The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN RETAINED EARNINGS,
ACCUMULATED OTHER COMPREHENSIVE LOSS AND NONCONTROLLING INTERESTS
| | (In thousands) | Retained Earnings | | Accumulated Other Comprehensive (Loss) | Retained Earnings | | Accumulated Other Comprehensive (Loss) | | Noncontrolling Interests |
Balances March 31, 2017 | $ | 897,458 |
| | $ | (216,892 | ) | |
Net income | 12,614 |
| | — |
| |
Foreign currency translation adjustments | — |
| | 14,123 |
| |
Pension and post-retirement plan adjustments, net of tax of $935 | — |
| | 2,157 |
| |
(Income) loss attributable to noncontrolling interests | (82 | ) | | 837 |
| |
Common dividends | (13,359 | ) | | — |
| |
Preferred dividends | (10 | ) | | — |
| |
Balances June 30, 2017 | $ | 896,621 |
| | $ | (199,775 | ) | |
| | | | |
Balances March 31, 2018 | $ | 887,656 |
| | $ | (156,203 | ) | $ | 887,656 |
| | $ | (156,203 | ) | | $ | 5,265 |
|
Net income | 33,421 |
| | — |
| 33,421 |
| | — |
| | — |
|
Foreign currency translation adjustments | — |
| | (27,880 | ) | — |
| | (27,880 | ) | | — |
|
Pension and post-retirement plan adjustments, net of tax of $614 | — |
| | 3,059 |
| — |
| | 3,059 |
| | — |
|
Reclassification from accumulated other comprehensive (loss) into earnings | — |
| | (774 | ) | |
(Income) loss attributable to noncontrolling interests | (242 | ) | | 273 |
| |
Reclassification from accumulated other comprehensive (loss) into net income | | — |
| | (774 | ) | | — |
|
Income attributable to noncontrolling interests | | (242 | ) | | 273 |
| | (31 | ) |
Common dividends | (14,581 | ) | | — |
| (14,581 | ) | | — |
| | — |
|
Preferred dividends | (10 | ) | | — |
| |
Preferred dividends ($0.5625 per share) | | (10 | ) | | — |
| | — |
|
Balances June 30, 2018 | $ | 906,244 |
| | $ | (181,525 | ) | $ | 906,244 |
| | $ | (181,525 | ) | | $ | 5,234 |
|
| | | | | | | | |
Balances December 31, 2016 | $ | 901,415 |
| | $ | (230,246 | ) | |
Balances March 31, 2019 | | $ | 947,929 |
| | $ | (204,563 | ) | | $ | 5,924 |
|
Net income | 27,304 |
| | — |
| 40,112 |
| | — |
| | — |
|
Foreign currency translation adjustments | — |
| | 24,867 |
| — |
| | (385 | ) | | — |
|
Pension and post-retirement plan adjustments, net of tax of $2,043 | — |
| | 4,141 |
| |
(Income) loss attributable to noncontrolling interests | (359 | ) | | 1,463 |
| |
Pension and post-retirement plan adjustments, net of tax of $1,384 | | — |
| | 1,378 |
| | — |
|
Unrealized net gains on available-for-sale securities (Note 17) | | — |
| | 27 |
| | — |
|
Income attributable to noncontrolling interests | | (306 | ) | | 137 |
| | 169 |
|
Common dividends | (25,804 | ) | | — |
| (16,272 | ) | | — |
| | — |
|
Preferred dividends | (20 | ) | | — |
| |
Cumulative effect of the adoption of ASU 2016-16 (Note 2) | (5,915 | ) | | — |
| |
Balances June 30, 2017 | $ | 896,621 |
| | $ | (199,775 | ) | |
Preferred dividends ($0.5625 per share) | | (10 | ) | | — |
| | — |
|
Balances June 30, 2019 | | $ | 971,453 |
| | $ | (203,406 | ) | | $ | 6,093 |
|
| | | | | | | | |
Balances December 31, 2017 | $ | 868,675 |
| | $ | (171,762 | ) | $ | 868,675 |
| | $ | (171,762 | ) | | $ | 4,977 |
|
Net income | 65,910 |
| | — |
| 65,910 |
| | — |
| | — |
|
Foreign currency translation adjustments | — |
| | (14,480 | ) | — |
| | (14,480 | ) | | — |
|
Pension and post-retirement plan adjustments, net of tax of $1,682 | — |
| | 5,388 |
| — |
| | 5,388 |
| | — |
|
Reclassification from accumulated other comprehensive (loss) into earnings | — |
| | (774 | ) | |
(Income) loss attributable to noncontrolling interests | (360 | ) | | 103 |
| |
Reclassification from accumulated other comprehensive (loss) into net income | | — |
| | (774 | ) | | — |
|
Income attributable to noncontrolling interests | | (360 | ) | | 103 |
| | 257 |
|
Common dividends | (27,961 | ) | | — |
| (27,961 | ) | | — |
| | — |
|
Preferred dividends | (20 | ) | | — |
| |
Preferred dividends ($0.5625 per share) | | (20 | ) | | — |
| | — |
|
Balances June 30, 2018 | $ | 906,244 |
| | $ | (181,525 | ) | $ | 906,244 |
| | $ | (181,525 | ) | | $ | 5,234 |
|
| | | | | | |
Balances December 31, 2018 | | $ | 935,577 |
| | $ | (218,927 | ) | | $ | 5,637 |
|
Net income | | 63,488 |
| | — |
| | — |
|
Foreign currency translation adjustments | | — |
| | (24 | ) | | — |
|
Pension and post-retirement plan adjustments, net of tax of $2,050 | | — |
| | 3,401 |
| | — |
|
Unrealized net gains on available-for-sale securities (Note 17) | | — |
| | 563 |
| | — |
|
Reclassification of currency translation from accumulated other comprehensive (loss) into net income (Note 6) | | — |
| | 15,359 |
| | — |
|
Income attributable to noncontrolling interests | | (450 | ) | | (6 | ) | | 456 |
|
Common dividends | | (30,914 | ) | | — |
| | — |
|
Preferred dividends ($0.5625 per share) | | (20 | ) | | — |
| | — |
|
Reclassification due to the adoption of ASU 2018-02 (Note 2) | | 3,772 |
| | (3,772 | ) | | — |
|
Balances June 30, 2019 | | $ | 971,453 |
| | $ | (203,406 | ) | | $ | 6,093 |
|
The accompanying notes are an integral part of the consolidated financial statements.
MSA SAFETY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1—Basis of Presentation
The condensed consolidated financial statements of MSA Safety Incorporated and its subsidiaries ("MSA" or the "Company") are unaudited. These condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary by management to fairly state the Company's results. Intercompany accounts and transactions have been eliminated. The results reported in these condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. The December 31, 2017 condensed consolidated balance sheet2018 Condensed Consolidated Balance Sheet data was derived from the audited consolidated balance sheet, but does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP). This Form 10-Q report should be read in conjunction with MSA's Form 10-K for the year ended December 31, 2017,2018, which includes all disclosures required by U.S. GAAP.
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 unaudited Condensed 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 18—Contingencies).
Note 2—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 goods 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 method as of January 1, 2018. The majority of our revenue transactions consist of a single performance obligation to transfer promised goods or services. The adoption of this new standard did not impact the Company's consolidated statement of income or balance sheet and there was no cumulative effect of initially applying the standard to the opening balance of retained earnings. See Note 3—Significant Accounting Policies Update for further information on our updated revenue recognition policy.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. This ASU was adopted on January 1, 2017. This ASU applies only to inventory measured using the first-in, first-out (FIFO) or average cost methods and requires inventory to be measured at the lower of cost and net realizable value (NRV). This ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. The adoption of this ASU did not have a material effect on our condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to record a right of useright-of-use asset and a liability for virtually all leases. This ASU will be effective beginning January 1, 2019. The Company has developed a transition plan and continues to evaluate the impact that the adoption of this ASU will have on the consolidated financial statements. During 2017, we conducted a survey to identify all leases across the organization and are currently working to obtain all lease contracts to accumulate the necessary information for adoption. We have identified that a majority of our leases fall into one of three categories: office equipment, real estate and vehicles. We identified that most office equipment and vehicle leases utilize standard master leasing contracts that have similar terms. During the first six months of 2018, we selected a service provider to help us inventory and account for our leases and began gathering data necessary to prepare the transition accounting. Total assets and total liabilities will increase significantly in the period the ASU is adopted. At June 30, 2018, the Company's undiscounted future minimum rent commitments under noncancellable operating leases were approximately $39.4 million. We are still evaluating whether we will elect the practical expedients allowed in the standard.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU simplifies the accounting for many aspects associated with share-based payment accounting, including income taxes and the use of forfeiture rates. This ASU was adopted on January 1, 2017. The provisions2019, using the modified retrospective transition method at the adoption date. Comparative periods presented in our unaudited condensed consolidated financial statements are reported in accordance with ASC 840, Leases. In addition, the Company elected the package of this ASUpractical expedients permitted under the transition guidance within the new standard, which impactedamong other things, allowed us included a requirement that all excess tax benefits and deficiencies that pertain to share-based payment arrangements be recognized as a component of income tax expense rather than as a component of shareholders’ equity.carry forward the historical lease classification. The Company expectsalso 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 to create volatility in its effective tax rate on a go-forward basis as the impact is treated as a discrete item within our quarterly tax provision. The extent of excess tax benefits/deficiencies is subject to variation in our stock price and timing/extent of stock-based compensation share vestings and employee stock option exercises. This ASU also removes the impact of the excess tax benefits and deficiencies from the calculation of diluted earnings per share and no longer requires a presentation of excess tax benefits and deficiencies related to the vesting and exercise of share-based compensation as both an operating outflow and financing inflow on the statement of cash flows. We have applied all of these changes on a prospective basis and therefore, prior years were not adjusted. Additionally, this ASU allows for an accounting policy election to estimate the number of awards that are expected to vest or account for forfeitures when they occur. We elected to maintain our current forfeitures policy and will continue to include an estimate of those forfeitures when recognizing stock-based compensation expense. This ASU also requires cash payments to tax authorities when an employer uses a net-settlement feature to withhold shares to meet statutory tax withholding provisions to be presented as a financing activity (eliminating previous diversity in practice). ApplicationASU. Adoption of this ASU resulted in an additional discrete tax benefitthe recording of lease liabilities of approximately $1.9$54 million with the offset to lease right-of-use assets of $54 million. The standard did not materially impact our unaudited Condensed Consolidated Statement of Income and $6.8 million duringhad no impact on our unaudited Condensed Consolidated Statement of Cash Flows. The new standard also requires increased disclosures to help financial statement users better understand the six months ended June 30, 2018amount, timing and 2017, respectively.uncertainty of cash flows arising from leases. See additional disclosures in Note 14—Leases.
In June 2016, the FASB issued ASU 2016-13, Allowance for Loan and Lease 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 tradetrade/other receivables. This ASU will be effective beginning in 2020. Based on a review of its portfolio of financial instruments, the Company does not believehas developed a project plan and is in the process of assessing the impact that this ASU will have on our reserve for trade receivables as recorded in our unaudited Condensed Consolidated Balance Sheet. Additionally, we expect the adoption of this ASU will have a material impact on the condensed consolidated financial statements, but does expect the adoption to result in additional disclosures.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Payments and Cash Receipts. This ASU clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company's adoption of this ASU on January 1, 2018 did not have a material impact on our presentation of the condensed consolidated statement of cash flows.
In October 2016, the FASB issued ASU 2016-16, Intra-entity Transfers of Assets Other than Inventory. This ASU states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU was early adopted on January 1, 2017 using the modified retrospective approach which resulted in a $5.9 million cumulative-effect adjustment directly to retained earnings for any previously deferred income tax effects.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash. This ASU requires that amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted this ASU on January 1, 2018 using the retrospective method. The adoption of ASU 2016-18 had an impact on our financial statement presentation within the condensed consolidated statement of cash flows, as amounts generally described as restricted cash and restricted cash equivalents are now included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows and transfers of these amounts between balance sheet line items are no longer presented as an operating, investing or financing cash flow. For the six months ended June 30, 2017, cash flow used in financing activities increased by $0.4 million as a result of the adoption of this ASU. Furthermore, adoption of ASU 2016-18 resulted in additional disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations - Clarifying the Definition of a Business. This ASU provides further guidance for identifying whether a set of assets and activities is a business by providing a screen outlining that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This ASU was adopted beginning in 2018 and was applied prospectively. The adoption of this ASU may have a material effect on our condensed consolidated financial statements in the event that we have an acquisition or disposal that falls within this screen.
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. ThisThe Company adopted ASU is effective beginning in 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed after2017-04 on January 1, 2017. The2019 and adoption of this ASU may have a material effect on our unaudited condensed consolidated financial statements in the event that we determine that goodwill for any of our reporting units is impaired.
In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost, to improve the presentation of net periodic pension and net periodic post-retirement benefit cost. This ASU requires companies to present the service cost component of net periodic benefit cost in the same income statement line item as other compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. Additionally, this ASU requires that companies present the other components of the net periodic benefit cost separately from the line item that includes the service cost and outside of any subtotal of income from operations, if one is presented. This ASU is effective for annual periods beginning after December 15, 2017, and early adoption is permitted. The amendments in this ASU are to be applied retrospectively for presentation in the condensed consolidated statement of income and prospectively for the capitalization of the service cost component of net periodic pension cost and net periodic post-retirement benefit in assets. A practical expedient allows the Company to use the amount disclosed in its pension and other post-retirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company adopted ASU 2017-07 on January 1, 2018, using the retrospective method and elected to use the practical expedient. The adoption of this ASU resulted in a $2.2 million and $1.6 million decrease in operating income for the six months ended June 30, 2018 and 2017, respectively. The Company does not capitalize costs in assets so there is no impact from that provision of ASU 2017-07.
