and Chief Executive Officer
|
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/s/ KENNETH D. KRAUSE LEE B. MCCHESNEY |
Kenneth D. Krause
Sr.Lee B. McChesney
Senior Vice President and Chief Financial Officer and Treasurer
|
February 20, 2020
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of MSA Safety Incorporated
Opinion on Internal Control over Financial Reporting
We have audited MSA Safety Incorporated’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, MSA Safety Incorporated (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Sierra Monitor Corporation, which is included in the 2019 consolidated financial statements of the Company and constituted 2% and 4% of total and net assets, respectively, as of December 31, 2019 and 1% and (2%) of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Sierra Monitor Corporation.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, cash flows, and changes in retained earnings, accumulated other comprehensive loss and noncontrolling interests for each of the three years in the period ended December 31, 2019,2022, and the related notes and financial statement schedule listed in the Index at Item 15(a) 2.2 and our report dated February 20, 202016, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 20, 2020
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of MSA Safety Incorporated
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of MSA Safety Incorporated (the Company) as of December 31, 20192022 and 2018,2021, the related consolidated statements of income, comprehensive income, cash flows, and changes in retained earnings, accumulated other comprehensive loss and noncontrolling interests for each of the three years in the period ended December 31, 2019,2022, and the related notes and financial statement schedule listed in the Index at Item 15(a) 2.2 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 20, 202016, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of athe critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
38
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| Valuation of cumulative trauma product liability claims |
| Description of the Matter | | As more fully described in Note 19Notes 1 and 20 to the consolidated financial statements, the Company's subsidiary MSA LLC is named as a defendant in lawsuits comprised of cumulative trauma product liability claims involving potential exposures to harmful substances (e.g.,that are alleged to have occurred over a number of years. In recent periods, this has included asbestos, silica asbestos, and coal dust) that occurred years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, mesothelioma, or coal worker’s pneumoconiosis. The Company believes itdust claims. It is probable that itMSA LLC will incur losses related to asserted and incurred but not reported (IBNR) claims and that the amount of losslosses can be reasonably estimated. At December 31, 2019,2022, the Company’s accrualreserve for asserted and IBNRcumulative trauma product liability claims was $167.5$395.1 million, representing its best estimate of the expected losses related to these claims.
Auditing management’s accounting for and disclosure of loss contingencies arising from cumulative trauma product liability claims was especially challenging, as the estimate of probable loss is highly subjective. In particular, the estimate was sensitive to significant assumptions such asthat included, among others, the estimated value of settlements paid to claimants, the percentage of cumulative trauma product liability claims asserted against MSA LLC that are dismissed without payment, the future number and type of claims asserted against MSA LLC and the propensity of claimants and their counsel asserting cumulative traumathose claims, the percentage of claims resolved through settlement and the values of settlements paid to name MSA LLC as a defendant.
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| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of relevant internal controls over the Company’s assessment and measurement of its estimate of probable loss for its subsidiary's cumulative trauma product liability claims. Our audit procedures included testing controls over the Company’s assessment and measurement of the best estimate of the expected losses related to cumulative trauma product liability claims.
To test the Company’s assessment of its subsidiary's cumulative trauma product liability claims, we performed audit procedures which included, among others: reading the minutes of the meetings of the committees of the board of directors, requesting and receiving internal and external legal counsel letters, meeting with internal and external counsel to discuss the claims, meeting with management’s valuation consultant, testing the completeness and accuracy of data from underlying systems that are used in the Company’s assessment, performing a historical lookback analysis on claims data, performing a search for new or contrary evidence affecting the assessment, and obtaining a representation letter from the Company. Additional audit procedures to test the Company’s valuation of the expected losses related to cumulative trauma product liability claims included: evaluating significant assumptions underlying the estimate, such asincluding the estimated value of settlements paid to claimants, the percentage of cumulative trauma product liability claims asserted against MSA LLC that are dismissed without payment, the future number and type of claims asserted against MSA LLC and the propensity of claimants and their counsel asserting cumulative traumathose claims, the percentage of claims resolved through settlement and the values of settlements paid to name MSA LLC as a defendant.claimants. We engaged our actuarial specialists to assist in the analysis of the significant assumptions and methodology used by management. We assessedOur procedures also included evaluating the historical accuracysufficiency of management’s estimates by performing a lookback analysis and performed sensitivity analyses of significant assumptions usedthe Company’s disclosures with respect to cumulative trauma product liability claims described in Note 20 to the current year.consolidated financial statements. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2014.
Pittsburgh, Pennsylvania
February 20, 2020
MSA SAFETY INCORPORATED
CONSOLIDATED STATEMENTSTATEMENTS OF INCOME
| | | | Year ended December 31, | | Year ended December 31, |
| (In thousands, except per share amounts) | 2019 | | 2018 | | 2017 | (In thousands, except per share amounts) | 2022 | | 2021 | | 2020 |
| Net sales | $ | 1,401,981 |
| | $ | 1,358,104 |
| | $ | 1,196,809 |
| Net sales | $ | 1,527,953 | | | $ | 1,400,182 | | | $ | 1,348,223 | |
| Cost of products sold | 765,369 |
| | 746,241 |
| | 657,918 |
| Cost of products sold | 854,122 | | | 784,834 | | | 752,731 | |
| Gross profit | 636,612 |
| | 611,863 |
| | 538,891 |
| Gross profit | 673,831 | | | 615,348 | | | 595,492 | |
| | | | | | | |
| Selling, general and administrative | 330,502 |
| | 324,784 |
| | 300,062 |
| Selling, general and administrative | 338,872 | | | 332,862 | | | 290,334 | |
| Research and development | 57,848 |
| | 52,696 |
| | 50,061 |
| Research and development | 57,012 | | | 57,793 | | | 58,268 | |
| Restructuring charges (Note 2) | 13,846 |
| | 13,247 |
| | 17,632 |
| |
| Currency exchange losses, net (Note 5) | 19,814 |
| | 2,330 |
| | 5,127 |
| |
| Product liability (Note 19) and other operating expense | 28,372 |
| | 45,327 |
| | 126,432 |
| |
| Restructuring charges (Note 3) | | Restructuring charges (Note 3) | 7,965 | | | 16,433 | | | 27,381 | |
| Currency exchange losses, net | | Currency exchange losses, net | 10,255 | | | 216 | | | 8,578 | |
| Product liability expense (Note 20) | | Product liability expense (Note 20) | 20,590 | | | 185,264 | | | 39,036 | |
| Operating income | 186,230 |
| | 173,479 |
| | 39,577 |
| Operating income | 239,137 | | | 22,780 | | | 171,895 | |
| | | | | | | |
| Interest expense | 13,589 |
| | 18,881 |
| | 15,360 |
| Interest expense | 21,660 | | | 10,758 | | | 9,432 | |
| Loss on extinguishment of debt (Note 11) | — |
| | 1,494 |
| | — |
| |
| Other income, net (Note 15) | (11,094 | ) | | (9,231 | ) | | (5,558 | ) | |
| Total other expense, net | 2,495 |
| | 11,144 |
| | 9,802 |
| |
| | Other income, net (Note 16) | | Other income, net (Note 16) | (21,056) | | | (11,582) | | | (5,684) | |
| Total other expense (income), net | | Total other expense (income), net | 604 | | | (824) | | | 3,748 | |
| | | | | | | |
| Income before income taxes | 183,735 |
| | 162,335 |
| | 29,775 |
| Income before income taxes | 238,533 | | | 23,604 | | | 168,147 | |
| Provision for income taxes (Note 9) | 46,086 |
| | 37,220 |
| | 2,819 |
| |
| Provision for income taxes (Note 10) | | Provision for income taxes (Note 10) | 58,903 | | | 1,816 | | | 43,009 | |
| | Net income | 137,649 |
| | 125,115 |
| | 26,956 |
| Net income | $ | 179,630 | | | $ | 21,788 | | | $ | 125,138 | |
| | | | | | | |
| Net income attributable to noncontrolling interests | $ | (1,209 | ) | | $ | (965 | ) | | $ | (929 | ) | Net income attributable to noncontrolling interests | — | | | (448) | | | (1,061) | |
| | | | | | | | | | | | |
| Net income attributable to MSA Safety Incorporated | $ | 136,440 |
| | $ | 124,150 |
| | $ | 26,027 |
| Net income attributable to MSA Safety Incorporated | $ | 179,630 | | | $ | 21,340 | | | $ | 124,077 | |
| | | | | | | | | | | | |
| Earnings per share attributable to MSA Safety Incorporated common shareholders (Note 8): | | | | | | |
| | Earnings per share attributable to MSA Safety Incorporated common shareholders (Note 9): | | Earnings per share attributable to MSA Safety Incorporated common shareholders (Note 9): | |
| Basic | $ | 3.52 |
| | $ | 3.23 |
| | $ | 0.68 |
| Basic | $ | 4.58 | | | $ | 0.54 | | | $ | 3.19 | |
| | Diluted | $ | 3.48 |
| | $ | 3.18 |
| | $ | 0.67 |
| Diluted | $ | 4.56 | | | $ | 0.54 | | | $ | 3.15 | |
| | Dividends per common share | $ | 1.64 |
| | $ | 1.49 |
| | $ | 1.38 |
| Dividends per common share | $ | 1.82 | | | $ | 1.75 | | | $ | 1.71 | |
The accompanying notes are an integral part of the consolidated financial statements.
MSA SAFETY INCORPORATED
CONSOLIDATED STATEMENTSTATEMENTS OF COMPREHENSIVE INCOME
| | | | Year ended December 31, | | Year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 | (In thousands) | 2022 | | 2021 | | 2020 |
| Net income | $ | 137,649 |
| | $ | 125,115 |
| | $ | 26,956 |
| Net income | $ | 179,630 | | | $ | 21,788 | | | $ | 125,138 | |
| Other comprehensive (loss) income, net of tax: | | | | | | Other comprehensive (loss) income, net of tax: | |
| Foreign currency translation adjustments (Note 5) | (1,657 | ) | | (30,103 | ) | | 41,129 |
| |
| Pension and post-retirement plan actuarial gains (losses), net of tax (Note 5) | (5,559 | ) | | (17,569 | ) | | 20,120 |
| |
| Unrealized gains (losses) on available-for-sale securities (Note 5) | 578 |
| | (572 | ) | | — |
| |
| Reclassification from accumulated other comprehensive (loss) into net income (Note 5) | 15,261 |
| | 774 |
| | — |
| |
| Total other comprehensive income (loss), net of tax | 8,623 |
| | (47,470 | ) | | 61,249 |
| |
| Foreign currency translation adjustments (Note 6) | | Foreign currency translation adjustments (Note 6) | (19,453) | | | (25,354) | | | 22,260 | |
| Pension and post-retirement plan actuarial gains, net of tax (Note 6) | | Pension and post-retirement plan actuarial gains, net of tax (Note 6) | 6,961 | | | 58,256 | | | 9,296 | |
| Unrealized gains (losses) on available-for-sale securities (Note 6) | | Unrealized gains (losses) on available-for-sale securities (Note 6) | 3 | | | (4) | | | (7) | |
| Reclassifications from accumulated other comprehensive loss into net income (Note 6) | | Reclassifications from accumulated other comprehensive loss into net income (Note 6) | 2,912 | | | 267 | | | 216 | |
| Total other comprehensive (loss) income, net of tax | | Total other comprehensive (loss) income, net of tax | (9,577) | | | 33,165 | | | 31,765 | |
| Comprehensive income | 146,272 |
| | 77,645 |
| | 88,205 |
| Comprehensive income | 170,053 | | | 54,953 | | | 156,903 | |
| Comprehensive income attributable to noncontrolling interests | (1,136 | ) | | (660 | ) | | (3,694 | ) | Comprehensive income attributable to noncontrolling interests | — | | | (356) | | | (1,220) | |
| Comprehensive income attributable to MSA Safety Incorporated | 145,136 |
| | $ | 76,985 |
| | $ | 84,511 |
| Comprehensive income attributable to MSA Safety Incorporated | $ | 170,053 | | | $ | 54,597 | | | $ | 155,683 | |
The accompanying notes are an integral part of the consolidated financial statements.
MSA SAFETY INCORPORATED
CONSOLIDATED BALANCE SHEETSHEETS
|
| | | | | | | |
| | December 31, |
| (In thousands, except share amounts) | 2019 | | 2018 |
| Assets | | | |
| Cash and cash equivalents | $ | 152,195 |
| | $ | 140,095 |
|
Trade receivables, less allowance for doubtful accounts of $4,860 and $5,369 | 255,082 |
| | 245,032 |
|
| Inventories (Note 3) | 185,027 |
| | 156,602 |
|
| Investments, short-term (Note 18) | 49,892 |
| | 55,106 |
|
| Prepaid income taxes | 13,072 |
| | 10,769 |
|
| Notes receivable, insurance companies (Note 19) | 3,676 |
| | 3,555 |
|
| Prepaid expenses and other current assets | 34,419 |
| | 45,464 |
|
| Total current assets | 693,363 |
| | 656,623 |
|
| | | | |
| Property, plant and equipment, net (Note 4) | 167,038 |
| | 157,940 |
|
| Operating lease assets, net (Note 16) | 51,675 |
| | — |
|
| Prepaid pension cost (Note 14) | 75,066 |
| | 57,568 |
|
| Deferred tax assets (Note 9) | 32,596 |
| | 32,522 |
|
| Goodwill (Note 12) | 436,679 |
| | 413,640 |
|
| Intangible assets, net (Note 12) | 171,326 |
| | 169,515 |
|
| Notes receivable, insurance companies, noncurrent (Note 19) | 52,336 |
| | 56,012 |
|
| Insurance receivable (Note 19) and other noncurrent assets | 59,614 |
| | 64,192 |
|
| Total assets | $ | 1,739,693 |
| | $ | 1,608,012 |
|
| | | | |
| Liabilities | | | |
| Notes payable and current portion of long-term debt (Note 11) | $ | 20,000 |
| | $ | 20,063 |
|
| Accounts payable | 89,120 |
| | 78,367 |
|
| Employees’ compensation | 41,882 |
| | 51,386 |
|
| Insurance and product liability (Note 19) | 25,870 |
| | 48,688 |
|
| Income taxes payable (Note 9) | 6,739 |
| | — |
|
| Warranty reserve (Note 19) and other current liabilities | 93,898 |
| | 83,556 |
|
| Total current liabilities | 277,509 |
| | 282,060 |
|
| | | | |
| Long-term debt, net (Note 11) | 328,394 |
| | 341,311 |
|
| Pensions and other employee benefits (Note 14) | 186,697 |
| | 166,101 |
|
| Noncurrent operating lease liabilities (Note 16) | 42,632 |
| | — |
|
| Deferred tax liabilities (Note 9) | 9,787 |
| | 7,164 |
|
| Product liability (Note 19) and other noncurrent liabilities | 162,101 |
| | 171,857 |
|
| Total liabilities | $ | 1,007,120 |
| | $ | 968,493 |
|
| Commitments and contingencies (Note 19) |
| |
|
| | | | |
| Shareholders' Equity | | | |
Preferred stock, 4 1/2% cumulative, $50 par value (Note 6) | 3,569 |
| | 3,569 |
|
| Common stock, no par value (180,000,000 shares authorized; 62,081,391 shares issued; 38,841,194 and 38,526,523 shares outstanding at December 31, 2019 and 2018, respectively) | 229,127 |
| | 211,806 |
|
| Treasury shares, at cost (Note 6) | (305,159 | ) | | (298,143 | ) |
| Accumulated other comprehensive loss (Note 5) | (214,003 | ) | | (218,927 | ) |
| Retained earnings | 1,012,266 |
| | 935,577 |
|
| Total MSA Safety Incorporated shareholders’ equity | 725,800 |
| | 633,882 |
|
| Noncontrolling interests | 6,773 |
| | 5,637 |
|
| Total shareholders’ equity | 732,573 |
| | 639,519 |
|
| Total liabilities and shareholders’ equity | $ | 1,739,693 |
| | $ | 1,608,012 |
|
| | | | | | | | | | | |
| December 31, |
| (In thousands, except share amounts) | 2022 | | 2021 |
| Assets | | | |
| Cash and cash equivalents | $ | 162,902 | | | $ | 140,895 | |
Trade receivables, less allowance for credit loss of $6,769 and $5,789 | 297,028 | | | 254,187 | |
| Inventories (Note 4) | 338,316 | | | 280,617 | |
| Investments, short-term (Note 19) | 9,905 | | | 48,974 | |
| Prepaid income taxes | 21,700 | | | 21,235 | |
| Notes receivable, insurance companies (Note 20) | 5,931 | | | 3,914 | |
| Prepaid expenses and other current assets | 44,344 | | | 42,982 | |
| Total current assets | 880,126 | | | 792,804 | |
| | | |
| Property, plant and equipment, net (Note 5) | 207,552 | | | 207,793 | |
| Operating lease right-of-use assets, net (Note 17) | 44,142 | | | 50,178 | |
| Prepaid pension cost (Note 15) | 141,643 | | | 163,283 | |
| Deferred tax assets (Note 10) | 25,490 | | | 35,257 | |
| Goodwill (Note 13) | 620,622 | | | 636,858 | |
| Intangible assets, net (Note 13) | 281,853 | | | 306,948 | |
| Notes receivable, insurance companies, noncurrent (Note 20) | 38,695 | | | 44,626 | |
| Insurance receivable (Note 20) and other noncurrent assets | 136,853 | | | 158,649 | |
| Total assets | $ | 2,376,976 | | | $ | 2,396,396 | |
| | | |
| Liabilities | | | |
| Notes payable and current portion of long-term debt (Note 12) | $ | 7,387 | | | $ | — | |
| Accounts payable | 112,532 | | | 106,780 | |
| Employees’ compensation | 45,077 | | | 49,884 | |
| Insurance and product liability (Note 20) | 73,898 | | | 55,125 | |
| Income taxes payable (Note 10) | 6,149 | | | 5,366 | |
| Accrued restructuring (Note 3) and other current liabilities | 100,822 | | | 113,451 | |
| Total current liabilities | 345,865 | | | 330,606 | |
| | | |
| Long-term debt, net (Note 12) | 565,445 | | | 597,651 | |
| Pensions and other employee benefits (Note 15) | 137,810 | | | 189,973 | |
| Noncurrent operating lease liabilities (Note 17) | 35,345 | | | 40,706 | |
| Deferred tax liabilities (Note 10) | 31,881 | | | 33,337 | |
| Product liability (Note 20) and other noncurrent liabilities | 336,889 | | | 369,735 | |
| Total liabilities | $ | 1,453,235 | | | $ | 1,562,008 | |
| Commitments and contingencies (Note 20) | | | |
| | | |
| Shareholders' Equity | | | |
| Preferred stock, 4.5% cumulative, $50 par value (Note 7) | 3,569 | | | 3,569 | |
| Common stock, no par value (180,000,000 shares authorized; 62,081,391 shares issued; 39,213,064 and 39,276,518 shares outstanding at December 31, 2022 and 2021, respectively) | 281,980 | | | 260,121 | |
| Treasury shares, at cost (Note 7) | (361,438) | | | (330,376) | |
| Accumulated other comprehensive loss (Note 6) | (158,717) | | | (149,140) | |
| Retained earnings | 1,158,347 | | | 1,050,214 | |
| | | |
| | | |
| Total shareholders’ equity | 923,741 | | | 834,388 | |
| Total liabilities and shareholders’ equity | $ | 2,376,976 | | | $ | 2,396,396 | |
The accompanying notes are an integral part of the consolidated financial statements.
MSA SAFETY INCORPORATED
CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS |
| | | | | | | | | | | |
| | Year ended December 31, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Operating Activities | | | | | |
| Net income | $ | 137,649 |
| | $ | 125,115 |
| | $ | 26,956 |
|
| Depreciation and amortization | 38,020 |
| | 37,852 |
| | 37,877 |
|
| Restructuring charges (Note 2) | — |
| | — |
| | 11,384 |
|
| Stock-based compensation (Note 10) | 13,760 |
| | 12,239 |
| | 11,758 |
|
| Pension expense (Note 14) and other charges | 3,382 |
| | 5,901 |
| | 7,142 |
|
| Deferred income tax provision (benefit) (Note 9) | 1,272 |
| | (4,065 | ) | | (31,320 | ) |
| Losses on asset dispositions, net | 371 |
| | 484 |
| | 557 |
|
| Pension contributions (Note 14) | (5,537 | ) | | (4,718 | ) | | (4,094 | ) |
| Currency exchange losses, net (Note 5) | 19,814 |
| | 2,330 |
| | 5,127 |
|
| Product liability expense (Note 19) | 26,619 |
| | 45,327 |
| | 126,432 |
|
Collections on insurance receivable and notes receivable, insurance companies (Note 19) | 21,035 |
| | 101,552 |
| | 111,969 |
|
| Product liability payments (Note 19) | (54,504 | ) | | (61,500 | ) | | (49,381 | ) |
| Loss on extinguishment of debt (Note 11) | — |
| | 1,494 |
| | — |
|
| Changes in: | | | | | |
| Trade receivables | (8,855 | ) | | (10,075 | ) | | (6,384 | ) |
| Inventories (Note 3) | (23,246 | ) | | (11,122 | ) | | (30,363 | ) |
| Prepaid expenses and other current assets | (822 | ) | | 10,866 |
| | (13,661 | ) |
| Accounts payable and accrued liabilities | 5,801 |
| | 17,985 |
| | 17,870 |
|
| Other noncurrent assets and liabilities | (9,797 | ) | | (5,778 | ) | | 8,467 |
|
| Cash Flow From Operating Activities | 164,962 |
| | 263,887 |
| | 230,336 |
|
| Investing Activities | | | | | |
| Capital expenditures | (36,604 | ) | | (33,960 | ) | | (23,725 | ) |
| Purchase of short-term investments (Note 18) | (169,245 | ) | | (73,022 | ) | | — |
|
| Proceeds from maturities of short-term investments (Note 18) | 174,670 |
| | 18,000 |
| | — |
|
| Acquisition, net of cash acquired (Note 13) | (33,196 | ) | | — |
| | (216,308 | ) |
| Property disposals and other investing | 218 |
| | 4,587 |
| | 832 |
|
| Cash Flow (Used In) Investing Activities | (64,157 | ) | | (84,395 | ) | | (239,201 | ) |
| Financing Activities | | | | | |
| (Payments on) proceeds from short-term debt, net (Note 11) | (65 | ) | | 51 |
| | 13 |
|
| Payments on long-term debt (Note 11) | (880,500 | ) | | (570,167 | ) | | (559,767 | ) |
| Proceeds from long-term debt (Note 11) | 864,000 |
| | 462,500 |
| | 637,000 |
|
| Debt issuance costs | — |
| | (1,216 | ) | | — |
|
| Cash dividends paid | (63,523 | ) | | (57,248 | ) | | (52,537 | ) |
| Company stock purchases (Note 6) | (12,648 | ) | | (4,824 | ) | | (17,513 | ) |
| Exercise of stock options (Note 6) | 7,471 |
| | 8,573 |
| | 18,465 |
|
| Employee stock purchase plan (Note 6) | 641 |
| | 556 |
| | 532 |
|
| Other, net | — |
| | (1,494 | ) | | (590 | ) |
| Cash Flow (Used In) From Financing Activities | (84,624 | ) | | (163,269 | ) | | 25,603 |
|
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (4,242 | ) | | (13,508 | ) | | 6,189 |
|
| Increase in cash, cash equivalents and restricted cash | 11,939 |
| | 2,715 |
| | 22,927 |
|
| Beginning cash, cash equivalents and restricted cash | 140,604 |
| | 137,889 |
| | 114,962 |
|
| Ending cash, cash equivalents and restricted cash | $ | 152,543 |
| | $ | 140,604 |
| | $ | 137,889 |
|
| | | | | | |
| Supplemental cash flow information: | | | | | |
| Cash and cash equivalents | $ | 152,195 |
| | 140,095 |
| | 134,244 |
|
| Restricted cash included in prepaid expenses and other current assets | 348 |
| | 509 |
| | 3,645 |
|
| Total cash, cash equivalents and restricted cash | $ | 152,543 |
| | 140,604 |
| | 137,889 |
|
| | | | | | |
| Interest paid in cash | $ | 14,490 |
| | $ | 20,408 |
| | $ | 15,504 |
|
| Income tax paid in cash | 48,673 |
| | 40,587 |
| | 40,376 |
|
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (In thousands) | 2022 | | 2021 | | 2020 |
| Operating Activities | | | | | |
| Net income | $ | 179,630 | | | $ | 21,788 | | | $ | 125,138 | |
| Depreciation and amortization | 56,317 | | | 50,317 | | | 39,674 | |
| | | | | |
| Stock-based compensation (Note 11) | 19,650 | | | 18,908 | | | 6,920 | |
| Pension (income) expense (Note 15) and other charges | (11,499) | | | 2,448 | | | 10,082 | |
| Deferred income tax benefit (Note 10) | 5,171 | | | (38,850) | | | (2,254) | |
| Loss on asset write-down and dispositions, net | 6,290 | | | 788 | | | 236 | |
| Pension contributions (Note 15) | (5,032) | | | (5,543) | | | (5,596) | |
| Currency exchange losses, net (Note 6) | 10,255 | | | 216 | | | 8,578 | |
| Product liability expense (Note 20) | 20,590 | | | 185,264 | | | 39,036 | |
Collections on insurance receivable and notes receivable,
insurance companies (Note 20) | 9,516 | | | 15,443 | | | 10,853 | |
| Product liability payments (Note 20) | (36,755) | | | (39,548) | | | (23,727) | |
| | | | | |
| | | | | |
| Changes in: | | | | | |
| Trade receivables | (38,587) | | | 4,374 | | | 7,677 | |
| Inventories (Note 4) | (67,366) | | | (17,827) | | | (13,645) | |
| Accounts payable | 7,585 | | | 13,299 | | | (3,069) | |
| Other current assets and liabilities | (1,795) | | | 823 | | | 7,749 | |
| Other noncurrent assets and liabilities | 3,485 | | | (12,755) | | | (1,097) | |
| Cash Flow From Operating Activities | 157,455 | | | 199,145 | | | 206,555 | |
| Investing Activities | | | | | |
| Capital expenditures | (42,553) | | | (43,837) | | | (48,905) | |
| Purchase of short-term investments (Note 19) | (79,542) | | | (133,913) | | | (199,318) | |
| Proceeds from maturities of short-term investments (Note 19) | 119,000 | | | 160,000 | | | 175,000 | |
| Acquisitions, net of cash acquired (Note 14) | — | | | (392,437) | | | — | |
| Property disposals and other investing | (1,389) | | | (5,286) | | | 454 | |
| | | | | |
| Cash Flow Used In Investing Activities | (4,484) | | | (415,473) | | | (72,769) | |
| Financing Activities | | | | | |
| | | | | |
| Payments on long-term debt (Note 12) | (1,023,000) | | | (1,346,557) | | | (1,031,000) | |
| Proceeds from long-term debt (Note 12) | 1,010,000 | | | 1,639,733 | | | 987,000 | |
| Debt issuance costs | — | | | (2,106) | | | — | |
| Cash dividends paid | (71,497) | | | (68,586) | | | (66,578) | |
| Acquisition of noncontrolling interests in consolidated subsidiaries (Note 14) | — | | | (13,381) | | | — | |
| Distribution to noncontrolling interests (Note 14) | — | | | (5,632) | | | — | |
| Company stock purchases (Note 7) | (34,394) | | | (6,171) | | | (29,144) | |
| Exercise of stock options (Note 7) | 4,650 | | | 5,770 | | | 12,446 | |
| Employee stock purchase plan (Note 7) | 891 | | | 855 | | | 747 | |
| | | | | |
| | | | | |
| Cash Flow (Used In) Provided by Financing Activities | (113,350) | | | 203,925 | | | (126,529) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (16,631) | | | (7,193) | | | 1,234 | |
| Increase (decrease) in cash, cash equivalents and restricted cash | 22,990 | | | (19,596) | | | 8,491 | |
| Beginning cash, cash equivalents and restricted cash | 141,438 | | | 161,034 | | | 152,543 | |
| Ending cash, cash equivalents and restricted cash | $ | 164,428 | | | $ | 141,438 | | | $ | 161,034 | |
| | | | | |
| Supplemental cash flow information: | | | | | |
| Cash and cash equivalents | $ | 162,902 | | | $ | 140,895 | | | $ | 160,672 | |
| Restricted cash included in prepaid expenses and other current assets | 1,526 | | | 543 | | | 362 | |
| Total cash, cash equivalents and restricted cash | $ | 164,428 | | | $ | 141,438 | | | $ | 161,034 | |
| | | | | |
| Interest paid in cash | $ | 20,740 | | | $ | 9,288 | | | $ | 9,856 | |
| Income tax paid in cash | $ | 60,491 | | | $ | 45,556 | | | $ | 61,072 | |
The accompanying notes are an integral part of the consolidated financial statements.
