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 unaudited 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 unaudited condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. The December 31, 2021, 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, 2021, which includes all disclosures required by U.S. GAAP.
During the fourth quarter of 2021, the Company changed its method of accounting for certain inventory in the United States from the last-in, first-out ("LIFO") method to the first-in, first-out ("FIFO") method. The FIFO method of accounting for inventory is preferable because it conforms the Company's entire inventory to a single method of accounting and improves comparability with the Company's peers. The effects of the change in accounting method from LIFO to FIFO have been retrospectively applied to all periods presented in all sections of this Quarterly Report. Refer to Note 4—Inventory of the consolidated financial statements in Part II Item 8 of our 2021 Form 10-K for further information related to the change in accounting principle.
Note 2—Cash and Cash Equivalents
Several of the Company's subsidiaries participate in a notional cash pooling arrangement to manage global liquidity requirements. As part of a master netting arrangement, the participants combine their cash balances in pooling accounts at the same financial institution with the ability to offset bank overdrafts of one participant against positive cash account balances held by another participant. Under the terms of the master netting arrangement, the financial institution has the right, ability and intent to offset a positive balance in one account against an overdrawn amount in another account. Amounts in each of the accounts are unencumbered and unrestricted with respect to use. As such, the net cash balance related to this pooling arrangement is included in Cash and cash equivalents in the unaudited Condensed Consolidated Balance Sheets.
The Company's net cash pool position consisted of the following:
| | | | | | | | |
| (In thousands) | | September 30, 2022 |
| Gross cash pool position | | $ | 60,019 | |
| Less: cash pool borrowings | | (58,071) | |
| Net cash pool position | | $ | 1,948 | |
Note 3—Restructuring Charges
During the three and nine months ended September 30, 2022, we recorded restructuring charges of $0.9 million and $3.1 million, respectively. International segment restructuring charges of $2.2 million during the nine months ended September 30, 2022, were primarily related to the implementation of our new European Shared Service Center in Warsaw, Poland. Americas segment restructuring charges of $1.0 million during the nine months ended September 30, 2022, were related to various optimization activities.
During the three and nine months ended September 30, 2021, we recorded restructuring charges of $3.9 million and $12.2 million, respectively. International segment restructuring charges of $10.0 million during the nine months ended September 30, 2021, were primarily related to our ongoing initiatives to drive profitable growth and rightsize our operations. Americas segment restructuring charges of $2.1 million during the nine months ended September 30, 2021, were primarily related to integration activities and costs associated with our global Fixed Gas & Flame Detection manufacturing footprint optimization as well as programs to adjust our operations in response to current business conditions.
Activity and reserve balances for restructuring by segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Americas | | International | | Corporate | | Total |
| Reserve balances at December 31, 2020 | $ | 2.8 | | | $ | 19.3 | | | $ | 0.4 | | | $ | 22.5 | |
| Restructuring charges | 4.6 | | | 11.2 | | | 0.6 | | | 16.4 | |
| Currency translation | (0.1) | | | (0.2) | | | — | | | (0.3) | |
| Cash payments / utilization | (4.0) | | | (12.9) | | | (0.7) | | | (17.6) | |
| Reserve balances at December 31, 2021 | $ | 3.3 | | | $ | 17.4 | | | $ | 0.3 | | | $ | 21.0 | |
| Restructuring charges (releases) | 1.0 | | | 2.2 | | | (0.1) | | | 3.1 | |
| Currency translation and other adjustments | 0.1 | | | (2.2) | | | — | | | (2.1) | |
| Cash payments | (3.2) | | | (6.2) | | | (0.2) | | | (9.6) | |
| Reserve balances at September 30, 2022 | $ | 1.2 | | | $ | 11.2 | | | $ | — | | | $ | 12.4 | |
Restructuring reserves are included in Accrued restructuring and other current liabilities in the accompanying unaudited Condensed Consolidated Balance Sheets.