In May 2017, the FASB issued ASU 2017-09, Stock Compensation - Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements. This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. This ASU is effective for periods beginning after December 31, 2017. The Company's adoption of ASU on January 1, 2018, did not have a material effect on our condensed consolidated financial statements.
In January 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI"), which gives entities the option to reclassify to retained earnings the tax effects resulting from the new tax reform legislation commonly known as the Tax Cuts and Jobs Act ("the Act") related to items in AOCI that the FASB refers to as having been stranded in AOCI. The new guidance may be applied retrospectively to each period in which the effect of the Act is recognized in the period of adoption. The Company must adopt this guidance for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period the Act was enacted. The guidance, when adopted, will requireASU2018-02 requires new disclosures regarding a company’sthe Company’s accounting policy for releasing the tax effects in AOCIaccumulated other comprehensive loss and permit a companyallows the optionCompany 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 tax effects resulting fromsame amount.
In August 2018, the ActFASB 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 strandednot 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 AOCI. The Company has elected notunrealized 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. Further,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 unaudited condensed consolidated financial statements but does expect changes to our disclosures.
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 currently evaluating howeffective for fiscal years ending after December 15, 2020 and early adoption is permitted. The amendments in this ASU are required to apply the new guidance and has not determined whether or not it will electbe applied on a retrospective basis to reclassify stranded amounts, if any. As such, theall periods presented. The Company is still evaluating the impact that the adoption of ASU 2018-022018-14 will have on the unaudited condensed consolidated financial statements, but does expect changes to our disclosures.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which will now allow all cloud computing arrangements classified as service contracts to capitalize certain implementation costs in accordance with ASC 350-40, Intangibles - Goodwill and Other - Internal-Use Software, depending on the project stage within which the costs were incurred. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal periods. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period and the amendments can be applied either retrospectively or prospectively. In 2018, the Company adopted this ASU prospectively for all implementation costs incurred related to cloud computing arrangements and the implementation did not have a material impact on our unaudited condensed consolidated financial statements.
Note 3—Significant Accounting Policies Update
Revenue Recognition—We generate revenue primarily from manufacturing and selling a comprehensive line of safety products to protect the health and safety of workers and facility infrastructures around the world in the oil, gas and petrochemical, fire service, construction, utilities and mining industries. Our core safety products include fixed gas and flame detection instruments, breathing apparatus where SCBA is the principal product, portable gas detection instruments, industrial head protection products, firefighter helmets & protective apparel and fall protection devices. Our customers generally fall into two categories: distributors and industrial or military end-users. In our Americas segment, approximately 75% to 85% of our sales are made through distributors. In our International segment, approximately 55% to 65% of our sales are made through distributors. The underlying principles of revenue recognition are identical for both categories of customers and revenue is generally recognized at a point in time as described below.
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.
Refer to Note 9—Segment Information for disaggregation of revenue by segment and product group, as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
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 freight and shipping 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 Condensed Consolidated Statement of Income.
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 condensed 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 condensed consolidated balance sheet. Accordingly, during the period of contract performance, billings and costs are accumulated on the condensed 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 June 30, 2018, there were no material contract assets or contract liabilities recorded on the Condensed Consolidated Balance Sheet.
Practical Expedients and Exemptions
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses in our Condensed Consolidated Statement of Income.
Note 4—Inventories
The following table sets forth the components of inventory:
|
| | | | | | | | |
(In thousands) | | June 30, 2019 | | December 31, 2018 |
Finished products | | $ | 82,184 |
| | $ | 65,965 |
|
Work in process | | 10,996 |
| | 6,169 |
|
Raw materials and supplies | | 135,107 |
| | 124,554 |
|
Inventories at current cost | | 228,287 |
| | 196,688 |
|
Less: LIFO valuation | | (40,508 | ) | | (40,086 | ) |
Total inventories | | $ | 187,779 |
| | $ | 156,602 |
|
|
| | | | | | | | |
(In thousands) | | June 30, 2018 | | December 31, 2017 |
Finished products | | $ | 79,059 |
| | $ | 66,064 |
|
Work in process | | 7,542 |
| | 10,141 |
|
Raw materials and supplies | | 130,509 |
| | 117,388 |
|
Inventories at current cost | | 217,110 |
| | 193,593 |
|
Less: LIFO valuation | | (39,854 | ) | | (39,854 | ) |
Total inventories | | $ | 177,256 |
| | $ | 153,739 |
|
Note 5—4—Restructuring Charges
During the three and six months ended June 30, 2019, we recorded restructuring charges of $3.5 million and $9.4 million, respectively. International segment restructuring charges of $8.9 million during the six months ended June 30, 2019, 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 closure of our pension plan in the United Kingdom. Corporate segment restructuring charges of $0.4 million during the six months ended June 30, 2019, were related primarily to the legal and operational realignment of our U.S. and Canadian operations.
During the three and six months ended June 30, 2018, we recorded restructuring charges net of adjustments, of $2.3 million and $7.6 million, respectively. Americas segment restructuring charges of $0.6 million during the six months ended June 30, 2018, were related to severance costs for staff reductions in our Latin America Region. International segment restructuring charges of $3.5 million during the six months ended June 30, 2018, were primarily related to severance costs for staff reductions associated with our ongoing initiatives to drive profitable growth in Europe. Corporate segment restructuring charges of $3.5 million during the six months ended June 30, 2018, were related primarily to our ongoing review of the Company's legal structure to evaluate potential realignments to better facilitate the executionand operational realignment of our corporate strategy.
During the threeU.S. and six months ended June 30, 2017, we recorded restructuring charges, net of adjustments, of $1.0 million and $13.7 million, respectively. Americas segment restructuring charges of $12.4 million during the six months ended June 30, 2017, related primarily to a non-cash special termination benefit expense of $11.4 million for a voluntary retirement incentive package ("VRIP") as well as severance from staff reductions in Brazil. All benefits for the VRIP were paid from our over funded North America pension plan. International segment restructuring charges of $1.6 million during the six months ended June 30, 2017, were related to severance costs for staff reductions in Europe, Australia and Africa.Canadian operations.
Activity and reserve balances for restructuring charges by segment were as follows:
|
| | | | | | | | | | | | | | | |
(In millions) | Americas | | International | | Corporate | | Total |
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 | 0.1 |
| | 8.9 |
| | 0.4 |
| | 9.4 |
|
Currency translation and other adjustments | — |
| | (0.4 | ) | | — |
| | (0.4 | ) |
Cash payments/utilization | (0.2 | ) | | (5.6 | ) | | (0.4 | ) | | (6.2 | ) |
Reserve balances at June 30, 2019 | $ | 0.4 |
| | $ | 6.9 |
| | $ | — |
| | $ | 7.3 |
|
|
| | | | | | | | | | | | | | | |
(In millions) | Americas | | International | | Corporate | | Total |
Reserve balances at December 31, 2016 | $ | 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 | 0.6 |
| | 3.5 |
| | 3.5 |
| | 7.6 |
|
Currency translation and other adjustments | (0.2 | ) | | (0.3 | ) | | — |
| | (0.5 | ) |
Cash payments | (0.6 | ) | | (2.0 | ) | | (3.5 | ) | | (6.1 | ) |
Reserve balances at June 30, 2018 | $ | 0.3 |
| | $ | 4.8 |
| | $ | — |
| | $ | 5.1 |
|
Note 6—5—Property, Plant and Equipment
The following table sets forth the components of property, plant and equipment:
|
| | | | | | | |
(In thousands) | June 30, 2019 | | December 31, 2018 |
Land | $ | 3,047 |
| | $ | 3,188 |
|
Buildings | 119,819 |
| | 117,910 |
|
Machinery and equipment | 393,327 |
| | 386,690 |
|
Construction in progress | 28,687 |
| | 24,044 |
|
Total | 544,880 |
| | 531,832 |
|
Less: accumulated depreciation | (386,833 | ) | | (373,892 | ) |
Net property, plant and equipment | $ | 158,047 |
| | $ | 157,940 |
|
|
| | | | | | | |
(In thousands) | June 30, 2018 | | December 31, 2017 |
Land | $ | 3,244 |
| | $ | 3,312 |
|
Buildings | 119,238 |
| | 119,970 |
|
Machinery and equipment | 379,740 |
| | 379,747 |
|
Construction in progress | 11,675 |
| | 12,036 |
|
Total | 513,897 |
| | 515,065 |
|
Less: accumulated depreciation | (365,117 | ) | | (358,051 | ) |
Net property, plant and equipment | $ | 148,780 |
| | $ | 157,014 |
|
Note 7—6—Reclassifications Out of Accumulated Other Comprehensive Loss
We recognized non-cash cumulative translation losses of approximately $15.4 million, during the six months ended June 30, 2019, primarily as a result of the approval of our 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 (“CTA”), a separate component of accumulated other comprehensive loss within the equity section of the unaudited Condensed Consolidated Balance Sheet and has been reclassified into net income during the six months ended June 30, 2019.
Changes in accumulated other comprehensive loss were as follows:
| | | | MSA Safety Incorporated | | Noncontrolling Interests | | MSA Safety Incorporated | | Noncontrolling Interests |
| | Three Months Ended June 30, | | Three Months Ended June 30, | | Three Months Ended June 30, | | Three Months Ended June 30, |
(In thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Pension and other post-retirement benefits (a) | | | | | | | | | | | | | | | | |
Balance at beginning of period | | $ | (95,619 | ) | | $ | (116,084 | ) | | $ | — |
| | $ | — |
| | $ | (117,266 | ) | | $ | (95,619 | ) | | $ | — |
| | $ | — |
|
Amounts reclassified from Accumulated other comprehensive loss: | | | | | | | | | |
Amortization of prior service cost | | (131 | ) | | (109 | ) | | — |
| | — |
| |
Recognized net actuarial losses | | 3,804 |
| | 3,201 |
| | — |
| | — |
| |
Amounts reclassified from accumulated other comprehensive loss into net income: | | | | | | | | | |
Amortization of prior service credit (Note 15) | | | 11 |
| | (131 | ) | | — |
| | — |
|
Recognized net actuarial losses (Note 15) | | | 2,751 |
| | 3,804 |
| | — |
| | — |
|
Tax benefit | | (614 | ) | | (935 | ) | | — |
| | — |
| | (1,384 | ) | | (614 | ) | | — |
| | — |
|
Total amount reclassified from Accumulated other comprehensive loss, net of tax | | 3,059 |
| | 2,157 |
| | — |
| | — |
| |
Total amount reclassified from accumulated other comprehensive loss, net of tax, into net income | | | 1,378 |
| | 3,059 |
| | — |
| | — |
|
Balance at end of period | | | $ | (115,888 | ) | | $ | (92,560 | ) | | $ | — |
| | $ | — |
|
Available-for-sale securities | | | | | | | | | |
Balance at beginning of period | | | (36 | ) | | — |
| | — |
| | — |
|
Unrealized gains on available-for-sale securities (Note 17) | | | 27 |
| | — |
| | — |
| | — |
|
Balance at end of period | | $ | (92,560 | ) | | $ | (113,927 | ) | | $ | — |
| | $ | — |
| | $ | (9 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
Foreign Currency Translation | | | | | | | | | | | | | | | | |
Balance at beginning of period | | $ | (60,584 | ) | | $ | (100,808 | ) | | $ | 971 |
| | $ | (2,590 | ) | | (87,261 | ) | | (60,584 | ) | | 639 |
| | 971 |
|
Reclassification from accumulated other comprehensive loss into net income | | (774 | ) | | — |
| | — |
| | — |
| | — |
| | (774 | ) | | — |
| | — |
|
Foreign currency translation adjustments | | (27,607 | ) | | 14,960 |
| | (273 | ) | | (837 | ) | | $ | (248 | ) | | $ | (27,607 | ) | | $ | (137 | ) | | $ | (273 | ) |
Balance at end of period | | $ | (88,965 | ) | | $ | (85,848 | ) | | $ | 698 |
| | $ | (3,427 | ) | | $ | (87,509 | ) | | $ | (88,965 | ) | | $ | 502 |
| | $ | 698 |
|
|
| | | | | | | | | | | | | | | | |
| | MSA Safety Incorporated | | Noncontrolling Interests |
| | Six Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Pension and other post-retirement benefits (a) | | | | | | | | |
Balance at beginning of period | | $ | (115,517 | ) | | $ | (97,948 | ) | | $ | — |
| | $ | — |
|
Amounts reclassified from accumulated other comprehensive loss into net income: | | | | | | | | |
Amortization of prior service credit (Note 15) | | (94 | ) | | (213 | ) | | — |
| | — |
|
Recognized net actuarial losses (Note 15) | | 5,545 |
| | 7,283 |
| | — |
| | — |
|
Tax benefit | | (2,050 | ) | | (1,682 | ) | | — |
| | — |
|
Total amount reclassified from accumulated other comprehensive loss, net of tax, into net income | | 3,401 |
| | 5,388 |
| | — |
| | — |
|
Reclassification to retained earnings due to the adoption of ASU 2018-02 (Note 2) | | (3,772 | ) | | — |
| | — |
| | — |
|
Balance at end of period | | $ | (115,888 | ) | | $ | (92,560 | ) | | $ | — |
| | $ | — |
|
Available-for-sale securities | | | | | | | | |
Balance at beginning of period | | $ | (572 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
Unrealized gains on available-for-sale securities (Note 17) | | 563 |
| | — |
| | — |
| | — |
|
Balance at end of period | | $ | (9 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
Foreign Currency Translation | | | | | | | | |
Balance at beginning of period | | $ | (102,838 | ) | | $ | (73,814 | ) | | $ | 496 |
| | $ | 801 |
|
Reclassification from accumulated other comprehensive loss into net income | | 15,359 |
| (b) | (774 | ) | | — |
| | — |
|
Foreign currency translation adjustments | | (30 | ) | | (14,377 | ) | | 6 |
| | (103 | ) |
Balance at end of period | | $ | (87,509 | ) | | $ | (88,965 | ) | | $ | 502 |
| | $ | 698 |
|
(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 16—15—Pensions and Other Post-RetirementPost-retirement Benefits).
|
| | | | | | | | | | | | | | | | |
| | MSA Safety Incorporated | | Noncontrolling Interests |
| | Six Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Pension and other post-retirement benefits (a) | | | | | | | | |
Balance at beginning of period | | $ | (97,948 | ) | | $ | (118,068 | ) | | $ | — |
| | $ | — |
|
Amounts reclassified from Accumulated other comprehensive loss: | | | | | | | | |
Amortization of prior service cost | | (213 | ) | | (218 | ) | | — |
| | — |
|
Recognized net actuarial losses | | 7,283 |
| | 6,402 |
| | — |
| | — |
|
Tax benefit | | (1,682 | ) | | (2,043 | ) | | — |
| | — |
|
Total amount reclassified from Accumulated other comprehensive loss, net of tax | | 5,388 |
| | 4,141 |
| | — |
| | — |
|
Balance at end of period | | $ | (92,560 | ) | | $ | (113,927 | ) | | $ | — |
| | $ | — |
|
Foreign Currency Translation | | | | | | | | |
Balance at beginning of period | | $ | (73,814 | ) | | $ | (112,178 | ) | | $ | 801 |
| | $ | (1,964 | ) |
Reclassification from accumulated other comprehensive loss into net income | | (774 | ) | | — |
| | — |
| | — |
|
Foreign currency translation adjustments | | (14,377 | ) | | 26,330 |
| | (103 | ) | | (1,463 | ) |
Balance at end of period | | $ | (88,965 | ) | | $ | (85,848 | ) | | $ | 698 |
| | $ | (3,427 | ) |
(a)(b) 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 within the computationunaudited Condensed Consolidated Statement of net periodic pension and other post-retirement benefit costs (refer to Note 16—Pensions and Other Post-Retirement Benefits).Income.