MSA SAFETY INCORPORATED
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN RETAINED EARNINGS,
ACCUMULATED OTHER COMPREHENSIVE LOSS AND NONCONTROLLING INTERESTS
|
| | | | | | | | | | | |
| (In thousands) | Retained Earnings | | Accumulated Other Comprehensive (Loss) | | Noncontrolling Interests |
| Balances January 1, 2017 | $ | 901,415 |
| | $ | (230,246 | ) | | $ | 3,047 |
|
| Net income | 26,956 |
| | — |
| | — |
|
| Foreign currency translation adjustments | — |
| | 41,129 |
| | — |
|
| Pension and post-retirement plan adjustments, net of tax of $10,417 | — |
| | 20,120 |
| | — |
|
| (Income) loss attributable to noncontrolling interests | (929 | ) | | (2,765 | ) | | 3,694 |
|
| Acquisition of noncontrolling interests | — |
| | — |
| | (1,764 | ) |
| Common dividends | (52,495 | ) | | — |
| | — |
|
| Preferred dividends ($0.5625 per share) | (42 | ) | | — |
| | — |
|
| Cumulative effect of the adoption of ASU 2016-16 (Note 1) | (6,230 | ) | | — |
| | — |
|
| Balances December 31, 2017 | 868,675 |
| | (171,762 | ) | | 4,977 |
|
| Net income | 125,115 |
| | — |
| | — |
|
| Foreign currency translation adjustments | — |
| | (30,103 | ) | | — |
|
| Pension and post-retirement plan adjustments, net of tax of ($6,325) | — |
| | (17,569 | ) | | — |
|
| Unrecognized net losses on available-for-sale securities (Note 18) | — |
| | (572 | ) | | — |
|
| Reclassification of currency translation from accumulated other comprehensive (loss) into net income (Note 5) | — |
| | 774 |
| | — |
|
| (Income) loss attributable to noncontrolling interests | (965 | ) | | 305 |
| | 660 |
|
| Common dividends | (57,206 | ) | | — |
| | — |
|
| Preferred dividends ($0.5625 per share) | (42 | ) | | — |
| | — |
|
| Balances December 31, 2018 | 935,577 |
| | (218,927 | ) | | 5,637 |
|
| Net income | 137,649 |
| | — |
| | — |
|
| Foreign currency translation adjustments | — |
| | (1,657 | ) | | — |
|
| Pension and post-retirement plan adjustments, net of tax of ($3,072) | — |
| | (5,559 | ) | | — |
|
| Unrecognized net gains on available-for-sale securities (Note 18) | — |
| | 578 |
| | — |
|
| Reclassification of currency translation from accumulated other comprehensive (loss) into net income (Note 5) | — |
| | 15,261 |
| | — |
|
| (Income) loss attributable to noncontrolling interests | (1,209 | ) | | 73 |
| | 1,136 |
|
| Common dividends | (63,481 | ) | | — |
| | — |
|
| Preferred dividends ($0.5625 per share) | (42 | ) | | — |
| | — |
|
| Reclassification due to the adoption of ASU 2018-02 (Note 1) | $ | 3,772 |
| | $ | (3,772 | ) | | $ | — |
|
| Balances December 31, 2019 | $ | 1,012,266 |
| | $ | (214,003 | ) | | $ | 6,773 |
|
| | | | | | | | | | | | | | | | | |
| (In thousands, except per share amounts) | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Noncontrolling Interests |
| Balances at January 1, 2020 | $ | 1,045,593 | | | $ | (214,003) | | | $ | 6,773 | |
| Net income | 125,138 | | | — | | | — | |
| Foreign currency translation adjustments | — | | | 22,260 | | | — | |
| Pension and post-retirement plan adjustments, net of $2,245 tax benefit | — | | | 9,296 | | | — | |
| Unrecognized net losses on available-for-sale securities (Note 19) | — | | | (7) | | | — | |
| Reclassification of currency translation from accumulated other comprehensive loss into net income (Note 6) | — | | | 216 | | | — | |
| (Income) loss attributable to noncontrolling interests | (1,061) | | | (159) | | | 1,220 | |
| Common dividends ($1.71 per share) | (66,537) | | | — | | | — | |
| Preferred dividends ($0.5625 per share) | (41) | | | — | | | — | |
| | | | | |
| | | | | |
| Balances at December 31, 2020 | 1,103,092 | | | (182,397) | | | 7,993 | |
| Net income | 21,788 | | | — | | | — | |
| Foreign currency translation adjustments | — | | | (25,354) | | | — | |
| Pension and post-retirement plan adjustments, net of $18,564 tax benefit | — | | | 58,256 | | | — | |
| Unrecognized net losses on available-for-sale securities (Note 19) | — | | | (4) | | | — | |
| Reclassification of currency translation from accumulated other comprehensive loss into net income (Note 6) | — | | | 267 | | | — | |
| (Income) loss attributable to noncontrolling interests | (448) | | | 92 | | | 356 | |
| Acquisition of noncontrolling interests in consolidated subsidiaries | — | | | — | | | (8,349) | |
| Distributions to noncontrolling interests (Note 14) | (5,632) | | | — | | | — | |
| Common dividends ($1.75 per share) | (68,545) | | | — | | | — | |
| Preferred dividends ($0.5625 per share) | (41) | | | — | | | — | |
| | | | | |
| Balances at December 31, 2021 | 1,050,214 | | | (149,140) | | | — | |
| Net income | 179,630 | | | — | | | — | |
| Foreign currency translation adjustments | — | | | (19,453) | | | — | |
| Pension and post-retirement plan adjustments, net of $2,570 tax benefit | — | | | 6,961 | | | — | |
| Unrecognized net gains on available-for-sale securities (Note 19) | — | | | 3 | | | — | |
| Reclassification of currency translation from accumulated other comprehensive loss into net income (Note 6) | — | | | 2,912 | | | — | |
| | | | | |
| | | | | |
| | | | | |
| Common dividends ($1.82 per share) | (71,456) | | | — | | | — | |
| Preferred dividends ($0.5625 per share) | (41) | | | — | | | — | |
| | | | | |
| Balances at December 31, 2022 | $ | 1,158,347 | | | $ | (158,717) | | | $ | — | |
The accompanying notes are an integral part of the consolidated financial statements.
MSA SAFETY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Significant Accounting Policies
General Information and Basis of Presentation—The consolidated financial statements of MSA Safety Incorporated ("MSA" or "the Company") are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP)("U.S. GAAP") and require management to make certain judgments, estimates, and assumptions. These may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. They also may affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates upon subsequent resolution of identified matters.
Principles of Consolidation—The consolidated financial statements include the accounts of the Company and all subsidiaries. Intercompany accounts and transactions are eliminated.
Noncontrolling Interests—Noncontrolling interests reflect noncontrolling shareholders’ investments in certain consolidated subsidiaries and their proportionate share of the income and accumulated other comprehensive income (loss)loss of those subsidiaries. During July 2021, the Company purchased the remaining noncontrolling interests in MSA (China) Safety Equipment Co., Ltd. See Note 14—Acquisitions for further detail.
Currency Translation—The functional currency of all significant non-U.S. subsidiaries is the local country currency. Assets and liabilities of these operations are translated at year-end exchange rates. Income statement accounts are translated using the average exchange rates for the reporting period. Translation adjustments for these companiessubsidiaries are reported as a component of shareholders’ equity and are not included in net income. Foreign currency transaction gains and losses are included in net income for the reporting period.
Cash Equivalents—Cash equivalents include temporary deposits with financial institutions and highly liquid investments with original maturities of 90 days or less. Other highlyHighly liquid investments consist of money market funds and balanceswhich were $17.9$1.9 million and $11.4$8.7 million at December 31, 20192022 and 2018,2021, respectively. These funds are valued at net asset value (“NAV”). The money marketThese funds are required to price and transact at a NAV per share that fluctuates based upon the pricing of the underlying portfolio of securities and thissecurities. This requirement may impact the value of thosethese fund shares.
Restricted Cash—Restricted cash, which is designated for use other than current operations, is included in prepaid expenses and other current assets in the Consolidated Balance Sheet.Sheets. Restricted cash balances were $0.3$1.5 million and $0.5 million at December 31, 20192022 and 2018,2021, respectively. These balances were used to support letter of credit balances.
Inventories—Inventories are stated at the lower of cost orand net realizable value. The majority of U.S. inventories are valued onvalue, which approximates current replacement cost. Cost is determined using the last-in, first-out (LIFO) cost method which is used since this method provides better matching of costs and revenues. Other inventories are valued at actual costs, at standard costs which approximate actual costs or in very rare occasions, on the average costFIFO method. It is the Company's general policy to write-down any inventory identified as obsolete. Additionally, it will write-down any inventory balance in excess of the last twenty-four24 months of consumption.consumption and any inventory identified as obsolete.
Investment securities—The Company’s investment securities, primarily consisting of fixed income securities, are classified as available-for-sale. The securities are recorded at fair market value and reportedincluded in “Investments, short-term” in the accompanying Consolidated Balance SheetSheets with changes in fair market value recorded in other comprehensive income, net of tax. The purchases and sales of these investments are classified as investing activities in the Consolidated StatementStatements of Cash Flows.
Property and Depreciation—Property is recorded at cost. Depreciation is computed primarily using the straight-line and accelerated methodsmethod over the estimated useful lives of the assets, generally as follows: buildings 20 to 40 years, and machinery and equipment 3 to 10 years. Expenditures for significant renewals and improvements are capitalized. Ordinary repairs and maintenance are expensed as incurred. Gains or losses on property dispositions are included in other income(income) expense, net and the cost and related accumulated depreciation are removed from the accounts. Depreciation expense for the years ended December 31, 2019, 20182022, 2021 and 20172020 was $26.5$36.7 million, $26.9$33.0 million and $28.0$27.7 million, respectively. Properties, plants,plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or asset groups may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted net cash flows of the operations related to the assets to their carrying amount. An impairment loss would be recognized when the carrying amount of the assets exceeds the estimated undiscounted net cash flows. The amount of the impairment loss to be recorded is calculated as the excess of the carrying value of the assets over their fair value, with fair value determined using the best information available, which generally is a discounted cash flow model.
45
Software Development Costs—Software development costs consist primarily ofare costs incurred in software development and related personnel compensation to create, enhance and deploy the Company’s broad range of wireless technology and cloud-based computing safety services. Software development costs, other than software development costs qualifying for capitalization, are expensed as incurred. Costs of computer software developed or obtained for internal use that are incurred in the preliminary project and post implementation stages are expensed as incurred. Certain costs incurred during the application and development stage, which primarily include compensation and related expenses, are capitalized. Additionally, costs of upgrades and enhancements are capitalized when it is probable that the upgrades and enhancements will result in added functionality. During 2022, 2021 and 2020, respectively, there was approximately $8.7 million, $8.1 million and $8.2 million of software development costs capitalized. The estimated useful lifeCompany has unamortized computer software development costs of costs capitalized is three years. $16.5 million and $15.7 million as of December 31, 2022 and 2021, respectively, included in property, plant and equipment, net.
Capitalized costs are amortized through cost of products sold using the straight-line method over the estimated useful life, which is normally three years, beginning in the period in which the software is ready for its intended use or when the upgrade or enhancement is deployed. During 2019 and 2018, thereSoftware development cost depreciation expense was approximately $5.0$7.9 million, $4.9 million and $1.6$1.5 million during the years ended December 31, 2022, 2021 and 2020, respectively.
Lessee Arrangements—At the inception of our contracts, we determine if the contract is or contains a lease. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Right-of-use assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement. We use our incremental borrowing rate ("IBR") at the recognition date in determining the present value of future payments for leases that do not have a readily determinable implicit rate. Our IBR reflects a fully secured rate based on our credit rating, taking into consideration the repayment timing of the lease and any impacts due to the economic environment in which the lease operates.
Our lease payments are largely fixed. Variable lease payments that depend on an index or a rate are included in the lease payments and are measured using the prevailing index or rate at the measurement date, with differences between the calculated lease payment and the actual lease payment being expensed in the period of the change. Other variable lease payments, including utilities, consumption and common area maintenance as well as repairs, maintenance and mileage overages on vehicles, are expensed during the period incurred. A majority of our real estate leases include options to extend the lease and options to early terminate the lease. Leases with an early termination option generally involve a termination payment. If we are reasonably certain to exercise an option to extend a lease, the extension period is included as part of the right-of-use asset and the lease liability. Some of our leases contain residual value guarantees. These are guarantees made to the lessor that the value of an underlying asset returned to the lessor at the end of a lease will be at least a specified amount. Our leases do not contain restrictions or covenants that restrict us from incurring other financial obligations. For our leases, we have elected to not apply the recognition requirements to leases of less than twelve months. These leases are expensed on a straight-line basis and are not included within the Company's operating lease asset or liability.
Lease right-of-use assets and liabilities are recognized based on the present value of the fixed future lease payments over the lease term. Operating leases are included in Operating lease right-of-use assets, net, Accrued restructuring and other current liabilities, and Noncurrent operating lease liabilities in our Consolidated Balance Sheets. Finance leases are included in Property, plant and equipment, net, Accrued restructuring and other current liabilities, and Product liability and other noncurrent liabilities in our Consolidated Balance Sheets. Lease expense for all operating leases is classified in Cost of products sold or Selling, general and administrative expense in the Consolidated Statements of Income. For finance leases, the amortization of the right-of-use asset is included in depreciation and amortization, and the interest is included in interest expense.
Lessor Arrangements—The Company derives a portion of its revenue from various leasing arrangements where the Company is the lessor, primarily fire service contracts entered into by Bristol which was acquired in January 2021 (Note 14). Such arrangements provide for monthly payments covering equipment provided, maintenance and interest. These arrangements meet the criteria to be accounted for as sales-type leases under Accounting Standards Codification ("ASC") 842 and contain both lease and non-lease components. For a component to be separate, the customer would be able to benefit from the right of use of the component separately or with other resources readily available to the customer and the right of the use is not highly dependent or highly interrelated with the other rights to use the other underlying assets or components.
Revenue from equipment provided is considered a lease component and recognized with point in time revenue recognition upon lease commencement. Upon the recognition of such revenue, an asset is established for the investment in sales-type leases. Maintenance revenue, which is considered a non-lease component, and interest are recognized monthly over the lease term. Lease revenues and interest earned by the Company, included in the Consolidated Statements of Income, were not material to any of the years ended December 31, 2022, 2021 and 2020.
Net investment in sales-type leases of $5.7 million and $19.4 million were included in Prepaid expenses and other current assets and Insurance receivable and other noncurrent assets, respectively, in the Consolidated Balance Sheets as of software development costs capitalized. During 2017, there was 0 software development costs capitalized.December 31, 2022. The portion in Insurance receivable and other noncurrent assets at December 31, 2022 is expected to be collected over the next seven years.
Goodwill and Other Intangible Assets—Intangible assets with a finite useful life are amortized on a straight-line basis over their useful lives. Indefinite lived intangible assets are assessed for possible impairment annually on October 1st or whenever circumstances change such that the recorded value of the asset may not be recoverable. We performed a quantitative assessment of the indefinite lived trade name intangible asset as outlined in Accounting Standards Codification ("ASC")ASC 350 by comparing the estimated fair value of the trade name intangible asset to theirits carrying value. We estimate the fair value using the relief from royalty income approach. A number of significant assumptions and estimates are involved in the application of the relief from royalty model, including sales volumes and prices, royalty rates and tax rates. Forecasts are based on sales generated by the underlying trade name assets and are generally based on approved business unit operating plans for the early years and historical relationships in later years. Based on this assessment, there wasthese assessments, no indication of impairment for 2019.impairments were identified during the years ended December 31, 2022, 2021 or 2020.
Goodwill is not amortized, but is subject to impairment assessments. On October 1st of each year, or more frequently if indicators of impairment exist or if a decision is made to sell a business, we evaluate goodwill for impairment. A significant amount of judgmentJudgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a decline in expected cash flows, a significant adverse change in the business climate, unanticipated competition, slower growth rates, or negative developments in equity and credit markets, among others.
All goodwill is assigned to and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. For goodwill impairment testing purposes, we consider our operating segments to be our reporting units. The evaluation of impairment involves using either a qualitative or quantitative approach as outlined in ASC Topic 350. 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 value, including goodwill. Factors considered as part of the qualitative assessment include entity-specific industry, market and general economic conditions. In 2019,2022, we elected to bypass the qualitative evaluation for all of our reporting units, and performed a two-step quantitative test at October 1, 2019.2022. Step 1 of the quantitative testing involves comparing the estimated fair value of each reporting unit to its carrying value. We estimate reporting unit fair value using a weighted average of fair values determined by discounted cash flow (DCF)("DCF") and market approach methodologies, as we believe both are equally important indicators of fair value. A number of significant assumptions and estimates are involved in the application of the DCF model, including sales volumes and prices, costs to produce, tax rates, capital spending, discount rates, and working capital changes. Cash flow forecasts are generally based on approved reporting unit operating plans for the early years and historical relationships in later years. The betas used in calculating the individual reporting units’ weighted average cost of capital (WACC) rate are estimated for each reporting unit based on peer data. The market approach methodology measures value through an analysis of peer companies. The analysis entails measuring the multiples of EBITDAearnings before interest, taxes, depreciation and amortization ("EBITDA") at which peer companies are trading.
In the event the carrying value is in excess of the estimated fair value of a reporting unit per the weighted average of the DCF and market approach models, an impairment loss equal to such excess would be recognized, which could materially and adversely affect reported consolidated results of operations and shareholders’ equity. There has been 0no impairment of our goodwill as ofduring the years ended December 31, 2019, 20182022, 2021 or 2017.
Revenue Recognition—We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2018, using the modified retrospective method.. Revenue from the sale of products is recognized when there is persuasive evidence of an arrangement and control passes to the customer, which generally occurs either when product is shipped to the customer or, in the case of most U.S. distributor customers, when product is delivered to the distributor's delivery site. We establish our shipping terms according to local practice and market characteristics. We do not ship product unless we have an order or other documentation authorizing shipment to our customers. Our payment terms vary by the type and location of our customer and the products offered. The term between invoicing and when payment is due is not significant.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Amounts billed and due from our customers are classified as receivables on the Consolidated Balance Sheet.Sheets. We make appropriate provisions for uncollectible accounts receivablecredit losses which have historically been insignificant in relation to our net sales. Certain contracts with customers, primarily distributor customers, have an element of variable consideration that is estimated when revenue is recognized under the contract to the extent that it is material to the individual contract. Variable consideration includes volume incentive rebates, performance guarantees, price concessions and returns. Rebates are based on achieving a certain level of purchases and other performance criteria that are documented in established distributor programs. These rebates are estimated based on projected sales to the customer and accrued as a reduction of net sales as they are earned by the customer. The rebate accrual is reviewed monthly and adjustments are made as the estimate of projected sales changes. Product returns, including an adjustment for restocking fees if it is material, are estimated based on historical return experience and revenue is adjusted. Sales, value add and other taxes collected with revenue-producing activities and remitted to governmental authorities are excluded from revenue.
Depending on the terms of the arrangement, we may defer revenue for which we have a future obligation, including training, and extended warranty, maintenance and technical services, until such time that the obligation has been satisfied. We use an observable price, or a cost plus margin approach when one is not available, to determine the stand-alone selling price for separate performance obligations. We have elected to recognize the cost for shipping and handling as an expense when control of the product has passed to the customer. These costs are included within the Cost of Products Soldproducts sold line on the Consolidated StatementStatements of Income. Amounts billed to customers for shipping and handling are included in net sales.
Product Warranties—Estimated expenses related to product warranties and additional service actions are charged to costCost of products sold in the period in which the related revenue is recognized or when significant product quality issues are identified.
Research and Development—Research and development costs are expensed as incurred.
Income Taxes—Deferred income taxes are recognized for temporary differences between financial and tax reporting. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. We record tax benefits related to uncertain tax positions taken or expected to be taken on a tax return when such benefits meet a more likely than not threshold. We recognize interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. Deferred taxes are booked for available cash in excess of working capital for non-U.S. subsidiaries as these earnings are no longernot considered to be permanently reinvested.
Stock-Based Compensation—We recognize compensation expense for employee and non-employee director stock-based compensation based on the grant date fair value.value of the awards. Except for retirement-eligible participants, for whom there is no requisite service period, this expense is recognized ratably over the requisite service periods following the date of grant. For retirement-eligible participants, this expense is recognized over an accelerated period of at the grant date.least one year.
Derivative Instruments—We may use derivative instruments from time to time to minimize the effects of changes in currency exchange rates. We do not enter into derivative transactions for speculative purposes and do not hold derivative instruments for trading purposes. Changes in the fair value of derivative instruments designated as fair value hedges are recorded in the balance sheet as adjustments to the underlying hedged asset or liability. Changes in the fair value of derivative instruments that do not qualify for hedge accounting treatment are recognized in the Consolidated StatementStatements of Income and Consolidated Statements of Cash Flows as currencyCurrency exchange losses, net in the current period.
Commitments and Contingencies—For asserted claims and assessments, liabilities are recorded when a loss is deemed to be probable and the amount of the loss is reasonably estimable. Management assesses the probability of an unfavorable outcome with respect to asserted claims or assessments based on many factors such as the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters, among others. Once an unfavorable outcome is assessed to be probable, management evaluates estimates of the potential loss, and the most reasonable loss estimate is recorded (or, if the estimate of the loss is a range, and no amount within the range is considered to be a better estimate than any other amount, the minimum amount in the range is recorded). If a loss is deemed to be reasonably possible but less than probable and/or such loss cannot be reasonably estimated, then the matter is disclosed and no liability is recorded.
With respect to unasserted claims or assessments, management first determines whether it is probable that a claim or assessment may be asserted and then, if so, the degree of probability of an unfavorable outcome. If an unfavorable outcome is probable, management assesses whether the amount of potential loss can be reasonably estimated and, if so, accrues the most reasonable estimate of the loss (or, if the estimate of the loss is a range, and notno amount within the range is considered to be a better estimate than any other amount, the minimum amount in the range is recorded). If an unfavorable outcome is reasonably possible but less than probable, or the amount of loss cannot be reasonably estimated, then the matter is disclosed and no liability is recorded. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood and/or estimate of a potential loss. Please refer to Note 1920 — Contingencies for further details on product liability related matters.
Concentration of credit and business risks - We are exposed to credit risk in the event of nonpayment by customers, principally in the oil, gas and petrochemical, fire service, construction, utilities, and mining industries. Changes in these industries or other developments may significantly affect our financial performance and management's estimates. We mitigate our exposure to credit risk by performing ongoing credit evaluations and, when deemed necessary, requiring letters of credit, credit insurance, prepayments, guarantees or other collateral. No individual customer represented more than 10% of our sales.
Reclassifications - Certain reclassifications of prior years' data have been made to conform to the current year presentation. These reclassifications relate to (1) additional captions disclosed within the operating section of the Consolidated Statement of Cash Flows but do not change the overall cash flow from operating activities for the prior years as previously reported, and (2) additional captions disclosed for product warranty activity within the table that reconciles the changes in the Company's accrued warranty reserve (Note 19).
Recently Adopted and Recently Issued Accounting Standards—In May 2014, the FASB issued ASU 2014-09, Revenue with Contracts from Customers. This ASU establishes a single revenue recognition model for all contracts with customers based on recognizing revenue to depict the transfer of promised goodssales or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, eliminates industry specific requirements and expands disclosure requirements. We adopted ASU 2014-09 using the modified retrospective methodreceivables as of January 1, 2018. The majority of our revenue transactions consist of a single performance obligation to transfer promised goodsDecember 31, 2022 or services. The adoption of this new standard did not impact the Company's Consolidated Statement of Income2021 or Balance Sheet and there was no cumulative effect of initially applying the standard to the opening balance of retained earnings. See Revenue Recognition section above for further information on our updated revenue recognition policy.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to record a right-of-use asset and a liability for virtually all leases. This ASU was adopted on January 1, 2019, using the modified retrospective transition method at the adoption date. Comparative periods presented in our consolidated financial statements were reported in accordance with ASC 840, Leases. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. The Company also elected the practical expedient to not separate lease and non-lease components for new leases entered into after January 1, 2019, when calculating the lease liability under this ASU. Adoption of this ASU resulted in the recording of lease liabilities of approximately $54 million with the offset to lease right-of-use assets of $54 million. The standard did not materially impact our Consolidated Statement of Income and had no impact on our Consolidated Statement of Cash Flows. The new standard also requires increased disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. This ASU introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including loans, held-to-maturity debt securities, loan commitments, financial guarantees and net investments in leases, as well as reinsurance and trade receivables. This ASU will be effective beginning in 2020. Based on a review of its portfolio of financial instruments, the Company does not believe the adoption of this ASU will have a material impact on the consolidated financial statements, but does expect the adoption to result in additional disclosures.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill impairments under Step 2 by eliminating the requirement to perform procedures to determine the fair value of the assets and liabilities of the reporting unit, including previously unrecognized assets and liabilities, in order to determine the fair value of the goodwill and any impairment charge to be recognized. Under this ASU, the impairment charge to be recognized should be the amount by which the reporting unit's carrying value exceeds the reporting unit's fair value as calculated under Step 1 provided that the loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The Company adopted ASU 2017-04 effective January 1, 2019 and this ASU may have a material effect on our consolidated financial statements in the event that we determine that goodwill for any of our reporting units is impaired.the three years ended December 31, 2022.
Note 2—Cash and Cash Equivalents
Several of the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): ReclassificationCompany's affiliates participate in a notional cash pooling arrangement to manage global liquidity requirements. As part of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI"), which gives entitiesa master netting arrangement, the optionparticipants combine their cash balances in pooling accounts at the same financial institution with the ability to reclassifyoffset bank overdrafts of one participant against positive cash account balances held by another participant. Under the terms of the master netting arrangement, the financial institution has the right, ability and intent to retained earningsoffset a positive balance in one account against an overdrawn amount in another account. Amounts in each of the tax effects resulting fromaccounts are unencumbered and unrestricted with respect to use. As such, the new tax reform legislation commonly known as the Tax Cuts and Jobs Act of 2017 (the "Act")net cash balance related to itemsthis pooling arrangement is included in AOCI thatCash and cash equivalents in the FASB refers to as having been stranded in AOCI. Consolidated Balance Sheets.
The new guidance may be applied retrospectively to each period in which the effectCompany's net cash pool position consisted of the Act is recognized in the period of adoption. ASU2018-02 requires new disclosures regarding the Company’s accounting policy for releasing the tax effects in accumulated other comprehensive loss and allows the Company to reclassify the effect of remeasuring deferred tax liabilities and assets related to items within accumulated other comprehensive loss using the then newly enacted 21% federal corporate income tax rate. The Company adopted ASU 2018-02 on January 1, 2019, and this adoption resulted in a reclassification that increased retained earnings by $3.8 million, with an offsetting increase to accumulated other comprehensive loss for the same amount.following:
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which improves fair value disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements and adding relevant disclosure requirements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted and an entity can choose to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. Based on a review of its portfolio of financial instruments, the Company does not believe the adoption of this ASU will have a material impact on the consolidated financial statements but does expect changes to our disclosures. | | | | | | | | |
| (In thousands) | | December 31, 2022 |
| Gross cash pool position | | $ | 72,271 | |
| Less: cash pool borrowings | | (65,102) | |
| Net cash pool position | | $ | 7,169 | |
In August 2018, the FASB issued ASU 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which improves defined benefit disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements and adding relevant disclosure requirements. This ASU is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The amendments in this ASU are required to be applied on a retrospective basis to all periods presented. The Company is still evaluating the impact that the adoption of ASU 2018-14 will have on the consolidated financial statements but does expect changes to our disclosures.
Note 2—3—Restructuring Charges
During the years ended December 31, 2019, 20182022, 2021 and 2017,2020, we recorded restructuring charges of $13.8$8.0 million, $13.2$16.4 million and $17.6$27.4 million, respectively. These charges were primarily related to our ongoing initiatives to drive profitable growth and right size our operations.
Americas segment restructuring charges of $0.5$2.3 million during the year ended December 31, 2019,2022, were related to severance costs for staff reductions in our Latin America Region.various optimization activities. International segment restructuring charges of $12.7$5.1 million during the year ended December 31, 2019,2022, were primarily related to severance costs for staff reductions associated with our ongoing initiatives to drive profitable growth and a non-cash settlement charge for the terminationimplementation of our pension plannew European Shared Service Center in the United Kingdom.Warsaw, Poland. Corporate segment restructuring charges of $0.6 million during the year ended December 31, 2019,2022, were primarily related primarily to programs to realign the legalorganization and operational realignment ofadjust our U.S. and Canadian operations.operations in response to current business conditions.
A total of 99151 positions were eliminated in 2019.2022. There were 1224 positions eliminated in the Americas segment, and 87123 in the International segment and 4 in the Corporate segment.
Americas segment restructuring charges of $2.3$4.6 million during the year ended December 31, 2018,2021, were primarily related to severanceintegration related activities and costs for staff reductionsassociated with our global Fixed Gas & Flame Detection manufacturing footprint optimization as well as programs to adjust our operations in our Northern North America and Latin America Regions.response to current business conditions. International segment restructuring charges of $5.6$11.2 million during the year ended December 31, 2018,2021, were primarily related to our initiatives to drive profitable growth and right size our operations. Corporate segment restructuring charges of $0.6 million during the year ended December 31, 2021, were primarily related to programs to adjust our operations in response to current business conditions.
A total of 143 positions were eliminated in 2021. There were 66 positions eliminated in the Americas segment, 71 in the International segment, and 6 in the Corporate segment.