Note 4—Inventories
The following table sets forth the components of inventory:
| | | | | | | | | | | | | | |
| (In thousands) | | September 30, 2022 | | December 31, 2021 |
| Finished products | | $ | 97,758 | | | $ | 87,657 | |
| Work in process | | 23,193 | | | 6,534 | |
| Raw materials and supplies | | 228,713 | | | 186,426 | |
| Total inventories | | $ | 349,664 | | | $ | 280,617 | |
Note 5—Property, Plant and Equipment
The following table sets forth the components of property, plant and equipment, net:
| | | | | | | | | | | |
| (In thousands) | September 30, 2022 | | December 31, 2021 |
| Land | $ | 4,697 | | | $ | 5,131 | |
| | | |
| Buildings | 134,567 | | | 136,272 | |
| Machinery and equipment | 443,705 | | | 435,652 | |
| Construction in progress | 27,753 | | | 36,552 | |
| Total | 610,722 | | | 613,607 | |
| Less: accumulated depreciation | (411,192) | | | (405,814) | |
| Property, plant and equipment, net | $ | 199,530 | | | $ | 207,793 | |
Note 6—Reclassifications Out of Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| MSA Safety Incorporated | | Noncontrolling Interests |
| Three Months Ended
September 30, | | Three Months Ended
September 30, |
| (In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Pension and other post-retirement benefits (a) | | | | | | | |
| Balance at beginning of period | $ | (52,702) | | | $ | (108,183) | | | $ | — | | | $ | — | |
| Amounts reclassified from accumulated other comprehensive loss into net income: | | | | | | | |
| Amortization of prior service credit (Note 15) | (48) | | | (24) | | | — | | | — | |
| Recognized net actuarial losses (Note 15) | 3,328 | | | 4,820 | | | — | | | — | |
| Tax benefit | (981) | | | (1,095) | | | — | | | — | |
| Total amount reclassified from accumulated other comprehensive loss, net of tax, into net income | 2,299 | | | 3,701 | | | — | | | — | |
| | | | | | | |
| Balance at end of period | $ | (50,403) | | | $ | (104,482) | | | $ | — | | | $ | — | |
| Available-for-sale securities | | | | | | | |
| Balance at beginning of period | $ | (23) | | | $ | (5) | | | $ | — | | | $ | — | |
| Unrealized net gains (losses) on available-for-sale securities (Note 17) | 13 | | | (11) | | | — | | | — | |
| Balance at end of period | $ | (10) | | | $ | (16) | | | $ | — | | | $ | — | |
| Foreign currency translation | | | | | | | |
| Balance at beginning of period | $ | (117,553) | | | $ | (70,957) | | | $ | — | | | $ | 280 | |
| Reclassification from accumulated other comprehensive loss into net income | 2,912 | | (b) | — | | | — | | | — | |
Acquisition of noncontrolling interest in consolidated subsidiaries | — | | | — | | | — | | | (280) | |
| Foreign currency translation adjustments | (32,361) | | | (13,868) | | | — | | | |
| Balance at end of period | $ | (147,002) | | | $ | (84,825) | | | $ | — | | | $ | — | |
(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 15—Pensions and Other Post-retirement Benefits).
(b) Reclassifications out of accumulated other comprehensive loss and into net income relate primarily to the approval of our plan to close a foreign subsidiary.