Note 8—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 are 71,340 shares issued and 52,878 shares held in treasury at June 30, 2018.2019. The Treasury shares at cost line on the unaudited Condensed Consolidated Balance Sheet includes $1.8 million related to preferred stock. There were no treasury purchases of preferred stock during the six months ended June 30, 20182019 or 2017.2018. The Company has also authorized 1,000,000 shares of $10 par value second cumulative preferred voting stock. No shares have been issued as of June 30, 2018.2019.
Common Stock - The Company has authorized 180,000,000 shares of no par value common stock. There were 62,081,391 shares issued as of December 31, 2017.2018. No new shares have beenwere issued induring the six months ended June 30, 2019 or 2018. There were 38,420,34038,711,509 and 38,222,92838,526,523 shares outstanding at June 30, 2018,2019, and December 31, 2017,2018, respectively.
Treasury Shares - On May 12, 2015, the Board of Directors adopted a stockThe Company's share repurchase program replacing the existing program. The program authorizes up to $100.0 million to repurchase 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. During the six months ended June 30, 2019, 33,465 shares were repurchased under this program. No shares were repurchased under the program during the six months ended June 30, 2018 or 2017.2018. We do not have any other share repurchase programs. There were 23,661,05123,369,882 and 23,858,46323,554,868 Treasury Shares at June 30, 2018,2019, and December 31, 2017,2018, respectively.
The Company issues Treasury Shares for all share based benefit plans. Shares are issued from Treasury at the average Treasury Share cost on the date of the transaction. There were 241,732293,556 and 514,704241,732 Treasury Shares issued for these purposes during the six months ended June 30, 2019 and 2018, and 2017, respectively.
Common stock activity is summarized as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
(In thousands) | Common Stock | | Treasury Cost | | Common Stock | | Treasury Cost |
Balance at beginning of period | $ | 213,099 |
| | $ | (300,919 | ) | | $ | 200,002 |
| | $ | (297,350 | ) |
Stock compensation expense | 3,340 |
| | — |
| | 2,085 |
| | — |
|
Restricted and performance stock awards | (232 | ) | | 232 |
| | (399 | ) | | 399 |
|
Stock options exercised | 1,372 |
| | 395 |
| | 2,246 |
| | 1,200 |
|
Treasury shares purchased | — |
| | (148 | ) | | — |
| | (1,162 | ) |
Stock consideration in acquisition (Note 19) | 921 |
| | — |
| | — |
| | — |
|
Employee stock purchase program | 301 |
| | 43 |
| | 237 |
| | 43 |
|
Share repurchase program | — |
| | (3,347 | ) | | — |
| | — |
|
Balance at end of period | $ | 218,801 |
| | $ | (303,744 | ) | | $ | 204,171 |
| | $ | (296,870 | ) |
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2018 |
(In thousands) | Common Stock | | Treasury Cost | | Common Stock | | Treasury Cost |
Balance at beginning of period | $ | 211,806 |
| | $ | (296,390 | ) | | $ | 194,953 |
| | $ | (296,081 | ) |
Stock compensation expense | 6,086 |
| | — |
| | 7,692 |
| | — |
|
Restricted and performance stock awards | (2,643 | ) | | 2,643 |
| | (1,501 | ) | | 1,501 |
|
Stock options exercised | 2,330 |
| | 902 |
| | 2,790 |
| | 1,502 |
|
Treasury shares purchased | — |
| | (7,595 | ) | | — |
| | (3,835 | ) |
Stock consideration in acquisition (Note 19) | 921 |
| | — |
| | — |
| | — |
|
Employee stock purchase program | 301 |
| | 43 |
| | 237 |
| | 43 |
|
Share repurchase program | — |
| | (3,347 | ) | | — |
| | — |
|
Balance at end of period | $ | 218,801 |
| | $ | (303,744 | ) | | $ | 204,171 |
| | $ | (296,870 | ) |
Note 9—8—Segment Information
We are organized into sevensix geographic operating segments based on management responsibilities. The operating segments have been aggregated (based on economic similarities, the nature of their products, end-user markets and methods of distribution) into three 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 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.
The Company's sales are allocated to each country based primarily on the destination of the end-customer.
Adjusted operating income (loss), adjusted operating margin, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and adjusted operatingEBITDA 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, other operatingproduct liability expense and strategic transaction costs. Adjustedcosts and adjusted operating margin is defined as adjusted operating income (loss) divided by segment sales to external customers. Adjusted EBITDA is defined as adjusted operating income (loss) plus depreciation and amortization and adjusted EBITDA margin is defined as adjusted EBITDA divided by segment 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 operatingEBITDA 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 unaudited Condensed 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.
Reportable segment information is presented in the following table:
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Americas | | International | | Corporate | | Reconciling Items1 | | Consolidated Totals |
Three Months Ended June 30, 2018 | | | | | | | | | | |
Sales to external customers | | $ | 215,339 |
| | $ | 123,992 |
| | $ | — |
| | $ | — |
| | $ | 339,331 |
|
Intercompany sales | | 36,445 |
| | 84,514 |
| | — |
| | (120,959 | ) | | — |
|
Operating income | | | | | | | | | | 46,797 |
|
Restructuring charges (Note 5) | | | | | | | | | | 2,335 |
|
Currency exchange losses, net | | | | | | | | | | 815 |
|
Other operating expense (Note 19) | | | | | | | | | | 8,018 |
|
Strategic transaction costs (Note 15) | | | | | | | | | | 58 |
|
Adjusted operating income (loss) | | 49,838 |
| | 15,853 |
| | (7,668 | ) | | — |
| | 58,023 |
|
Adjusted operating margin % | | 23.1 | % | | 12.8 | % | | | | | | |
Six Months Ended June 30, 2018 | | | | | | | | | | |
Sales to external customers | | $ | 424,468 |
| | $ | 240,757 |
| | $ | — |
| | $ | — |
| | $ | 665,225 |
|
Intercompany sales | | 70,643 |
| | 166,893 |
| |
|
| | (237,536 | ) | | — |
|
Operating income | | | | | | | | | | 91,232 |
|
Restructuring charges (Note 5) | | | | | | | | | | 7,609 |
|
Currency exchange losses, net | | | | | | | | | | 2,823 |
|
Other operating expense (Note 19) | | | | | | | | | | 10,842 |
|
Strategic transaction costs (Note 15) | | | | | | | | | | 152 |
|
Adjusted operating income (loss) | | 99,924 |
| | 28,631 |
| | (15,897 | ) | | — |
| | 112,658 |
|
Adjusted operating margin % | | 23.5 | % | | 11.9 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands, except percentage amounts) | | Americas | | International | | Corporate | | Reconciling Items1 | | Consolidated Totals |
Three Months Ended June 30, 2019 | | | | | | | | | | |
Sales to external customers | | $ | 231,389 |
| | $ | 118,286 |
| | $ | — |
| | $ | — |
| | $ | 349,675 |
|
Intercompany sales | | 148,776 |
| | 77,454 |
| | — |
| | (226,230 | ) | | — |
|
Operating income | | | | | | | | | | 54,478 |
|
Restructuring charges (Note 4) | | | | | | | | | | 3,522 |
|
Currency exchange losses, net (Note 6) | | | | | | | | | | 1,290 |
|
Product liability expense (Note 18) | | | | | | | | | | 3,529 |
|
Strategic transaction costs (Note 19) | | | | | | | | | | 1,529 |
|
Adjusted operating income (loss) | | 57,689 |
| | 15,072 |
| | (8,413 | ) | | — |
| | 64,348 |
|
Adjusted operating margin % | | 24.9 | % | | 12.7 | % | | | | | | |
Depreciation and amortization | | | | | | | | | | 9,466 |
|
Adjusted EBITDA | | 63,842 |
| | 18,288 |
| | (8,316 | ) | | — |
| | 73,814 |
|
Adjusted EBITDA % | | 27.6 | % | | 15.5 | % | | | | | | |
Six Months Ended June 30, 2019 | | | | | | | | | | |
Sales to external customers | | $ | 445,076 |
| | $ | 230,637 |
| | $ | — |
| | $ | — |
| | $ | 675,713 |
|
Intercompany sales | | 308,038 |
| | 156,783 |
| | — |
| | (464,821 | ) | | — |
|
Operating income | | | | | | | | | | 86,638 |
|
Restructuring charges (Note 4) | | | | | | | | | | 9,353 |
|
Currency exchange losses, net (Note 6) | | | | | | | | | | 18,251 |
|
Product liability expense (Note 18) | | | | | | | | | | 6,425 |
|
Strategic transaction costs (Note 19) | | | | | | | | | | 1,985 |
|
Adjusted operating income (loss) | | 112,492 |
| | 26,112 |
| | (15,952 | ) | | — |
| | 122,652 |
|
Adjusted operating margin % | | 25.3 | % | | 11.3 | % | | | | | | |
Depreciation and amortization | | | | | | | | | | 18,792 |
|
Adjusted EBITDA | | 124,742 |
| | 32,459 |
| | (15,757 | ) | | — |
| | 141,444 |
|
Adjusted EBITDA % | | 28.0 | % | | 14.1 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Americas | | International | | Corporate | | Reconciling Items1 | | Consolidated Totals |
Three Months Ended June 30, 2017 | | | | | | | | | | |
Sales to external customers | | $ | 174,960 |
| | $ | 113,815 |
| | $ | — |
| | $ | — |
| | $ | 288,775 |
|
Intercompany sales | | 32,264 |
| | 75,575 |
| | — |
| | (107,839 | ) | | — |
|
Operating income | | | | | | | | | | 13,498 |
|
Restructuring charges (Note 5) | | | | | | | | | | 967 |
|
Currency exchange losses, net | | | | | | | | | | 2,851 |
|
Other operating expense (Note 19) | | | | | | | | | | 29,610 |
|
Strategic transaction costs (Note 15) | | | | | | | | | | 1,642 |
|
Adjusted operating income (loss) | | 43,573 |
| | 12,122 |
| | (7,127 | ) | | — |
| | 48,568 |
|
Adjusted operating margin % | | 24.9 | % | | 10.7 | % | | | | | | |
Six Months Ended June 30, 2017 | | | | | | | | | | |
Sales to external customers | | $ | 341,528 |
| | $ | 213,012 |
| | $ | — |
| | $ | — |
| | $ | 554,540 |
|
Intercompany sales | | 62,453 |
| | 145,771 |
| | — |
| | (208,224 | ) | | — |
|
Operating income | | | | | | | | | | 32,117 |
|
Restructuring charges (Note 5) | | | | | | | | | �� | 13,706 |
|
Currency exchange losses, net | | | | | | | | | | 3,431 |
|
Other operating expense (Note 19) | | | | | | | | | | 29,610 |
|
Strategic transaction costs (Note 15) | | | | | | | | | | 2,979 |
|
Adjusted operating income (loss) | | 79,724 |
| | 19,918 |
| | (17,799 | ) | | — |
| | 81,843 |
|
Adjusted operating margin % | | 23.3 | % | | 9.4 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands, except percentage amounts) | | Americas | | International | | Corporate | | Reconciling Items1 | | Consolidated Totals |
Three Months Ended June 30, 2018 | | | | | | | | | | |
Sales to external customers | | $ | 215,339 |
| | $ | 123,992 |
| | $ | — |
| | $ | — |
| | $ | 339,331 |
|
Intercompany sales | | 36,445 |
| | 84,514 |
| |
|
| | (120,959 | ) | | — |
|
Operating income | | | | | | | | | | 46,797 |
|
Restructuring charges (Note 4) | | | | | | | | | | 2,335 |
|
Currency exchange losses, net (Note 6) | | | | | | | | | | 815 |
|
Product liability expense (Note 18) | | | | | | | | | | 8,018 |
|
Strategic transaction costs (Note 19) | | | | | | | | | | 58 |
|
Adjusted operating income (loss) | | 49,838 |
| | 15,853 |
| | (7,668 | ) | | — |
| | 58,023 |
|
Adjusted operating margin % | | 23.1 | % | | 12.8 | % | | | | | | |
Depreciation and amortization | | | | | | | | | | 9,536 |
|
Adjusted EBITDA | | 55,894 |
| | 19,233 |
| | (7,568 | ) | |
| | 67,559 |
|
Adjusted EBITDA % | | 26.0 | % | | 15.5 | % | | | | | | |
Six Months Ended June 30, 2018 | | | | | | | | | | |
Sales to external customers | | $ | 424,468 |
| | $ | 240,757 |
| | $ | — |
| | $ | — |
| | $ | 665,225 |
|
Intercompany sales | | 70,643 |
| | 166,893 |
| | — |
| | (237,536 | ) | | — |
|
Operating income | | | | | | | | | | 91,232 |
|
Restructuring charges (Note 4) | | | | | | | | | | 7,609 |
|
Currency exchange losses, net (Note 6) | | | | | | | | | | 2,823 |
|
Product liability expense (Note 18) | | | | | | | | | | 10,842 |
|
Strategic transaction costs | | | | | | | | | | 152 |
|
Adjusted operating income (loss) | | 99,924 |
| | 28,631 |
| | (15,897 | ) | | — |
| | 112,658 |
|
Adjusted operating margin % | | 23.5 | % | | 11.9 | % | | | | | | |
Depreciation and amortization | | | | | | | | | | 19,207 |
|
Adjusted EBITDA | | 112,119 |
| | 35,441 |
| | (15,695 | ) | | | | 131,865 |
|
Adjusted EBITDA % | | 26.4 | % | | 14.7 | % | | | | | | |
1Reconciling items consist primarily of intercompany eliminations and items not directly attributable to reporting segments.