Americas segment restructuring charges of $4.7 million during the year ended December 31, 2020, were related to costs associated with our global Fixed Gas & Flame Detection manufacturing footprint optimization as well as programs to adjust our operations in response to current business conditions. International segment restructuring charges of $21.9 million during the year ended December 31, 2020, were primarily related to severance costs for staff reductions and footprint optimization associated with our ongoing initiatives to drive profitable growth in Europe.growth. Corporate segment restructuring charges of $5.3$0.8 million during the year ended December 31, 2018,2020, were primarily related primarily to the legal and operational realignment ofprograms to adjust our U.S. and Canadian operations.operations in response to current business conditions.
A total of 45121 positions were eliminated in 2018.2020. There were 842 positions eliminated in the Americas segment, 3476 in the International segment, and 3 in the Corporate segment.
Americas segment restructuring charges
Approximately 155 positions were eliminated in 2017. There were 90 positions were eliminated in the Americas segment and approximately 65 in the International segment.
Activity and reserve balances for restructuring charges by segment were as follows:
|
| | | | | | | | | | | | | | | |
| (in millions) | Americas | | International | | Corporate | | Total |
| Reserve balances at January 1, 2017 | $ | 0.9 |
| | $ | 2.8 |
| | $ | 0.3 |
| | $ | 4.0 |
|
| Restructuring charges | 13.0 |
| | 4.9 |
| | — |
| | 17.9 |
|
| Currency translation and other adjustments | (0.2 | ) | | (0.1 | ) | | — |
| | (0.3 | ) |
| Cash payments / utilization | (13.2 | ) | | (4.0 | ) | | (0.3 | ) | | (17.5 | ) |
| Reserve balances at December 31, 2017 | $ | 0.5 |
| | $ | 3.6 |
| | $ | — |
| | $ | 4.1 |
|
| Restructuring charges | 2.3 |
| | 5.6 |
| | 5.3 |
| | 13.2 |
|
| Currency translation and other adjustments | (0.3 | ) | | (0.3 | ) | | — |
| | (0.6 | ) |
| Cash payments | (2.0 | ) | | (4.9 | ) | | (5.3 | ) | | (12.2 | ) |
| Reserve balances at December 31, 2018 | $ | 0.5 |
| | $ | 4.0 |
| | $ | — |
| | $ | 4.5 |
|
| Restructuring charges | 0.5 |
| | 12.7 |
| | 0.6 |
| | 13.8 |
|
| Currency translation and other adjustments | (0.1 | ) | | (0.6 | ) | | — |
| | (0.7 | ) |
| Cash payments / utilization | (0.6 | ) | | (10.2 | ) | | (0.6 | ) | | (11.4 | ) |
| Reserve balances at December 31, 2019 | $ | 0.3 |
| | $ | 5.9 |
| | $ | — |
| | $ | 6.2 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Americas | | International | | Corporate | | Total |
| Reserve balances at January 1, 2020 | $ | 0.3 | | | $ | 5.9 | | | $ | — | | | $ | 6.2 | |
| Restructuring charges | 4.7 | | | 21.9 | | | 0.8 | | | 27.4 | |
| Currency translation and other adjustments | (0.1) | | | 0.1 | | | — | | | — | |
| Cash payments / utilization | (2.1) | | | (8.6) | | | (0.4) | | | (11.1) | |
| Reserve balances at December 31, 2020 | $ | 2.8 | | | $ | 19.3 | | | $ | 0.4 | | | $ | 22.5 | |
| Restructuring charges | 4.6 | | | 11.2 | | | 0.6 | | | 16.4 | |
| Currency translation and other adjustments | (0.1) | | | (0.2) | | | — | | | (0.3) | |
| Cash payments / utilization | (4.0) | | | (12.9) | | | (0.7) | | | (17.6) | |
| Reserve balances at December 31, 2021 | $ | 3.3 | | | $ | 17.4 | | | $ | 0.3 | | | $ | 21.0 | |
| Restructuring charges | 2.3 | | | 5.1 | | | 0.6 | | | 8.0 | |
| Currency translation and other adjustments | 0.1 | | | (1.3) | | | — | | | (1.2) | |
| Cash payments / utilization | (4.0) | | | (8.4) | | | (0.4) | | | (12.8) | |
| Reserve balances at December 31, 2022 | $ | 1.7 | | | $ | 12.8 | | | $ | 0.5 | | | $ | 15.0 | |
Note 3—4—Inventories
The following table sets forth the components of inventory:
|
| | | | | | | |
| | December 31, |
| (In thousands) | 2019 | | 2018 |
| Finished products | $ | 71,918 |
| | $ | 65,965 |
|
| Work in process | 4,083 |
| | 6,169 |
|
| Raw materials and supplies | 151,129 |
| | 124,554 |
|
| Inventories at current cost | 227,130 |
| | 196,688 |
|
| Less: LIFO valuation | (42,103 | ) | | (40,086 | ) |
| Total inventories | $ | 185,027 |
| | $ | 156,602 |
|
| | | | | | | | | | | |
| December 31, |
| (In thousands) | 2022 | | 2021 |
| Finished products | $ | 97,142 | | | $ | 87,657 | |
| Work in process | 16,360 | | | 6,534 | |
| Raw materials and supplies | 224,814 | | | 186,426 | |
| Total inventories | $ | 338,316 | | | $ | 280,617 | |
| | | |
| | | |
Inventories stated on the LIFO basis represent 43% and 39% of total inventories at December 31, 2019 and 2018, respectively. We did not have any LIFO liquidations during the years ended December 31, 2019 and 2018.
Note 4—5—Property, Plant, and Equipment
The following table sets forth the components of property, plant and equipment:
| | | | | | | | | | | |
| December 31, |
| (In thousands) | 2022 | | 2021 |
| Land | $ | 4,884 | | | $ | 5,131 | |
| | | |
| Buildings | 138,618 | | | 136,272 | |
| Machinery and equipment | 466,394 | | | 435,652 | |
| Construction in progress | 22,097 | | | 36,552 | |
| Total | 631,993 | | | 613,607 | |
| Less accumulated depreciation | (424,441) | | | (405,814) | |
| Property, plant and equipment, net | $ | 207,552 | | | $ | 207,793 | |
| | | |
|
| | | | | | | |
| | December 31, |
| (In thousands) | 2019 | | 2018 |
| Land | $ | 4,194 |
| | $ | 3,188 |
|
| Buildings | 125,223 |
| | 117,910 |
|
| Machinery and equipment | 397,287 |
| | 386,690 |
|
| Construction in progress | 24,759 |
| | 24,044 |
|
| Total | 551,463 |
| | 531,832 |
|
| Less accumulated depreciation | (384,425 | ) | | (373,892 | ) |
| Property, plant and equipment, net | $ | 167,038 |
| | $ | 157,940 |
|
Note 5—6—Reclassifications Out of Accumulated Other Comprehensive Loss
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | MSA Safety Incorporated | | Noncontrolling Interests |
| (In thousands) | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
Pension and other post-retirement benefits(a) | | | | | | | | | | | |
| Balance at beginning of period | $ | (115,517 | ) | | $ | (97,948 | ) | | $ | (118,068 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
| Unrecognized net actuarial (losses) gains | (19,479 | ) | | (37,977 | ) | | 17,659 |
| | — |
| | — |
| | — |
|
| Tax benefit (expense) | 5,847 |
| | 9,936 |
| | (6,124 | ) | | — |
| | — |
| | — |
|
| Total other comprehensive (loss) income before reclassifications, net of tax | (13,632 | ) | | (28,041 | ) | | 11,535 |
| | — |
| | — |
| | — |
|
| Amounts reclassified from accumulated other comprehensive loss into net income: | | | | | | | | | | | |
| Amortization of prior service credit (Note 14) | (180 | ) | | (424 | ) | | (176 | ) | | — |
| | — |
| | — |
|
| Recognized net actuarial losses (Note 14) | 11,028 |
| | 14,507 |
| | 13,054 |
| | — |
| | — |
| | — |
|
| Tax benefit | (2,775 | ) | | (3,611 | ) | | (4,293 | ) | | — |
| | — |
| | — |
|
| Total amount reclassified from accumulated other comprehensive loss, net of tax, into net income | 8,073 |
| | 10,472 |
| | 8,585 |
| | — |
| | — |
| | — |
|
| Reclassification to retained earnings due to the adoption of ASU 2018-02 (Note 1) | (3,772 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Total other comprehensive (loss) income | $ | (9,331 | ) | | $ | (17,569 | ) | | $ | 20,120 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Balance at end of period | $ | (124,848 | ) | | $ | (115,517 | ) | | $ | (97,948 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
| Available-for-sale securities | | | | | | | | | | | |
| Balance at beginning of period | $ | (572 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Unrealized gain (loss) on available-for-sale securities (Note 18) | 578 |
| | (572 | ) | | — |
| | — |
| | — |
| | — |
|
| Balance at end of period | $ | 6 |
| | $ | (572 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Foreign currency translation | | | | | | | | | | | |
| Balance at beginning of period | $ | (102,838 | ) | | $ | (73,814 | ) | | $ | (112,178 | ) | | $ | 496 |
| | $ | 801 |
| | $ | (1,964 | ) |
| Reclassification from accumulated other comprehensive loss into net income | 15,261 |
| (b) | 774 |
| (c) | — |
| | — |
| | — |
| | — |
|
| Foreign currency translation adjustments | (1,584 | ) | | (29,798 | ) | | 38,364 |
| | (73 | ) | | (305 | ) | | 2,765 |
|
| Balance at end of period | $ | (89,161 | ) | | $ | (102,838 | ) | | $ | (73,814 | ) | | $ | 423 |
| | $ | 496 |
| | $ | 801 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| MSA Safety Incorporated | | Noncontrolling Interests |
| (In thousands) | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Pension and other post-retirement benefits(a) | | | | | | | | | | | |
| Balance at beginning of period | $ | (57,296) | | | $ | (115,552) | | | $ | (124,848) | | | $ | — | | | $ | — | | | $ | — | |
| Unrecognized net actuarial (losses) gains | (2,862) | | | 54,384 | | | (6,322) | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Tax benefit (expense) | 703 | | | (12,804) | | | 1,997 | | | — | | | — | | | — | |
| Total other comprehensive (loss) gain before reclassifications, net of tax | (2,159) | | | 41,580 | | | (4,325) | | | — | | | — | | | — | |
| Amounts reclassified from accumulated other comprehensive loss into net income: | | | | | | | | | | | |
| Amortization of prior service credit (Note 15) | (199) | | | (95) | | | (216) | | | — | | | — | | | — | |
| Recognized net actuarial losses (Note 15) | 12,592 | | | 22,531 | | | 18,079 | | | — | | | — | | | — | |
| Tax benefit | (3,273) | | | (5,760) | | | (4,242) | | | — | | | — | | | — | |
| Total amount reclassified from accumulated other comprehensive loss, net of tax, into net income | 9,120 | | | 16,676 | | | 13,621 | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Total other comprehensive income | $ | 6,961 | | | $ | 58,256 | | | $ | 9,296 | | | $ | — | | | $ | — | | | $ | — | |
| Balance at end of period | $ | (50,335) | | | $ | (57,296) | | | $ | (115,552) | | | $ | — | | | $ | — | | | $ | — | |
| Available-for-sale securities | | | | | | | | | | | |
| Balance at beginning of period | $ | (5) | | | $ | (1) | | | $ | 6 | | | $ | — | | | $ | — | | | $ | — | |
| Unrealized gain (loss) on available-for-sale securities (Note 19) | 3 | | | (4) | | | (7) | | | — | | | — | | | — | |
| Balance at end of period | $ | (2) | | | $ | (5) | | | $ | (1) | | | $ | — | | | $ | — | | | $ | — | |
| Foreign currency translation | | | | | | | | | | | |
| Balance at beginning of period | $ | (91,839) | | | $ | (66,844) | | | $ | (89,161) | | | $ | — | | | $ | 372 | | | $ | 213 | |
Reclassification from accumulated other comprehensive loss into net income(b) | 2,912 | | (c) | 267 | | | 216 | | | — | | | — | | | — | |
| Acquisition of noncontrolling interests in consolidated subsidiaries | — | | | — | | | — | | | — | | | (280) | | | — | |
| Foreign currency translation adjustments | (19,453) | | | (25,262) | | | 22,101 | | | — | | | (92) | | | 159 | |
| Balance at end of period | $ | (108,380) | | | $ | (91,839) | | | $ | (66,844) | | | $ | — | | | $ | — | | | $ | 372 | |
(a)Reclassifications out of accumulated other comprehensive loss and into net income are included in the computation of net
periodic pension and other post-retirement benefit costs (refer to Note 14—15—Pensions and Other Post-retirement Benefits).
(b)Included in Currency exchange losses, net, within the Consolidated Statements of Income.
(c)Reclassifications out of accumulated other comprehensive loss and into net income relate primarily to the approval of our
plan to close our South Africa affiliates as discussed above and are included in Currency exchange losses, net, withina foreign subsidiary.
the Consolidated Statement of Income.51
(c)Included in Currency exchange losses, net, on the Consolidated Statement of Income.
Note 6—7—Capital Stock
Preferred Stock - The Company has authorized 100,000 shares of $50 par value 4.5% cumulative preferred nonvoting stock which is callable at $52.50. There arewere 71,340 shares issued and 52,87852,998 shares held in treasury at both December 31, 2019.2022 and 2021. The Treasury shares at cost line of the Consolidated Balance SheetSheets includes $1.8 million related to preferred stock. There were 0 treasury purchasesno shares of preferred stock purchased and subsequently held in treasury during the years ended December 31, 2019, 20182022, or 2017.2021. The Company has also authorized 1,000,000 shares of $10 par value second cumulative preferred voting stock. NaNNo shares have been issued as of December 31, 20192022 or 2018.2021.
Common Stock - The Company has authorized 180,000,000 shares of 0no par value common stock. There were 62,081,391 shares issued as of both December 31, 20192022 and December 31, 2018.2021. There were 38,841,19439,213,064 and 38,526,52339,276,518 shares outstanding at December 31, 20192022 and 2018,2021, respectively.
Treasury Shares - The Company's stock repurchase program authorizes up to $100.0 million to repurchase MSA common stock in the open market and in private transactions. The share repurchase program has no expiration date. The maximum number of shares that may be purchased is calculated based on the dollars remaining under the program and the respective month-end closing share price. ThereUnder the program, there were 33,465251,408 shares repurchased during 2019 and 168,9412022, no shares repurchased during 2017. NaN2021 and 175,000 shares were repurchased during 2018.2020. We do not have any other share repurchase programs. There were 23,240,19722,868,327 and 23,554,86822,804,873 Treasury Sharesshares at December 31, 20192022 and 2018,2021, respectively.
The Company issues Treasury Sharesshares for all sharestock based benefit plans. Shares are issued from Treasury at the average Treasury Shareshare cost on the date of the transaction. There were 436,549219,214 and 357,510246,376 Treasury Sharesshares issued for these purposes during the years ended December 31, 20192022 and 2018,2021, respectively.
52
Common stock activity is summarized as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares | | Dollars | | |
| (Dollars in thousands) | | Issued | | Treasury | | Common
Stock | | Treasury
Cost | | |
| Balance at January 1, 2020 | | 62,081,391 | | | (23,240,197) | | | $ | 229,127 | | | $ | (303,566) | | | |
| Restricted stock awards | | — | | | 55,691 | | | (773) | | | 773 | | | |
| Restricted stock expense | | — | | | — | | | 7,065 | | | — | | | |
| Restricted stock forfeitures | | — | | | — | | | (807) | | | — | | | |
| Stock options exercised | | — | | | 274,672 | | | 8,590 | | | 3,856 | | | |
| Stock option expense | | — | | | — | | | 153 | | | — | | | |
| Stock option forfeitures | | — | | | — | | | (40) | | | — | | | |
| Performance stock issued | | — | | | 134,824 | | | (1,826) | | | 1,826 | | | |
| Performance stock expense | | — | | | — | | | 1,305 | | | — | | | |
| Performance stock forfeitures | | — | | | — | | | (755) | | | — | | | |
| | | | | | | | | | |
| Employee stock purchase plan | | — | | | 6,494 | | | 654 | | | 93 | | | |
| Treasury shares purchased | | — | | | (69,973) | | | — | | | (9,025) | | | |
| Share repurchase program | | — | | | (175,000) | | | — | | | (20,113) | | | |
| | | | | | | | | | |
| Balances December 31, 2020 | | 62,081,391 | | | (23,013,489) | | | $ | 242,693 | | | $ | (326,156) | | | |
| Restricted stock awards | | — | | | 53,934 | | | (762) | | | 762 | | | |
| Restricted stock expense | | — | | | — | | | 6,562 | | | — | | | |
| Restricted stock forfeitures | | — | | | — | | | (765) | | | — | | | |
| Stock options exercised | | — | | | 122,119 | | | 4,003 | | | 1,767 | | | |
| Stock option expense | | — | | | — | | | 90 | | | — | | | |
| Stock option forfeitures | | — | | | — | | | (9) | | | — | | | |
| Performance stock issued | | — | | | 64,543 | | | (939) | | | 939 | | | |
| Performance stock expense | | — | | | — | | | 13,227 | | | — | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Employee stock purchase plan | | — | | | 5,730 | | | 772 | | | 83 | | | |
| Treasury shares purchased | | — | | | (37,710) | | | — | | | (6,171) | | | |
| Acquisition of noncontrolling interests in consolidated subsidiaries | | — | | | — | | | (4,751) | | | — | | | |
| Balances December 31, 2021 | | 62,081,391 | | | (22,804,873) | | | $ | 260,121 | | | $ | (328,776) | | | |
| Restricted stock awards | | — | | | 52,810 | | | (711) | | | 711 | | | |
| Restricted stock expense | | — | | | — | | | 7,715 | | | — | | | |
| Restricted stock forfeitures | | — | | | — | | | (1,227) | | | — | | | |
| Stock options exercised | | — | | | 103,545 | | | 3,021 | | | 1,629 | | | |
| Stock option expense | | — | | | — | | | 49 | | | — | | | |
| | | | | | | | | | |
| Performance stock issued | | — | | | 55,447 | | | (880) | | | 880 | | | |
| Performance stock expense | | — | | | — | | | 15,843 | | | — | | | |
| Performance stock forfeitures | | — | | | — | | | (2,730) | | | — | | | |
| | | | | | | | | | |
| Employee stock purchase plan | | — | | | 7,412 | | | 779 | | | 112 | | | |
| Treasury shares purchased | | — | | | (31,260) | | | — | | | (4,021) | | | |
| Share repurchase program | | — | | | (251,408) | | | — | | | (30,373) | | | |
| Balances December 31, 2022 | | 62,081,391 | | | (22,868,327) | | | $ | 281,980 | | | $ | (359,838) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | | Shares | | Dollars |
| (Dollars in thousands) | | Issued | | Treasury | | Common Stock | | Treasury Cost |
| Balances January 1, 2017 | | 62,081,391 |
| | (24,344,813 | ) | | $ | 172,681 |
| | $ | (287,501 | ) |
| Restricted stock awards | | — |
| | 34,798 |
| | (422 | ) | | 422 |
|
| Restricted stock expense | | — |
| | — |
| | 4,746 |
| | — |
|
| Restricted stock forfeitures | | — |
| | (690 | ) | | (49 | ) | | (6 | ) |
| Stock options exercised | | — |
| | 620,646 |
| | 10,901 |
| | 7,564 |
|
| Stock option expense | |
|
| | — |
| | 380 |
| | — |
|
| Performance stock issued | | — |
| | 72,504 |
| | (866 | ) | | 866 |
|
| Performance stock expense | | — |
| | — |
| | 6,687 |
| | — |
|
| Employee stock purchase plan | | — |
| | 7,127 |
| | 445 |
| | 87 |
|
| Treasury shares purchased for stock compensation programs | | — |
| | (79,094 | ) | | — |
| | (5,732 | ) |
| Share repurchase program | | — |
| | (168,941 | ) | | — |
| | (11,781 | ) |
| Acquisition of noncontrolling interest | | — |
| | — |
| | 450 |
| | — |
|
| Balances December 31, 2017 | | 62,081,391 |
| | (23,858,463 | ) | | $ | 194,953 |
| | $ | (296,081 | ) |
| Restricted stock awards | | — |
| | 92,401 |
| | (1,079 | ) | | 1,079 |
|
| Restricted stock expense | | — |
| | — |
| | 6,504 |
| | — |
|
| Restricted stock forfeitures | | — |
| | — |
| | (283 | ) | | — |
|
| Stock options exercised | | — |
| | 215,724 |
| | 5,738 |
| | 2,835 |
|
| Stock option expense | | — |
| | — |
| | 272 |
| | — |
|
| Stock option forfeitures | | — |
| | — |
| | (55 | ) | | — |
|
| Performance stock issued | | — |
| | 41,660 |
| | (523 | ) | | 523 |
|
| Performance stock expense | | — |
| | — |
| | 6,186 |
| | — |
|
| Performance stock forfeitures | | — |
| | — |
| | (385 | ) | | — |
|
| Employee stock purchase plan | | — |
| | 7,725 |
| | 478 |
| | 78 |
|
| Treasury shares purchased for stock compensation programs | | — |
| | (53,915 | ) | | — |
| | (4,824 | ) |
| Balances December 31, 2018 | | 62,081,391 |
| | (23,554,868 | ) | | $ | 211,806 |
| | $ | (296,390 | ) |
| Restricted stock awards | | — |
| | 96,893 |
| | (1,253 | ) | | 1,253 |
|
| Restricted stock expense | | — |
| | — |
| | 7,397 |
| | — |
|
| Restricted stock forfeitures | | — |
| | — |
| | (483 | ) | | — |
|
| Stock options exercised | | — |
| | 193,681 |
| | 5,107 |
| | 2,364 |
|
| Stock option expense | | — |
| | — |
| | 492 |
| | — |
|
| Stock option forfeitures | | — |
| | — |
| | (5 | ) | | — |
|
| Performance stock issued | | — |
| | 139,478 |
| | (1,778 | ) | | 1,778 |
|
| Performance stock expense | | — |
| | — |
| | 6,574 |
| | — |
|
| Performance stock forfeitures | | — |
| | — |
| | (215 | ) | | — |
|
| Stock consideration in acquisition (Note 13) | | — |
| | — |
| | 921 |
| | — |
|
| Employee stock purchase plan | | — |
| | 5,895 |
| | 564 |
| | 77 |
|
| Treasury shares purchased for stock compensation programs | | — |
| | (87,811 | ) | | — |
| | (9,301 | ) |
| Share repurchase program | | — |
| | (33,465 | ) | | — |
| | (3,347 | ) |
| Balances December 31, 2019 | | 62,081,391 |
| | (23,240,197 | ) | | $ | 229,127 |
| | $ | (303,566 | ) |
Note 7—8—Segment Information
We are organized into 6 geographicfour geographical operating segments that are based on management responsibilities.responsibilities: Northern North America, Latin America, Europe, Middle East & Africa, and Asia Pacific. The operating segments have been aggregated (based on economic similarities, the nature of their products, end-user markets and methods of distribution) into 3three reportable segments: Americas, International, and Corporate.
The Americas segment is comprised of our operations in North America and Latin America geographies. The International segment is comprised of our operations in all geographies outside of the Americas. Certain global expenses are allocated to each segment in a manner consistent with where the benefits from the expenses are derived.
The Company's sales are allocated to each countrysegment based primarily on the country destination of the end-customer.
Adjusted operating income (loss), adjusted operating margin, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and adjusted EBITDA margin are the measures used by the chief operating decision maker to evaluate segment performance and allocate resources. Adjusted operating income (loss) is defined as operating income excluding restructuring charges, currency exchange gains (losses), product liability expense, and strategic transactionacquisition related costs, and adjustedincluding acquisition related amortization. Adjusted operating margin is defined as adjusted operating income (loss) divided by segment net sales to external customers. Adjusted EBITDA is defined as adjusted operating income (loss) plus depreciation and amortization and adjustedamortization. Adjusted EBITDA margin is defined as adjusted EBITDA divided by segment net sales to external customers. Adjusted operating income (loss), adjusted operating margin, adjusted EBITDA and adjusted EBITDA margin are not recognized terms under U.S. GAAP, and therefore, do not purport to be alternatives to operating income or operating margin as a measure of operating performance. Further, the Company's measure of adjusted operating income (loss), adjusted operating margin, adjusted EBITDA and adjusted EBITDA margin may not be comparable to similarly titled measures of other companies. Adjusted operating income (loss) and adjusted EBITDA on a consolidated basis is presented in the following table to reconcile the segment operating performance measure to operating income as presented on the Consolidated Statement of Income.
The accounting principles applied at the operating segment level in determining operating income (loss) are generally the same as those applied at the consolidated financial statement level. Sales and transfers between operating segments are accounted for at market-based transaction prices and are eliminated in consolidation.