| | | | | | | | | | | | | | | | | | | | | | | |
| MSA Safety Incorporated | | Noncontrolling Interests |
| Nine Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Pension and other post-retirement benefits (a) | | | | | | | |
| Balance at beginning of period | $ | (57,296) | | | $ | (115,552) | | | $ | — | | | $ | — | |
| Amounts reclassified from accumulated other comprehensive loss into net income: | | | | | | | |
| Amortization of prior service credit (Note 15) | (144) | | | (72) | | | — | | | — | |
| Recognized net actuarial losses (Note 15) | 9,984 | | | 14,460 | | | — | | | — | |
| Tax benefit | (2,947) | | | (3,318) | | | — | | | — | |
| Total amount reclassified from accumulated other comprehensive loss, net of tax, into net income | 6,893 | | | 11,070 | | | — | | | — | |
| | | | | | | |
| Balance at end of period | $ | (50,403) | | | $ | (104,482) | | | $ | — | | | $ | — | |
| Available-for-sale securities | | | | | | | |
| Balance at beginning of period | $ | (5) | | | $ | (1) | | | $ | — | | | $ | — | |
| Unrealized net losses on available-for-sale securities (Note 17) | (5) | | | (15) | | | — | | | — | |
| Balance at end of period | $ | (10) | | | $ | (16) | | | $ | — | | | $ | — | |
| Foreign currency translation | | | | | | | |
| Balance at beginning of period | $ | (91,839) | | | $ | (66,844) | | | $ | — | | | $ | 372 | |
| Reclassification from accumulated other comprehensive loss into net income | 2,912 | | (b) | — | | | — | | | — | |
Acquisition of noncontrolling interest in consolidated subsidiaries (Note 14) | — | | | — | | | — | | | (280) | |
| Foreign currency translation adjustments | $ | (58,075) | | | $ | (17,981) | | | $ | — | | | $ | (92) | |
| Balance at end of period | $ | (147,002) | | | $ | (84,825) | | | $ | — | | | $ | — | |
(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 15—Pensions and Other Post-retirement Benefits).
(b) Reclassifications out of accumulated other comprehensive loss and into net income relate primarily to the approval of our plan to close a foreign subsidiary.
Note 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 52,998 shares held in treasury at September 30, 2022. The Treasury shares at cost line in the unaudited Condensed Consolidated Balance Sheets includes $1.8 million related to preferred stock. There were no treasury purchases of preferred stock shares during both the nine months ended September 30, 2022 and 2021. 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 September 30, 2022.
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, 2021. No new shares were issued during the nine months ended September 30, 2022 or 2021. There were 39,197,700 and 39,276,518 shares outstanding at September 30, 2022 and December 31, 2021, respectively.
Treasury Shares - The Company's share repurchase program authorizes up to $100.0 million to repurchase MSA common stock in the open market and in private transactions. The share repurchase program has no expiration date. The maximum number of shares that may be repurchased is calculated based on the dollars remaining under the program and the respective month-end closing share price. During the nine months ended September 30, 2022, 251,408 shares were repurchased under this program. During the nine months ended September 30, 2021, no shares were repurchased under this program. There were 22,883,691 and 22,804,873 Treasury Shares at September 30, 2022 and December 31, 2021, respectively.
The Company issues Treasury Shares for all stock-based compensation plans. Shares are issued from Treasury at the average Treasury Share cost on the date of the transaction. There were 203,619 and 37,478 Treasury Shares issued for these purposes during the nine months ended September 30, 2022 and 2021, respectively.
Common stock activity is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 |
| (In thousands) | Common
Stock | | Treasury
Cost | | Common
Stock | | Treasury
Cost |
| Balance at beginning of period | $ | 267,645 | | | $ | (359,314) | | | $ | 253,773 | | | $ | (329,439) | |
| Stock compensation expense | 2,967 | | | — | | | 2,867 | | | — | |
| Restricted and performance stock awards | (103) | | | 103 | | | (159) | | | 159 | |
| Stock options exercised | 2,501 | | | 1,364 | | | 354 | | | 155 | |
| Treasury shares purchased for stock compensation programs | — | | | (59) | | | — | | | (625) | |
| | | | | | | |
Acquisition of noncontrolling interest in consolidated subsidiaries | — | | | — | | | (4,751) | | | — | |
| | | | | | | |
| Share repurchase program | — | | | (2,150) | | | — | | | — | |
| Balance at end of period | $ | 273,010 | | | $ | (360,056) | | | $ | 252,084 | | | $ | (329,750) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
| (In thousands) | Common
Stock | | Treasury
Cost | | Common
Stock | | Treasury
Cost |
| Balance at beginning of period | $ | 260,121 | | | $ | (328,776) | | | $ | 242,693 | | | $ | (326,156) | |
| Stock compensation expense | 11,325 | | | — | | | 13,562 | | | — | |
| Restricted and performance stock awards | (1,564) | | | 1,564 | | | (1,662) | | | 1,662 | |
| Stock options exercised | 2,704 | | | 1,459 | | | 1,833 | | | 838 | |
| Treasury shares purchased for stock compensation programs | — | | | (3,990) | | | — | | | (6,137) | |
| | | | | | | |
Acquisition of noncontrolling interest in consolidated subsidiaries | — | | | — | | | (4,751) | | | — | |
| Employee stock purchase program | 424 | | | 62 | | | 409 | | | 43 | |
| Share repurchase program | — | | | (30,375) | | | — | | | — | |
| Balance at end of period | $ | 273,010 | | | $ | (360,056) | | | $ | 252,084 | | | $ | (329,750) | |
Note 8—Segment Information
We are organized into four geographical operating segments that are based on management responsibilities: Northern North America, Latin America, Europe, Middle East & Africa, and Asia Pacific. The operating segments have been aggregated (based on economic similarities, the nature of their products, end-user markets and methods of distribution) into three reportable segments: Americas, International, and Corporate.