Total sales by product group was as follows:
|
| | | | | | | | | | | | | | |
Three Months Ended June 30, 2019 | Consolidated | | Americas | | International |
(In thousands, except percentages) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
Breathing Apparatus | $ | 74,907 |
| 22% | | $ | 50,584 |
| 22% | | $ | 24,323 |
| 21% |
Fixed Gas & Flame Detection | 70,310 |
| 20% | | 39,118 |
| 17% | | 31,192 |
| 26% |
Firefighter Helmets & Protective Apparel | 48,799 |
| 14% | | 39,091 |
| 17% | | 9,708 |
| 8% |
Portable Gas Detection | 42,343 |
| 12% | | 33,844 |
| 13% | | 8,499 |
| 7% |
Industrial Head Protection | 38,921 |
| 11% | | 25,045 |
| 12% | | 13,876 |
| 12% |
Fall Protection | 31,629 |
| 9% | | 18,720 |
| 8% | | 12,909 |
| 11% |
Other | 42,766 |
| 12% | | 24,987 |
| 11% | | 17,779 |
| 15% |
Total | $ | 349,675 |
| 100% | | $ | 231,389 |
| 100% | | $ | 118,286 |
| 100% |
| | | | | | | | |
Six Months Ended June 30, 2019 | Consolidated | | Americas | | International |
(In thousands, except percentages) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
Breathing Apparatus | $ | 150,354 |
| 22% | | $ | 101,489 |
| 23% | | $ | 48,865 |
| 21% |
Fixed Gas & Flame Detection | 130,709 |
| 19% | | 72,048 |
| 16% | | 58,661 |
| 25% |
Firefighter Helmets & Protective Apparel | 92,376 |
| 14% | | 74,155 |
| 17% | | 18,221 |
| 8% |
Portable Gas Detection | 83,069 |
| 12% | | 55,458 |
| 12% | | 27,611 |
| 12% |
Industrial Head Protection | 74,665 |
| 12% | | 58,258 |
| 13% | | 16,407 |
| 7% |
Fall Protection | 61,756 |
| 9% | | 36,680 |
| 8% | | 25,076 |
| 11% |
Other | 82,784 |
| 12% | | 46,988 |
| 11% | | 35,796 |
| 16% |
Total | $ | 675,713 |
| 100% | | $ | 445,076 |
| 100% | | $ | 230,637 |
| 100% |
|
| | | | | | | | | | | | | | |
Three Months Ended June 30, 2018 | Americas | | International | | Consolidated |
(In thousands) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
Breathing Apparatus | $ | 46,678 |
| 22% | | $ | 28,605 |
| 23% | | $ | 75,283 |
| 22% |
Fixed Gas & Flame Detection | 33,128 |
| 15% | | 30,471 |
| 25% | | 63,599 |
| 19% |
Firefighter Helmets & Protective Apparel | 37,779 |
| 18% | | 8,897 |
| 7% | | 46,676 |
| 14% |
Portable Gas Detection | 27,137 |
| 13% | | 14,170 |
| 11% | | 41,307 |
| 12% |
Industrial Head Protection | 31,151 |
| 14% | | 8,488 |
| 7% | | 39,639 |
| 12% |
Fall Protection | 15,094 |
| 7% | | 10,958 |
| 9% | | 26,052 |
| 8% |
Other | 24,372 |
| 11% | | 22,403 |
| 18% | | 46,775 |
| 13% |
Total | $ | 215,339 |
| 100% | | $ | 123,992 |
| 100% | | $ | 339,331 |
| 100% |
| | | | | | | | |
Six Months Ended June 30, 2018 | Americas | | International | | Consolidated |
(In thousands) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
Breathing Apparatus | $ | 96,012 |
| 23% | | $ | 53,889 |
| 22% | | $ | 149,901 |
| 23% |
Fixed Gas & Flame Detection | 65,654 |
| 15% | | 58,876 |
| 24% | | 124,530 |
| 19% |
Firefighter Helmets & Protective Apparel | 72,533 |
| 17% | | 18,626 |
| 8% | | 91,159 |
| 14% |
Portable Gas Detection | 55,899 |
| 13% | | 27,635 |
| 11% | | 83,534 |
| 13% |
Industrial Head Protection | 58,992 |
| 14% | | 15,602 |
| 6% | | 74,594 |
| 11% |
Fall Protection | 29,203 |
| 7% | | 22,554 |
| 9% | | 51,757 |
| 8% |
Other | 46,175 |
| 11% | | 43,575 |
| 20% | | 89,750 |
| 12% |
Total | $ | 424,468 |
| 100% | | $ | 240,757 |
| 100% | | $ | 665,225 |
| 100% |
|
| | | | | | | | | | | | | | |
Three Months Ended June 30, 2018 | Consolidated | | Americas | | International |
(In thousands, except percentages) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
Breathing Apparatus | $ | 75,283 |
| 22% | | $ | 46,678 |
| 22% | | $ | 28,605 |
| 23% |
Fixed Gas & Flame Detection | 63,599 |
| 19% | | 33,128 |
| 15% | | 30,471 |
| 25% |
Firefighter Helmets & Protective Apparel | 46,676 |
| 14% | | 37,779 |
| 18% | | 8,897 |
| 7% |
Portable Gas Detection | 41,307 |
| 12% | | 27,137 |
| 13% | | 14,170 |
| 11% |
Industrial Head Protection | 39,639 |
| 12% | | 31,151 |
| 14% | | 8,488 |
| 7% |
Fall Protection | 26,052 |
| 8% | | 15,094 |
| 7% | | 10,958 |
| 9% |
Other | 46,775 |
| 13% | | 24,372 |
| 11% | | 22,403 |
| 18% |
Total | $ | 339,331 |
| 100% | | $ | 215,339 |
| 100% | | $ | 123,992 |
| 100% |
| | | | | | | | |
Six Months Ended June 30, 2018 | Consolidated | | Americas | | International |
(In thousands, except percentages) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
Breathing Apparatus | $ | 149,901 |
| 23% | | $ | 96,012 |
| 23% | | $ | 53,889 |
| 22% |
Fixed Gas & Flame Detection | 124,530 |
| 19% | | 65,654 |
| 15% | | 58,876 |
| 24% |
Firefighter Helmets & Protective Apparel | 91,159 |
| 14% | | 72,533 |
| 17% | | 18,626 |
| 8% |
Portable Gas Detection | 83,534 |
| 13% | | 55,899 |
| 13% | | 27,635 |
| 11% |
Industrial Head Protection | 74,594 |
| 11% | | 58,992 |
| 14% | | 15,602 |
| 6% |
Fall Protection | 51,757 |
| 8% | | 29,203 |
| 7% | | 22,554 |
| 9% |
Other | 89,750 |
| 12% | | 46,175 |
| 11% | | 43,575 |
| 20% |
Total | $ | 665,225 |
| 100% | | $ | 424,468 |
| 100% | | $ | 240,757 |
| 100% |
|
| | | | | | | | | | | | | | |
Three Months Ended June 30, 2017 | Americas | | International | | Consolidated |
(In thousands) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
Breathing Apparatus | $ | 45,269 |
| 26% | | $ | 25,124 |
| 22% | | $ | 70,393 |
| 24% |
Fixed Gas & Flame Detection | 30,660 |
| 18% | | 29,515 |
| 26% | | 60,175 |
| 21% |
Firefighter Helmets & Protective Apparel | 5,676 |
| 3% | | 8,385 |
| 7% | | 14,061 |
| 5% |
Portable Gas Detection | 24,669 |
| 14% | | 12,346 |
| 11% | | 37,015 |
| 13% |
Industrial Head Protection | 28,205 |
| 16% | | 7,792 |
| 7% | | 35,997 |
| 12% |
Fall Protection | 14,262 |
| 8% | | 11,250 |
| 10% | | 25,512 |
| 9% |
Other | 26,219 |
| 15% | | 19,403 |
| 17% | | 45,622 |
| 16% |
Total | $ | 174,960 |
| 100% | | $ | 113,815 |
| 100% | | $ | 288,775 |
| 100% |
| | | | | | | | |
Six Months Ended June 30, 2017 | Americas | | International | | Consolidated |
(In thousands) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
Breathing Apparatus | $ | 93,959 |
| 28% | | $ | 44,679 |
| 21% | | $ | 138,638 |
| 25% |
Fixed Gas & Flame Detection | 58,639 |
| 17% | | 52,317 |
| 25% | | 110,956 |
| 20% |
Firefighter Helmets & Protective Apparel | 11,778 |
| 3% | | 16,688 |
| 8% | | 28,466 |
| 5% |
Portable Gas Detection | 49,683 |
| 15% | | 23,838 |
| 11% | | 73,521 |
| 13% |
Industrial Head Protection | 52,964 |
| 16% | | 13,909 |
| 7% | | 66,873 |
| 12% |
Fall Protection | 25,490 |
| 7% | | 21,965 |
| 10% | | 47,455 |
| 9% |
Other | 49,015 |
| 14% | | 39,616 |
| 18% | | 88,631 |
| 16% |
Total | $ | 341,528 |
| 100% | | $ | 213,012 |
| 100% | | $ | 554,540 |
| 100% |
Note 10—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: | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands, except per share amounts) | | 2019 | | 2018 | | 2019 | | 2018 |
Net income | | $ | 39,806 |
| | $ | 33,179 |
| | $ | 63,038 |
| | $ | 65,550 |
|
Preferred stock dividends | | (10 | ) | | (10 | ) | | (20 | ) | | (20 | ) |
Net income available to common equity | | 39,796 |
| | 33,169 |
| | 63,018 |
| | 65,530 |
|
Dividends and undistributed earnings allocated to participating securities | | (49 | ) | | (31 | ) | | (71 | ) | | (63 | ) |
Net income available to common shareholders | | 39,747 |
| | 33,138 |
| | 62,947 |
| | 65,467 |
|
| | | | | | | | |
Basic weighted-average shares outstanding | | 38,663 |
| | 38,327 |
| | 38,602 |
| | 38,272 |
|
Stock options and other stock compensation | | 497 |
| | 576 |
| | 522 |
| | 569 |
|
Diluted weighted-average shares outstanding | | 39,160 |
| | 38,903 |
| | 39,124 |
| | 38,841 |
|
Antidilutive stock options | | — |
| | — |
| | — |
| | — |
|
| | | | | | | | |
Earnings per share: | | | | | | | | |
Basic | | $ | 1.03 |
| | $ | 0.86 |
| | $ | 1.63 |
| | $ | 1.71 |
|
Diluted | | $ | 1.01 |
| | $ | 0.85 |
| | $ | 1.61 |
| | $ | 1.69 |
|
|
| | | | | | | | | | | | | | | | |
Amounts attributable to MSA Safety Incorporated common shareholders: | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands, except per share amounts) | | 2018 | | 2017 | | 2018 | | 2017 |
Net income | | $ | 33,179 |
| | $ | 12,532 |
| | $ | 65,550 |
| | $ | 26,945 |
|
Preferred stock dividends | | (10 | ) | | (10 | ) | | (20 | ) | | (20 | ) |
Net income available to common equity | | 33,169 |
| | 12,522 |
| | 65,530 |
| | 26,925 |
|
Dividends and undistributed earnings allocated to participating securities | | (31 | ) | | (10 | ) | | (63 | ) | | (26 | ) |
Net income available to common shareholders | | 33,138 |
| | 12,512 |
| | 65,467 |
| | 26,899 |
|
| | | | | | | | |
Basic weighted-average shares outstanding | | 38,327 |
| | 38,065 |
| | 38,272 |
| | 37,914 |
|
Stock options and other stock compensation | | 576 |
| | 715 |
| | 569 |
| | 771 |
|
Diluted weighted-average shares outstanding | | 38,903 |
| | 38,780 |
| | 38,841 |
| | 38,685 |
|
Antidilutive stock options | | — |
| | — |
| | — |
| | — |
|
| | | | | | | | |
Earnings per share: | | | | | | | | |
Basic | | $ | 0.86 |
| | $ | 0.33 |
| | $ | 1.71 |
| | $ | 0.71 |
|
Diluted | | $ | 0.85 |
| | $ | 0.32 |
| | $ | 1.69 |
| | $ | 0.70 |
|
Note 11—10—Income Taxes
The Tax CutsCompany's effective tax rate for the second quarter of 2019 was 24.8% and Jobs Act of 2017 ("the Act"), which was signed into law on December 22, 2017, has resulted in significant changes todiffers from the U.S. corporate incomefederal statutory rate of 21% primarily due to increased profitability in less favorable tax system including reducing the U.S. corporate rate to 21% startingjurisdictions and higher foreign entity losses in 2018. The Act also creates a territorialjurisdictions where we cannot take 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 U.S. 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. In addition, deferred taxes have been recorded on the outside basis differences of non-U.S. subsidiaries in the amount of $7.8 million, fully offset by foreign tax credits. We have made no adjustments to those amounts during the six months ended June 30, 2018. Changes to applicable tax law, regulations or interpretations of the Act may require further adjustments and changes in our estimates. The final determination of the transition tax and the revaluation of U.S. deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the Act.
benefits. The Company's effective tax rate for the second quarter of 2018 was 22.8% and, which differs from the U.S. federal statutory rate of 21% primarily due to increased profitability in less favorable tax jurisdictions and higher foreign entity losses in jurisdictions where we cannot take tax benefits, partially offset by a tax benefit of approximately 2.2% related to certain share-based payments related to the application of ASU 2016-09. The Company's effective tax rate for the second quarter of 2017 was a benefit of 7.7%, which differs from the U.S. federal statutory rate of 35% primarily due to a significant tax benefit of approximately 34.4% related to certain share-based payments related to the application of ASU 2016-09 as well as increased profitability in more favorable tax jurisdictions and benefits associated with U.S. tax credits for research and development and the manufacturing deduction.