54
Reportable segment information is presented in the following table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Americas | | International | | Corporate | | Reconciling Items(1) | | Consolidated
Totals |
| 2022 | | | | | | | | | |
| Net sales to external customers | $ | 1,043,238 | | | $ | 484,715 | | | $ | — | | | $ | — | | | $ | 1,527,953 | |
| | | | | | | | | |
| Operating income | | | | | | | | | 239,137 | |
| Restructuring charges (Note 3) | | | | | | | | | 7,965 | |
| Currency exchange losses, net (Note 6) | | | | | | | | | 10,255 | |
| Product liability expense (Note 20) | | | | | | | | | 20,590 | |
Acquisition related costs(a) (Note 14) | | | | | | | | | 12,440 | |
| | | | | | | | | |
| Adjusted operating income (loss) | 267,392 | | | 60,923 | | | (37,928) | | | | | 290,387 | |
| Adjusted operating margin % | 25.6 | % | | 12.6 | % | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Depreciation and amortization | 34,334 | | | 12,256 | | | 520 | | | | | 47,110 | |
| Adjusted EBITDA | 301,726 | | | 73,179 | | | (37,408) | | | | | 337,497 | |
| Adjusted EBITDA margin % | 28.9 | % | | 15.1 | % | | | | | | |
| Noncash items: | | | | | | | | | |
| Pension (income) expense | $ | (18,368) | | | $ | 6,869 | | | $ | — | | | $ | — | | | $ | (11,499) | |
| | | | | | | | | |
| Total Assets | 1,660,776 | | | 703,444 | | | 11,673 | | | 1,083 | | | 2,376,976 | |
| Capital expenditures | 33,324 | | | 9,229 | | | — | | | — | | | 42,553 | |
| | | | | | | | | |
| 2021 | | | | | | | | | |
| Net sales to external customers | $ | 908,068 | | | $ | 492,114 | | | $ | — | | | $ | — | | | $ | 1,400,182 | |
| | | | | | | | | |
| Operating income | | | | | | | | | 22,780 | |
| Restructuring charges (Note 3) | | | | | | | | | 16,433 | |
| Currency exchange losses, net (Note 6) | | | | | | | | | 216 | |
| Product liability expense (Note 20) | | | | | | | | | 185,264 | |
Acquisition related costs(a) (Note 14) | | | | | | | | | 15,884 | |
| | | | | | | | | |
| Adjusted operating income (loss) | 202,496 | | | 73,279 | | | (35,198) | | | — | | | 240,577 | |
| Adjusted operating margin % | 22.3 | % | | 14.9 | % | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Depreciation and amortization | 31,236 | | | 13,718 | | | 463 | | | — | | | 45,417 | |
| Adjusted EBITDA | 233,732 | | | 86,997 | | | (34,735) | | | — | | | 285,994 | |
| Adjusted EBITDA margin % | 25.7 | % | | 17.7 | % | | | | | | |
| Noncash items: | | | | | | | | | |
| Pension (income) expense | $ | (2,916) | | | $ | 5,790 | | | $ | — | | | $ | — | | | $ | 2,874 | |
| | | | | | | | | |
| Total Assets | 1,661,619 | | | 720,257 | | | 13,034 | | | 1,486 | | | 2,396,396 | |
| Capital expenditures | 25,148 | | | 11,408 | | | 7,281 | | | — | | | 43,837 | |
| | | | | | | | | |
| 2020 | | | | | | | | | |
| Net sales to external customers | $ | 874,305 | | | $ | 473,918 | | | $ | — | | | $ | — | | | $ | 1,348,223 | |
| | | | | | | | | |
| Operating income | | | | | | | | | 171,895 | |
| Restructuring charges (Note 3) | | | | | | | | | 27,381 | |
| Currency exchange losses, net (Note 6) | | | | | | | | | 8,578 | |
| Product liability expense (Note 20) | | | | | | | | | 39,036 | |
Acquisition related costs(a) (Note 14) | | | | | | | | | 717 | |
| COVID-19 related costs | | | | | | | | | 757 | |
| Adjusted operating income (loss) | 205,304 | | | 71,140 | | | (28,080) | | | — | | | 248,364 | |
| Adjusted operating margin % | 23.5 | % | | 15.0 | % | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Depreciation and amortization | 26,762 | | | 12,521 | | | 391 | | | — | | | 39,674 | |
| Adjusted EBITDA | 232,066 | | | 83,661 | | | (27,689) | | | — | | | 288,038 | |
| Adjusted EBITDA margin % | 26.5 | % | | 17.7 | % | | | | | | |
| Noncash items: | | | | | | | | | |
| Pension expense | $ | 910 | | | $ | 8,113 | | | $ | — | | | $ | — | | | $ | 9,023 | |
| | | | | | | | | |
| Total Assets | 1,273,302 | | | 617,698 | | | 29,761 | | | (1,130) | | | 1,919,631 | |
| Capital expenditures | 43,181 | | | 5,724 | | | — | | | — | | | 48,905 | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands) | Americas | | International | | Corporate | | Reconciling Items(1) | | Consolidated Totals |
| 2019 | | | | | | | | | |
| Sales to external customers | $ | 915,118 |
| | $ | 486,863 |
| | $ | — |
| | $ | — |
| | $ | 1,401,981 |
|
| Operating income | | | | | | | | | 186,230 |
|
| Restructuring charges (Note 2) | | | | | | | | | 13,846 |
|
| Currency exchange losses, net | | | | | | | | | 19,814 |
|
| Product liability expense (Note 19) | | | | | | | | | 26,619 |
|
| Strategic transaction costs (Note 13) | | | | | | | | | 4,400 |
|
| Adjusted operating income (loss) | 226,596 |
| | 59,910 |
| | (35,597 | ) | | — |
| | 250,909 |
|
| Adjusted operating margin % | 24.8 | % | | 12.3 | % | | | | | | |
| Depreciation and amortization | 24,691 |
| | 12,938 |
| | 391 |
| | — |
| | 38,020 |
|
| Adjusted EBITDA | 251,287 |
| | 72,848 |
| | (35,206 | ) | | — |
| | 288,929 |
|
| Adjusted EBITDA % | 27.5 | % | | 15.0 | % | | | | | | |
| Noncash items: | | | | | | | | | |
| Pension (income) expense | (6,111 | ) | | 7,044 |
| | — |
| | — |
| | 933 |
|
| Total Assets | 1,131,911 |
| | 584,195 |
| | 22,367 |
| | 1,220 |
| | 1,739,693 |
|
| Capital expenditures | 26,823 |
| | 9,781 |
| | — |
| | — |
| | 36,604 |
|
| 2018 | | | | | | | | | |
| Sales to external customers | $ | 854,287 |
| | $ | 503,817 |
| | $ | — |
| | $ | — |
| | $ | 1,358,104 |
|
| Operating income | | | | | | | | | 173,479 |
|
| Restructuring charges (Note 2) | | | | | | | | | 13,247 |
|
| Currency exchange losses, net | | | | | | |
| | 2,330 |
|
| Product liability expense (Note 19) | | | | | | | | | 45,327 |
|
| Strategic transaction costs (Note 13) | | | | | | | | | 421 |
|
| Adjusted operating income (loss) | 206,839 |
| | 59,866 |
| | (31,901 | ) | | — |
| | 234,804 |
|
| Adjusted operating margin % | 24.2 | % | | 11.9 | % | | | | | | |
| Depreciation and amortization | 24,143 |
| | 13,303 |
| | 406 |
| | — |
| | 37,852 |
|
| Adjusted EBITDA | 230,982 |
| | 73,169 |
| | (31,495 | ) | | — |
| | 272,656 |
|
| Adjusted EBITDA % | 27.0 | % | | 14.5 | % | | | | | |
|
| Noncash items: | | | | | | | | | |
| Pension (income) expense | (1,201 | ) | | 7,102 |
| | — |
| | — |
| | 5,901 |
|
| Total Assets | 1,077,938 |
| | 522,042 |
| | 10,842 |
| | (2,810 | ) | | 1,608,012 |
|
| Capital expenditures | 25,001 |
| | 8,959 |
| | — |
| | — |
| | 33,960 |
|
| 2017 | | | | | | | | | |
| Sales to external customers | $ | 736,847 |
| | $ | 459,962 |
| | $ | — |
| | $ | — |
| | $ | 1,196,809 |
|
| Operating income | | | | | | | | | 39,577 |
|
| Restructuring charges (Note 2) | | | | | | | | | 17,632 |
|
| Currency exchange losses, net | | | | | | | | | 5,127 |
|
| Product liability expense (Note 19) | | | | | | | | | 126,432 |
|
| Strategic transaction costs (Note 13) | | | | | | | | | 4,225 |
|
| Adjusted operating income (loss) | 175,589 |
| | 50,391 |
| | (32,987 | ) | | — |
| | 192,993 |
|
| Adjusted operating margin % | 23.8 | % | | 11.0 | % | | | | | | |
| Depreciation and amortization | 23,207 |
| | 14,265 |
| | 405 |
| | — |
| | 37,877 |
|
| Adjusted EBITDA | 198,796 |
| | 64,656 |
| | (32,582 | ) | | — |
| | 230,870 |
|
| Adjusted EBITDA % | 27.0 | % | | 14.1 | % | | | | | |
|
| Noncash items: | | | | | | | | | |
| Pension expense | 246 |
| | 6,896 |
| | — |
| | — |
| | 7,142 |
|
| Total Assets | 1,110,698 |
| | 563,480 |
| | 12,099 |
| | (1,451 | ) | | 1,684,826 |
|
| Capital expenditures | 16,910 |
| | 6,815 |
| | — |
| | — |
| | 23,725 |
|
(1)Reconciling items consist primarily of intercompany eliminations and items not directly attributable to operating segments.
55
Geographic information on Net sales to external customers, based on country of origin:
|
| | | | | | | | | | | |
| (In thousands) | 2019 | | 2018 | | 2017 |
| United States | $ | 785,155 |
| | $ | 734,033 |
| | $ | 622,276 |
|
| Other | 616,826 |
| | 624,071 |
| | 574,533 |
|
| Total | $ | 1,401,981 |
| | $ | 1,358,104 |
| | $ | 1,196,809 |
|
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 | | 2020 |
| United States | $ | 876,945 | | | $ | 746,825 | | | $ | 750,315 | |
| Other | 651,008 | | | 653,357 | | | 597,908 | |
| Total | $ | 1,527,953 | | | $ | 1,400,182 | | | $ | 1,348,223 | |
Geographic information on tangible long-lived assets, net, based on country of origin:
|
| | | | | | | | | | | |
| (In thousands) | 2019 | | 2018 | | 2017 |
| United States | $ | 113,528 |
| | $ | 92,511 |
| | $ | 91,730 |
|
| Other | 105,185 |
| | 65,429 |
| | 65,284 |
|
| Total | $ | 218,713 |
| | $ | 157,940 |
| | $ | 157,014 |
|
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 | | 2020 |
| United States | $ | 159,345 | | | $ | 155,667 | | | $ | 134,234 | |
| | | | | |
| | | | | |
| | | | | |
| Other | 92,349 | | | 102,304 | | | 108,837 | |
| Total | $ | 251,694 | | | $ | 257,971 | | | $ | 243,071 | |
Total Net sales by product group was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | Consolidated | | Americas | | International |
| (In thousands) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
| Breathing Apparatus | $ | 371,176 | | 24% | | $ | 265,558 | | 25% | | $ | 105,618 | | 22% |
Fixed Gas & Flame Detection (a) | 356,075 | | 23% | | 227,609 | | 22% | | 128,466 | | 27% |
Firefighter Helmets & Protective Apparel (b) | 207,759 | | 14% | | 150,869 | | 14% | | 56,890 | | 12% |
| Portable Gas Detection | 173,660 | | 11% | | 121,934 | | 12% | | 51,726 | | 11% |
| Industrial Head Protection | 163,253 | | 11% | | 127,485 | | 12% | | 35,768 | | 7% |
| Fall Protection | 110,094 | | 7% | | 69,225 | | 7% | | 40,869 | | 8% |
Other (c) | 145,936 | | 10% | | 80,558 | | 8% | | 65,378 | | 13% |
| Total | $ | 1,527,953 | | 100% | | $ | 1,043,238 | | 100% | | $ | 484,715 | | 100% |
| | | | | | | | |
| 2021 | Consolidated | | Americas | | International |
| (In thousands) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
| Breathing Apparatus | $ | 322,412 | | 23% | | $ | 217,340 | | 24% | | $ | 105,072 | | 21% |
Fixed Gas & Flame Detection (a) | 299,018 | | 21% | | 182,515 | | 20% | | 116,503 | | 24% |
Firefighter Helmets & Protective Apparel (b) | 203,914 | | 15% | | 137,086 | | 15% | | 66,828 | | 14% |
| Portable Gas Detection | 162,761 | | 12% | | 109,543 | | 12% | | 53,218 | | 11% |
| Industrial Head Protection | 143,601 | | 10% | | 108,869 | | 12% | | 34,732 | | 7% |
| Fall Protection | 117,731 | | 8% | | 69,108 | | 8% | | 48,623 | | 10% |
Other (c) | 150,745 | | 11% | | 83,607 | | 9% | | 67,138 | | 13% |
| Total | $ | 1,400,182 | | 100% | | $ | 908,068 | | 100% | | $ | 492,114 | | 100% |
| | | | | | | | |
| 2020 | Consolidated | | Americas | | International |
| (In thousands) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
| Breathing Apparatus | $ | 329,179 | | 24% | | $ | 220,650 | | 25% | | $ | 108,529 | | 23% |
| Fixed Gas & Flame Detection | 287,414 | | 21% | | 158,924 | | 18% | | 128,490 | | 27% |
| Firefighter Helmets & Protective Apparel | 162,207 | | 12% | | 133,653 | | 15% | | 28,554 | | 6% |
| Portable Gas Detection | 142,581 | | 11% | | 90,545 | | 10% | | 52,036 | | 11% |
| Industrial Head Protection | 125,921 | | 9% | | 92,075 | | 11% | | 33,846 | | 7% |
| Fall Protection | 103,075 | | 8% | | 58,060 | | 7% | | 45,015 | | 10% |
Other (c) | 197,846 | | 15% | | 120,398 | | 14% | | 77,448 | | 16% |
| Total | $ | 1,348,223 | | 100% | | $ | 874,305 | | 100% | | $ | 473,918 | | 100% |
|
| | | | | | | | | | | | | | |
| 2019 | Consolidated | | Americas | | International |
| (In thousands) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
| Breathing Apparatus | $ | 317,678 |
| 23% | | $ | 212,463 |
| 23% |
| $ | 105,215 |
| 22% |
| Fixed Gas & Flame Detection | 292,988 |
| 21% | | 159,892 |
| 17% |
| 133,096 |
| 27% |
| Firefighter Helmets & Protective Apparel | 178,012 |
| 13% | | 142,043 |
| 16% | | 35,969 |
| 7% |
| Portable Gas Detection | 169,479 |
| 12% | | 113,914 |
| 12% |
| 55,565 |
| 11% |
| Industrial Head Protection | 145,403 |
| 10% | | 112,673 |
| 12% |
| 32,730 |
| 7% |
| Fall Protection | 125,869 |
| 9% | | 78,054 |
| 9% |
| 47,815 |
| 10% |
| Other | 172,552 |
| 12% | | 96,079 |
| 11% |
| 76,473 |
| 16% |
| Total | $ | 1,401,981 |
| 100% | | $ | 915,118 |
| 100% | | $ | 486,863 |
| 100% |
| | | | | | | | | |
| 2018 | Consolidated | | Americas | | International |
| (In thousands) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
| Breathing Apparatus | $ | 324,672 |
| 24% | | $ | 205,100 |
| 24% | | $ | 119,572 |
| 24% |
| Fixed Gas & Flame Detection | 262,432 |
| 19% | | 135,922 |
| 16% | | 126,510 |
| 25% |
| Firefighter Helmets & Protective Apparel | 169,679 |
| 13% | | 136,794 |
| 16% | | 32,885 |
| 6% |
| Portable Gas Detection | 163,716 |
| 12% | | 109,401 |
| 13% | | 54,315 |
| 11% |
| Industrial Head Protection | 146,388 |
| 11% | | 114,465 |
| 13% | | 31,923 |
| 6% |
| Fall Protection | 109,472 |
| 8% | | 61,289 |
| 7% | | 48,183 |
| 10% |
| Other | 181,745 |
| 13% | | 91,316 |
| 11% | | 90,429 |
| 18% |
| Total | $ | 1,358,104 |
| 100% | | $ | 854,287 |
| 100% | | $ | 503,817 |
| 100% |
| | | | | | | | | |
| 2017 | Consolidated | | Americas | | International |
| (In thousands) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
| Breathing Apparatus | $ | 292,448 |
| 24% | | $ | 191,457 |
| 26% |
| $ | 100,991 |
| 22% |
| Fixed Gas & Flame Detection | 248,047 |
| 21% | | 123,414 |
| 17% |
| 124,633 |
| 27% |
| Firefighter Helmets & Protective Apparel | 103,441 |
| 9% | | 69,767 |
| 9% |
| 33,674 |
| 7% |
| Portable Gas Detection | 149,063 |
| 12% | | 98,580 |
| 13% |
| 50,483 |
| 11% |
| Industrial Head Protection | 133,180 |
| 11% | | 105,514 |
| 14% |
| 27,666 |
| 6% |
| Fall Protection | 98,929 |
| 8% | | 54,468 |
| 7% |
| 44,461 |
| 10% |
| Other | 171,701 |
| 15% | | 93,647 |
| 14% |
| 78,054 |
| 17% |
| Total | $ | 1,196,809 |
| 100% | | $ | 736,847 |
| 100% | | $ | 459,962 |
| 100% |
(b) Firefighter Helmets & Protective Apparel include sales from the Bristol acquisition from January 25, 2021 onward (International).
(c) Other products include sales of Air Purifying Respirators.
Note 8—9—Earnings per Share
Basic earnings per share attributable to MSA Safety Incorporated common shareholders is computed by dividing net income, after the deduction of preferred stock dividends and undistributed earnings allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to MSA Safety Incorporated common shareholders assumes the issuance of common stock for all potentially dilutive share equivalents outstanding not classified as participating securities. Participating securities are defined as unvested stock-based payment awards that contain nonforfeitable rights to dividends.
| | | Amounts attributable to MSA Safety Incorporated common shareholders: | | | | | | Amounts attributable to MSA Safety Incorporated common shareholders: | |
| (In thousands, except per share amounts) | 2019 | | 2018 | | 2017 | (In thousands, except per share amounts) | 2022 | | 2021 | | 2020 |
| Net income | $ | 136,440 |
| | $ | 124,150 |
| | $ | 26,027 |
| Net income | $ | 179,630 | | | $ | 21,340 | | | $ | 124,077 | |
| Preferred stock dividends | (42 | ) | | (42 | ) | | (42 | ) | Preferred stock dividends | (41) | | | (41) | | | (41) | |
| Net income available to common equity | 136,398 |
| | 124,108 |
| | 25,985 |
| Net income available to common equity | 179,589 | | | 21,299 | | | 124,036 | |
| Dividends and undistributed earnings allocated to participating securities | $ | (183 | ) | | $ | (117 | ) | | $ | (62 | ) | Dividends and undistributed earnings allocated to participating securities | (30) | | | (24) | | | (84) | |
| Net income available to common shareholders | $ | 136,215 |
| | $ | 123,991 |
| | $ | 25,923 |
| Net income available to common shareholders | $ | 179,559 | | | $ | 21,275 | | | $ | 123,952 | |
| | | | | | | |
| | Basic weighted-average shares outstanding | 38,653 |
| | 38,362 |
| | 37,997 |
| Basic weighted-average shares outstanding | 39,232 | | | 39,173 | | | 38,885 | |
| Stock options and other stock compensation | 536 |
| | 599 |
| | 700 |
| |
| Stock options and other stock-based awards | | Stock options and other stock-based awards | 175 | | | 276 | | | 401 | |
| Diluted weighted-average shares outstanding | 39,189 |
| | 38,961 |
| | 38,697 |
| Diluted weighted-average shares outstanding | 39,407 | | | 39,449 | | | 39,286 | |
| | | | | | | |
| Antidilutive stock options | — |
| | — |
| | — |
| Antidilutive stock options | — | | | — | | | — | |
| | | | | | | |
| Earnings per share: | | | | | | Earnings per share: | |
| Basic | $ | 3.52 |
| | $ | 3.23 |
| | $ | 0.68 |
| Basic | $ | 4.58 | | | $ | 0.54 | | | $ | 3.19 | |
| Diluted | $ | 3.48 |
| | $ | 3.18 |
| | $ | 0.67 |
| Diluted | $ | 4.56 | | | $ | 0.54 | | | $ | 3.15 | |
|
Note 10—Income Taxes
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 | | 2020 |
| Components of income before income taxes | | | | | |
| U.S. income (loss) | $ | 170,426 | | | $ | (59,746) | | | $ | 109,726 | |
| Non-U.S. income | 68,107 | | | 83,350 | | | 58,421 | |
| Income before income taxes | $ | 238,533 | | | $ | 23,604 | | | $ | 168,147 | |
| Provision for income taxes | | | | | |
| Current | | | | | |
| Federal | $ | 26,022 | | | $ | 13,179 | | | $ | 23,587 | |
| State | 7,708 | | | 5,000 | | | 4,896 | |
| Non-U.S. | 20,002 | | | 22,487 | | | 16,780 | |
| Total current provision | $ | 53,732 | | | $ | 40,666 | | | $ | 45,263 | |
| Deferred | | | | | |
| Federal | $ | 7,350 | | | $ | (29,631) | | | $ | (573) | |
| State | 862 | | | (7,204) | | | (579) | |
| Non-U.S. | (3,041) | | | (2,015) | | | (1,102) | |
| Total deferred provision (benefit) | 5,171 | | | (38,850) | | | (2,254) | |
| Provision for income taxes | $ | 58,903 | | | $ | 1,816 | | | $ | 43,009 | |
On June 10, 2021 the United Kingdom ("U.K.") Parliament announced royal assent for Bill No. 12, on the Finance Act of 2021. This bill will increase the statutory rate from 19% to 25% in April 2023. The Company recorded this impact on its deferred tax balances in the second quarter of 2021.
57
Note 9—Income Taxes
|
| | | | | | | | | | | |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Components of income (loss) before income taxes | | | | | |
| U.S. income (loss) | $ | 126,552 |
| | $ | 85,234 |
| | $ | (20,555 | ) |
| Non-U.S. income | 57,183 |
| | 77,101 |
| | 50,330 |
|
| Income before income taxes | 183,735 |
| | 162,335 |
| | 29,775 |
|
| Provision for income taxes | | | | | |
| Current | | | | | |
| Federal | $ | 13,770 |
| | $ | 13,574 |
| | $ | 22,272 |
|
| State | 5,436 |
| | 4,265 |
| | 813 |
|
| Non-U.S. | 25,608 |
| | 23,446 |
| | 11,054 |
|
| Total current provision | 44,814 |
| | 41,285 |
| | 34,139 |
|
| Deferred | | | | | |
| Federal | $ | 5,744 |
| | $ | 291 |
| | $ | (26,931 | ) |
| State | 1,346 |
| | (1,604 | ) | | (3,630 | ) |
| Non-U.S. | (5,818 | ) | | (2,752 | ) | | (759 | ) |
| Total deferred provision (benefit) | 1,272 |
| | (4,065 | ) | | (31,320 | ) |
| Provision for income taxes | $ | 46,086 |
| | $ | 37,220 |
| | $ | 2,819 |
|
The Company elected to treat Global Intangible Low Taxed Income, which was effective in 2018 for the Company, as a period cost.
The Tax Cuts and Jobs Act of 2017 ("the Act"), which was signed into law on December 22, 2017, has resulted in significant changes to the U.S. corporate income tax system including reducing the U.S. corporate rate to 21% starting in 2018. The Act also creates a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries.
On December 22, 2017, SAB 118 was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company calculated its best estimate of the impact of the Act and recorded income tax expense of $19.8 million during the fourth quarter of 2017, the period in which the legislation was enacted. Of this amount, $18.0 million related to the one-time transition tax and the remaining $1.8 million was related to the revaluation of U.S. deferred tax assets and liabilities. The Company previously considered the earnings in non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. As as result of the Act, among other things, the Company determined it will repatriate earnings for all non-U.S. subsidiaries with cash in excess of working capital needs. The Company has estimated the associated tax to be $1.9 million, offset partially by $0.7 million of foreign tax credits. As of December 31, 2018, the Company had completed its accounting for all of the enactment-date income tax effects of the Act. Accordingly, we reduced our estimate for the one-time transition tax by $2.0 million and increased our estimate for the revaluation of U.S. deferred tax assets and liabilities by $2.5 million and a $2.0 million increase associated with prepaid taxes for updated regulations related to the Act.
During 2017, the Company recognized a benefit of $2.5 million associated with the reduction of exit taxes related to our European reorganization.
During 2018, the Company recorded $1.8 million of foreign income tax reserves related to the legal and operational realignment of our U.S., Canadian and European operations.
Reconciliation of the U.S. federal income tax rates to our effective tax rate:
|
| | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| U.S. federal income tax rate | 21.0 | % | | 21.0 | % | | 35.0 | % |
| State income taxes—U.S. | 2.9 | % | | 1.3 | % | | (6.2 | )% |
| Nondeductible Compensation | 1.9 | % | | 1.0 | % | | — | % |
| Foreign exchange on entity closures | 1.8 | % | | — | % | | — | % |
| Valuation allowances | 0.4 | % | | 0.5 | % | | (3.3 | )% |
| Taxes on non-U.S. income - U.S., Canadian & European reorganization | 0.3 | % | | 1.1 | % | | (8.4 | )% |
| U.S. tax reform | — | % | | 1.6 | % | | 66.6 | % |
| Manufacturing deduction credit | — | % | | (1.0 | )% | | (15.3 | )% |
| Employee share-based payments | (2.6 | )% | | (1.6 | )% | | (28.0 | )% |
| Research and development credit | (0.6 | )% | | (0.9 | )% | | (4.7 | )% |
| Taxes on non-U.S. income | (0.5 | )% | | 0.4 | % | | (24.6 | )% |
| Other | 0.5 | % | | (0.5 | )% | | (1.6 | )% |
| Effective income tax rate | 25.1 | % | | 22.9 | % | | 9.5 | % |
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| U.S. federal income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes-U.S. | 2.9 | % | | (7.0) | % | | 2.0 | % |
| Nondeductible compensation | 1.2 | % | | 15.3 | % | | 3.4 | % |
| Valuation allowances | 0.8 | % | | 7.0 | % | | 0.8 | % |
| Foreign exchange on entity closures | 0.3 | % | | (0.4) | % | | — | % |
| Taxes on non-U.S. income | 0.1 | % | | (10.9) | % | | 2.6 | % |
| Employee share-based payments | (0.8) | % | | (18.3) | % | | (3.9) | % |
| Research and development credit | (0.4) | % | | (5.3) | % | | (1.2) | % |
| Taxes on non-U.S. income - U.S., Canadian & European reorganization | — | % | | — | % | | 0.7 | % |
| | | | | |
| | | | | |
| Other | (0.4) | % | | 6.3 | % | | 0.2 | % |
| Effective income tax rate | 24.7 | % | | 7.7 | % | | 25.6 | % |
Components of deferred tax assets and liabilities: |
| | | | | | | |
| | December 31, |
| (In thousands) | 2019 | | 2018 |
| Deferred tax assets | | | |
| Product liability | $ | 29,405 |
| | $ | 31,169 |
|
| Capitalized research and development | 17,886 |
| | 10,938 |
|
| Employee benefits | 12,009 |
| | 9,641 |
|
| Net operating losses and tax credit carryforwards | 6,026 |
| | 7,845 |
|
| Share-based compensation | 5,396 |
| | 5,561 |
|
| Accrued expenses and other reserves | 4,384 |
| | 4,385 |
|
| Other | 3,828 |
| | 4,056 |
|
| Total deferred tax assets | 78,934 |
| | 73,595 |
|
| Valuation allowances | (5,937 | ) | | (5,039 | ) |
| Net deferred tax assets | 72,997 |
| | 68,556 |
|
| Deferred tax liabilities | | | |
| Goodwill and intangibles | (35,999 | ) | | (31,290 | ) |
| Property, plant and equipment | (11,714 | ) | | (9,555 | ) |
| Other | (2,475 | ) | | (2,353 | ) |
| Total deferred tax liabilities | (50,188 | ) | | (43,198 | ) |
| Net deferred taxes | $ | 22,809 |
| | $ | 25,358 |
|
| | | | | | | | | | | |
| December 31, |
| (In thousands) | 2022 | | 2021 |
| Deferred tax assets | | | |
| Product liability | $ | 72,950 | | | $ | 71,709 | |
| Capitalized research and development | 26,988 | | | 25,644 | |
| | | |
| Net operating losses and tax credit carryforwards | 10,696 | | | 9,404 | |
| Accrued expenses and other reserves | 5,738 | | | 4,627 | |
| Share-based compensation | 4,562 | | | 3,619 | |
| | | |
| | | |
| Other | 5,068 | | | 4,785 | |
| Total deferred tax assets | 126,002 | | | 119,788 | |
| Valuation allowances | (10,017) | | | (8,812) | |
| Net deferred tax assets | 115,985 | | | 110,976 | |
| Deferred tax liabilities | | | |
| Goodwill and intangibles | (80,383) | | | (79,285) | |
| Property, plant and equipment | (18,735) | | | (17,088) | |
| Employee benefits | (18,899) | | | (8,985) | |
| Inventory | — | | | (1,264) | |
| Other | (4,359) | | | (2,434) | |
| Total deferred tax liabilities | (122,376) | | | (109,056) | |
| Net deferred taxes | $ | (6,391) | | | $ | 1,920 | |
At December 31, 2019,2022, we had net operating loss carryforwards of approximately $30.2 million, all of which are in non-U.S. tax jurisdictions.$49.0 million. All net operating loss carryforwards without a valuation allowance may be carried forward for a period of at least six years. The change in valuation allowance for the year of $0.8 million is primarily due to our inability to recognize deferred tax assets on certain foreign entities that continue to generate losses partially offset by the release of a valuation allowance on certain losses.
A reconciliation of the change in the tax liability for unrecognized tax benefits for the years ended December 31, 20192022 and 20182021 is as follows:
|
| | | | | | | |
| (In thousands) | 2019 | | 2018 |
| Beginning balance | $ | 16,155 |
| | $ | 15,055 |
|
| Adjustments for tax positions related to the current year | — |
| | 1,869 |
|
| Adjustments for tax positions related to prior years | (7,740 | ) | | (32 | ) |
| Statute expiration | (3,296 | ) | | (737 | ) |
| Ending balance | $ | 5,119 |
| | $ | 16,155 |
|
| | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 |
| Beginning balance | $ | 4,937 | | | $ | 8,092 | |
| Adjustments for tax positions related to the current year | 100 | | | 182 | |
| Adjustments for tax positions related to prior years | 155 | | | 733 | |
| Settlements | — | | | (3,211) | |
| Statute expiration | — | | | (859) | |
| Ending balance | $ | 5,192 | | | $ | 4,937 | |
The total amount of unrecognized tax benefits, if recognized, would reduce our future effective tax rate. We have recognized tax benefits associated with these liabilities in the amount of$2.2 $2.7 million and $5.2$2.5 million at December 31, 20192022 and 2018,2021, respectively.
We recognize interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. Our liability for accrued interest and penalties related to uncertain tax positions was $0.5$1.1 million and $3.3$0.8 million at December 31, 20192022 and 2018,2021, respectively.
We are subject to regular review and audit by both foreign and domestic tax authorities. While we believe our tax positions will be sustained, the final outcome of tax audits and related litigation may differ materially from the tax amounts recorded in our consolidated financial statements.
We file a U.S. federal income tax return along with various state and foreign income tax returns. Examinations of our U.S. federal returns have been completed through 2013, with the 2014 and 2015 tax years closed by statute.2018. Various state and foreign income tax returns may be subject to tax audits for periods after 2013.2015.
On August 16, 2022, President Biden signed the Inflation Reduction Act which includes a new minimum tax on certain large corporations and an excise tax on stock buybacks. We do not anticipate this legislation will have a material impact for the company. Note 10—11—Stock Plans
The 2016 Management Equity Incentive Plan provides for various forms of stock-based compensation for eligible key employees through May 2026. Management stock-based compensation includes2026 including stock options, restricted stock awards, restricted stock units and performance stock units. Additionally, 2019 amounts granted include outstanding Sierra Monitor Corporation awards converted into MSA awards after the merger and acquisition. See Note 13—Acquisitions for more information. The 2017 Non-Employee Directors’ Equity Incentive Plan provides for grants of stock options and restricted stock to non-employee directors through May 2027. Stock options are granted at market prices and expire after ten years. Stock options are exercisable beginning three years after the grant date. Restricted stock and restricted stock units are granted without payment to the Company and generally vest three years after the grant date. Restricted stock and restricted stock units are valued at the market value of the stock on the grant date. Performance stock units with a market condition are valued at an estimated fair value using thea Monte Carlo simulation model. The final number of shares to be issued for performance stock units may range from 0zero to 200%240% of the target award based on achieving the specified performance targets over the performance period and further range based upon the achieved market metric over the performance period. In general, unvested stock options, restricted stock and performance stock units are forfeited if the participant’s employment with the Company terminates for any reason other than retirement, death or disability. We issue Treasury shares for stock option exercises and grants of restricted stock and performance stock. Please refer to Note 67—Capital Stock for further information regarding stock compensation share issuance. As of December 31, 2019,2022, there were 903,802598,813 and 103,09876,890 shares, respectively, reserved for future grants under the management and non-employee directors’ equity incentive plans.