The Americas segment is comprised of our operations in Northern North American and Latin American 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 net 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 EBITDA margin are the measures used by the chief operating decision maker to evaluate segment performance and allocate resources. Adjusted operating income (loss) is defined as operating income excluding restructuring charges, currency exchange (gains) losses, product liability expense, acquisition related costs, including acquisition related amortization. Adjusted operating margin is defined as adjusted operating income (loss) divided by segment net sales to external customers. Adjusted EBITDA is defined as adjusted operating income (loss) plus depreciation and amortization. Adjusted EBITDA margin is defined as adjusted EBITDA divided by segment net sales to external customers.
The accounting principles applied at the operating segment level in determining operating income (loss) are generally the same as those applied at the unaudited condensed consolidated financial statements 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, except percentage amounts) | | Americas | | International | | Corporate | | | | Consolidated
Totals |
| Three Months Ended September 30, 2022 | | | | | | | | | | |
| Net sales to external customers | | $ | 276,082 | | | $ | 105,612 | | | $ | — | | | | | $ | 381,694 | |
| | | | | | | | | | |
| Operating income | | | | | | | | | | 64,313 | |
| Restructuring charges (Note 3) | | | | | | | | | | 899 | |
| Currency exchange losses, net | | | | | | | | | | 2,979 | |
| Product liability expense (Note 18) | | | | | | | | | | 4,035 | |
Acquisition related costs(a) | | | | | | | | | | 2,899 | |
| | | | | | | | | | |
| Adjusted operating income (loss) | | 75,088 | | | 8,448 | | | (8,411) | | | | | 75,125 | |
| Adjusted operating margin % | | 27.2 | % | | 8.0 | % | | | | | | |
Depreciation and amortization(a) | | | | | | | | | | 11,518 | |
| Adjusted EBITDA | | 83,945 | | | 10,980 | | | (8,282) | | | | | 86,643 | |
| Adjusted EBITDA margin % | | 30.4 | % | | 10.4 | % | | | | | | |
| | | | | | | | | | |
| Nine Months Ended September 30, 2022 | | | | | | | | | | |
| Net sales to external customers | | $ | 754,116 | | | $ | 330,583 | | | $ | — | | | | | $ | 1,084,699 | |
| | | | | | | | | | |
| Operating income | | | | | | | | | | 168,517 | |
| Restructuring charges (Note 3) | | | | | | | | | | 3,146 | |
| Currency exchange losses, net | | | | | | | | | | 4,788 | |
| Product liability expense (Note 18) | | | | | | | | | | 9,733 | |
Acquisition related costs(a) | | | | | | | | | | 8,398 | |
| | | | | | | | | | |
| Adjusted operating income (loss) | | 184,664 | | | 34,674 | | | (24,756) | | | | | 194,582 | |
| Adjusted operating margin % | | 24.5 | % | | 10.5 | % | | | | | | |
Depreciation and amortization(a) | | | | | | | | | | 34,961 | |
| Adjusted EBITDA | | 210,201 | | | 43,708 | | | (24,366) | | | | | 229,543 | |