The Company's effective tax rate for the six months ended June 30, 2018,2019, was 22.7%25.9% and differs from the U.S. federal statutory rate of 21% primarily due to increased profitability in less favorable tax jurisdictions and higher foreign entity losses in jurisdictions where we cannot take tax benefits and non-deductible foreign exchange on entity closures partially offset by a tax benefit of approximately 2.2% related to certain share-based payments related to the application of ASU 2016-09. The Company's effective tax rate for the six months ended June 30, 2017,2018, was 3.2%22.7% which differs from the U.S. federal statutory rate of 35%21% primarily due to higher profitability in less favorable tax jurisdictions and a significantcharge for Global Intangible Low-Taxed Income (GILTI), partially offset a tax benefit of approximately 24.2% related to certain share-based payments related to the application of ASU 2016-09 as well as increased profitability in more favorable tax jurisdictions, reduced foreign entity losses in jurisdictions where we cannot take tax benefits and benefits associated with U.S. tax credits for research and development and the manufacturing deduction.2016-09.
At June 30, 2018,2019, the Company had a gross liability for unrecognized tax benefits of $14.6$13.4 million. The Company has recognized tax benefits associated with these liabilities of $5.2 million at June 30, 2018.2019. The gross liability includes amounts associated with prior period foreign tax exposure.
The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company's liability for accrued interest related to uncertain tax positions was $2.8$1.8 million at June 30, 2018.2019.
Note 12—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 includes stock options, restricted stock, 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 19 - 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. We issue treasury shares for stock option exercises, and grants of restricted stock and performance stock. Please refer to Note 8—7—Capital Stock for further information regarding stock compensation share issuance.
Stock compensation expense is as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Stock compensation expense | | $ | 3,340 |
| | $ | 2,085 |
| | $ | 6,086 |
| | $ | 7,692 |
|
Income tax benefit | | 815 |
| | 507 |
| | 1,485 |
| | 1,869 |
|
Stock compensation expense, net of income tax benefit | | $ | 2,525 |
| | $ | 1,578 |
| | $ | 4,601 |
| | $ | 5,823 |
|
Stock options are granted at market value option prices and expire after ten years. Stock options are exercisable beginning three years after the grant date. 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.
|
| | | | |
| | 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 the U.S. Treasury yield curve. Expected dividend yield is based on the most recent annualized dividend divided by the 1 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.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Stock compensation expense | | $ | 2,085 |
| | $ | 1,908 |
| | $ | 7,692 |
| | $ | 8,233 |
|
Income tax benefit | | 507 |
| | 721 |
| | 1,869 |
| | 3,107 |
|
Stock compensation expense, net of income tax benefit | | $ | 1,578 |
| | $ | 1,187 |
| | $ | 5,823 |
| | $ | 5,126 |
|
A summary of stock option activity for the six months ended June 30, 2018,2019, follows:
|
| | | | | | | |
| | Shares | | Weighted Average Exercise Price |
Outstanding at January 1, 2019 | | 735,001 |
| | $ | 43.79 |
|
Granted (Note 19) | | 23,285 |
| | 43.54 |
|
Exercised | | (87,619 | ) | | 38.09 |
|
Outstanding at June 30, 2019 | | 670,667 |
| | 44.53 |
|
Exercisable at June 30, 2019 | | 657,453 |
| | $ | 44.56 |
|
|
| | | | | | | |
| | Shares | | Weighted Average Exercise Price |
Outstanding at January 1, 2018 | | 955,446 |
| | $ | 42.75 |
|
Exercised | | (118,957 | ) | | 36.09 |
|
Forfeited | | (3,358 | ) | | 44.50 |
|
Outstanding at June 30, 2018 | | 833,131 |
| | 43.72 |
|
Exercisable at June 30, 2018 | | 719,299 |
| | $ | 43.59 |
|
Restricted stock 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 for the six months ended June 30, 2018,2019, follows:
|
| | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
Unvested at January 1, 2019 | | 205,449 |
| | $ | 68.97 |
|
Granted | | 60,760 |
| | 102.96 |
|
Vested | | (67,311 | ) | | 49.31 |
|
Forfeited | | (3,701 | ) | | 83.88 |
|
Unvested at June 30, 2019 | | 195,197 |
| | $ | 87.93 |
|
|
| | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
Unvested at January 1, 2018 | | 227,161 |
| | $ | 57.50 |
|
Granted | | 65,133 |
| | 85.57 |
|
Vested | | (81,031 | ) | | 58.32 |
|
Forfeited | | (3,555 | ) | | 57.76 |
|
Unvested at June 30, 2018 | | 207,708 |
| | $ | 66.89 |
|
Performance stock units have a market condition modifier and are valued at an estimated fair value using the Monte Carlo model. The final number of shares to be issued for performance stock units granted in the first quarter of 20182019 may range from 0% to 200% of the target award based on achieving the specified performance targets over the performance period.period plus an additional payout modifier based on total shareholder return (TSR) performance. The following weighted average assumptions were used in the Monte Carlo model for units granted in the first quarter of 20182019 with a market condition modifier.
|
| |
Fair value per unit | $83.5899.82 |
Risk-free interest rate | 2.36%2.47% |
Expected dividend yield | 1.82%1.57% |
Expected volatility | 28.3%26.6% |
MSA stock beta | 1.2401.094 |
The risk-free interest rate is based on the U.S. Treasury Constant Maturity rates as of the grant date converted into an implied spot rate 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 ten year historical volatility using daily stock prices. Expected life is based on historical stock option exercise data.
On January 22, 2016, the Company entered into a multi-currency note purchase and private shelf agreement (the "Notes"), pursuant to which MSA issued notes in an aggregate original principal amount of £54.9 million (approximately $72.5$69.8 million at June 30, 2018)2019). The notesNotes are repayable in annual installments of £6.1 million (approximately $8.1$7.8 million at June 30, 2018)2019), commencing January 22, 2023, with a final payment of any remaining amount outstanding on January 22, 2031. The interest rate on these notesNotes is fixed at 3.4%. TheOn September 7, 2018, the Company entered into an amended and restated agreement associated with these Notes. Under this 2018 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. There were no amounts borrowed under the Amended Note Purchase Agreement as of June 30, 2019.
The Company had outstanding bank guarantees and standby letters of credit with banks as of June 30, 2018,2019, totaling $15.1$9.8 million, of which $6.2$3.0 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 of June 30, 2018.2019. The Company is also required to provide cash collateral in connection with certain arrangements. At June 30, 2018,2019, the Company has $3.2$0.5 million of restricted cash in support of these arrangements.
Changes in intangible assets, net of accumulated amortization during the six months ended June 30, 2018,2019, are as follows:
Note 15—Acquisitions14—Leases
AcquisitionEffective 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 Globe Holding Company, LLC
On July 31, 2017, we acquired 100%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 common stocklease. 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 Globe Holding Company, LLC ("Globe") in an all-cash transaction valued at $215 million pluseffect for those periods. The adoption of this standard had a working capital adjustment of $1.4 million. There is no 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 borrowingsmaterial impact 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 will be accounted for using the acquisition method of accounting.
We finalized the purchase price allocationunaudited Condensed Consolidated Balance Sheet as of June 30, 2018. The following table summarizes2019 due to the fair valuescapitalization of right-of-use assets and lease liabilities associated with our current operating leases in which we are the lessee. Adoption of the Globenew standard resulted in the recording of additional right-of-use assets acquiredand 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 assumed atare recognized based on the date of acquisition:
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| | | |
(In millions) | July 31, 2017 |
Current assets (including cash of $58 thousand) | $ | 28.6 |
|
Property, plant and equipment and other noncurrent assets | 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 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 fairpresent value of intangible assets included the relief from royalty methodfixed future lease payments over the lease term. Lease expense for trade nameall operating leases is classified in cost of products sold or selling, general and technology related intangible assets;administrative expense in the excess earnings approach for distributor relationships using distributor inputs and contributory charges; andunaudited Condensed Consolidated Statement of Income. For finance leases, the cost method for assembled workforce whichamortization of the right-of-use asset is included in goodwill. A number of significant assumptionsdepreciation and estimates were involvedamortization, 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. Our lease payments are largely fixed. Variable lease payments that depend on an index or a rate are included in the application of these valuation methods, including sales volumeslease payments and prices, royalty rates, costs to produce, tax rates, capital spending, discount rates,are measured using the prevailing index or rate at the measurement date, with differences between the calculated lease payment and working capital changes. Cash flow forecasts were generally based on Globe 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 distributor relationships acquiredthe actual lease payment being expensed in the Globe transaction will be amortized over a period of 20 yearsthe 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 remaining identifiable assets will be amortized over 5 years. The trade name was determined to have an indefinite useful life. We will perform an impairment assessment annually on the trade name, or sooner if there is a triggering event. Additionally, 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 future amortization expense related to the identifiable intangible assets is approximately $2.1 million for the remainder of 2018, $4.1 million in each of the next three years 2019 through 2021 and $3.2 million in 2022. Estimated future depreciation expense related to Globe property, plant and equipment is approximately $0.5 million for the remainder of 2018 and $1.0 million in each of the next four 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 acquiredperiod incurred. Variable lease costs were the acquisition of an assembled workforce, the expected synergies and other benefits that we believe will result from combining the operations of Globe with our operations. Goodwill of $74.5 million related to the Globe acquisition has been recorded in the Americas reportable segment and is deductible for tax purposes.
Our resultsimmaterial for the six months ended June 30, 2018,2019. A majority of our real estate leases include strategic transaction costsoptions 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 $0.2 million, including an insignificant amountthe right-of-use asset and the lease liability. Some of transaction and integration costs relatedour leases contain residual value guarantees. These are guarantees made to the acquisitionlessor that the value of Globe Holding Company LLC.an underlying asset returned to the lessor at the end of a lease will be at least a specified amount. Our resultsleases do not contain restrictions or covenants that restrict us from incurring other financial obligations. We do 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 six months ended June 30, 2017, include strategic transaction costs of $3.0 million. These costs are reported in selling, general and administrative expenses.
The operating results of the Globe acquisition2019. We did not have been included in our consolidated financial statements from the acquisition date through June 30, 2018. Our results for the six months ended June 30, 2018, include Globe sales and net income of $60.9 million and $7.4 million, respectively.
The following unaudited pro forma information presents our combined results as if the Globe acquisition had occurred at the beginning of 2017. 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’s results. There were no materialany lease transactions between MSA and Globe during the periods presented that are required to be eliminated. Intercompany transactions between Globe companies during the periods presented have been eliminated in the unaudited pro forma condensed combined financial information. The unaudited pro forma condensed combined 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 condensed combined financial information (Unaudited)with related parties.
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| | | | | | | |
(In millions, except per share amounts) | Three Months Ended June 30, 2017 | | Six Months Ended June 30, 2017 |
Net sales | $ | 317 |
| | $ | 610 |
|
Net income | $ | 19 |
| | $ | 39 |
|
Basic earnings per share | $ | 0.49 |
| | $ | 1.03 |
|
Diluted earnings per share | $ | 0.48 |
| | $ | 1.00 |
|
|
| | | | | | | | | | |
| | | | Other Information |
| | | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands, except percentage amounts) | | 2019 | | 2019 |
Lease cost: | | | | |
| | Operating lease cost recognized as rent expense | | $ | 3,299 |
| | $ | 6,562 |
|
| | Total lease cost | | 3,299 |
| | 6,562 |
|
| | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | |
| | Operating cash flows related to operating leases | | $ | 3,267 |
| | $ | 6,692 |
|
| | | | | | |
Non-cash other information: | | |
| | Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 746 |
| | $ | 2,629 |
|
| | | | | | |
| | | | | | June 30, 2019 |
Weighted-average remaining lease term (in years): | | |
| | Operating leases | |
|
| | 11 |
|
| | | | | | |
Weighted-average discount rate: | | |
| | Operating leases | |
|
| | 4.32 | % |
The unaudited pro forma condensed combined financial information is presented for information purposes only
At June 30, 2019, future lease payments under operating leases were as follows:
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| | | | | |
| | | |
(In thousands) | | | Operating Leases |
| | | |
Remainder of 2019 | | | $ | 6,207 |
|
2020 | | | 9,188 |
|
2021 | | | 7,636 |
|
2022 | | | 4,825 |
|
2023 | | | 4,028 |
|
After 2023 | | | 32,700 |
|
Total future minimum operating lease payments | | | $ | 64,584 |
|
Less: Imputed interest | | | 13,748 |
|
Present value of operating lease liabilities | | | 50,836 |
|
Less: Current portion operating lease liabilities(a) | | | 10,126 |
|
Noncurrent operating lease liabilities | | | $ | 40,710 |
|
(a) Included in "Warranty reserve 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 acquisitions been completed as of the date and for the period presented, and should not be taken as representative of our consolidated results of operations or financial condition following the acquisitions. In addition,other current liabilities" on the unaudited proforma condensed combined financial information is not intended to project the future financial position or results of operations of the combined company.Condensed Consolidated Balance Sheet.