Stock-based compensation expense was as follows:
|
| | | | | | | | | | | |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Restricted stock | $ | 6,914 |
| | $ | 6,221 |
| | $ | 4,691 |
|
| Stock options | 487 |
| | 217 |
| | 380 |
|
| Performance stock | 6,359 |
| | 5,801 |
| | 6,687 |
|
| Total compensation expense before income taxes | 13,760 |
| | 12,239 |
| | 11,758 |
|
| Income tax benefit | 3,357 |
| | 2,974 |
| | 4,440 |
|
| Total compensation expense, net of income tax benefit | $ | 10,403 |
| | $ | 9,265 |
| | $ | 7,318 |
|
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 | | 2020 |
| Restricted stock units | $ | 6,488 | | | $ | 5,797 | | | $ | 6,258 | |
| Stock options | 49 | | | 81 | | | 113 | |
| Performance stock units | 13,113 | | | 13,030 | | | 549 | |
| Total stock-compensation expense before income taxes | 19,650 | | | 18,908 | | | 6,920 | |
| Income tax benefit | 4,814 | | | 4,633 | | | 1,668 | |
| Total stock-compensation expense, net of income tax benefit | $ | 14,836 | | | $ | 14,275 | | | $ | 5,252 | |
We did not capitalize any stock-based compensation expense, and all expense is recordedincluded in selling,Selling, general and administrative expense in 2019, 2018, and 2017.
Stock option expense is based on the fair value of stock option grants estimated on the grant dates using the Black-Scholes option pricing model and the following weighted average assumptions for options granted in 2019. There were 0 stock options granted in 2018 or 2017.
|
| | | |
| | 2019 |
| Fair value per option | $ | 59.07 |
|
| Risk-free interest rate | 2.3 | % |
| Expected dividend yield | 1.7 | % |
| Expected volatility | 31 | % |
| Expected life (years) | 6.4 |
|
The risk-free interest rate is based on the U.S. Treasury yield curve. Expected dividend yield is based on the most recent annualized dividend divided by the one year average closing share price. Expected volatility is based on the historical volatility using daily stock prices. Expected life is based on historical stock option exercise data.Income.
A summary of option activity follows:
|
| | | | | | | | | |
| | Shares | | Weighted Average Exercise Price | | Exercisable at Year-end |
| Outstanding January 1, 2017 | 1,576,092 |
| | $ | 37.63 |
| | |
| Exercised | (620,646 | ) | | 29.75 |
| | |
| Outstanding December 31, 2017 | 955,446 |
| | 42.75 |
| | 614,414 |
|
| Exercised | (215,724 | ) | | 39.25 |
| | |
| Forfeited | (4,721 | ) | | 44.50 |
| | |
| Outstanding December 31, 2018 | 735,001 |
| | 43.79 |
| | 638,673 |
|
| Granted (Note 13) | 23,285 |
| | 43.54 |
| | |
| Exercised | (198,535 | ) | | 38.16 |
| | |
| Forfeited | (95 | ) | | 49.19 |
| | |
| Outstanding December 31, 2019 | 559,656 |
| | $ | 45.78 |
| | 552,682 |
|
| | | | | | | | | | | | | | | | | |
| Shares | | Weighted
Average
Exercise Price | | Exercisable at
Year-end |
| Outstanding January 1, 2020 | 559,656 | | | $ | 45.78 | | | |
| | | | | |
| Exercised | (274,704) | | | 45.31 | | | |
| | | | | |
| Forfeited | (954) | | | 42.00 | | | |
| Outstanding December 31, 2020 | 283,998 | | | 46.23 | | | 281,593 | |
| | | | | |
| Exercised | (122,087) | | | 47.25 | | | |
| | | | | |
| Forfeited | (210) | | | 43.75 | | | |
| Outstanding December 31, 2021 | 161,701 | | | 45.47 | | | 161,347 | |
| | | | | |
| Exercised | (103,545) | | | 44.91 | | | |
| Outstanding December 31, 2022 | 58,156 | | | $ | 46.48 | | | 58,156 | |
For various exercise price ranges, characteristics of outstanding and exercisable stock options at December 31, 20192022 were as follows:
| | | | | | | | | | | | | | | | | |
| Stock Options Outstanding |
| Range of Exercise Prices | Shares | | Weighted-Average |
| Exercise Price | | Remaining Life |
| | | | | |
| $33.01 – $45.00 | 33,148 | | | $ | 44.50 | | | 2.41 |
| $45.01 – $57.93 | 25,008 | | | 49.10 | | | 2.21 |
| $33.01 – $57.93 | 58,156 | | | $ | 46.48 | | | 2.32 |
|
| | | | | | | | |
| | Stock Options Outstanding |
| Range of Exercise Prices | Shares | | Weighted-Average |
| Exercise Price | | Remaining Life |
| $17.83 – $33.00 | 10,732 |
| | $ | 27.88 |
| | 0.30 |
| $33.01 – $45.00 | 258,806 |
| | 42.19 |
| | 3.92 |
| $45.01 – $57.93 | 290,118 |
| | 49.63 |
| | 3.74 |
| $17.83 – $57.93 | 559,656 |
| | $ | 45.78 |
| | 3.76 |
|
| | | | | | | | |
| | Stock Options Exercisable |
| Range of Exercise Prices | Shares | | Weighted-Average |
| Exercise Price | | Remaining Life |
| $17.83 – $33.00 | 10,732 |
| | $ | 27.88 |
| | 0.30 |
| $33.01 – $45.00 | 255,573 |
| | 42.21 |
| | 3.87 |
| $45.01 – $57.93 | 286,377 |
| | 49.64 |
| | 3.69 |
| $17.83 – $57.93 | 552,682 |
| | $ | 45.78 |
| | 3.71 |
| | | | | | | | | | | | | | | | | |
| | Stock Options Exercisable |
| Range of Exercise Prices | Shares | | Weighted-Average |
| Exercise Price | | Remaining Life |
| | | | | |
| $33.01 – $45.00 | 33,148 | | | $ | 44.50 | | | 2.41 |
| $45.01 – $57.93 | 25,008 | | | 49.10 | | | 2.21 |
| $33.01 – $57.93 | 58,156 | | | $ | 46.48 | | | 2.32 |
Cash received from the exercise of stock options was $7.5$4.7 million, $8.6$5.8 million and $18.5$12.4 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively. The tax benefit we realized from these exercises was $4.8$1.9 million, $2.5$4.3 million and $7.4$6.4 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively.
Stock options become exercisable when they are vested. The aggregate intrinsic value of stock options exercisable at December 31, 2019 was $44.5 million. The aggregate intrinsic value of all stock optionsand outstanding at December 31, 20192022 was $45.1$5.7 million.
Restricted stock awards and restricted stock units are valued at the market value of the stock on the grant date. A summary of restricted stock and unit activity follows:
|
| | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
| Unvested January 1, 2017 | 234,592 |
| | $ | 49.76 |
|
| Granted | 72,878 |
| | 75.27 |
|
| Vested | (76,834 | ) | | 52.74 |
|
| Forfeited | (3,475 | ) | | 50.46 |
|
| Unvested at December 31, 2017 | 227,161 |
| | 57.50 |
|
| Granted | 75,430 |
| | 87.36 |
|
| Vested | (92,401 | ) | | 58.10 |
|
| Forfeited | (4,741 | ) | | 59.61 |
|
| Unvested at December 31, 2018 | 205,449 |
| | 68.97 |
|
| Granted | 70,160 |
| | 104.53 |
|
| Vested | (97,253 | ) | | 56.47 |
|
| Forfeited | (5,655 | ) | | 85.48 |
|
| Unvested at December 31, 2019 | 172,701 |
| | $ | 90.38 |
|
| | | | | | | | | | | |
| Shares | | Weighted Average
Grant Date
Fair Value |
| Unvested January 1, 2020 | 172,701 | | | $ | 90.38 | |
| Granted | 51,468 | | | 124.61 | |
| Vested | (70,399) | | | 81.58 | |
| Forfeited | (7,579) | | | 106.54 | |
| Unvested at December 31, 2020 | 146,191 | | | 105.83 | |
| Granted | 43,146 | | | 167.13 | |
| Vested | (65,225) | | | 95.43 | |
| Forfeited | (5,769) | | | 132.54 | |
| Unvested at December 31, 2021 | 118,343 | | | 132.62 | |
| Granted | 87,697 | | | 130.28 | |
| Vested | (51,369) | | | 113.96 | |
| Forfeited | (8,785) | | | 139.66 | |
| Unvested at December 31, 2022 | 145,886 | | | $ | 137.36 | |
A summary of performance stock unit activity follows:
|
| | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
| Unvested at January 1, 2017 | 186,621 |
| | $ | 46.18 |
|
| Granted | 98,886 |
| | 72.73 |
|
| Vested | (72,504 | ) | | 57.19 |
|
| Performance adjustments | 29,183 |
| | 57.27 |
|
| Unvested at December 31, 2017 | 242,186 |
| | 55.06 |
|
| Granted | 62,775 |
| | 84.79 |
|
| Vested | (41,660 | ) | | 40.23 |
|
| Performance adjustments | (35,756 | ) | | 45.21 |
|
| Forfeited | (8,659 | ) | | 44.53 |
|
| Unvested at December 31, 2018 | 218,886 |
| | 68.43 |
|
| Granted | 83,819 |
| | 101.03 |
|
| Vested | (139,478 | ) | | 44.75 |
|
| Performance adjustments | 76,960 |
| | 44.24 |
|
| Forfeited | (2,152 | ) | | 99.82 |
|
| Unvested at December 31, 2019 | 238,035 |
| | $ | 85.39 |
|
| | | | | | | | | | | |
| Shares | | Weighted Average
Grant Date
Fair Value |
| Unvested at January 1, 2020 | 238,035 | | | $ | 85.39 | |
| Granted | 67,479 | | | 127.48 | |
| Vested | (132,036) | | | 73.00 | |
| Performance adjustments | 33,499 | | | 72.36 | |
| Forfeited | (6,765) | | | 111.60 | |
| Unvested at December 31, 2020 | 200,212 | | | 104.69 | |
| Granted | 52,309 | | | 175.59 | |
| Vested | (64,543) | | | 85.41 | |
| Performance adjustments | 5,357 | | | 88.45 | |
| | | |
| Unvested at December 31, 2021 | 193,335 | | | 129.86 | |
| Granted | 81,504 | | | 142.38 | |
| Vested | (55,447) | | | 101.38 | |
| Performance adjustments | (22,147) | | | 99.84 | |
| Forfeited | (18,485) | | | 147.66 | |
| Unvested at December 31, 2022 | 178,760 | | | $ | 146.28 | |
The 20192022 performance adjustments above relate primarily to adjustments made relative to2019 performance unit awards that exceededwere below the performance targets when vested during 20192022, including the final number of shares issued, for the 2016 Management Performance Units, which were 237.6%64.2% of the target award based on Total Shareholder Returnactual results during the three year performance period, and vested in the first quarter of 2019.
During the years ended December 31, 2019, 20182022, 2021 and 2017,2020, the total intrinsic value of stock options exercised (the difference between the market price on the date of exercise and the option price paid to exercise the option) was $14.6$8.6 million, $12.2$13.0 million and $29.3$24.6 million, respectively. The fair values of restricted stock vested during the years ended December 31, 2019, 20182022, 2021 and 20172020 were $5.5$5.9 million, $5.4$6.2 million and $4.1$5.7 million, respectively. The fair value of performance stock units vested during the years ended December 31, 2019, 20182022, 2021 and 20172020 was $6.2$5.6 million, $1.7$5.5 million and $4.1$9.6 million, respectively.
On December 31, 2019,2022, there was $11.6$16.4 million of unrecognized stock-based compensation expense. The weighted average period over which this expense is expected to be recognized was approximately 1.531.8 years.
Note 11—Short and 12—Long-Term Debt
Short-TermLong-Term Debt
Short-term borrowings with banks, which excludes the current portion of long-term debt, was insignificant at December 31, 2019 and 2018, respectively. The average month-end balance of total short-term borrowings during 2019 was $0.2 million. The maximum month-end balance of $0.6 million occurred in October 2019.
Long-Term Debt |
| | | | | | | |
| | December 31, |
| (In thousands) | 2019 | | 2018 |
| 2010 Senior Notes payable through 2021, 4.00%, net of debt issuance costs | $ | 40,000 |
| | $ | 60,000 |
|
| 2016 Senior Notes payable through 2031, 3.40%, net of debt issuance costs | 72,708 |
| | 69,604 |
|
| Senior revolving credit facility maturing in 2023, net of debt issuance costs | 235,686 |
| | 231,707 |
|
| Total | 348,394 |
| | 361,311 |
|
| Amounts due within one year | 20,000 |
| | 20,000 |
|
| Long-term debt | $ | 328,394 |
| | $ | 341,311 |
|
| | | | | | | | | | | |
| | December 31, |
| (In thousands) | 2022 | | 2021 |
| 2016 Senior Notes payable through 2031, 3.40%, net of debt issuance costs | $ | 66,379 | | | $ | 74,203 | |
| 2021 Senior Notes payable through 2036, 2.69%, net of debt issuance costs | 99,711 | | | 99,694 | |
| 2021 Senior Notes payable through 2036, 2.69%, net of debt issuance costs | 99,711 | | | 99,694 | |
| Senior revolving credit facility maturing in 2026, net of debt issuance costs | 307,031 | | | 324,060 | |
| Total | 572,832 | | | 597,651 | |
| Amounts due within one year | 7,387 | | | — | |
| Long-term debt, net of debt issuance costs | $ | 565,445 | | | $ | 597,651 | |
On September 7, 2018,May 24, 2021, the Company entered into a ThirdFourth Amended and Restated Credit Agreement associated with our senior revolving credit facility which(the “Revolving Credit Facility" or "Facility”) that extended theits term of the revolving credit facility through September 2023May 24, 2026 and increased the capacity to $600.0$900.0 million. Under this 2018 Amended and Restated Credit Agreement,the amended agreement, the Company may elect either a Base rate of interest (“BASE”) or an interest rate based on the London Interbank Offered Rate (“LIBOR”). The BASE is a daily fluctuating per annum rate equal to the highest of (i) 0.00%, (ii) the Prime Rate, (ii)(iii) the Federal Funds Open Rate plus one half of one percent (0.5%), (iii)(iv) the Overnight Bank Funding Rate, plus one half of one percent (0.5%), or (iv)(v) the Daily LiborLIBOR Rate plus one percent (1.00%). The Company pays a credit spread of 0 to 175 basis points based on the Company’s net EBITDA leverage ratio and the elected rate (BASE or LIBOR). The facility contemplates the discontinuance of LIBOR and includes an option to replace LIBOR with a comparable rate or if a comparable rate cannot be found the base rate would be utilized. The Company has a weighted average revolver interest rate of 2.77%5.13% as of December 31, 2019.2022. At December 31, 2019, $361.32022, $589.9 million of the existing $600.0$900.0 million senior revolving credit facility was unused, including letters of credit.credit issued under the facility. The facility also provides an accordion feature that allows the Company to access an additional $400.0 million of capacity pending approval by MSA’s board of directors and from the bank group.
On January 22, 2016,July 1, 2021, the Company entered into a SecondThird Amended and Restated Multi-Currency Note Purchase and Private Shelf Agreement (the "Notes"“Prudential Note Agreement”), pursuant with PGIM, Inc. (“Prudential”). The Prudential Note Agreement provided for (i) the issuance of $100.0 million of 2.69% Series C Senior Notes due July 1, 2036 and (ii) the establishment of an uncommitted note issuance facility whereby the Company may request, subject to which MSA issued notesPrudential’s acceptance in anits sole discretion, the issuance of up to $335.0 million aggregate original principal amount of senior unsecured notes. As of December 31, 2022, the Company had issued £54.9 million (approximately $72.9$66.5 million at December 31, 2019). The2022) of 3.4% Series B Senior Notes are repayable in annual installments of £6.1 million (approximately $8.1 million at December 31, 2019), commencingdue January 22, 2023, with a final payment of any remaining amount outstanding on January 22, 2031. The interest rate on these Notes is fixed at 3.4%.
On September 7, 2018,July 1, 2021, the Company entered into a first amendment of such amended and restated agreement associated with these Notes. Under the Second Amended and Restated Multi-Currency Note Purchase and Private Shelf Agreement, as amended ("Amended Note Purchase Agreement"), the Company may request from time to time during a three-year period ending September 7, 2021, the issuance of up to $150 million of additional senior notes.
On January 4, 2019, the Company entered into an amended and restated agreement associated with the New York Life master note facility dated June 2, 2014. Under this Amended and Restated Master Note Facility ("Amended(the “NYL Note Facility"Facility”), with NYL Investors. The NYL Note Facility provided for (i) the issuance of $100.0 million of 2.69% Series A Senior Notes due July 1, 2036 and (ii) the establishment of an uncommitted note issuance facility whereby the Company may request, from timesubject to time during a three-year period ending January 4, 2022,NYL Investors’ acceptance in its sole discretion, the issuance of up to $150$200.0 million aggregate principal amount of additional senior promissoryunsecured notes. As of the Form 10-K filing date, there are no promissory notes outstanding.
Both the AmendedThe Revolving Credit Facility, Prudential Note Purchase Agreement and AmendedNYL Note Facility require MSAthe Company to comply with specified financial covenants, including a requirement to maintain a minimum fixed charges coverage ratio of not less than 1.50 to 1.00 and a consolidated net leverage ratio not to exceed 3.50 to 1.00,1.00; except during an acquisition period, defined as four consecutive fiscal quarters beginning with the quarter of acquisition, in which case the consolidated net leverage ratio shall not exceed 4.00 to 1.00; in each case calculated on the basis of the trailing four fiscal quarters. In addition, the Amended Note Purchase Agreement and Amended Note Facility bothagreements contain negative covenants limiting the ability of MSAthe Company and its subsidiaries to incur additional indebtedness or issue guarantees, create or incur liens, make loans and investments, make acquisitions, transfer or sell assets, enter into transactions with affiliated parties, make changes in its organizational documents that are materially adverse to lenders or modify the nature of MSA'sthe Company's or its subsidiaries' business. However,All credit facilities exclude the covenants contained in the Amended Note Facility do not apply until promissory notes are issued.subsidiary, Mine Safety Appliances Company, LLC.
On July 1, 2021, the Company acquired Bacharach in a transaction valued at $329.4 million, net of cash acquired. The acquisition was partially financed by $200.0 million of 2.69% Senior Notes from the Prudential Note Agreement and NYL Note Facility. The remaining purchase price was financed under the Revolving Credit Facility.
During August 24, 2018, we repaid our 5.41% 2006 Senior Notes. In connection2021, the Company amended its Revolving Credit Facility to transition from Sterling LIBOR reference rates to Sterling Overnight Interbank Average Rate ("SONIA") reference rates. The Company will apply the optional expedients in ASC 848, Reference Rate Reform, to this modification and potential future modifications driven by reference rate reform, accounting for the modifications as a continuation of the existing contracts. Therefore, these modifications will not require remeasurement at the modification date or a reassessment of previous accounting determinations. As such, the Company does not anticipate the change in reference rates will have an impact on the Company’s consolidated financial statements. Management continues to evaluate the Company’s other outstanding U.S. LIBOR based contracts to determine whether reference rate modifications are necessary.
As of December 31, 2022, MSA was in full compliance with the payoff of these notes, MSA recognized a loss on extinguishment of debt of $1.5 million which was recorded in loss on extinguishment of debt on our Consolidated Statement of Income.restrictive covenants under its various credit agreements.
Approximate maturities on our long-term debt over the next five years are $20.0 million in 2020, $20.0 million in 2021, NaN in 2022, $245.2$7.4 million in 2023, $8.1$7.4 million in 2024, $7.4 million in 2025, $316.0 million in 2026, $7.4 million in 2027 and $56.6$229.6 million thereafter. The revolving credit facilities require the Company to comply with specified financial covenants. In addition, the revolving credit facilities contain negative covenants limiting the ability of the Company and its subsidiaries to enter into specified transactions. The Company was in compliance with all covenants at December 31, 2019.
The Company had outstanding bank guarantees and standby letters of credit with banks as of December 31, 2019,2022, totaling $8.6$9.3 million, of which $1.9$1.5 million relate to the senior revolving credit facility. The letters of credit serve to cover customer requirements in connection with certain sales orders and insurance companies. The full amount of the letters of credit remains unused and available at December 31, 2019. The Company is also required to provide cash collateral in connection with certain arrangements. At December 31, 2019,2022, the Company has $0.3$1.5 million of restricted cash in support of these arrangements.
In January 2023, we entered into a new $250 million term loan and $65 million was drawn down from our revolving credit facility to fund the divestiture of MSA LLC, a wholly owned subsidiary that holds legacy product liability claims relating to coal dust, asbestos, silica, and other exposures. Please refer to Note 20—Contingencies for additional information. Note 12—13—Goodwill and Intangible Assets
Changes in goodwill during the years ended December 31, 20192022 and 2018,2021, were as follows:
|
| | | | | | | |
| (In thousands) | 2019 | | 2018 |
| Net balance at January 1 | $ | 413,640 |
| | $ | 422,185 |
|
| Additions (Note 13) | 19,917 |
| | — |
|
| Disposals | — |
| | (525 | ) |
| Currency translation | 3,122 |
| | (8,020 | ) |
| Net balance at December 31 | $ | 436,679 |
| | $ | 413,640 |
|
| | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 |
| Balance at January 1, 2022 | $ | 636,858 | | | $ | 443,272 | |
| Additions | — | | | 199,454 | |
| Measurement period adjustment | (1,041) | | | — | |
| | | |
| Currency translation | (15,195) | | | (5,868) | |
| Balance at December 31. 2022 | $ | 620,622 | | | $ | 636,858 | |
At December 31, 2019,2022, goodwill of $293.2$447.6 million and $143.5$173.0 million related to the Americas and International reportingreportable segments, respectively.
Changes in intangible assets, net of accumulated amortization, during the years ended December 31, 20192022 and 2018,2021, were as follows:
| | | (In thousands) | 2019 | | 2018 | (In thousands) | 2022 | | 2021 |
| Net balance at January 1 | $ | 169,515 |
| | $ | 183,088 |
| |
| Additions (Note 13) | 11,100 |
| | — |
| |
| Net balance at January 1, 2022 | | Net balance at January 1, 2022 | $ | 306,948 | | | $ | 161,051 | |
| Additions | | Additions | — | | | 164,426 | |
| Amortization expense | (11,119 | ) | | (10,509 | ) | Amortization expense | (19,137) | | | (16,814) | |
| Currency translation | 1,830 |
| | (3,064 | ) | Currency translation | (5,958) | | | (1,715) | |
| Net balance at December 31 | $ | 171,326 |
| | $ | 169,515 |
| |
| Net balance at December 31, 2022 | | Net balance at December 31, 2022 | $ | 281,853 | | | $ | 306,948 | |
63
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | December 31, 2022 | | December 31, 2021 |
| Intangible Assets: | Weighted Average Useful Life (years) | Gross Carrying Amount | | Accumulated Amortization and Reserves | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization and Reserves | | Net Carrying Amount |
| Customer relationships | 19 | $ | 178.7 | | | $ | (35.3) | | | $ | 143.4 | | | $ | 185.7 | | | $ | (27.9) | | | $ | 157.8 | |
| Distribution agreements | 20 | 65.8 | | | (26.9) | | | 38.9 | | | 66.1 | | | (23.8) | | | 42.3 | |
| Technology related assets | 8 | 49.5 | | | (29.3) | | | 20.2 | | | 50.4 | | | (25.5) | | | 24.9 | |
| Patents, trademarks and copyrights | 16 | 34.0 | | | (14.8) | | | 19.2 | | | 35.2 | | | (13.6) | | | 21.6 | |
| License agreements | 5 | 5.4 | | | (5.3) | | | 0.1 | | | 5.4 | | | (5.3) | | | 0.1 | |
| Other | 3 | 3.3 | | | (3.2) | | | 0.1 | | | 3.3 | | | (3.0) | | | 0.3 | |
| Total | 17 | $ | 336.7 | | | $ | (114.8) | | | $ | 221.9 | | | $ | 346.1 | | | $ | (99.1) | | | $ | 247.0 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | December 31, 2019 | | December 31, 2018 |
| Intangible Assets: | Weighted Average Useful Life (years) | Gross Carrying Amount | | Accumulated Amortization and Reserves | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization and Reserves | | Net Carrying Amount |
| Customer relationships | 14 | $ | 58.3 |
| | $ | (15.3 | ) | | $ | 43.0 |
| | $ | 46.7 |
| | $ | (10.6 | ) | | $ | 36.1 |
|
| Distribution agreements | 20 | 66.0 |
| | (17.3 | ) | | 48.7 |
| | 66.1 |
| | (14.1 | ) | | 52.0 |
|
| Technology related assets | 8 | 30.0 |
| | (18.3 | ) | | 11.7 |
| | 28.3 |
| | (15.5 | ) | | 12.8 |
|
| Patents, trademarks and copyrights | 12 | 19.0 |
| | (11.3 | ) | | 7.7 |
| | 18.7 |
| | (10.4 | ) | | 8.3 |
|
| License agreements | 5 | 5.3 |
| | (5.3 | ) | | — |
| | 5.3 |
| | (5.3 | ) | | — |
|
| Other | 2 | 3.0 |
| | (2.8 | ) | | 0.2 |
| | 2.9 |
| | (2.6 | ) | | 0.3 |
|
| Total | 14 | $ | 181.6 |
| | $ | (70.3 | ) | | $ | 111.3 |
| | $ | 168.0 |
| | $ | (58.5 | ) | | $ | 109.5 |
|
During 2017, we acquiredAt December 31, 2022, the above intangible assets balance includes a trade name related to the Globe acquisition with an indefinite life totaling $60.0 million. This intangible asset is tested for impairment on October 1st of each year, or more frequently if indicators of impairment exist.
Intangible asset amortization expense over the next five years is expected to be approximately $12$18.0 million in 2020 and 2021, $10 million in 2022 and $9 million inboth 2023 and 2024.2024 and $17.1 million annually from 2025 to 2027.
Note 13—14—Acquisitions
Acquisition of Sierra Monitor CorporationBacharach
On May 20, 2019,July 1, 2021, we acquired 100% of the common stock in Sierra Monitor Corporation ("SMC")of Bacharach in an all-cashall cash transaction valued at $33.2$329.4 million, net of cash acquired. Additionally, we converted outstanding stock options and restricted stock units into MSA stock options and restricted stock units which resulted
Headquartered near Pittsburgh in additional goodwill of approximately $0.9 million based on the fair value of the awards identified as transaction consideration.
BasedNew Kensington, PA, Bacharach is a leader in Milpitas, California,gas detection technologies used in the heart of Silicon Valley, SMC is a leading provider of fixed gasheating, ventilation, air conditioning, and flame detection instruments and Industrial Internet of Things solutions that connect and help protect high-value infrastructure assets. The acquisition enables MSA to accelerate its strategy to enhance worker safety and accountability through the use of cloud technology and wireless connectivity.refrigeration ("HVAC-R") markets. This acquisition enhances a key focus of the Company's recently established Safety io subsidiary, launched in 2018 primarily to leverage the capabilities of its portableexpanded MSA’s gas detection portfolio as it relates to cloud connectivity. The transaction was funded through borrowings on our unsecured senior revolving credit facility.and leverages MSA’s product and manufacturing expertise into new markets.
SMCBacharach's operating results are included in our consolidated financial statements from the acquisition date as part ofwithin the Americas, International and Corporate reportable segment.segments. The acquisition qualifiesqualified as a business combination and was accounted for using the acquisition method of accounting.
We finalized the purchase price allocation as of December 31, 2019. The following table summarizes the fair values of the SMCBacharach assets acquired and liabilities assumed at the date of the acquisition:
| | | | | |
| (In millions) | July 1, 2021 |
| Current assets (including cash of $11.7 million) | $ | 32.1 | |
| Property, plant and equipment and other noncurrent assets | 4.3 | |
| Customer relationships | 123.0 | |
| Developed technology | 20.5 | |
| Trade name | 15.0 | |
| Goodwill | 193.5 | |
| Total assets acquired | 388.4 | |
| Total liabilities assumed | (47.3) | |
| Net assets acquired | $ | 341.1 | |
|
| | | |
| (In millions) | May 20, 2019 |
| Current assets (including cash of $2.1 million) | $ | 10.5 |
|
| Property, plant and equipment and other noncurrent assets | 1.3 |
|
| Customer relationships | 9.6 |
|
| Acquired technology | 1.4 |
|
| Goodwill | 19.9 |
|
| Total assets acquired | 42.7 |
|
| Total liabilities assumed | 6.5 |
|
| Net assets acquired | $ | 36.2 |
|
64
Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values. Fair values were determined by management, based, in part on an independent valuation performed by a third-party valuation specialist. The valuation methods used to determine the fair value of intangible assets included the relief from royalty method for technology related intangible assets; the excess earnings approach for customer relationships using customer inputs and contributory charges; and the cost method for assembled workforce which is included in goodwill. A number of significant assumptions and estimates were involved in the application of these valuation methods, including sales volumes and prices, royalty rates, costs to produce, tax rates, capital spending, discount rates, and working capital changes. Cash flow forecasts were generally based on SMC pre-acquisition forecasts coupled with estimated MSA sales synergies. Identifiable intangible assets with finite lives are subject to amortization over their estimated useful lives. The customer relationships acquired in the SMC transaction will be amortized over a period of 10 years and the technology will be amortized over 5 years. Estimated future amortization expense related to the identifiable intangible assets is approximately $1 million in each of the next five years. The step up to fair value of acquired inventory as part of the purchase price allocation totaled $1.6 million which was fully recognized as amortization expense during the year ended December 31, 2019.