| Adjusted EBITDA margin % | | 27.9 | % | | 13.2 | % | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(a)Acquisition related costs include advisory, legal, accounting, valuation, and other professional or consulting fees incurred during due diligence and integration. These costs are included in Selling, general and administrative expense in the unaudited Condensed Consolidated Statements of Income. Acquisition related costs also include the acquisition related amortization, which is included in Cost of products sold in the unaudited Condensed Consolidated Statements of Income.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands, except percentage amounts) | | Americas | | International | | Corporate | | | | Consolidated
Totals |
| Three Months Ended September 30, 2021 | | | | | | | | | | |
| Net sales to external customers | | $ | 229,076 | | | $ | 111,121 | | | $ | — | | | | | $ | 340,197 | |
| | | | | | | | | | |
| Operating income | | | | | | | | | | 32,402 | |
| Restructuring charges (Note 3) | | | | | | | | | | 3,853 | |
| Currency exchange losses, net | | | | | | | | | | 100 | |
| Product liability expense (Note 18) | | | | | | | | | | 10,688 | |
Acquisition related costs(a) | | | | | | | | | | 7,351 | |
| | | | | | | | | | |
| Adjusted operating income (loss) | | 47,624 | | | 12,780 | | | (6,010) | | | | | 54,394 | |
| Adjusted operating margin % | | 20.8 | % | | 11.5 | % | | | | | | |
Depreciation and amortization(a) | | | | | | | | | | 11,823 | |
| Adjusted EBITDA | | 55,774 | | | 16,323 | | | (5,880) | | | | | 66,217 | |
| Adjusted EBITDA margin % | | 24.3 | % | | 14.7 | % | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | |
| Nine Months Ended September 30, 2021 | | | | | | | | | | |
| Net sales to external customers | | $ | 655,123 | | | $ | 334,792 | | | $ | — | | | | | $ | 989,915 | |
| | | | | | | | | | |
| Operating income | | | | | | | | | | 111,619 | |
| Restructuring charges (Note 3) | | | | | | | | | | 12,239 | |
| Currency exchange gains, net | | | | | | | | | | (359) | |
| Product liability expense (Note 18) | | | | | | | | | | 25,235 | |
Acquisition related costs(a) | | | | | | | | | | 11,891 | |
| | | | | | | | | | |
| Adjusted operating income (loss) | | 142,160 | | | 41,982 | | | (23,517) | | | | | 160,625 | |
| Adjusted operating margin % | | 21.7 | % | | 12.5 | % | | | | | | |
Depreciation and amortization(a) | | | | | | | | | | 33,716 | |
| Adjusted EBITDA | | 165,243 | | | 52,283 | | | (23,185) | | | | | 194,341 | |
| Adjusted EBITDA margin % | | 25.2 | % | | 15.6 | % | | | | | | |
| | | | | | | | | | |
| *Prior periods have been adjusted to reflect the change in inventory accounting method, as described in the Company's fiscal 2021 Annual Report on Form 10-K. Adjustments were made to Americas and International. |
| | | | | | | | | | |
(a)Acquisition related costs include advisory, legal, accounting, valuation, and other professional or consulting fees incurred during due diligence and integration. These costs are included in Selling, general and administrative expense in the unaudited Condensed Consolidated Statements of Income. Acquisition-related costs also include the acquisition related amortization, which is included in Cost of products sold in the unaudited Condensed Consolidated Statements of Income.