The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting under existing U.S. GAAP. MSA has been treated as the acquirer.
Note 16—15—Pensions and Other Post-retirement Benefits
Components of net periodic benefit cost consisted of the following:
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| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Three Months Ended June 30, | | | | | | | | |
Service cost | | $ | 2,736 |
| | $ | 2,891 |
| | $ | 89 |
| | $ | 83 |
|
Interest cost | | 4,721 |
| | 4,219 |
| | 249 |
| | 175 |
|
Expected return on plan assets | | (9,658 | ) | | (9,096 | ) | | — |
| | — |
|
Amortization of prior service cost (credit) | | 112 |
| | (6 | ) | | (101 | ) | | (125 | ) |
Recognized net actuarial losses | | 2,534 |
| | 3,453 |
| | 217 |
| | 351 |
|
Settlements | | 2,363 |
| (b) | 27 |
| | — |
| | 141 |
|
Net periodic benefit cost (a) | | $ | 2,808 |
| | $ | 1,488 |
| | $ | 454 |
| | $ | 625 |
|
| | | | | | | | |
Six Months Ended June 30, | | | | | | | | |
Service cost | | $ | 5,159 |
| | $ | 5,782 |
| | $ | 178 |
| | $ | 184 |
|
Interest cost | | 9,426 |
| | 8,438 |
| | 498 |
| | 396 |
|
Expected return on plan assets | | (19,311 | ) | | (18,193 | ) | | — |
| | — |
|
Amortization of prior service cost (credit) | | 108 |
| | (11 | ) | | (202 | ) | | (202 | ) |
Recognized net actuarial losses | | 5,111 |
| | 6,907 |
| | 434 |
| | 376 |
|
Settlements | | 2,363 |
| (b) | 53 |
| | — |
| | — |
|
Net periodic benefit cost(a) | | $ | 2,856 |
| | $ | 2,976 |
| | $ | 908 |
| | $ | 754 |
|
|
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(In thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Three Months Ended June 30, | | | | | | | | |
Service cost | | $ | 2,891 |
| | $ | 2,721 |
| | $ | 83 |
| | $ | 106 |
|
Interest cost | | 4,219 |
| | 4,572 |
| | 175 |
| | 237 |
|
Expected return on plan assets | | (9,096 | ) | | (8,738 | ) | | — |
| | — |
|
Amortization of prior service cost | | (6 | ) | | (4 | ) | | (125 | ) | | (105 | ) |
Recognized net actuarial losses | | 3,453 |
| | 3,184 |
| | 351 |
| | 17 |
|
Settlements | | 27 |
| | 34 |
| | 141 |
| | — |
|
Net periodic benefit cost (a) | | 1,488 |
| | 1,769 |
| | 625 |
| | 255 |
|
| | | | | | | | |
Six Months Ended June 30, | | | | | | | | |
Service cost | | $ | 5,782 |
| | $ | 5,442 |
| | $ | 184 |
| | $ | 212 |
|
Interest cost | | 8,438 |
| | 9,144 |
| | 396 |
| | 474 |
|
Expected return on plan assets | | (18,193 | ) | | (17,476 | ) | | — |
| | — |
|
Amortization of prior service cost | | (11 | ) | | (8 | ) | | (202 | ) | | (210 | ) |
Recognized net actuarial losses | | 6,907 |
| | 6,368 |
| | 376 |
| | 34 |
|
Settlement/curtailment loss (credit) | | 53 |
| | 68 |
| | — |
| | — |
|
Net periodic benefit cost, excluding below | | 2,976 |
| | 3,538 |
| | 754 |
| | 510 |
|
Special termination charge | | — |
| | 11,384 |
| (b) | — |
| | — |
|
Net periodic benefit cost (a) | | 2,976 |
| | 14,922 |
| | 754 |
| | 510 |
|
(a) Components of net periodic benefit cost other than service cost are included in the line item "Other income, net" in the income statement.
(b) Represents the charge for special termination benefits related to the VRIP which were paid from our over funded North America pension plan and recorded as restructuring charges on theunaudited Condensed Consolidated Statement of Income. See further details in Note 5—Restructuring Charges.
Effective December 31, 2017,(b) Related to a non-cash charge associated with the Company changed the method it uses to estimate the service and interest cost componentsclosure of net periodic benefit cost forour 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 utilize 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 determinationU.K. and included in "Restructuring charges" on the unaudited Condensed Consolidated Statement 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. We estimate that service and interest cost for the pension and OPEB plans will be reduced by approximately $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 continue to employ the current approaches 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.Income.
We made contributions of $2.5$3.5 million and $3.0$2.5 million to our pension plans during the six months ended June 30, 20182019 and 2017,2018, respectively. We expect to make total contributions of approximately $5.0$7.1 million to our pension plans in 20182019 which are primarily associated with our International segment.
Note 17—16—Derivative Financial Instruments
As part of our currency exchange rate risk management strategy, we may enter into certain derivative foreign currency forward contracts that do not meet the U.S. GAAP criteria for hedge accounting, but which 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, (gains)net, in the unaudited Condensed Consolidated Statement of Income. The notional amount of open forward contracts was $71.0$74.8 million and $124.7$72.4 million at June 30, 2018,2019, and December 31, 2017,2018, respectively.
The following table presents the unaudited Condensed Consolidated Balance Sheet location and fair value of assets and liabilities associated with derivative financial instruments:
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| | | | | | | | |
(In thousands) | | June 30, 2019 | | December 31, 2018 |
Derivatives not designated as hedging instruments: | | | | |
Foreign exchange contracts: other current liabilities | | $ | 212 |
| | $ | 12 |
|
Foreign exchange contracts: other current assets | | — |
| | 488 |
|
|
| | | | | | | | |
(In thousands) | | June 30, 2018 | | December 31, 2017 |
Derivatives not designated as hedging instruments: | | | | |
Foreign exchange contracts: other current liabilities | | $ | 25 |
| | $ | 314 |
|
Foreign exchange contracts: other current assets | | 106 |
| | 840 |
|
The following table presents the unaudited Condensed Consolidated Statement of Income location and impact of derivative financial instruments:
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| | | | | | | | | | |
| | | | Loss Recognized in Income |
| | | | Six Months Ended June 30, |
(In thousands) | | Statement of Income Location | | 2019 | | 2018 |
Derivatives not designated as hedging instruments: | | | | |
Foreign exchange contracts | | Currency exchange losses, net | | $ | 2,407 |
| | $ | 587 |
|
|
| | | | | | | | | | |
| | | | Loss (Gain) Recognized in Income |
| | | | Six Months Ended June 30, |
(In thousands) | | Statement of Income Location | | 2018 | | 2017 |
Derivatives not designated as hedging instruments: | | | | |
Foreign exchange contracts | | Currency exchange losses (gains), net | | $ | 587 |
| | $ | (5,014 | ) |
Note 18—17—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 toinclude the derivative financial instruments described in Note 17—16—Derivative Financial Instruments. 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.
We value our investments in 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 $72.1 million and $55.4 million as of June 30, 2019 and December 31, 2018, respectively. The fair value was $72.5 million and $55.1 million as of June 30, 2019 and December 31, 2018, respectively, which was reported in "Investments, short-term" in the accompanying unaudited Condensed Consolidated Balance Sheet. 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, as such, management believes that any unrealized gains or losses are temporary; therefore, 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 June 30, 2019.
With the exception of fixed rate long-term debt, we believe that the reported carrying amounts of our financial assets and liabilities approximate their fair values. The reported carrying amount of our fixed rate long-term debt (including the current portion) was $180.8$129.6 million and $130.0 million at both June 30, 2018,2019, and December 31, 2017.2018, respectively. The fair value of this debt was $191.0$143.9 million and $200.0$139.0 million at June 30, 2018,2019, and December 31, 2017,2018, respectively. The fair value of this debt was determined using Level 2 inputs by evaluating similarly rated companies with publicly traded bonds where available or current borrowing rates available for financings with similar terms and maturities.
Note 19—18—Contingencies
Product liability
We 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. MSA LLCThe Company estimates its 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"). The estimate for IBNR claims is based on experience, sales volumes, 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 $4.7$4.0 million and $3.6 million at June 30, 2018,2019 and $5.4 million at December 31, 2017.2018, respectively. Single incident product liability expense was $0.4 million during the six months ended June 30, 2019 and $0.9 million during the six months ended June 30, 2018 and $0.2 million during the six months ended June 30, 2017.2018. 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. Cumulative trauma product liability claims involve exposures to harmful substances (e.g., 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. One of the Company's affiliates Mine Safety Appliances Company, LLC ("MSA LLCLLC") was named as a defendant in 1,4701,552 lawsuits comprised of 2,3452,450 claims as of June 30, 2018.2019. These lawsuits mainly involve respiratory protection products allegedly manufactured and sold by MSA LLC or its predecessors. The products at issue were manufactured many years ago and are not currently offered by MSA LLC.
A summary of cumulative trauma product liability lawsuits and asserted cumulative trauma product liability claims activity is as follows:
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| | | | | | |
| | Six Months Ended June 30, 2019 | | Year Ended December 31, 2018 |
Open lawsuits, beginning of period | | 1,481 |
| | 1,420 |
|
New lawsuits | | 133 |
| | 369 |
|
Settled and dismissed lawsuits | | (62 | ) | | (308 | ) |
Open lawsuits, end of period | | 1,552 |
| | 1,481 |
|
|
| | | | | | |
| | Six Months Ended June 30, 2018 | | Year Ended December 31, 2017 |
Open lawsuits, beginning of period | | 1,420 |
| | 1,794 |
|
New lawsuits | | 189 |
| | 398 |
|
Settled and dismissed lawsuits | | (139 | ) | | (772 | ) |
Open lawsuits, end of period | | 1,470 |
| | 1,420 |
|
|
| | | | | | |
| | Six Months Ended June 30, 2019 | | Year Ended December 31, 2018 |
Asserted claims, beginning of period | | 2,355 |
| | 2,242 |
|
New claims | | 233 |
| | 479 |
|
Settled and dismissed claims | | (138 | ) | | (366 | ) |
Asserted claims, end of period | | 2,450 |
| | 2,355 |
|
|
| | | | | | |
| | Six Months Ended June 30, 2018 | | Year Ended December 31, 2017 |
Asserted claims, beginning of period | | 2,242 |
| | 3,023 |
|
New claims | | 258 |
| | 455 |
|
Settled and dismissed claims | | (155 | ) | | (1,236 | ) |
Asserted claims, end of period | | 2,345 |
| | 2,242 |
|
More than half of the open lawsuits at June 30, 2018,2019, 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.
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. Factors that have historically limitedlimit MSA LLC's ability to estimate potential liability for cumulative trauma product liability claims 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, orand other factors. With respect to the risk associated with any particular case that is filed against MSA
LLC, it has typically not been until very late in the legal process that it can be reasonably determined whether it is probable that such a case will ultimately result in a liability. This uncertainty is caused by many factors, including consideration of the applicable statute of limitations, the sufficiency of product identification and other defenses. The complaints initially filed generally have not provided information sufficient to determine if a lawsuit will develop into an actively litigated case. Even when a case is actively litigated, it is often difficult to determine if the lawsuit will be dismissed or otherwise resolved until late in the lawsuit. Moreover, even if it is probable that such a lawsuit will result in a loss, it is often difficult to estimate the amount of actual loss that will be incurred. These actual loss amounts are highly variable and turn on a case-by-case analysis of the relevant facts, including the nature of the injury, the jurisdiction in which the claim is filed, the counsel for the plaintiff and the number of parties in the lawsuit. In addition, there are uncertainties concerning the impact of bankruptcies of other companies that are co-defendants with respect to particular claims and uncertainties surrounding the litigation process in different jurisdictions and from case to case within a particular jurisdiction.
Management works with outside legal counsel quarterly to review and assess MSA LLC's exposure to asserted cumulative trauma product liability claims not yet resolved. In addition, in connection with finalizing and reporting its 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 exposure to IBNRall cumulative trauma product liability claims. The review process for asserted cumulative trauma product liability claims not yet resolved takes into account available facts for those claims, including their number and composition, outcomes of matters resolved during current and prior periods, and variances associated with different groups of claims, plaintiffs' counsel, claims filing trends, and venues, as well as any other relevant information.
In August 2017, MSA LLC obtained additional detailed information about a significant number of claims that were then pending against it, including the nature and extent of the alleged injuries, product identification and other factors. MSA LLC subsequently agreed to resolve a substantial number of these claims for $75.2 million, a portion of which was insured. Amounts in excess of estimated insurance recoveries were reflected within Other operatingProduct liability expense in the unaudited Condensed Consolidated Statement of Income. MSA LLC paid a total of $25.2$28.6 million during 20172018 and $14.3$21.4 million during the six months ended June 30, 2018,2019, related to these settlements. MSA LLC expects to pay $7.1 million ratably overThe payments made during 2019 represent the next five quarters ending in the third quarter of 2019. As a result offinal payments for these developments, the cumulative trauma product liability reserve covers all cumulative trauma product liability claims that have been asserted against MSA LLC, both those that have been settled but not yet paid and an estimated amount for asserted cumulated trauma product liability claims not yet resolved.claims.
In the fourth quarter of 2017, MSA LLC, in consultation with an outside valuation consultant and outside legal counsel, performed a review for IBNR cumulative trauma product liability claims. Based on that review process, which concluded in early 2018, it was determined that a reasonable estimate for the liability of MSA LLC's IBNR claims was $111.1 million. Accordingly, the cumulative trauma product liability reserve was increased by $111.1 million at December 31, 2017, for estimated IBNR cumulative trauma product liability claims and the balance is $107.8 million at June 30, 2018. This estimated amount is not discounted to present value. This amount represents estimated liability relating to asbestos, silica and coal dust claims projected to be asserted through 2060.