Acquisition of Globe Holding Company, LLC
On July 31, 2017, we acquired 100% of the common stock in Globe Holding Company, LLC ("Globe") in an all-cash transaction valued at $215 million plus a working capital adjustment of $1.4 million. There is 0 contingent consideration.
Based in Pittsfield, NH, Globe is a leading innovator and provider of firefighter protective clothing and boots. This acquisition aligns with our corporate strategy in that it strengthens our leading position in the North American fire service market. The transaction was funded through borrowings on our unsecured senior revolving credit facility.
Globe operating results are included in our consolidated financial statements from the acquisition date as part of the Americas reportable segment. The acquisition qualifies as a business combination and was accounted for using the acquisition method of accounting.
We finalized the purchase price allocation as of June 30, 2018. The following table summarizes the fair values of the Globe assets acquired and liabilities assumed at the date of acquisition:
|
| | | |
| (In millions) | July 31, 2017 |
| Current assets (including cash of $58 thousand) | $ | 28.6 |
|
| Property, plant and equipment | 8.3 |
|
| Trade name | 60.0 |
|
| Distributor relationships | 40.2 |
|
| Acquired technology and other intangible assets | 10.5 |
|
| Goodwill | 74.5 |
|
| Total assets acquired | 222.1 |
|
| Total liabilities assumed | 5.7 |
|
| Net assets acquired | $ | 216.4 |
|
Assets acquired and liabilities assumed in connection with the acquisition were recorded at their fair values. Fair values were determined by management, based in part on an independent valuation performed by a third party valuation specialist. The valuation methods used to determine the fair value of intangible assets included the excess earnings approach for customer relationships using customer inputs and contributory charges; the relief from royalty method for trade name and technology related intangible assets; the excess earnings approach for distributor relationships using distributor inputs and contributory charges;developed technologies; and the cost method for assembled workforce which iswas included in goodwill. A number of significant assumptions and estimates were involved in the application of these valuation methods, including forecasted sales volumes and prices, royalty rates, costs to produce, tax rates, capital spending, discount rates, attrition rates and working capital changes. Cash flow forecasts were generally based on GlobeBacharach pre-acquisition forecasts, coupled with estimated MSA sales synergies. Identifiable intangible assets with finite lives are subject to amortization over their estimated useful lives. The distributorcustomer relationships, developed technology and trade name acquired in the GlobeBacharach transaction will beare being amortized over a periodperiods of 21 years, 7 to 9 years and 20 years, and the remaining identifiable assets will be amortized over 5 years.respectively. The trade name was determinedstep up to have an indefinite useful life. We perform an impairment assessment annually on October 1st on the trade name, or sooner if there is a triggering event. Additionally,fair value of acquired inventory as part of each impairment assessment, we will reassess whether the asset continues to have an indefinite life or whether it should be reassessed with a finite life. Estimated futurepurchase price allocation totaled $2.3 million. The amortization expense related to the identifiable intangible assets is approximately $4 million in each of the next two years 2020 and 2021, $3 millioninventory step up was included in 2022 and $2 millionCost of products sold in 2023 and 2024. Estimated future depreciation expense related to Globe property, plant and equipment is approximately $1 million in eachthe Consolidated Statements of Income for the next five years.
Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired were the acquisition of an assembled workforce, the expected synergies and other benefits that we believe will result from combining the operations of Globe and SMCBacharach with our operations. Goodwill of $74.5$193.5 million related to the GlobeBacharach acquisition was recorded, with $154.6 million and $38.9 million allocated to the Americas reportable segment and International reportable segment, respectively. This Goodwill is non-deductible for tax purposes.
Acquisition of Bristol Uniforms and Bell Apparel
On January 25, 2021, we acquired 100% of the common stock of B T Q Limited, including Bristol in an all-cash transaction valued at $63.0 million, net of cash acquired.
Bristol, which is headquartered in the U.K., is a leading innovator and provider of protective apparel to the fire, rescue services, and utility sectors. The acquisition strengthens MSA's position as a global market leader in fire service personal protective equipment products, which include breathing apparatus, firefighter helmets, thermal imaging cameras, and firefighter protective apparel, while providing an avenue to expand its business in the U.K. and key European markets. Bristol is also a leading manufacturer of flame-retardant, waterproof, and other protective work wear for the utility industry. Marketed under the Bell Apparel brand, this line complements MSA's existing and broad range of offerings for the global utilities market.
Bristol's operating results are included in our consolidated financial statements from the acquisition date as part of the International reportable segment. The acquisition qualified as a business combination and was accounted for using the acquisition method of accounting.
The following table summarizes the fair values of the Bristol assets acquired and liabilities assumed at the date of the acquisition:
| | | | | |
| (In millions) | January 25, 2021 |
| Current assets (including cash of $13.3 million) | $ | 37.1 | |
| Net investment in sales-type leases, noncurrent | 29.0 | |
| Property, plant and equipment and other noncurrent assets | 12.0 | |
| Customer relationships | 4.5 | |
| Trade name and other intangible assets | 1.4 | |
| Goodwill | 4.9 | |
| Total assets acquired | 88.9 | |
| Total liabilities assumed | (12.6) | |
| Net assets acquired | $ | 76.3 | |
Assets acquired and liabilities assumed in connection with the acquisition were recorded at fair values. Fair values were determined by management, based in part on an independent valuation performed by a third party valuation specialist. The valuation methods used to determine the fair value of intangible assets included the excess earnings approach for customer relationships using customer inputs and contributory charges; the relief from royalty method for trade name; and the cost method for assembled workforce which is included in goodwill. A number of significant assumptions and estimates were involved in the application of these valuation methods, including forecasted sales volumes and prices, royalty rates, costs to produce, tax rates, capital spending, discount rates, attrition rates and working capital changes. Cash flow forecasts were generally based on Bristol pre-acquisition forecasts, coupled with estimated MSA sales synergies. Identifiable intangible assets with finite lives are subject to amortization over their estimated useful lives. The customer relationships and trade name acquired in the Bristol transaction will be amortized over a period of 15 years. The step up to fair value of acquired inventory as part of the purchase price allocation totaled $1.5 million. The amortization of the inventory step up was included in Cost of products sold in the Consolidated Statements of Income for the year ended December 31, 2021.
Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired were the acquisition of an assembled workforce, the expected synergies and other benefits that we believe will result from combining the operations of Bristol with our operations. Goodwill of $4.9 million related to the Bristol acquisition has been recorded in the Americas reportable segment and is expected to be tax deductible. Goodwill of $19.9 million related to the SMC acquisition has been recorded in the AmericasInternational reportable segment and is non-deductible for tax purposes.
Our results for the year ended December 31, 2019 include strategic transaction costs of $4.4 million, including costs related to the acquisition of SMC. Our results for the year ended December 31, 2018 include strategic transaction costs of $0.4 million. Our results for the year ended December 31, 2017, include strategic transaction costs of $4.2 million, including costs related to the acquisition of Globe. These costs are all reported in selling, general and administrative expenses.
The operating results of boththe Bristol and Bacharach acquisitions have been included in our consolidated financial statements from thetheir respective acquisition date.dates. Our results for the year ended December 31, 2019,2021, include SMCcombined net sales and net loss of $13.5$67.2 million and $3.3$6.3 million, respectively. Excluding purchase accounting amortization for intangible assets and inventory step up of $2.6 million, transaction costs of $2.2 million, and stock compensation cost related to converted options and excess performance on PSUs related to the acquisition of $1.5 million, adjusted earnings for SMC for the year ended December 31, 2019 was $1.5 million. Our results for the year ended December 31, 2018 include Globe sales of $113.9 million and net income of $13.3 million. These results include depreciation expense of $1.0 million and amortization expense of $4.1 million. Excluding transaction and integration costs, Globe provided $13.6 million of net income for the year ended December 31, 2018. Our results for the year ended December 31, 2017 include Globe sales of $46.1 million and net income of 3.7 million. These results include depreciation expense of $0.5 million and amortization expense of $1.7 million. Excluding transaction and integration costs, Globe provided $4.9 million of net income for the year ended December 31, 2017.
The following unaudited pro forma information presents our combined results as if boththe Bristol and Bacharach acquisitions had occurred at the beginning of 2017.2020. The unaudited pro forma financial information was prepared to give effect to events that are (1) directly attributable to the acquisition; (2) factually supportable; and (3) expected to have a continuing impact on the combined company’scompany's results. There were no material transactions between MSA and GlobeBristol or SMCBacharach during the periods presented that are required to be eliminated. Intercompany transactions between Globe companies and SMC companies during the periods presented have been eliminated in theThe unaudited pro forma combined financial information. The unaudited pro forma financial information does not reflect any cost savings, operating synergies or revenue enhancements that the combined companies may achieve as a result of the acquisitions or the costs to integrate the operations or the costs necessary to achieve cost savings, operating synergies or revenue enhancements.
Pro forma combined financial information (Unaudited)
|
| | | | | | | | | |
| (In millions, except per share amounts) | 2019 | 2018 | 2017 |
| Net sales | $ | 1,410 |
| $ | 1,380 |
| $ | 1,281 |
|
| Net Income | 131 |
| 124 |
| 36 |
|
| Basic earnings per share | 3.40 |
| 3.24 |
| 0.94 |
|
| Diluted earnings per share | 3.35 |
| 3.19 |
| 0.93 |
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions, except per share amounts) | | 2021 | | 2020 |
| Net sales | | $ | 1,437.9 | | | $ | 1,470.4 | |
| Net income | | 10.2 | | | 114.6 | |
| Basic earnings per share | | 0.26 | | | 2.94 | |
| Diluted earnings per share | | 0.26 | | | 2.91 | |
| | | | |
The unaudited pro forma combined financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations or financial position that we would have reported had the acquisitionsacquisition been completed as of the date and for the periods presented, and should not be taken as representative of our consolidated results of operations or financial condition following the acquisitions.acquisition. In addition, the unaudited pro forma combined financial information is not intended to project the future financial position or results of operations of the combined company.
The unaudited pro forma combined financial information was prepared using the acquisition method of accounting for both acquisitions under existing U.S. GAAP. MSA has been treated as the acquirer.
Total acquisition related costs were $12.4 million, $15.9 million and $0.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. Transactional costs are included in Selling, general and administrative expenses and acquisition-related amortization is included in Cost of products sold in the Consolidated Statements of Income.
Acquisition of Noncontrolling Interest
During July 2021, the Company purchased the remaining 10% noncontrolling interest in MSA (China) Safety Equipment Co., Ltd. from our partner in China for $19.0 million, inclusive of a $5.6 million distribution.
Note 14—15—Pensions and Other Post-retirement Benefits
We maintain various defined benefit and defined contribution plans covering the majority of our employees. Our principal U.S. plan is funded in compliance with the Employee Retirement Income Security Act (ERISA)("ERISA"). It is our general policy to fund current costs for the international plans, except in Germany and Mexico, where it is common practice and permissible under tax laws to accrue book reserves.
We provide health care benefits and limited life insurance for certain retired employees who are covered by our principal U.S. defined benefit pension plan until they become Medicare-eligible.
Information pertaining to defined
Defined benefit pension plansplan and other post-retirement benefits plansplan information is provided in the following tables:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| (In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| Change in Benefit Obligations | | | | | | | |
| Benefit obligations at January 1 | $ | 654,362 | | | $ | 670,857 | | | $ | 29,831 | | | $ | 32,225 | |
| Service cost | 12,281 | | | 12,910 | | | 327 | | | 398 | |
| Interest cost | 14,377 | | | 11,518 | | | 590 | | | 476 | |
| Participant contributions | 257 | | | 287 | | | 259 | | | 345 | |
| Plan amendments | 154 | | | (243) | | | — | | | — | |
Actuarial gains(a) | (156,214) | | | (10,277) | | | (5,884) | | | (1,518) | |
| Benefits paid | (26,377) | | | (25,117) | | | (2,585) | | | (3,021) | |
| Curtailments | (286) | | | (439) | | | — | | | — | |
| Settlements | (260) | | | (3,190) | | | — | | | — | |
| | | | | | | |
Transfers(b) | — | | | (19,312) | | | — | | | — | |
| Acquisitions | — | | | 26,231 | | | — | | | 926 | |
| Currency translation | (7,929) | | | (8,863) | | | — | | | — | |
| Benefit obligations at December 31 | $ | 490,365 | | | $ | 654,362 | | | $ | 22,538 | | | $ | 29,831 | |
| Change in Plan Assets | | | | | | | |
| Fair value of plan assets at January 1 | $ | 651,986 | | | $ | 586,822 | | | $ | — | | | $ | — | |
| Actual return on plan assets | (115,105) | | | 80,366 | | | — | | | — | |
| Employer contributions | 5,032 | | | 5,543 | | | 2,326 | | | 2,676 | |
| Participant contributions | 257 | | | 287 | | | 259 | | | 345 | |
| Acquisitions | — | | | 25,476 | | | — | | | — | |
| Settlements | (260) | | | (1,365) | | | — | | | — | |
| Benefits paid | (26,377) | | | (25,117) | | | (2,585) | | | (3,021) | |
| | | | | | | |
Transfers(b) | — | | | (19,312) | | | — | | | — | |
| Administrative expenses paid | (54) | | | (67) | | | — | | | — | |
| Currency translation | (1,261) | | | (647) | | | — | | | — | |
| Fair value of plan assets at December 31 | $ | 514,218 | | | $ | 651,986 | | | $ | — | | | $ | — | |
| Funded Status | | | | | | | |
| Funded status at December 31 | $ | 23,853 | | | $ | (2,376) | | | $ | (22,538) | | | $ | (29,831) | |
| | | | | | | |
| Unrecognized prior service credit (cost) | 1,224 | | | 1,186 | | | (429) | | | (767) | |
| Unrecognized net actuarial losses | 90,212 | | | 95,674 | | | 6,445 | | | 13,570 | |
| Net amount recognized | $ | 115,289 | | | $ | 94,484 | | | $ | (16,522) | | | $ | (17,028) | |
| Amounts Recognized in the Balance Sheets | | | | | | | |
| Noncurrent assets | $ | 141,643 | | | $ | 163,283 | | | $ | — | | | $ | — | |
| Current liabilities | (3,712) | | | (6,569) | | | (2,226) | | | (2,739) | |
| Noncurrent liabilities | (114,078) | | | (159,090) | | | (20,312) | | | (27,092) | |
| Net amount recognized | $ | 23,853 | | | $ | (2,376) | | | $ | (22,538) | | | $ | (29,831) | |
| Amounts Recognized in Accumulated Other Comprehensive Loss | | | | | | | |
| Net actuarial losses | $ | 90,212 | | | $ | 95,674 | | | $ | 6,445 | | | $ | 13,570 | |
| Prior service cost (credit) | 1,224 | | | 1,186 | | | (429) | | | (767) | |
| | | | | | | |
| Total (before tax effects) | $ | 91,436 | | | $ | 96,860 | | | $ | 6,016 | | | $ | 12,803 | |
| Accumulated Benefit Obligations for all Defined Benefit Plans | $ | 459,630 | | | $ | 608,436 | | | $ | — | | | $ | — | |
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| (In thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| Change in Benefit Obligations | | | | | | | |
| Benefit obligations at January 1 | $ | 525,520 |
| | $ | 560,385 |
| | $ | 28,477 |
| | $ | 22,027 |
|
| Service cost | 10,342 |
| | 11,125 |
| | 354 |
| | 369 |
|
| Interest cost | 18,803 |
| | 17,214 |
| | 996 |
| | 793 |
|
| Participant contributions | 470 |
| | 97 |
| | 380 |
| | 302 |
|
| Actuarial losses (gains) | 81,132 |
| | (29,181 | ) | | 1,319 |
| | 7,841 |
|
| Benefits paid | (24,452 | ) | | (23,724 | ) | | (3,375 | ) | | (2,855 | ) |
| Curtailments | — |
| | (2,151 | ) | | — |
| | — |
|
| Settlements | (7,265 | ) | | (726 | ) | | — |
| | — |
|
| Currency translation | (999 | ) | | (7,519 | ) | | — |
| | — |
|
| Benefit obligations at December 31 | 603,551 |
| | 525,520 |
| | 28,151 |
| | 28,477 |
|
| Change in Plan Assets | | | | | | | |
| Fair value of plan assets at January 1 | 443,112 |
| | 492,677 |
| | — |
| | — |
|
| Actual return on plan assets | 98,210 |
| | (26,804 | ) | | — |
| | — |
|
| Employer contributions | 5,537 |
| | 4,718 |
| | 2,995 |
| | 2,553 |
|
| Participant contributions | 470 |
| | 97 |
| | 380 |
| | 302 |
|
| Settlements | (7,265 | ) | | (726 | ) | | — |
| | — |
|
| Benefits paid | (24,452 | ) | | (23,724 | ) | | (3,375 | ) | | (2,855 | ) |
| Administrative Expenses Paid | (297 | ) | | (704 | ) | | — |
| | — |
|
| Currency translation | 543 |
| | (2,422 | ) | | — |
| | — |
|
| Fair value of plan assets at December 31 | 515,858 |
| | 443,112 |
| | — |
| | — |
|
| Funded Status | | | | | | | |
| Funded status at December 31 | (87,693 | ) | | (82,408 | ) | | (28,151 | ) | | (28,477 | ) |
| Unrecognized transition losses | 4 |
| | 5 |
| | — |
| | — |
|
| Unrecognized prior service credit | 1,572 |
| | (687 | ) | | (1,519 | ) | | (1,924 | ) |
| Unrecognized net actuarial losses | 183,733 |
| | 178,640 |
| | 12,547 |
| | 12,096 |
|
| Net amount recognized | 97,616 |
| | 95,550 |
| | (17,123 | ) | | (18,305 | ) |
| Amounts Recognized in the Balance Sheet | | | | | | | |
| Noncurrent assets | 75,066 |
| | 57,568 |
| | — |
| | — |
|
| Current liabilities | (5,944 | ) | | (5,741 | ) | | (2,406 | ) | | (2,736 | ) |
| Noncurrent liabilities | (156,815 | ) | | (134,231 | ) | | (25,745 | ) | | (25,741 | ) |
| Net amount recognized | (87,693 | ) | | (82,404 | ) | | (28,151 | ) | | (28,477 | ) |
| Amounts Recognized in Accumulated Other Comprehensive Loss | | | | | | | |
| Net actuarial losses | 183,733 |
| | 178,640 |
| | 12,547 |
| | 12,096 |
|
| Prior service credit | 1,572 |
| | (687 | ) | | (1,519 | ) | | (1,924 | ) |
| Unrecognized net initial obligation | 4 |
| | 5 |
| | — |
| | — |
|
| Total (before tax effects) | 185,309 |
| | 177,958 |
| | 11,028 |
| | 10,172 |
|
| Accumulated Benefit Obligations for all Defined Benefit Plans | 558,183 |
| | 489,159 |
| | — |
| | — |
|
(b)Transfers consist of Netherlands defined benefit plan conversion to a defined contribution plan.
68
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| (In thousands) | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Components of Net Periodic Benefit Cost | | | | | | | | | | | |
| Service cost | $ | 10,342 |
| | $ | 11,125 |
| | $ | 11,023 |
| | $ | 354 |
| | $ | 369 |
| | $ | 403 |
|
| Interest cost | 18,803 |
| | 17,214 |
| | 18,450 |
| | 996 |
| | 793 |
| | 882 |
|
| Expected return on plan assets | (38,644 | ) | | (36,352 | ) | | (35,417 | ) | | — |
| | — |
| | — |
|
| Amortization of transition amounts | 2 |
| | 1 |
| | 2 |
| | — |
| | — |
| | — |
|
| Amortization of prior service cost (credit) | 223 |
| | (21 | ) | | (19 | ) | | (405 | ) | | (405 | ) | | (307 | ) |
| Recognized net actuarial losses | 10,159 |
| | 13,755 |
| | 12,955 |
| | 869 |
| | 752 |
| | 100 |
|
| Settlement/curtailment loss (credit) | 2,497 |
| (c) | 179 |
| | 148 |
| | — |
| | — |
| | (562 | ) |
| Special termination charge | — |
| | — |
| | 11,384 |
| (b) | — |
| | — |
| | — |
|
Net periodic benefit cost(a) | $ | 3,382 |
| | $ | 5,901 |
| | $ | 18,526 |
| | $ | 1,814 |
| | $ | 1,509 |
| | $ | 516 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| (In thousands) | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Components of Net Periodic Benefit (Income) Cost | | | | | | | | | | | |
| Service cost | $ | 12,281 | | | $ | 12,910 | | | $ | 12,094 | | | $ | 327 | | | $ | 398 | | | $ | 396 | |
| Interest cost | 14,377 | | | 11,518 | | | 14,905 | | | 590 | | | 476 | | | 716 | |
| Expected return on plan assets | (49,646) | | | (37,368) | | | (34,029) | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Amortization of prior service cost (credit) | 139 | | | 164 | | | 178 | | | (338) | | | (358) | | | (394) | |
| Recognized net actuarial losses | 11,704 | | | 17,458 | | | 15,799 | | | 1,242 | | | 1,597 | | | 1,145 | |
| Settlement/curtailment (gain) loss | (354) | | | (2,234) | | (b) | 1,135 | | (b) | — | | | — | | | — | |
| | | | | | | | | | | |
Net periodic benefit (income) cost(a) | $ | (11,499) | | | $ | 2,448 | | | $ | 10,082 | | | $ | 1,821 | | | $ | 2,113 | | | $ | 1,863 | |
(a)Components of net periodic benefit (income) cost other than service cost are included in the line item "OtherOther income, net"net, and service costs are included in the line items Cost of products sold and Selling, general and administrative in the Consolidated Statements of Income.
income statement.
(b)Represents the charge for special termination benefits relatedRelates primarily to the VRIP which were paid fromconversion of our overfunded North
AmericaNetherlands pension plan into a defined contribution plan and recorded as restructuring charges on the Consolidated Statement of Income. See further
details in Note 2—Restructuring Charges.
(c) Related to a non-cash charge associated with the termination of our pension plan in the U.K. andis included in "Restructuring charges" onin the Consolidated StatementStatements of Income.
Effective December 31, 2017, the Company changed the method it uses to estimate the service and interest cost components of net periodic benefit cost for pension and other post-retirement benefits for a majority of its U.S. and foreign plans. Historically, the service and interest cost components for these plans were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period. The Company has elected to utilizeutilizes a spot rate approach, which discounts the individual plan specific expected cash flows underlying the service and interest cost using the applicable spot rates derived from a yield curve used in the determination of the benefit obligation to the relevant projected cash flows. The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest costs. This change does not affect the measurement of total benefit obligations. Service and interest cost for the pension and OPEB plans were reduced by an estimated $1.8 million in 2018 as a result of this change. The Company has accounted for this change to the spot rate approach as a change in accounting estimate that is inseparable from a change in accounting principle, pursuant to Accounting Standards Codification (ASC) 250, Accounting Changes and Error Corrections, and accordingly, has accounted for it prospectively. For plans where the discount rate is not derived from plan specific expected cash flows, the Company will continueuses a single weighted-average discount rate derived from the yield curve used to employmeasure the current approachesprojected benefit obligation at the beginning of the period for measuring both the projected benefit obligations and the service and interest cost components of net periodic benefit cost for pension and other post-retirement benefits.
Amounts included in accumulated other comprehensive loss expected to be recognized in 2020 net periodic benefit costs:
|
| | | | | | | |
| (In thousands) | Pension Benefits | | Other Benefits |
| Loss recognition | $ | 15,740 |
| | $ | 1,145 |
|
| Prior service cost (credit) recognition | 184 |
| | (394 | ) |
| Transition obligation recognition | — |
| | — |
|
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
|
| | | | | | | |
| (In thousands) | 2019 | | 2018 |
| Aggregate accumulated benefit obligations (ABO) | $ | 185,747 |
| | $ | 159,545 |
|
| Aggregate projected benefit obligations (PBO) | 198,633 |
| | 168,819 |
|
| Aggregate fair value of plan assets | 35,882 |
| | 28,876 |
|
| | | | | | | | | | | |
| Pension Benefits |
| (In thousands) | 2022 | | 2021 |
| Aggregate accumulated benefit obligations (ABO) | $ | 116,531 | | | $ | 181,511 | |
| | | |
| Aggregate fair value of plan assets | 4,454 | | | 22,265 | |
67 | | | | | | | | | | | |
| Pension Benefits |
| (In thousands) | 2022 | | 2021 |
| | | |
| Aggregate projected benefit obligations (PBO) | $ | 122,229 | | | $ | 187,924 | |
| Aggregate fair value of plan assets | 4,454 | | | 22,265 | |
|
| | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Assumptions used to determine benefit obligations | | | | | | | |
| Average discount rate | 2.86 | % | | 3.79 | % | | 3.05 | % | | 4.21 | % |
| Rate of compensation increase | 2.93 | % | | 3.00 | % | | — |
| | — |
|
| Assumptions used to determine net periodic benefit cost | | | | | | | |
| Average discount rate - Service cost | 3.10 | % | | 3.34 | % | | 3.15 | % | | 3.57 | % |
| Average discount rate - Interest cost | 2.52 | % | | 3.34 | % | | 2.61 | % | | 3.57 | % |
| Expected return on plan assets | 7.09 | % | | 7.99 | % | | — |
| | — |
|
| Rate of compensation increase | 2.93 | % | | 3.00 | % | | — |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
| Assumptions used to determine benefit obligations | | | | | | | |
| Average discount rate | 5.01 | % | | 2.70 | % | | 5.09 | % | | 2.66 | % |
| Rate of compensation increase | 4.61 | % | | 4.58 | % | | 3.00 | % | | 2.91 | % |
| Assumptions used to determine net periodic benefit cost | | | | | | | |
| Average discount rate - Service cost | 3.12 | % | | 2.80 | % | | 2.84 | % | | 2.42 | % |
| Average discount rate - Interest cost | 2.17 | % | | 1.69 | % | | 2.04 | % | | 1.48 | % |
| Expected return on plan assets | 8.77 | % | | 7.13 | % | | — | | | — | |
| Rate of compensation increase | 4.58 | % | | 2.90 | % | | 2.91 | % | | 3.00 | % |
Discount rates for a majority of ourall U.S. and foreign plans were determined using the aforementioned spot rate methodology for 20192022 and 2018. All2021. Aside from sovereign bonds used in Mexico, the remaining plans' discount rates were determined using various corporate bond indexes as indicators of interest rate levels and movementsbonds and by matching our projected benefit obligation payment stream to current yields on high quality bonds.
The expected return on assets for the 20192022 net periodic pension cost was determined by multiplying the expected returns of each asset class (based on historical returns)capital market expectations) by the expected percentage of the total portfolio invested in that asset class. A total return was determined by summing the expected returns over all asset classes.
|
| | | | | |
| | Pension Plan Assets at December 31, |
| | 2019 | | 2018 |
| Equity securities | 46 | % | | 58 | % |
| Fixed income securities | 30 |
| | 25 |
|
| Pooled investment funds | 19 |
| | 11 |
|
| Insurance contracts | 4 |
| | 4 |
|
| Cash and cash equivalents | 1 |
| | 2 |
|
| Total | 100 | % | | 100 | % |
| | | | | | | | | | | |
| Pension Plan Assets at
December 31, |
| 2022 | | 2021 |
| Equity securities | 56 | % | | 51 | % |
| Fixed income securities | 26 | | | 25 | |
| Pooled investment funds | 15 | | | 22 | |
| Cash and cash equivalents | 2 | | | 1 | |
| Insurance contracts | 1 | | | 1 | |
| Total | 100 | % | | 100 | % |
The overall objective of our pension investment strategy is to earn a rate of return over time to satisfy the benefit obligations of the pension plans and to maintain sufficient liquidity to pay benefits and meet other cash requirements of our pension funds. Investment policies for our primary U.S. pension plan are determined by the plan’s Investment Committee and set forth in the plan’s investment policy. Asset managers are granted discretion for determining sector mix, selecting securities and timing transactions, subject to the guidelines of the investment policy. An aggressive, flexible management of the portfolio is permitted and encouraged, with shifts of emphasis among equities, fixed income securities and cash equivalents at the discretion of each manager. No target asset allocations are set forth in the investment policy. For our non-U.S. pension plans, our investment objective is generally met through the use of pooled investment funds and insurance contracts.
The fair values of the Company's pension plan assets are determined using net asset value (NAV)NAV as a practical expedient, or by information categorized in the fair value hierarchy level based on the inputs used to determine fair value, as further discussed in Note 18—19—Fair Value Measurements.