The ability to make a reasonable estimate of the potential liability for IBNR cumulative trauma product liability claims reflects recent developments affecting asbestos claims, recent developments affecting silica claims, and recent developments affecting coal dust claims. Significant changes in MSA LLC’s claims experience over the last few years have resulted in stabilization of a number of factors important to the estimation process and enabled greater predictability of IBNR claims. These developments occurred as a result of changes in defense strategy implemented in recent years, increased experience in defending, negotiating, and resolving key groups of claims, and resolutions of a substantial number of cumulative trauma product liability claims in the last few years. These changes have collectively resulted in MSA LLC having a more stable recent claims history that could be extrapolated into the future and greater certainty as to the number of claims that might be asserted against MSA LLC in the future, the percentage of those claims that might be resolved without payment, and the potential settlement value of those claims that are not resolved without payment. All of these factors were considered by MSA LLC’s valuation consultant in estimating the IBNR cumulative trauma product liability claims. MSA LLC, taking into account the analysis and estimates developed by its consultant, concluded in the fourth quarter of 2017 that reasonable estimates for its IBNR asbestos, silica and coal dust claims could be made and that the liability described above should be accrued.
Notwithstanding these developments, thereThere remains considerable uncertainty in numerous aspects of MSA LLC's potential future claims experience, such as with respect to the number of claims that might be asserted, the alleged severity of those claims and the average settlement values of those claims, and that uncertainty may cause actual claims experience in the future to vary from the current estimate. Numerous uncertainties also exist with respect to factors not specific to MSA LLC’s claims experience, 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 cumulative trauma product liability claims. If future estimates of asserted cumulative trauma product liability claims not yet resolved and/or IBNRincurred but not reported ("IBNR") cumulative trauma product liability claims are materially higher (lower) than the accrued liability, we will record an appropriate charge (credit) to the unaudited Condensed Consolidated Statement of Income to increase (decrease) the accrued liability.
Certain significant assumptions underlying the material components of the accrual for IBNR cumulative trauma product liability claims include MSA LLC's experience related to the following:
The types of illnesses alleged by claimants to give rise to their claims;
The number of claims asserted against MSA LLC;
The propensity of claimants and their counsel asserting cumulative trauma product liability claims to name MSA LLC as a defendant;
The percentage of cumulative trauma product liability claims asserted against MSA LLC that are dismissed without payment; and
The average value of settlements paid to claimants.claimants; and
The jurisdiction in which claims are asserted.
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, in particular, no material state or federal tort reform actions affecting such claims.
The totalTotal cumulative trauma product liability reserve was $162.3$158.8 million at June 30, 2018, of which $54.5 million related to asserted cumulative trauma product liability claims ($39.0 million for claims settled and related defense costs not yet paid and $15.5 million for the estimated value of claims asserted but not yet resolved) and $107.8 million related to estimated IBNR cumulative trauma product liability claims. The total cumulative trauma product liability reserve was $181.1 million at December 31, 2017, of which $70.0 million related to asserted cumulative trauma product liability claims ($54.52019, including $10.0 million for claims settled but not yet paid and $15.5related defense costs, and $187.3 million for the estimated value of claims asserted but not yet resolved) and $111.1at December 31, 2018, including $24.5 million related to estimated IBNR cumulative trauma product liability claims. The majority of the reserve relating tofor claims settled but not yet paid and related defense costs. This reserve includes estimated amounts for both periods relates to the August 2017 settlement of certain coal dustasserted claims described above.not yet resolved and IBNR claims. The amount included in the reserve for IBNR cumulative trauma product liability claims represents the estimated value of such claims if the most likely potential outcome with respect to each of the assumptions described above is applied. Those estimated amounts reflect asbestos, silica and coal dust claims expected to be asserted through the year 2069 and are 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, 2018 as a result of its annual review process. The revisions to the Company’s estimates of potential liability for cumulative trauma product liability claims are based on an assessment of trends in the tort system generally and changes in MSA LLC’s claims experience over the past year, including the number of claims asserted, average value of settlements paid to claimants, the number and percentage of claims resolved with payment, the jurisdiction in which claims are asserted, and the counsel asserting such claims. The reserve does not include amounts which will be spent to defend the claims covered by the reserve. Defense costs are recognized in the unaudited Condensed Consolidated Statement of Income as incurred. At June 30, 2018, $47.4 millionThere was no interim remeasurement of the cumulative trauma product liability reserve as of June 30, 2019.
At June 30, 2019, $12.5 million of the total reserve for asserted cumulative trauma product liability claims is recorded in the Insurance and product liability line within other current liabilities in the unaudited Condensed Consolidated Balance Sheet and the remainder, $7.1$146.3 million, is recorded in the OtherProduct liability and other noncurrent liabilities line. At December 31, 2017, $48.62018, $38.8 million of the total reserve for asserted cumulative trauma product liability claims is recorded in the Insurance and product liability line within other current liabilities in the unaudited Condensed Consolidated Balance Sheet and the remainder, $21.4$148.5 million, is recorded in the Other noncurrent liabilities line. All of the reserve for IBNR claims as of both June 30, 2018,Product liability and December 31, 2017, is recorded in the Otherother noncurrent liabilities line.
Because litigation is subject to inherent uncertainties, 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 liabilities relating to cumulative trauma product liability claims may be adjusted from time to time based on whether the actual number, types, and settlement value of claims differs from current projections and estimates and other developing facts and circumstances. These adjustments may reflect changes in estimates for asserted cumulative trauma product liability claims not yet resolved and/or IBNR cumulative trauma product liability claims. These adjustments may be material and could materially impact our consolidated financial statements in future periods.
Insurance Receivable and Notes Receivable, Insurance Companies
In the normal course of business, MSA LLC makes payments to settle various claims and for related defense costs and records receivables for the estimated amounts that are covered by insurance. With respect to cumulative trauma product liability claims, MSA LLC purchased insurance policies for the policy years from 1952-1986 from over 20 different insurance carriers that, subject to some common contract exclusions, provideprovided coverage for cumulative trauma product liability losses and, in many instances, related defense costs (the "Occurrence-Based Policies"). MSA LLC’s insurance policiesThe Occurrence-Based Policies have significant per claim retentions and applicable exclusions for cumulative trauma product liability claims after April 1986.
In While we continue to pursue reimbursement under certain policies, the normal coursevast majority of business,these insurance policies have been exhausted, settled or converted into negotiated coverage-in-place agreements with the applicable insurers (the "Coverage-In-Place Agreements"). As a result, MSA LLC makes payments to settleis now largely self-insured for cumulative trauma product liability claims and for related defense costs and records receivables for the estimated amounts that are covered by insurance. claims.
Since MSA LLC is now largely self-insured for cumulative trauma product liability claims, additional amounts recorded as insurance receivables will be limited and based on calculating the amounts to be reimbursed pursuant to negotiated Coverage-in-Place Agreements (as defined below).Coverage-In-Place Agreements. Various factors could affect the timing and amount of recovery of the insurance receivable,receivables, including assumptions regarding claims composition (which are relevant to calculating reimbursement under the terms of certain Coverage-In-Place Arrangements)Agreements) and the extent to which the issuing insurers may become insolvent in the future.
Insurance receivables at June 30, 2018,2019, totaled $125.7$59.9 million, of which, $10.6$9.9 million is reported in Prepaid expenses and other current assets in the unaudited Condensed Consolidated Balance Sheet and $115.1$50.0 million is reported in Insurance receivable and other noncurrent assets. Insurance receivables at December 31, 2017,2018, totaled $134.7$71.7 million, of which $11.6$14.8 million was reported in Prepaid expenses and other current assets in the unaudited Condensed Consolidated Balance Sheet and $123.1$56.9 million was reported in Insurance receivable and other noncurrent assets. The vast majority of the $59.9 million insurance receivable balance at June 30, 2019 is attributable to reimbursement believed to be due under the terms of signed Coverage-In-Place Agreements.
A summary of Insurance receivable balances and activity related to cumulative trauma product liability losses is as follows:
|
| | | | | | | | |
(In millions) | | Six Months Ended June 30, 2019 | | Year Ended December 31, 2018 |
Balance beginning of period | | $ | 71.7 |
| | $ | 134.7 |
|
Additions | | 0.8 |
| | 19.6 |
|
Collections, settlements converted to notes receivable and other adjustments | | (12.6 | ) | | (82.6 | ) |
Balance end of period | | $ | 59.9 |
| | $ | 71.7 |
|
|
| | | | | | | | |
(In millions) | | Six Months Ended June 30, 2018 | | Year Ended December 31, 2017 |
Balance beginning of period | | $ | 134.7 |
| | $ | 159.9 |
|
Additions | | 1.0 |
| | 94.6 |
|
Collections, settlements converted to notes receivable and other adjustments | | (10.0 | ) | | (119.8 | ) |
Balance end of period | | $ | 125.7 |
| | $ | 134.7 |
|
Additions to insurance receivables in the above table represent insured cumulative trauma product liability losses and related defense costs which we believe are covered by the Occurrence-Based Policies or applicable Coverage-in-Place Agreements. Collections of the receivablereceivables primarily occur upon settlement of the coverage litigation, perpursuant to the terms of the negotiated agreements with the insurance companies, either in a lump sum, in installments over time, or to reimburse a portion of future expense once incurred (i.e. pursuant to a Coverage-in-PlaceCoverage-In-Place Agreement). Collections and settlements primarily represent agreements with insurance companies to pay amounts due that are applicable to cumulative trauma claims. When there are contingencies embedded in these agreements, we apply payments to the undiscounted receivable in the period when the contingency is met.
In some cases, payment streams due pursuant to negotiated settlement agreements arewere converted to formal notes receivable from insurance companies. The notes receivable arewere recorded as a transfer from the Insurance receivable balance to the Notes receivable, insurance companies (current and noncurrent) in the unaudited Condensed Consolidated Balance Sheet. In cases where the payment stream covers multiple years and there arewere no contingencies, the present value of the payments iswas recorded as a transfer from the insurance receivable balance to the Notes receivable, insurance companies (current and long-term) in the unaudited Condensed Consolidated Balance Sheet. Provided the remaining insurance receivable iswas recoverable through the insurance carriers, no gain or loss iswas recognized at the time of transfer from Insurance receivable to Notes receivable, insurance companies.
Notes receivable from insurance companies at June 30, 2018,2019, totaled $63.8$60.3 million, of which $3.5$3.6 million is reported in Notes receivable, insurance companies, current on the unaudited Condensed Consolidated Balance Sheet and $60.3$56.7 million is reported in Notes receivable, insurance companies, noncurrent. Notes receivable from insurance companies at December 31, 2017,2018, totaled $76.9$59.6 million, of which $17.3$3.6 million was reported in Notes receivable, insurance companies, current onin the unaudited Condensed Consolidated Balance Sheet and $59.6$56.0 million was reported in Notes receivable, insurance companies, noncurrent.
A summary of Notes receivable, insurance companies balances is as follows:
|
| | | | | | | | |
(In millions) | | Six Months Ended June 30, 2019 | | Year Ended December 31, 2018 |
Balance beginning of period | | $ | 59.6 |
| | $ | 76.9 |
|
Additions | | 0.7 |
| | 1.7 |
|
Collections | | — |
| | (19.0 | ) |
Balance end of period | | $ | 60.3 |
| | $ | 59.6 |
|
|
| | | | | | | | |
(In millions) | | Six Months Ended June 30, 2018 | | Year Ended December 31, 2017 |
Balance beginning of period | | $ | 76.9 |
| | $ | 67.3 |
|
Additions | | 0.8 |
| | 35.1 |
|
Collections | | (13.9 | ) | | (25.5 | ) |
Balance end of period | | $ | 63.8 |
| | $ | 76.9 |
|
The collectibility of MSA LLC's insurance receivables and notes receivable is regularly evaluated and we believe that the amounts recorded are probable of collection. The determination that the recorded insurance receivables are probable of collection is based on analysis of the terms of the underlying insurance policies, experience in successfully recovering cumulative trauma product liabilitysettlement agreements reached with the insurers, assumptions regarding various aspects of the composition of future claims from MSA LLC's insurers(which are relevant to calculating reimbursement under other policies during coverage litigation,the terms of certain Coverage-In-Place Agreements), the financial ability of the insurance carriers to pay the claims, understanding and interpretation of the relevant facts and applicable law and the advice of MSA LLC's outside legal counsel. We believe that successful resolution of insurance litigation with substantially all of our insurance carriers over the years, most recently in July 2018 with North River, as well as the October 2016 trial verdict, which resulted in a favorable outcome, demonstrate that MSA LLC has strong legal positions concerning its rights to coverage. The trial verdict is described below. Approximately $51.0 million of the $125.7 million insurance receivable balance at June 30, 2018, is attributable to coverage in place agreements or negotiated installment payments.
Total cumulative trauma liability losses were $7.1 million and $11.8 million for the six months ended June 30, 2019 and June 30, 2018, respectively, primarily related to the defense of cumulative trauma product liability claims. Total cumulative trauma liability losses were $97.6 million for the six months ended June 30, 2017, primarily related to the defense and settlement of cumulative trauma product liability claims. Uninsured
cumulative trauma product liability losses, which were included in Other operatingProduct liability expense onin the unaudited Condensed Consolidated Statement of Income, were $6.4 million and $10.8 million for the six months ended June 30, 20182019 and $29.6 million for the six months ended June 30, 2017.2018, respectively.
Insurance Litigation
For more than a decade, MSA LLC has been involvedwas engaged in coverage litigation with many of its insurance carriers that issued Occurrence-Based Policies. MSA LLC has reached resolution with the majority of its insurance carriers through negotiated settlements regarding these policies.
North River
In 2009, MSA LLC (as Mine Safety Appliances Company) sued North River in the United States District Court for the Western District of Pennsylvania, alleging that North River breached one of its insurance policies by failing to pay amounts owed to MSA LLC and that it engaged in bad-faith claims handling.