The fair values at December 31, 2019,2022, were as follows:
| | | | | | | | Fair Value | | Fair Value |
| (In thousands) | Total | | NAV | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | (In thousands) | Total | | NAV | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Equity securities | $ | 235,491 |
| | $ | 56,449 |
| | $ | 179,042 |
| | $ | — |
| | $ | — |
| Equity securities | $ | 288,006 | | | $ | 44,583 | | | $ | 243,423 | | | $ | — | | | $ | — | |
| Fixed income securities | 154,640 |
| | — |
| | 73,874 |
| | 80,766 |
| | — |
| Fixed income securities | 132,659 | | | — | | | 63,522 | | | 69,137 | | | — | |
| Pooled investment funds | 97,373 |
| | 97,373 |
| | — |
| | — |
| | — |
| Pooled investment funds | 79,853 | | | 79,853 | | | — | | | — | | | — | |
| Cash and cash equivalents | | Cash and cash equivalents | 9,246 | | | 7,954 | | | 1,292 | | | — | | | — | |
| Insurance contracts | 21,502 |
| | — |
| | — |
| | — |
| | 21,502 |
| Insurance contracts | 4,454 | | | — | | | — | | | — | | | 4,454 | |
| Cash and cash equivalents | 6,852 |
| | 5,792 |
| | 1,060 |
| | — |
| | — |
| |
| Total | $ | 515,858 |
| | $ | 159,614 |
| | $ | 253,976 |
| | $ | 80,766 |
| | $ | 21,502 |
| Total | $ | 514,218 | | | $ | 132,390 | | | $ | 308,237 | | | $ | 69,137 | | | $ | 4,454 | |
The fair values of the Company's pension plan assets at December 31, 2018,2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value |
| (In thousands) | Total | | NAV | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Equity securities | $ | 329,795 | | | $ | 66,897 | | | $ | 262,898 | | | $ | — | | | $ | — | |
| Fixed income securities | 161,965 | | | — | | | 86,543 | | | 75,422 | | | — | |
| Pooled investment funds | 146,081 | | | 146,081 | | | — | | | — | | | — | |
| Cash and cash equivalents | 9,934 | | | 8,637 | | | 1,297 | | | — | | | — | |
| Insurance contracts | 4,211 | | | — | | | — | | | — | | | 4,211 | |
| Total | $ | 651,986 | | | $ | 221,615 | | | $ | 350,738 | | | $ | 75,422 | | | $ | 4,211 | |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value |
| (In thousands) | Total | | NAV | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Equity securities | $ | 259,014 |
| | $ | 62,027 |
| | $ | 196,987 |
| | $ | — |
| | $ | — |
|
| Fixed income securities | 109,876 |
| | — |
| | 28,312 |
| | 81,564 |
| | — |
|
| Pooled investment funds | 49,823 |
| | 49,823 |
| | — |
| | — |
| | — |
|
| Insurance contracts | 17,033 |
| | — |
| | — |
| | — |
| | 17,033 |
|
| Cash and cash equivalents | 7,366 |
| | 6,259 |
| | 1,107 |
| | — |
| | — |
|
| Total | $ | 443,112 |
| | $ | 118,109 |
| | $ | 226,406 |
| | $ | 81,564 |
| | $ | 17,033 |
|
Equity securities consist primarily of publicly traded U.S. and non-U.S. common stocks. Equities are valued at closing prices reported on the listing stock exchange.
Fixed income securities consist primarily of U.S. government and agency bonds and U.S. corporate bonds. Fixed income securities are valued at closing prices reported in active markets or based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the bond is valued under a discounted cash flow approach that maximizes observable inputs, such as current yields of similar instruments, and may include adjustments, for certain risks that may not be observable, such as credit and liquidity risks.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Pooled investment funds consist of mutual and collective investment funds that invest primarily in publicly traded equity and fixed income securities. Pooled investment funds are valued using the net asset value (NAV)NAV provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, divided by the number of shares outstanding. The underlying securities are generally valued at closing prices reported in active markets, quoted prices of similar securities, or discounted cash flows approach that maximizes observable inputs such as current value measurement at the reporting date. These investments are not classified in the fair value hierarchy in accordance with guidance in ASU 2015-07.
Insurance contracts are valued in accordance with the terms of the applicable collective pension contract. The fair value of the plan assets equals the discounted value of the expected cash flows of the accrued pensions which are guaranteed by the counterparty insurer.
Cash equivalents consist primarily of money market and similar temporary investment funds. Cash equivalents are valued at closing prices reported in active markets.
The preceding methods may produce fair value measurements that are not indicative of net realizable value or reflective of future fair values. Although we believe the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table presents a reconciliation of Level 3 assets:
| | | | | | | |
| (In thousands) | Insurance
Contracts | | |
| Balance January 1, 2021 | $ | 24,396 | | | |
| Net realized and unrealized gains | (881) | | | |
| Net purchases, issuances and settlements | (19,304) | | | |
| | | |
| Balance December 31, 2021 | 4,211 | | | |
| Net realized and unrealized gains | (119) | | | |
| Net purchases, issuances and settlements | 362 | | | |
| | | |
| Balance December 31, 2022 | $ | 4,454 | | | |
|
| | | |
| (In thousands) | Insurance Contracts |
| Balance January 1, 2018 | $ | 17,834 |
|
| Net realized and unrealized losses | (957 | ) |
| Net purchases, issuances and settlements | 156 |
|
| Balance December 31, 2018 | 17,033 |
|
| Net realized and unrealized gains | 5,602 |
|
| Net purchases, issuances and settlements | (1,133 | ) |
| Balance December 31, 2019 | $ | 21,502 |
|
| | | | | |
| (In thousands) | Insurance
Contracts |
| Net actuarial losses | $ | (1,781) | |
| Prior service cost | 744 | |
| Total (before tax effects) | $ | (1,037) | |
We expect to make net contributions of $7.6$8.2 million to our pension plans in 2020,2023, which are primarily associated with ourstatutorily required plans in the International reporting segment.
For the 20192022 beginning of the year measurement purposes (net periodic benefit expense), a 6.5%5.9% increase in the costs of covered health care benefits was assumed, decreasing by 0.5%0.2% for each successive year to 4.5% in 20232030 and thereafter. For the 20192022 end of the year measurement purposes (benefit obligation), a 6.5% increase in the costs of covered health care benefits was assumed, decreasing by 0.5%approximately 0.2% for each successive year to 4.5%4.4% in 20242032 and thereafter. A 1-percentage-point change in assumed health care cost trend rates would have increased or decreased the other post-retirement benefit obligations and current year plan expense by approximately $1.0 million and $0.1 million, respectively.
Expense for defined contribution pension plans was $8.3$12.6 million in 2019, $9.02022, $11.7 million in 20182021 and $8.1$10.6 million in 2017.2020.
Estimated pension benefits to be paid under our defined benefit pension plans during the next five years are $25.0 million in 2020, $25.6 million in 2021, $26.5 million in 2022, $27.6$30.2 million in 2023, and $28.1$29.6 million in 2024, $30.7 million in 2025, $31.1 million in 2026 and $31.5 million in 2027, and an aggregated $151.0$164.3 million for the five years thereafter. Estimated other post-retirement benefits to be paid during the next five years are $2.4$2.2 million in 2020, $2.52023, $2.2 million in 2021, $2.3 million in 2022,2024, $2.0 million in 2023, $2.12025, $1.9 million in 2024,2026, $2.0 million in 2027, and an aggregated $8.9$9.5 million for the five years thereafter.
Note 15—16—Other Income, Net
|
| | | | | | | | | | | |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Interest income | $ | 4,411 |
| | $ | 4,588 |
| | $ | 3,596 |
|
| Components of net periodic benefit cost other than service cost (Note 14) | 7,997 |
| | 4,641 |
| | 3,768 |
|
| (Loss) Gain on asset dispositions, net | (371 | ) | | 646 |
| | (557 | ) |
| Other, net | (943 | ) | | (644 | ) | | (1,249 | ) |
| Total other income, net | $ | 11,094 |
| | $ | 9,231 |
| | $ | 5,558 |
|
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (In thousands) | 2022 | | 2021 | | 2020 |
| Components of net periodic benefit (income) cost other than service cost (Note 15) | $ | 22,286 | | | $ | 8,321 | | | $ | 1,680 | |
| Interest income | 4,155 | | | 3,256 | | | 3,498 | |
| Loss on asset write-down and dispositions, net | (6,290) | | | (788) | | | (236) | |
| Other, net | 905 | | | 793 | | | 742 | |
| | | | | |
| | | | | |
| Total other income, net | $ | 21,056 | | | $ | 11,582 | | | $ | 5,684 | |
During the years ended December 31, 2019, 20182022, 2021 and 2017,2020, we recognized $4.4$4.2 million, $4.6$3.3 million and $3.6$3.5 million of other income, respectively, related to interest earned on cash balances, short-term investments and notes receivable from insurance companies. The short-term investments and notes receivables from insurance companies.companies were divested as of January 5, 2023. Please refer to Note 19—20—Contingencies for further discussion on the Company's notes receivables from insurance companies.
Note 16—17—Leases
Effective January 1, 2019, we implemented ASU 2016-02, Leases, which amended authoritative guidance on leases and is codified in ASC Topic 842. The amended guidance requires lessees to recognize most leases on their balance sheets as right-of-use assets along with corresponding lease liabilities. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. The FASB's authoritative guidance provides companies with the option to apply this ASU to new and existing leases within the scope of the guidance as of the beginning of the period of adoption. We elected this transition method of applying the new standard and have recognized right-of-use assets and lease liabilities as of January 1, 2019. Prior period amounts were not adjusted and will continue to be reported under the accounting standards in effect for those periods. The adoption of this standard had a material impact on our Consolidated Balance Sheet as of December 31, 2019 due to the capitalization of right-of-use assets and lease liabilities associated with our current operating leases in which we are the lessee. Adoption of the new standard resulted in the recording of additional right-of-use assets and lease liabilities of approximately $54 million and $54 million, respectively, as of January 1, 2019.
Upon adoption of the new standard on January 1, 2019, we elected the package of practical expedients provided under the guidance. The practical expedient package applies to leases that commenced prior to adoption of the new standard and permits companies not to reassess whether existing or expired contracts are or contain a lease, the lease classification and any initial direct costs for existing leases. We have elected to not separate the lease and non-lease components within our lease contracts. Therefore, all fixed costs associated with the lease are included in the right-of-use asset and the lease liability. These costs often relate to the payments for a proportionate share of real estate taxes, insurance, common area maintenance and other operating costs in addition to base rent. We did not elect the hindsight practical expedient.
At the inception of our contracts we determine if the contract is or contains a lease. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Right-of-use assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement. We use our incremental borrowing rate ("IBR") at the recognition date in determining the present value of future payments for leases that do not have a readily determinable implicit rate. Our IBR reflects a fully secured rate based on our credit rating, taking into consideration the repayment timing of the lease and any impacts due to the economic environment in which the lease operates.
Lease right-of-use assets and liabilities are recognized based on the present value of the fixed future lease payments over the lease term. Lease expense for all operating leases is classified in cost of products sold or selling, general and administrative expense in the Consolidated Statement of Income. For finance leases, the amortization of the right-of-use asset is included in depreciation and amortization, and the interest is included in interest expense.
As a lessee, we have various operating lease agreements primarily related to real estate, vehicles and office and plant equipment. OurThe components of lease payments are largely fixed. Variableexpense were as follows:
| | | | | | | | | | | | | | | | | | | |
| | | | | | Year Ended December 31, |
| (In thousands, except percentage and year amounts) | | | | 2022 | | 2021 |
| Lease cost: | | | | | | |
| Operating lease cost recognized as rent expense | | | | $ | 14,970 | | | $ | 14,230 | |
| Total lease cost | | | | $ | 14,970 | | | $ | 14,230 | |
| | | | | | | |
| | | | Other Information |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows related to operating leases | | | | $ | 14,906 | | | $ | 14,440 | |
| | | | | | | |
| Non-cash other information: | | | | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | | | $ | 6,418 | | | $ | 21,857 | |
| Right-of-use assets obtained in acquisitions | | | | $ | — | | | $ | 4,795 | |
| | | | | | | |
| | | | | December 31, |
| | | | | 2022 | | 2021 |
| Weighted-average remaining lease term (in years): | | | | |
| Operating leases | | | | 14 | | 14 |
| | | | | | | |
| Weighted-average discount rate: | | | | |
| Operating leases | | | | 2.66 | % | | 2.49 | % |
Rent expense was $15.0 million, $14.2 million and $13.0 million in 2022, 2021 and 2020, respectively. We did not have any lease payments that depend on an index or a rate are included in the lease payments and are measured using the prevailing index or rate at the measurement date,transactions with differences between the calculated lease payment and the actual lease payment being expensed in the period of the change. Other variable lease payments, including utilities, consumption and common area maintenance as well as repairs, maintenance and mileage overages on vehicles, are expensed during the period incurred. Variable lease costs were immaterial for the twelve months ended December 31, 2019. A majority of our real estate leases include options to extend the lease and options to early terminate the lease. Leases with an early termination option generally involve a termination payment. If we are reasonably certain to exercise an option to extend a lease, the extension period is included as part of the right-of-use asset and the lease liability. Some of our leases contain residual value guarantees. These are guarantees made to the lessor that the value of an underlying asset returned to the lessor at the end of a lease will be at least a specified amount. Our leases do not contain restrictions or covenants that restrict us from incurring other financial obligations.related parties. We dodid not have any significant leases not yet commenced.
For our leases, we have elected to not apply the recognition requirements to leases of less than twelve months. These leases are expensed on a straight-line basis and are not included within the Company's operating lease asset or liability. Lease costs associated with leases of less than twelve months were immaterial for the three and twelve months ended December 31, 2019. We did not have any lease transactions with related parties.
|
| | | | | |
| | | Other Information |
| | | | Twelve Months Ended December 31, |
| (In thousands, except percentage amounts) | | 2019 |
| Lease cost: | | |
| | Operating lease cost recognized as rent expense | | $ | 13,364 |
|
| | Total lease cost | | 13,364 |
|
| | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| | Operating cash flows related to operating leases | | $ | 13,346 |
|
| | | | |
| Non-cash other information: | | |
| | Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 6,637 |
|
| | | | |
| | | | December 31, 2019 |
| Weighted-average remaining lease term (in years): | | |
| | Operating leases | | 11 |
|
| | | | |
| Weighted-average discount rate: | | |
| | Operating leases | | 4.28 | % |
Rent expense was approximately $13.4 million in 2019, $12.5 million in 2018 and $13.7 million in 2017. At December 31, 2019,2022, future lease payments under operating leases were as follows:
|
| | | | | |
| | | | |
| (In thousands) | | | Operating Leases |
| | | | |
| 2020 | | | $ | 11,047 |
|
| 2021 | | | 9,064 |
|
| 2022 | | | 5,956 |
|
| 2023 | | | 4,724 |
|
| 2024 | | | 3,647 |
|
| After 2024 | | | 30,587 |
|
| Total future minimum operating lease payments | | | $ | 65,025 |
|
| Less: Imputed interest | | | 13,231 |
|
| Present value of operating lease liabilities | | | 51,794 |
|
Less: Current portion operating lease liabilities(a) | | | 9,162 |
|
| Noncurrent operating lease liabilities | | | $ | 42,632 |
|
| | | | | | | | | | | |
| | | |
| (In thousands) | | | Operating Leases |
| | | |
| 2023 | | | $ | 10,043 | |
| 2024 | | | 7,480 | |
| 2025 | | | 5,200 | |
| 2026 | | | 4,061 | |
| 2027 | | | 3,428 | |
| After 2027 | | | 22,031 | |
| | | $ | 52,243 | |
| Less: Imputed interest | | | 7,938 | |
| Present value of operating lease liabilities | | | 44,305 | |
Less: Current portion operating lease liabilities(a) | | | 8,960 | |
| Noncurrent operating lease liabilities | | | $ | 35,345 | |
(a) Included in "Warranty reserveAccrued restructuring and other current liabilities"liabilities on the Consolidated Balance Sheet.Sheets.
Note 17—18—Derivative Financial Instruments
As part of our currency exchange rate risk management strategy, we enter into certain derivative foreign currency forward contracts that do not meet the U.S. GAAP criteria for hedge accounting but have the impact of partially offsetting certain foreign currency exposures. We account for these forward contracts at fair value and report the related gains or losses in currency exchange losses, net, in the Consolidated StatementStatements of Income. At December 31, 2019,2022, the notional amount of open forward contracts was $74.9$103.0 million and thethere were no unrealized gaingains/losses on these contracts was $0.6 million.contracts. All open forward contracts will mature during the first quarter of 2020.2023.
The following table presents the Consolidated Balance SheetSheets location and fair value of assets and liabilities associated with derivative financial instruments:
|
| | | | | | | | |
| | | December 31, |
| (In thousands) | | 2019 | | 2018 |
| Derivatives not designated as hedging instruments: | | | | |
| Foreign exchange contracts: other current liabilities | | $ | 125 |
| | $ | 12 |
|
| Foreign exchange contracts: other current assets | | 687 |
| | 488 |
|
| | | | | | | | | | | | | | |
| | | December 31, |
| (In thousands) | | 2022 | | 2021 |
| Derivatives not designated as hedging instruments: | | | | |
| Foreign exchange contracts: prepaid expenses and other current assets | | $ | 724 | | | $ | 619 | |
| Foreign exchange contracts: accrued restructuring and other current liabilities | | $ | 85 | | | $ | 128 | |
The following table presents the Consolidated StatementStatements of Income and Consolidated Statements of Cash Flows location and impact of derivative financial instruments: |
| | | | | | | | | | |
| (In thousands) | | Income Statement Location | | Loss Recognized in Income |
| | Year ended December 31, |
| | 2019 | | 2018 |
| Derivatives not designated as hedging instruments: | | | | | | |
| Foreign exchange contracts | | Currency exchange losses, net | | $ | 3,015 |
| | $ | 2,428 |
|
| | | | | | | | | | | | | | |
| | Year ended
December 31, |
| 2022 | | 2021 |
| Derivatives not designated as hedging instruments: | | | | |
| Foreign exchange contracts: currency exchange losses, net | | $ | 6,656 | | | $ | 5,107 | |
Note 18—19—Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:
Level 1—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3—Unobservable inputs for the asset or liability.
The valuation methodologies we used to measure financial assets and liabilities were limited to the pension plan assets described in Note 14—Pensions and Other Post-retirement Benefits and the derivative financial instruments described in Note 17—15—Pensions and Other Post-retirement Benefits and Note 18—Derivative Financial Instruments.Instruments, respectively. See Note 1415 for the fair value hierarchy classification of pension plan assets. We estimate the fair value of the derivative financial instruments, consisting of foreign currency forward contracts, based upon valuation models with inputs that generally can be verified by observable market conditions and do not involve significant management judgment. Accordingly, the fair values of the derivative financial instruments are classified within Level 2 of the fair value hierarchy. With the exception of our investments in marketable securities and fixed rate long-term debt both as disclosed below, we believe that the reported carrying amounts of our remaining financial assets and liabilities approximate their fair values.
74
We value our investments in available-for-sale marketable securities, primarily fixed income, at fair value using quoted market prices for similar securities or pricing models. Accordingly, the fair values of the investments are classified within Level 2 of the fair value hierarchy. The amortized cost basis of our investments was $49.7$9.9 million and $55.4$49.0 million as of December 31, 2019,2022, and 2018,2021, respectively. The fair value of our investments was $49.9$9.9 million and $55.1$49.0 million as of December 31, 2019,2022, and 2018,2021, respectively, which was reported in "Investments, short-term"Investments, short-term in the accompanying Consolidated Balance Sheet.Sheets. The change in fair value is recorded in other comprehensive income, net of tax. The Company does not intend to sell, nor is it more likely than not that we will be required to sell, these securities prior to recovery of their cost, ascost. As such, management believes that any unrealized gains or losses are temporary; therefore,temporary and to the extent that unrealized losses are present, management has not identified such losses to be other than temporary in nature. Accordingly, no impairment gains or losses relating to these securities have been recognized. All investments in marketable securities have maturities of one year or less and are currently in an unrealized loss position as of December 31, 2019.2022.
The reported carrying amount of fixed rate long-term debt, (includingincluding the current portion)portion of long-term debt, was $113$266.5 million and $130$274.3 million at December 31, 2019,2022, and 2018,2021, respectively. The fair value of this debt was $129$218.3 million and $139$279.8 million at December 31, 2019,2022, and 2018,2021, respectively. The fair value of this debt was determined using Level 2 inputs by evaluating likesimilarly rated companies with publicly traded bonds where available or current borrowing rates available for financings with similar terms and maturities.
Note 19—20—Contingencies
Product liability
WeThe Company and its subsidiaries face an inherent business risk of exposure to product liability claims arising from the alleged failure of our products to prevent the types of personal injury or death against which they are designed to protect. Product liability claims are categorized as either single incident or cumulative trauma.
Single incident product liability claims. Single incident product liability claims involve incidents of short duration that are typically known when they occur and involve observable injuries, which provide an objective basis for quantifying damages. The Company estimates its liabilityManagement has established reserves for the single incident product liability claims based on expected settlement costs forof its various subsidiaries, including, asserted single incident product liability claims and an estimate of costs for single incident product liability claims incurred but not reported ("IBNR"). The estimate single incident claims. To determine the reserves, Management makes reasonable estimates of losses for IBNRsingle incident claims is based on the number and characteristics of asserted claims, historical experience, sales volumes, expected settlement costs, and other relevant information. The reserve for single incident product liability claims which includes asserted single incident product liability claims and IBNR single incident product liability claims, was $3.1$1.4 million at both December 31, 20192022 and $3.6 million at December 31, 2018.2021. Single incident product liability expense was nominal for the years ended December 31, 2022 and 2021, compared to a benefit of $0.5$1.7 million for the year ended December 31, 2019 compared to expense of $2.0 million and $2.4 million for the years ended December 31, 2018 and 2017, respectively.2020. Single incident product liability exposures are evaluated on an annual basis, or more frequently if changing circumstances warrant. Adjustments are made to the reserve as appropriate. The reserve has not been discounted to present value and does not include future amounts which will be spent to defend the claims.
Cumulative trauma product liability claims. Cumulative trauma product liability claims involve potential exposures to harmful substances (e.g.,that are alleged to have occurred over a number of years. In recent periods, this has included the asbestos, silica, asbestos and coal dust) that occurred years ago and may have developed over long periodsdust claims of time into diseases such as silicosis, asbestosis, mesothelioma, or coal worker’s pneumoconiosis. Oneone of the Company's affiliates, Mine Safety Appliances Company, LLC ("MSA LLC"),. As of December 31, 2022, MSA LLC was named as a defendant in 1,6051,500 lawsuits comprised of 2,456 claims as of December 31, 2019.4,054 claims. These lawsuits mainly involve respiratory protection products allegedly manufactured and sold by MSA LLC or its predecessors. The products at issueproduct models alleged were manufactured many years ago by MSA LLC and are not currently offered by MSA LLC.no longer sold.
75
A summary | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Open lawsuits, beginning of period | 1,675 | | | 1,622 | | | 1,605 | |
| New lawsuits | 300 | | | 432 | | | 402 | |
| Settled and dismissed lawsuits | (475) | | | (379) | | | (385) | |
| Open lawsuits, end of period | 1,500 | | | 1,675 | | | 1,622 | |
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Asserted claims, beginning of period | 4,554 | | | 2,878 | | | 2,456 | |
| New claims | 520 | | | 2,134 | | | 917 | |
| Settled, inactive and dismissed claims | (1,020) | | | (458) | | | (495) | |
| Asserted claims, end of period | 4,054 | | | 4,554 | | | 2,878 | |
As of December 31, 2022, MSA LLC is defending an action filed in 2003 by the State of West Virginia, through its Attorney General, in the Circuit Court of Lincoln County, West Virginia, against MSA LLC and two other manufacturers of respiratory protection products. The State asserts several causes of action and seeks substantial compensatory damages—primarily for reimbursement of costs the State allegedly has incurred for worker’s compensation and healthcare benefits provided to individuals with occupational pneumoconiosis—as well as unspecified punitive damages. The State also asserts a claim under the West Virginia Consumer Credit and Protection Act (“CCPA”), alleging that the defendants made willful misrepresentations regarding product performance in connection with sales and advertisement of respirators in West Virginia and seeks substantial civil penalties. The claims against MSA LLC were severed from the claims against the other defendants and the trial date against MSA LLC was continued indefinitely in November 2022. No reserve has been recorded for this matter because the Company believes that liability is unsupportable under West Virginia law, and therefore, has concluded that the loss is not probable. In addition, the Company is not able to estimate a reasonably possible loss or range of reasonably possible losses given significant unresolved legal and factual matters. MSA LLC is the named defendant in this matter and responsibility for the matter passed along with the divestiture of MSA LLC on January 5, 2023. See "Subsequent Event," below.
Management previously established a reserve for MSA LLC's potential exposure to cumulative trauma product liability lawsuits and asserted cumulative trauma product liability claims activity is as follows:
|
| | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Open lawsuits, beginning of period | 1,481 |
| | 1,420 |
| | 1,794 |
|
| New lawsuits | 346 |
| | 369 |
| | 398 |
|
| Settled and dismissed lawsuits | (222 | ) | | (308 | ) | | (772 | ) |
| Open lawsuits, end of period | 1,605 |
| | 1,481 |
| | 1,420 |
|
|
| | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Asserted claims, beginning of period | 2,355 |
| | 2,242 |
| | 3,023 |
|
| New claims | 486 |
| | 479 |
| | 455 |
|
| Settled and dismissed claims | (385 | ) | | (366 | ) | | (1,236 | ) |
| Asserted claims, end of period | 2,456 |
| | 2,355 |
| | 2,242 |
|
More than halfclaims. Prior to divestiture of the open lawsuits atsubsidiary, as of December 31, 2019 have had a de minimis level of activity over the last 5 years. It is possible that these cases could become active again at any time due to changes in circumstances.
Total2022, MSA LLC's total cumulative trauma product liability reserve was $167.5$395.1 million, including $3.0$13.4 million for claims settled but not yet paid and related defense costs and $409.8 million, including $2.5 million for claims settled but not yet paid and related defense costs, as of December 31, 2019 and $187.3 million, including $24.5 million for claims settled but not yet paid and related defense costs, as of December 31, 2018. This2021. The reserve includesincluded estimated amounts forrelated to asserted claims and IBNR claims. Those estimated amounts reflect asbestos, silica, and coal dust claims expected to be resolved through the year 2069 and are2075. The reserve was not discounted to present value. The Company revised its estimates of MSA LLC's potential liability for cumulative trauma product liability claims for the year ended December 31, 2019 as a result of its annual review process described below. The reserve doesvalue and did not include estimated future amounts which will be spentrelating to defenddefense of the claims covered by the reserve.claims. Defense costs are recognized in the Consolidated StatementStatements of Income as incurred.
At December 31, 2019, $17.42022, $65.1 million of the total reserve for cumulative trauma product liability claims is recorded in the Insurance and product liability line within other current liabilities in the Consolidated Balance Sheet and the remainder, $150.1$330.0 million, is recorded in the Product liability and other noncurrent liabilities line. At December 31, 2018, $38.82021, $46.7 million of the total reserve for cumulative trauma product liability claims wasis recorded in the Insurance and product liability line within other current liabilities in the Consolidated Balance Sheet and the remainder, $148.5$363.1 million, wasis recorded in the Product liability and other noncurrent liabilities line.
During the quarter ended June 30, 2022, MSA LLC finalized a process that will result in settlements to resolve and dismiss several hundred claims for up to $26.3 million. Amounts to resolve the unpaid portion of these claims have been accrued as part of the product liability reserve and as of December 31, 2022, $10.5 million remained unpaid with the final payments made during the first quarter of 2023.
Total cumulative trauma liability losses were $36.1$22.2 million, $63.8$228.2 million, and $219.0$77.8 million for the years ended December 31, 2019, 20182022, 2021 and 2017, respectively.2020, respectively, and related to updates to our cumulative trauma product liability reserve as well as the defense of cumulative trauma product liability claims for all periods. Uninsured cumulative trauma product liability losses, which were included in Product liability and other operating expense on the Consolidated StatementStatements of Income duringfor the years ended December 31, 2019, 20182022, 2021 and 2017,2020, were $27.1$20.6 million, $43.8$185.3 million and $124.5$39.0 million, respectively, and represent the total cumulative trauma product liability losses net of any estimated insurance receivables as discussed below.
MSA LLC's cumulative trauma product liability reserve is based upon a reasonable estimate of MSA LLC’s current and potential future liability for cumulative trauma product liability claims, in accordance with applicable accounting principles. To develop a reasonable estimate of MSA LLC’s potential exposure to cumulative trauma product liability claims, Managementmanagement performs an annual comprehensive review of MSA LLC’s cumulative trauma product liability claims in consultation with an outside valuation consultant and outside legal counsel. The review process takes into account MSA LLC’s historical claims experience, developments in MSA LLC’s claims experience over the past year, developments in the tort system generally, and any other relevant information. Quarterly, management and outside legal counsel review whether significant new developments have occurred which could materially impact recorded amounts.
Certain significant assumptions underlying the material components ofamounts, and if warranted, management reviews changes with an outside valuation consultant. Adjustments to the reserve for the year ended December 31, 2022 totaled $8.4 million,resulting from our annual comprehensive review of MSA LLC’s claims exposure, including review of activity experienced during the year.
The estimate of MSA LLC’s potential liability for cumulative trauma product liability claims, have been madeand the corresponding reserve, are based onupon numerous assumptions derived from MSA LLC's experience related toLLC’s historical experience. Those assumptions include the following:
Theincidence of applicable diseases in the general population, the number of claims that may be asserted against MSA LLC in the future, the years in which such claims may be asserted, the counsel asserting those claims, the percentage of claims resolved through settlement, the types and severity of illnesses alleged by claimants to give rise to their claims;
Theclaims, the venues in which the claims are asserted;
The number ofasserted, and numerous other factors, which influence how many claims assertedmay be brought against MSA LLC, whether those claims ultimately are resolved for payment, and the counsel asserting those claims; and
The percentage of claims resolved through settlement and the values of settlements paid to claimants.
Additional assumptions include the following:
MSA LLC will continue to evaluate and handle cumulative trauma product liability claims in accordance with its existing defense strategy;
The number and effect of co-defendant bankruptcies will not materially change in the future;
No material changes in medical science occur with respect to cumulative trauma product liability claims; and
No material changes in law occur with respect to cumulative trauma product liability claims including no material state or federal tort reform actions.
Cumulative trauma product liability litigation is inherently unpredictable and MSA LLC's expense with respect to cumulative trauma product liability claims could vary significantly in future periods. With respect to asserted claims, this is because it is unclear at the time of filing whether a claim will be actively litigated. Even when a case is actively litigated, it is often difficult to determine if the lawsuit will be dismissed without payment or settled, because of sufficiency of product identification, statute of limitations challenges, or other defenses. As a result, it is typically unclear until late into a lawsuit whether any particular claim will result in a loss and, if so, to what extent. Actual loss amounts for settled claims are highly variable and turn on a case-by-case analysis of the relevant facts.
With respect to asserted or IBNR cumulative trauma product liability claims, MSA LLC’s expense in future periods may vary from the reserve currently established for several reasons. In particular, MSA LLC’s actual claims experience may differ in one or more respects from the significant assumptions listed above that were used by in establishing the reserve. Other factors that make MSA LLC's asserted and IBNR claims difficult to reasonably estimate include low volumes in the number of claims asserted and resolved (both in general and with respect to particular plaintiffs' counsel, as claims experience can vary significantly among different counsel), inconsistency of claims composition, uncertainty as to if and over what time periods claims might be asserted in the future, and other factors. Numerous uncertainties also exist with respect to factors not specific to MSA LLC, including potential legislative or judicial changes at the federal level or in key states concerning claims adjudication, future bankruptcy proceedings involving key co-defendants, payments from trusts established to compensate claimants, and/or changes in medical science relating to the diagnosis and treatment of claims.
Because cumulative trauma product liability litigation is subject to the significant modeling assumptions and inherent uncertainties described above, and unfavorable rulings or developments could occur, there can be no certainty that MSA LLC may not ultimately incur charges in excess of presently recorded liabilities. The reserve for cumulative trauma product liability claims may be adjusted from time to time based on changes to the factors and assumptions described above. If future estimates of cumulative trauma product liability claims are materially different than the accrued liability, we will record an appropriate adjustment to the Consolidated Statement of Income. These adjustments could materially impact our consolidated financial statements in future periods.values.
Insurance Receivable and Notes Receivable, Insurance Companies
Many years ago, MSA LLC purchased insurance policies from various insurance carriers that, subject to common contract exclusions, provided coverage for cumulative trauma product liability losses (the "Occurrence-Based Policies"). While we continuehave continued to pursue reimbursement under certain remaining Occurrence-Based Policies, the vast majority of these policies have been exhausted, settled or converted into either (1) negotiated Coverage-in-Place Agreements, or (2) negotiated settlement agreements with scheduled payment streams.streams (recorded as notes receivables) or (2) negotiated Coverage-in-Place Agreements (recorded as insurance receivables). As a result, MSA LLC is largely self-insured for cumulative trauma product liability claims, and additional amounts recorded as insurance receivables or notes receivables will be limited. These policies, as well as the negotiated settlement agreements and Coverage-in-Place Agreements, together with all associated receivables are property of MSA LLC, which was divested on January 5, 2023. See "Subsequent Event," below.
When adjustments are made to amounts recorded in the cumulative trauma product liability reserve, we calculate amounts due to be reimbursed pursuant to the terms of the negotiated Coverage-In-Place Agreements, including cumulative trauma product liability losses and related defense costs, and we record the reimbursable amounts probable of reimbursement as insurance receivables. These amounts are not subject to current coverage litigation.
Insurance receivables at December 31, 2019,2022 totaled $63.8$127.6 million, of which $7.6$17.3 million is reported in Prepaid expenses and other current assets in the Consolidated Balance Sheet and $56.2$110.3 million is reported in Insurance receivable and other noncurrent assets. Insurance receivables at December 31, 2018,2021 totaled $71.7$130.2 million, of which $14.8$8.6 million was reported in Prepaid expenses and other current assets in the Consolidated Balance Sheet and $56.9$121.6 million was reported in Insurance receivable and other noncurrent assets. The vast majority of the $63.8$127.6 million insurance receivables balance at December 31, 2019,2022, is attributable to reimbursement believed to be due under the terms of signed Coverage-In-Place Agreements and a portion of this amount represents the estimated recovery of IBNR amounts not yet incurred.
77
A summary of insurance receivables balance and activity related to cumulative trauma product liability losses is as follows:
|
| | | | | | | | |
| (In millions) | | 2019 | | 2018 |
| Balance beginning of period | | $ | 71.7 |
| | $ | 134.7 |
|
| Additions | | 9.1 |
| | 19.6 |
|
| Collections and other adjustments | | (17.0 | ) | | (82.6 | ) |
| Balance end of period | | $ | 63.8 |
| | $ | 71.7 |
|
| | | | | | | | | | | | | | | | |
| (In millions) | | 2022 | | 2021 | | |
| Balance beginning of period | | $ | 130.2 | | | $ | 97.0 | | | |
| Additions | | 1.8 | | | 43.5 | | | |
| Collections | | (4.4) | | | (10.3) | | | |
| Balance end of period | | $ | 127.6 | | | $ | 130.2 | | | |
In other cases, we have recordedWe record formal notes receivables due from scheduled payment streams according to negotiated settlement agreements. The notes receivables were recorded as a transfer from the insurance receivables balanceagreements with insurers. These amounts are not subject to Notes receivable, insurance companies (current and noncurrent) in the Consolidated Balance Sheet. In cases where the payment stream covers multiple years and there were no contingencies, the present value of the payments was recorded as a transfer from the insurance receivable balance to Notes receivable, insurance companies (current and long-term) in the Consolidated Balance Sheet. Provided the remaining insurance receivable was recoverable through the insurance carriers, no gain or loss was recognized at the time of transfer from insurance receivables to Notes receivable, insurance companies.current coverage litigation.
Notes receivable from insurance companies at December 31, 2019,2022 totaled $56.0$44.6 million, of which $3.7$5.9 million is reported in Notes receivable, insurance companies, current on the Consolidated Balance Sheet and $52.3$38.7 million is reported in Notes receivable, insurance companies, noncurrent. Notes receivable from insurance companies at December 31, 2018,2021, totaled $59.6$48.5 million, of which $3.6$3.9 million was reported in Notes receivable, insurance companies, current on the Consolidated Balance Sheet and $56.0$44.6 million was reported in Notes receivable, insurance companies, noncurrent.
A summary of notes receivables from insurance companies balance is as follows:
|
| | | | | | | | |
| | | December 31, |
| (In millions) | | 2019 | | 2018 |
| Balance beginning of period | | $ | 59.6 |
| | $ | 76.9 |
|
| Additions | | 1.5 |
| | 1.7 |
|
| Collections | | (5.1 | ) | | (19.0 | ) |
| Balance end of period | | $ | 56.0 |
| | $ | 59.6 |
|
| | | | | | | | | | | | | | |
| | December 31, |
| (In millions) | | 2022 | | 2021 |
| Balance beginning of period | | $ | 48.5 | | | $ | 52.3 | |
| Additions | | 1.2 | | | 1.3 | |
| Collections | | (5.1) | | | (5.1) | |
| Balance end of period | | $ | 44.6 | | | $ | 48.5 | |
The collectibilityvast majority of the insurance receivables balances at both December 31, 2022 and 2021, is attributable to reimbursement under the terms of signed agreements with insurers and is not currently subject to litigation. The collectability of MSA LLC's insurance receivables and notes receivables is regularly evaluated and we believethe Company believes that the amounts recorded are probable of collection. The determination that the recorded insurance receivables are probable of collection is based on the terms of the settlement agreements reached with the insurers, our history of collection, and the advice of MSA LLC's outside legal counsel.counsel and consultants. Various factors could affect the timing and amount of recovery of the insurance and notes receivables, including assumptions regarding various aspects of the composition and characteristics of future claims (which are relevant to calculating reimbursement under the terms of certain Coverage-In-Place Agreements) and the extent to which the issuing insurers may become insolvent in the future.
Subsequent Event
On January 5, 2023, the Company divested MSA LLC, a wholly-owned subsidiary that holds legacy product liability claims relating to coal dust, asbestos, silica, and other exposures, to a joint venture between R&Q Insurance Holdings Ltd. and Obra Capital, Inc. In connection with the closing, the Company contributed $341 million in cash and cash equivalents, while R&Q and Obra contributed an additional $35 million.
As a result of the transaction in the first quarter of 2023, we will derecognize all legacy cumulative trauma product liability reserves, related insurance assets, and associated deferred tax assets of the divested subsidiary from our balance sheet and will recognize a loss of approximately $200 million. R&Q and Obra's joint venture has assumed management of the divested subsidiary, including the management of its claims and associated assets.
Other Litigation
Two subsidiaries of the Company, Globe Manufacturing Company, LLC ("Globe") and MSA LLC, are defending a number of lawsuits in which plaintiffs assert that certain of those entities’ products allegedly containing per- and polyfluoroalkyl substances (“PFAS”) have caused injury, health issues, or environmental issues. PFAS are a large class of substances that are widely used in everyday products. Specifically, Globe builds turnout gear from technical fabrics sourced from a small pool of specialty textile manufacturers. These protective fabrics have been tested and certified to meet industry standards, and some of them contain PFAS to achieve water, oil, or chemical resistance. No manufacturer of firefighter protective clothing is currently able to meet National Fire Protection Association safety standards while offering coats or pants that are completely PFAS free.
Globe and MSA LLC believe they have valid defenses to these lawsuits. These matters are at a very early stage with numerous factual and legal issues to be resolved. Defense costs relating to these lawsuits are recognized in the Consolidated Statement of Income as incurred. Globe and MSA LLC are also pursuing insurance coverage and indemnification related to the lawsuits. The PFAS claims against MSA LLC were included in the divestiture of MSA LLC on January 5, 2023 as discussed above under the Subsequent Event header. In total, Globe was named as a defendant in 34 lawsuits comprised of approximately 1,865 claims as of February 16, 2023.
Product Warranty
The Company provides warranties on certain product sales. Product warranty reserves are established in the same period that revenue from the sale of the related products is recognized, or in the period that a specific issue arises as to the functionality of the Company's product. The determination of such reserves requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under warranty.
The amounts of the reserves are based on established terms and the Company's best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. If actual return rates and/or repair and replacement costs differ significantly from estimates, adjustments to recognize additional cost of sales may be required in future periods.
The following table reconciles the changes in the Company's accrued warranty reserve:
|
| | | | | | | | | | | | |
| | | December 31, |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Beginning warranty reserve | | $ | 14,214 |
| | $ | 14,753 |
| | $ | 11,821 |
|
| Warranty payments | | (12,664 | ) | | (9,955 | ) | | (10,905 | ) |
| Warranty claims | | 12,033 |
| | 10,585 |
| | 12,471 |
|
| Provision for product warranties and other adjustments | | (868 | ) | | (1,169 | ) | | 1,366 |
|
| Ending warranty reserve | | $ | 12,715 |
| | $ | 14,214 |
| | $ | 14,753 |
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Beginning warranty reserve | | $ | 12,423 | | | $ | 11,428 | | | $ | 12,715 | |
| Warranty payments | | (10,631) | | | (8,987) | | | (10,861) | |
| Warranty claims | | 14,544 | | | 10,225 | | | 10,233 | |
| Provision for product warranties and other adjustments | | (1,106) | | | (243) | | | (659) | |
| Ending warranty reserve | | $ | 15,230 | | | $ | 12,423 | | | $ | 11,428 | |
Warranty expense for the years ended December 31, 2019, 20182022, 2021 and 20172020 was $11.2$13.4 million, $9.4$10.0 million and $13.8$9.6 million, respectively and is included in "CostsCosts of products sold"sold on the Consolidated StatementStatements of Income.
Note
20—21—Quarterly Financial Information (Unaudited)
| | | | | | | | | | | | | | 2022 |
| | 2019 | | Quarters | |
| | Quarters | | | |
| (In thousands, except earnings per share) | 1st | | 2nd | | 3rd | | 4th | | Year | |
| (In thousands, except per share amounts) | | (In thousands, except per share amounts) | 1st | | 2nd | | 3rd | | 4th | | Year |
| Net sales | $ | 326,038 |
| | $ | 349,675 |
| | $ | 351,014 |
| | $ | 375,254 |
| | $ | 1,401,981 |
| Net sales | $ | 330,692 | | | $ | 372,313 | | | $ | 381,694 | | | $ | 443,254 | | | $ | 1,527,953 | |
| Gross profit | 149,982 |
| | 161,084 |
| | 158,701 |
| | 166,845 |
| | 636,612 |
| Gross profit | 142,784 | | | 164,400 | | | 169,395 | | | 197,252 | | | 673,831 | |
| Net income attributable to MSA Safety Incorporated | 23,232 |
| | 39,806 |
| | 42,239 |
| | 31,163 |
| | 136,440 |
| Net income attributable to MSA Safety Incorporated | 35,542 | | | 47,693 | | | 44,906 | | | 51,489 | | | 179,630 | |
| | | | | | | | | | | |
Earnings per share(1) | | | | | | | | | | Earnings per share(1) | |
| Basic | $ | 0.60 |
| | $ | 1.03 |
| | $ | 1.09 |
| | $ | 0.80 |
| | $ | 3.52 |
| Basic | $ | 0.90 | | | $ | 1.21 | | | $ | 1.15 | | | $ | 1.31 | | | $ | 4.58 | |
| Diluted | 0.59 |
| | 1.01 |
| | 1.08 |
| | 0.79 |
| | 3.48 |
| Diluted | 0.90 | | | 1.21 | | | 1.14 | | | 1.31 | | | 4.56 | |
|
| | | | | | | | | | | | | | | | | | | |
| | 2018 |
| | Quarters | | |
| (In thousands, except earnings per share) | 1st | | 2nd | | 3rd | | 4th | | Year |
| Net sales | $ | 325,894 |
| | $ | 339,331 |
| | $ | 331,096 |
| | $ | 361,783 |
| | $ | 1,358,104 |
|
| Gross profit | 147,339 |
| | 153,836 |
| | 148,302 |
| | 162,386 |
| | 611,863 |
|
| Net income attributable to MSA Safety Incorporated | 32,371 |
| | 33,179 |
| | 33,717 |
| | 24,883 |
| | 124,150 |
|
| | | | | | | | | | |
Earnings per share(1) | | | | | | | | | |
| Basic | $ | 0.85 |
| | $ | 0.86 |
| | $ | 0.88 |
| | $ | 0.65 |
| | $ | 3.23 |
|
| Diluted | 0.83 |
| | 0.85 |
| | 0.86 |
| | 0.64 |
| | 3.18 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Quarters | | |
| (In thousands, except earnings per share) | 1st | | 2nd | | 3rd | | 4th | | Year |
| Net sales | $ | 308,428 | | | $ | 341,289 | | | $ | 340,197 | | | $ | 410,268 | | | $ | 1,400,182 | |
| Gross profit | 134,785 | | | 153,000 | | | 149,439 | | | 178,124 | | | 615,348 | |
| Net income (loss) attributable to MSA Safety Incorporated | 36,450 | | | 25,186 | | | 21,180 | | | (61,476) | | | 21,340 | |
| | | | | | | | | |
Earnings (loss) per share(1) | | | | | | | | | |
| Basic | $ | 0.93 | | | $ | 0.64 | | | $ | 0.54 | | | $ | (1.57) | | | $ | 0.54 | |
| Diluted | 0.92 | | | 0.64 | | | 0.54 | | | (1.57) | | | 0.54 | |
(1) Per share amounts are calculated independently for each period presented; therefore, the sum of the quarterly per share amounts may not equal the per share amounts for the year.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their evaluation as of the end of the period covered by this Form 10-K, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including the principal executive officer and principle financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management has excluded Sierra Monitor Corporation ("SMC") from its assessment of internal control over financial reporting as of December 31, 2019 because it was acquired by the Company in a purchase business combination in the second quarter of 2019. SMC is wholly-owned by MSA.
(b) Changes in internal control. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
See Item 8. Financial Statements and Supplementary Data—“Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm.”
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
With respect to this Part III, incorporated by reference herein pursuant to Rule 12b—23 are (1) “Election of Directors,” (2) “Executive Compensation,” (3) “Other Information Concerning the Board of Directors,” (4) “Stock Ownership,” and (5) “Selection of Independent Registered Public Accounting Firm,” appearing in the Proxy Statement filed pursuant to Regulation 14A in connection with the registrant’s Annual Meeting of Shareholders to be held on May 12, 2020.2023. The information appearing in such Proxy Statement under the caption “Audit Committee Report” and the other information appearing in such Proxy Statement and not specifically incorporated by reference herein is not incorporated herein. As to Item 10 above, also see the information reported in Part I of this Form 10-K, under the caption “Information about our Executive Officers,” which is incorporated herein by reference. As to Item 10 above, the Company has adopted a Code of Ethics applicable to its principal executive officer, principal financial officer and principal accounting officer and other Company officials. The text of the Code of Ethics is available on the Company’s website at www.MSAsafety.com. Any amendment to, or waiver of, a required provision of the Code of Ethics that applies to the Company’s principal executive, financial or accounting officer will also be posted on the Company’s Internet site at that address.
As to Item 12 above, the following table sets forth information as of December 31, 20192022 concerning common stock issuable under the Company’s equity compensation plans.
| | | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | Weighted average
exercise price of
outstanding options,
warrants and rights
(b) | | Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c) | | Plan Category | Number of securities
to be issued upon
exercise of
outstanding
options,
warrants and rights
(a) | | Weighted average
exercise price of
outstanding options,
warrants and rights
(b) | | Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c) | |
| Equity compensation plans approved by security holders | 559,656 |
| | $ | 45.78 |
| | 1,006,900 |
| * | Equity compensation plans approved by security holders | 58,156 | | | $ | 46.48 | | | 675,703 | | * |
| Equity compensation plans not approved by security holders | None |
| | — |
| | None |
| | Equity compensation plans not approved by security holders | None | | — | | | None | |
| Total | 559,656 |
| | 45.78 |
| | 1,006,900 |
| | Total | 58,156 | | | 46.48 | | | 675,703 | | |
*Includes 903,802598,813 shares available for issuance under the Amended and Restated 2016 Management Equity Incentive Plan and 103,09876,890 shares available for issuance under the 2017 Non-Employee Directors’ Equity Incentive Plan.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements and Report of Independent Registered Public Accounting Firm (see Part II, Item 8 of this Form 10-K).
The following information is filed as part of this Form 10-K.
|
| | | | |
| Page |
| |
| |
Consolidated StatementStatements of Income—three years ended December 31, 20192022 | |
Consolidated StatementStatements of Comprehensive Income—three years ended December 31, 20192022 | |
Consolidated Balance Sheet—Sheets—December 31, 20192022 and 20182021 | |
Consolidated StatementStatements of Cash Flows—three years ended December 31, 20192022 | |
Consolidated StatementStatements of Changes in Retained Earnings and Accumulated Other Comprehensive Income—three years ended December 31, 20192022 | |
| |
(a) 2. The following additional financial information for the three years ended December 31, 20192022 is filed with the report and should be read in conjunction with the above financial statements:
Schedule II—Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not material or the required information is shown in the consolidated financial statements and consolidated notes to the financial statements listed above.
(a) 3. Exhibits
Several of the following exhibits are incorporated herein by reference under Rule 12b-32 of the Securities Exchange Act of 1934, as amended, as indicated next to the name of the exhibit. Several other instruments, which would otherwise be required to be listed below, have not been so listed because those instruments do not authorize securities in an amount that exceeds 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant agrees to furnish a copy of any instrument that was so omitted on that basis to the Commission upon request.
|
| | | | |
| 3(i) | |
| |
| 3(ii) | |
| |
4(a) | |
| |
4(b) | Form of Amended and Restated Guarantee Agreement entered into as of March 7, 2014 by each of General Monitors, Inc., General Monitors Transnational, LLC and MSA International, Inc., in favor of the Note Purchasers under the Amended and Restated Note Purchase and Private Shelf Agreement dated as of March 7, 2014 (as confirmed and reaffirmed by such guarantors as of September 7, 2018), filed as Exhibit 4(b) to Form 10-K on February 25, 2015, is incorporated herein by reference. |
| |
4(c) | Form of Guarantee Agreement entered into as of March 7, 2014 by each of Mine Safety Appliances Company, LLC, MSA Worldwide, LLC, MSA Advanced Detection, LLC, MSA Safety Development, LLC, MSA Technology, LLC, and MSA Innovation, LLC, in favor of the Note Purchasers under the Amended and Restated Note Purchase and Private Shelf Agreement dated as of March 7, 2014 (as confirmed and reaffirmed by certain of such guarantors as of September 7, 2018), filed as Exhibit 4(c) to Form 10-K on February 25, 2015, is incorporated herein by reference. |
| |
|
| |
| 4(d) | |
| |
| 10(a)* | |
| |
| 10(b)* | |
| |
| 10(c)* | |
| |
| 10(d)* | |
| |
| 10(e)* | |
| |
| 10(f)* | |
| |
| | | | | |
| 10(g)* | |
| |
| 10(h)* | |
| |
| 10(i)* | |
| |
| 10(j)* | |
| |
| 10(k)* | |
| |
| 10(l)* | |
| |
10(l)*10(m) | |
| |
10(m) | ThirdFourth Amended and Restated Credit Agreement, dated September 7, 2018as of May 24, 2021, by and among MSA Safety Incorporated, MSA UK Holdings Limited, andMSA Great Britain Holdings Limited, MSA International Holdings B.V., as borrowers, various MSA subsidiaries, as guarantors, various financial institutions, as lenders, and PNC Bank National Association, as administrative agent, filed as Exhibit 10.1 to Form 8‑K/A on May 26, 2021, is incorporated herein by reference. |
| |
| 10(n) | |
| |
| 10(o) | |
| |
| 10(p) | Agreement and Plan of Merger, dated May 23, 2021, by and among MSA Advanced Detection, LLC, a Pennsylvania limited liability company, Cardinal Merger Subsidiary, Inc., a Delaware corporation, MSA Safety Incorporated, a Pennsylvania corporation, Viking Topco, Inc., a Delaware corporation, and Laurel Solutions Holdings LLC, a Delaware limited liability company, solely in its capacity as a representative of the stockholders of Viking Topco, Inc., filed as Exhibit 10.1 to Form 8‑K on May 24, 2021, is incorporated herein by reference. |
| |
| 10(q) | Membership Interest Purchase Agreement, dated January 5, 2023, by and among MSA Worldwide, LLC, a Pennsylvania limited liability company, Mine Safety Appliances Company, LLC, a Pennsylvania limited liability company, Sag Main Holdings, LLC, a Delaware limited liability company, and MSA Safety Jacksonville Manufacturing LLC, a Pennsylvania limited liability company, filed as Exhibit 10.1 to Form 8-K on January 6, 2023, is incorporated by reference. |
| |
| 10(r) | Credit Agreement, dated January 5, 2023, by and among the Company, as borrower, various Company subsidiaries, as guarantors, various financial institutions, as lenders, and PNC Bank, National Association, as administrative agent, including forms of Guaranty and Suretyship Agreement and Intercompany Subordination Agreement, filed as Exhibit 10.110.2 to Form 8‑K on September 10, 2018,January 6, 2023, is incorporated herein by reference. |
| |
2110(s) | Amendments to Fourth Amended and Restated Credit Agreement, dated May 24, 2021, as amended, among the Company, the other Borrowers party thereto, the Guarantors party thereto, the Lenders party thereto and PNC Bank, National Association, as Administrative Agent, filed as Exhibit 10.3 to Form 8‑K on January 6, 2023, is incorporated herein by reference. |
| |
| 10(t) | |
| |
| 10(u) | |
| |
| 21 | |
| |
| 23 | |
| |
| 31.1 | |
| |
| 31.2 | |
| |
| 32 | |
| |
| | | | | |
| 101.INS | XBRL Instance Document |
| |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
*The exhibits marked by an asterisk are management contracts or compensatory plans or arrangements.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| MSA SAFETY INCORPORATED | |
| | |
MSA SAFETY INCORPORATEDFebruary 16, 2023 | |
| By | | |
February 20, 2020 | By | /s/ NISHAN J. VARTANIAN |
| (Date) | | Nishan J. Vartanian
Chairman, President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | | | | |
| Signature | Title | Date |
| | |
/S/ NISHAN J. VARTANIAN Nishan J. Vartanian | Chairman, President and Chief Executive Officer
(Principal Executive Officer)
| February 20, 202016, 2023 |
| | |
/S/ KLENNETHEE B. MCCHESNEY Lee B. McChesney | Senior Vice President and Chief Financial Officer | February 16, 2023 |
| | |
/S/ JONATHAN D. KBRAUSEUCK KennethJonathan D. KrauseBuck
| Sr. Vice President, Chief FinancialAccounting Officer and TreasurerController (Principal Financial and Accounting Officer) | February 20, 202016, 2023 |
| | |
/S/ ROBERT A. BRUGGEWORTH Robert A. Bruggeworth | Director | February 20, 202016, 2023 |
| | |
/S/ THOMAS W. GIACOMINI
Thomas W. Giacomini
| Director | February 20, 2020 |
| | |
/S/ GREGORY B. JORDAN Gregory B. Jordan | Director | February 20, 202016, 2023 |
| | |
/S/ WILLIAM M. LAMBERT William M. Lambert | Director | February 20, 202016, 2023 |
| | |
/S/ DIANE M. PEARSE Diane M. Pearse | Director | February 20, 202016, 2023 |
| | |
/S/ REBECCA B. ROBERTS Rebecca B. Roberts | Director | February 20, 202016, 2023 |
| | |
/S/ SANDRA PHILLIPS ROGERS Sandra Phillips Rogers | Director | February 20, 202016, 2023 |
| | |
/S/ JOHN T. RYAN III John T. Ryan III | Director | February 20, 202016, 2023 |
| | |
/s/ LUCA SAVI Luca Savi | Director | February 16, 2023 |
| | |
/S/ WILLIAM R. SPERRY William R. Sperry | Director | February 20, 202016, 2023 |
SCHEDULE II
MSA SAFETY INCORPORATED AND AFFILIATES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 20192022
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (In thousands) |
| Allowance for doubtful accounts: | |
| Balance at beginning of year | $ | 5,789 | | | $ | 5,344 | | | $ | 4,860 | |
| Additions— | | | | | |
| Charged to costs and expenses | 1,253 | | | 1,645 | | | 1,172 | |
| Deductions— | | | | | |
| Deductions from reserves, net (1)(2) | 273 | | | 1,200 | | | 688 | |
| Balance at end of year | $ | 6,769 | | | $ | 5,789 | | | $ | 5,344 | |
| Income tax valuation allowance: | | | | | |
| Balance at beginning of year | $ | 8,812 | | | $ | 7,188 | | | $ | 5,936 | |
| Additions— | | | | | |
| Charged to costs and expenses (3) | 2,771 | | | 2,575 | | | 2,854 | |
| Deductions— | | | | | |
| Deductions from reserves (3) | 1,566 | | | 951 | | | 1,602 | |
| Balance at end of year | $ | 10,017 | | | $ | 8,812 | | | $ | 7,188 | |
(1)Bad debts written off, net of recoveries.
(3)Activity for 2022, 2021 and 2020 includes currency translation gains (losses) of $622, $29 and $(41), respectively.
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | (In thousands) |
| Allowance for doubtful accounts: | |
| Balance at beginning of year | $ | 5,369 |
| | $ | 5,540 |
| | $ | 5,610 |
|
| Additions— | | | | | |
| Charged to costs and expenses (2) | 2,015 |
| | 375 |
| | 1,649 |
|
| Deductions— | | | | | |
| Deductions from reserves, net (1)(2) | 2,524 |
| | 546 |
| | 1,719 |
|
| Balance at end of year | 4,860 |
| | 5,369 |
| | 5,540 |
|
| Income tax valuation allowance: | | | | | |
| Balance at beginning of year | $ | 5,039 |
| | $ | 4,559 |
| | $ | 5,303 |
|
| Additions— | | | | | |
| Charged to costs and expenses (3) | 1,138 |
| | 859 |
| | 906 |
|
| Deductions— | | | | | |
| Deductions from reserves (3) | 241 |
| | 379 |
| | 1,650 |
|
| Balance at end of year | $ | 5,936 |
| | $ | 5,039 |
| | $ | 4,559 |
|
| |
(1) | Bad debts written off, net of recoveries. |
| |
(2) | Activity for 2019, 2018 and 2017 includes currency translation (losses) gains of $(1,058), $(291) and $285, respectively.
|
| |
(3) | Activity for 2019, 2018 and 2017 includes currency translation (losses) gains of $104, $(367) and $248, respectively.
|