In 2010, North River sued MSA LLC (as Mine Safety Appliances Company) in the Court of Common Pleas of Allegheny County, Pennsylvania seeking a declaratory judgment concerning their responsibilities under three additional policies. MSA LLC asserted claims against North River for breaches of contract for failures to pay amounts owed to MSA LLC. MSA LLC also alleged that North River engaged in bad-faith claims handling.
In the fourth quarter of 2016, a Pennsylvania state court jury found that North River breached the three insurance policies at issue in the case. As a result of the jury's findings, the court entered a verdict in favor of MSA LLC and against North River for $10.9 million, the full amount of the contractual damages at issue in the case. In December 2016 and January 2017, the Pennsylvania state court heard evidence regarding the statutory bad faith claim. In the first and second quarters of 2017, the Court of Common Pleas of Allegheny County awarded MSA LLC an additional $48.9 million in damages related to this statutory bad faith claim.
In the first quarter of 2017, MSA LLC received payments of approximately $80.9 million (the "Payment") pursuant to insurance policies issued by North River. The Payment reflects amounts previously invoiced to North River for reimbursement on cumulative trauma product liability claims and therefore was recorded as a reduction to the insurance receivable.
In July 2018, MSA LLC resolved through a negotiated settlement its remaining coverage litigation with North River. As part of this settlement, MSA LLC dismissed all claims and appeals against North River in each of the pending coverage actions. This represents a settlement with MSA LLC’s last major Occurrence-Based insurance carrier. We anticipate payment under the settlement to be received in the third quarter of 2018. The payment is expected to be accounted for as a reduction of the insurance receivable balance and will satisfy the portion of the insurance receivable balance that has been subject to litigation. The settlement is not expected to have an impact on our operating results.
Delaware Matter
In July 2010, MSA LLC (as Mine Safety Appliances Company) filed a lawsuit in the Superior Court of the State of Delaware seeking declaratory and other relief concerning the future rights and obligations of MSA LLC and its excess insurance carriers under various insurance policies. During the same time period, MSA LLC was also engaged in coverage disputes with The North River Insurance Company (“North River”) in various courts. Since 2010, from time to time, MSA LLC has resolved its disputesreached negotiated resolutions with the vast majority of the insurance carriers once named in this action,litigation, including the recent July 2018 settlement with North River mentioned above. The case is on appeal with two remaining defendant insurance carriers.disclosed below.
In February 2017,July 2018, MSA LLC resolved through a negotiated settlement its remaining coverage litigation with The Hartford ("Hartford"). Additionally, in April 2017, MSA LLC resolved through negotiated settlements its coverage litigation with Travelers Insurance Company ("Travelers") and Wausau Indemnity Company ("Wausau"). Each of the settling carriers agreed to cash payments which were made in 2017 or January 2018. In addition, Travelers has agreed to pay a percentage of future cumulative trauma product liability settlements paid as incurred on a claim-by-claim basis.North River. As part of these settlements,this settlement in October 2018, MSA LLC dismissed all claims and appeals against Hartford, Travelers and WausauNorth River in each of the pending coverage actions. This represents a settlement with MSA LLC’s last major Occurrence-Based insurance carrier. Payment under this negotiated settlement was received in the coverage litigation in the Superior Courtthird quarter of 2018 and was accounted for as a reduction of the State of Delaware.insurance receivable balance.
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 a 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:
| | (In thousands) | | Six Months Ended June 30, 2018 | | Year Ended December 31, 2017 | | Six Months Ended June 30, 2019 | | Year Ended December 31, 2018 |
Beginning warranty reserve | | $ | 14,753 |
| | $ | 11,821 |
| | $ | 14,214 |
| | $ | 14,753 |
|
Warranty payments | | (315 | ) | | (550 | ) | | (6,395 | ) | | (9,955 | ) |
Warranty claims | | 1,217 |
| | 2,116 |
| | 6,379 |
| | 10,585 |
|
Provision for product warranties | | (392 | ) | | 1,366 |
| | (518 | ) | | (1,169 | ) |
Ending warranty reserve | | $ | 15,263 |
| | $ | 14,753 |
| | $ | 13,680 |
| | $ | 14,214 |
|
Warranty expense was $5.9 million and $5.5 million for the six months ended June 30, 2019 and 2018, respectively.
Note 19—Acquisitions
Acquisition of Sierra Monitor Corporation
On May 20, 2019, we acquired 100% of the common stock in Sierra Monitor Corporation ("SMC") in an all-cash transaction valued at $33.2 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 in additional goodwill of approximately $0.9 million based on the fair value of the awards identified as transaction consideration.
Based in Milpitas, California, in the heart of Silicon Valley, SMC 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. The acquisition enables MSA to accelerate its strategy to enhance worker safety and accountability through the use of cloud technology and wireless connectivity; a key focus of the Company's recently established Safety ioTM subsidiary. MSA launched Safety io 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.
SMC operating results are included in our unaudited condensed consolidated financial statements from the acquisition date as part of the Americas reportable segment. The acquisition qualifies as a business combination and will be accounted for using the acquisition method of accounting.
The following table summarizes the fair values of the SMC assets acquired and liabilities assumed at the date of acquisition:
|
| | | |
(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 | 19.8 |
|
Total assets acquired | 42.6 |
|
Total liabilities assumed | 6.4 |
|
Net assets acquired | $ | 36.2 |
|
The amounts in the table above are subject to change upon completion of the valuation of the assets acquired and liabilities assumed. This valuation is expected to be completed by mid-2020.
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 $0.6 million for the remainder of 2019, $1.2 million in each of the next four years 2020 through 2023 and $5.3 million thereafter. The step up to fair value of acquired inventory as part of the purchase price allocation totaled $1.6 million which will be amortized over six months.
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 SMC with our operations. Goodwill of $19.8 million related to the SMC acquisition has been recorded in the Americas reportable segment and is non-deductible for tax purposes.
Our results for the six months ended June 30, 2019, include strategic transaction costs of approximately $2 million, including costs related to the acquisition of SMC. Our results for the six months ended June 30, 2018, include an immaterial amount of strategic transaction costs. These costs are reported in selling, general and 2017, was $5.5administrative expenses.
The operating results of the SMC acquisition have been included in our unaudited condensed consolidated financial statements from the acquisition date through June 30, 2019. Our results for the six months ended June 30, 2019, include SMC sales and net loss of $2.6 million and $3.6$1.5 million, respectively.
The following unaudited pro forma information presents our combined results as if the SMC acquisition had occurred at on January 1, 2019. 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’s results. There were no material transactions between MSA and SMC during the periods presented that are required to be eliminated. Intercompany transactions between SMC companies during the periods presented have been eliminated in the unaudited pro forma condensed combined financial information. The unaudited pro forma condensed combined financial information does not reflect any cost savings, operating synergies or revenue enhancements that the combined companies may achieve as a result of the acquisition or the costs to integrate the operations or the costs necessary to achieve cost savings, operating synergies or revenue enhancements.
Pro forma condensed combined financial information (Unaudited)
|
| | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
(In millions, except per share amounts) | 2019 | | 2018 | 2019 | | 2018 |
Net sales | $ | 352.4 |
| | $ | 344.9 |
| $ | 684.0 |
| | $ | 675.9 |
|
Net income | 38.7 |
| | 33.2 |
| 62.0 |
| | 65.6 |
|
Basic earnings per share | 1.00 |
| | 0.87 |
| 1.61 |
| | 1.72 |
|
Diluted earnings per share | 0.99 |
| | 0.85 |
| 1.58 |
| | 1.69 |
|
The unaudited pro forma condensed 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 acquisition been completed as of the date and for the period presented, and should not be taken as representative of our condensed consolidated results of operations or financial condition following the acquisition. In addition, the unaudited proforma condensed combined financial information is not intended to project the future financial position or results of operations of the combined company.
The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting under existing U.S. GAAP. MSA has been treated as the acquirer.
|
| |
Item 2. | 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 quarterly report on Form 10-Q. 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 our annual report entitled “Forward-Looking Statements” and “Risk Factors.”
BUSINESS OVERVIEW
We are a global leader in the development, manufacture and supply of safety products that protect people and facility infrastructures. 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 is used by workers around the world in a broad range of markets, including the oil, gas and petrochemical ("OGP"), fire service, construction, utilities and mining industries. MSA's core products include fixed gas and flame detection systems, breathing apparatus where self-contained breathing apparatus ("SCBA") is the principal product, 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.
On July 31, 2017,May 20, 2019, the Company acquired 100% of the common stock of Globe Holding Company, LLCSierra Monitor Corporation ("Globe"SMC") for $215in an all-cash transaction valued at $33.2 million, innet of cash plus a working capital adjustment of $1.4 million.acquired. Based in Pittsfield, NH, GlobeMilpitas, California, in the heart of Silicon Valley, SMC is a leading innovator and provider of firefighter protective clothingfixed gas and boots. Thisflame detection instruments and Industrial Internet of Things solutions that connect and help protect high-value infrastructure assets. The acquisition aligns withenables MSA to accelerate its strategy to enhance worker safety and accountability through the Company's corporate strategyuse of cloud technology and wireless connectivity; a key focus of the company's recently established Safety ioTM subsidiary. MSA launched Safety io in that2018, primarily to leverage the capabilities of its portable gas detection portfolio as it strengthens our leading position in the North American fire service market.relates to cloud connectivity. The transaction was funded through borrowings on our unsecured senior revolving credit facility. Refer to Note 15—- 19 Acquisitions to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further information.
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 seven geographical operating segments that are aggregated into three reportable geographic segments: Americas, International and Corporate. In 2017, 62%2018, 63% and 38%37% 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.States (U.S.). We serve our markets across the Americas with manufacturing facilities in the U.S., Mexico and Brazil. Operations in other Americas segment countries focus primarily on sales and distribution in their respective home country markets.
International. Our International segment includes companies in Europe, the Middle East, Africa and the Asia Pacific region, some of which are in developing regions of the world. In our largest International affiliates (in Germany, France, United Kingdom (U.K.), Ireland and China), we develop, manufacture and sell a wide variety of products. In China, the products manufactured are sold primarily in the home country 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., United Kingdom,U.K., Ireland Sweden and China, or are purchased from third partythird-party vendors. During the six months ended June 30, 2019, a plan to close our South Africa affiliates was approved as part of our footprint rationalization but we will continue to serve the Africa region through our channel partners.
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.
PRINCIPAL PRODUCTS
The following is a brief description of each of our principal product categories:
MSA's corporate strategy includes a focus on driving sales of core products where we have leading market positions and a distinct competitive advantage. Core products, as mentioned above, include fixed gas and flame detection instruments, breathing apparatus where SCBA is the principal product, portable gas detection instruments, industrial head protection products, firefighter helmets &and protective apparel, and fall protection devices. These products receive the highest levels of investment and resources as they typically realize higher levels of return on investment than non-core products. Core products comprised approximately 87%88% and 84%87% of sales for the six months ended June 30, 20182019 and 2017,2018, respectively.
MSA maintains a portfolio of non-core products. Non-core products reinforce and extend the core offerings, drawing upon our customer relationships, distribution channels, geographical presence and technical experience. These products are complementary to the core offerings and have their roots within the core product value chain. Key non-core products include respirators, eye and face protection, ballistic helmets and gas masks. Ballistic helmet and gas mask sales are the primary sales to our military customers and were approximately $20.8$18.7 million and $19.0$20.8 million globally during the six months ended June 30, 20182019 and 2017,2018, respectively.
A detailed listing of our significant product offerings in the aforementioned product groups above is included in MSA's Annual Report on Form 10-K for the year ended December 31, 2017.2018.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2018,2019, Compared to Three Months Ended June 30, 20172018
Net Sales. Net sales for the three months ended June 30, 2018,2019, were $339.3$349.7 million, an increase of $50.5$10.4 million, or 17.5%,3.0% compared to $288.8$339.3 million for the three months ended June 30, 2017.2018. Please refer to the Net Sales table for a reconciliation of the quarter over quarter sales change.
| | Net Sales | Three Months Ended June 30, | | Dollar Increase | | Percent Increase | Three Months Ended June 30, | | Dollar Increase | | Percent Increase |
(In millions) | 2018 | | 2017 | | 2019 | | 2018 | |
Consolidated | $339.3 | | $288.8 | | $50.5 | | 17.5% | $349.7 | | $339.3 | | $10.4 | | 3.0% |
Americas | 215.3 | | 175.0 | | 40.3 | | 23.0% | 231.4 | | 215.3 | | 16.1 | | 7.5% |
International | 124.0 | | 113.8 | | 10.2 | | 9.0% | 118.3 | | 124.0 | | (5.7) | | (4.6)% |
| | Net Sales | Three Months Ended June 30, 2018 versus June 30, 2017 | Three Months Ended June 30, 2019 versus June 30, 2018 |
(Percent Change) | Americas | International | Consolidated | Americas | International | Consolidated |
GAAP reported sales change | 23.0% | 9.0% | 17.5% | 7.5% | (4.6)% | 3.0% |
Less: Currency translation effects | (1.5)% | 5.2% | 1.2% | |
Currency translation effects | | 0.6% | 5.1% | 2.4% |
Constant currency sales change | 24.5% | 3.8% | 16.3% | 8.1% | 0.5% | 5.4% |
Less: Acquisitions | 18.5% | —% | 11.2% | |
Organic constant currency change | 6.0% | 3.8% | 5.1% | |
Please refer to the Selling, general and administrative expenses table for a reconciliation of the yearperiod over yearperiod expense change.
Note: Organic constant currency change is a non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance. Constant currency change in selling, general, and administrative expenses is calculated by deducting the percentage impact from acquisitions and related strategic transaction costs as well as the currency translation effects from the overall percentage change in selling, general, and administrative expense. Management believes excluding acquisitions and currency translation effects provides investors with a greater level of clarity into spending levels on a year-over-year basis.
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.