Total sales by product group was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | Consolidated | | Americas | | International |
| (In thousands, except percentages) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
| Breathing Apparatus | $ | 91,977 | | 24% | | $ | 70,482 | | 26% | | $ | 21,495 | | 20% |
Fixed Gas & Flame Detection (a) | 87,746 | | 23% | | 62,134 | | 23% | | 25,612 | | 24% |
| Firefighter Helmets & Protective Apparel | 54,738 | | 14% | | 41,958 | | 15% | | 12,780 | | 12% |
| Portable Gas Detection | 39,481 | | 10% | | 28,358 | | 10% | | 11,123 | | 11% |
| Industrial Head Protection | 43,608 | | 11% | | 34,620 | | 13% | | 8,988 | | 9% |
| Fall Protection | 27,839 | | 7% | | 17,658 | | 6% | | 10,181 | | 10% |
Other (b) | 36,305 | | 11% | | 20,872 | | 7% | | 15,433 | | 14% |
| Total | $ | 381,694 | | 100% | | $ | 276,082 | | 100% | | $ | 105,612 | | 100% |
| | | | | | | | |
| Nine Months Ended September 30, 2022 | Consolidated | | Americas | | International |
| (In thousands, except percentages) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
| Breathing Apparatus | $ | 254,878 | | 23% | | $ | 185,490 | | 25% | | $ | 69,388 | | 21% |
Fixed Gas & Flame Detection (a) | 251,321 | | 23% | | 167,269 | | 22% | | 84,052 | | 25% |
| Firefighter Helmets & Protective Apparel | 151,097 | | 14% | | 110,471 | | 15% | | 40,626 | | 12% |
| Portable Gas Detection | 121,116 | | 11% | | 85,815 | | 11% | | 35,301 | | 11% |
| Industrial Head Protection | 123,489 | | 11% | | 96,808 | | 13% | | 26,681 | | 8% |
| Fall Protection | 79,114 | | 7% | | 50,940 | | 7% | | 28,174 | | 9% |
Other (b) | 103,684 | | 11% | | 57,323 | | 7% | | 46,361 | | 14% |
| Total | $ | 1,084,699 | | 100% | | $ | 754,116 | | 100% | | $ | 330,583 | | 100% |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 | Consolidated | | Americas | | International |
| (In thousands, except percentages) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
| Breathing Apparatus | $ | 70,790 | | 21% | | $ | 46,095 | | 20% | | $ | 24,695 | | 22% |
Fixed Gas & Flame Detection (a) | 79,786 | | 23% | | 53,787 | | 23% | | 25,999 | | 23% |
| Firefighter Helmets & Protective Apparel | 49,366 | | 15% | | 34,101 | | 15% | | 15,265 | | 14% |
| Portable Gas Detection | 41,853 | | 12% | | 29,186 | | 13% | | 12,667 | | 11% |
| Industrial Head Protection | 36,764 | | 11% | | 28,982 | | 13% | | 7,782 | | 7% |
| Fall Protection | 28,223 | | 8% | | 17,743 | | 8% | | 10,480 | | 9% |
Other (b) | 33,415 | | 10% | | 19,182 | | 8% | | 14,233 | | 14% |
| Total | $ | 340,197 | | 100% | | $ | 229,076 | | 100% | | $ | 111,121 | | 100% |
| | | | | | | | |
| Nine Months Ended September 30, 2021 | Consolidated | | Americas | | International |
| (In thousands, except percentages) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
| Breathing Apparatus | $ | 217,094 | | 22% | | $ | 146,329 | | 22% | | $ | 70,765 | | 21% |
Fixed Gas & Flame Detection (a) | 204,825 | | 21% | | 127,014 | | 19% | | 77,811 | | 23% |
| Firefighter Helmets & Protective Apparel | 148,497 | | 15% | | 105,513 | | 16% | | 42,984 | | 13% |
| Portable Gas Detection | 118,102 | | 12% | | 80,281 | | 12% | | 37,821 | | 11% |
| Industrial Head Protection | 107,615 | | 11% | | 82,913 | | 13% | | 24,702 | | 7% |
| Fall Protection | 85,098 | | 9% | | 51,093 | | 8% | | 34,005 | | 10% |
Other (b) | 108,684 | | 10% | | 61,980 | | 10% | | 46,704 | | 15% |
| Total | $ | 989,915 | | 100% | | $ | 655,123 | | 100% | | $ | 334,792 | | 100% |
(a)Fixed Gas & Flame Detection includes sales from the Bacharach, Inc. and its affiliated companies ("Bacharach") acquisition for periods following July 1, 2021 (Americas and International).
(b)Other products include sales of Air Purifying Respirators.
Note 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 compensation awards that contain nonforfeitable rights to dividends.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amounts attributable to MSA Safety Incorporated common shareholders: | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands, except per share amounts) | | 2022 | | 2021 | | 2022 | | 2021 |
| Net income | | $ | 44,906 | | | $ | 21,180 | | | $ | 128,141 | | | $ | 82,816 | |
| Preferred stock dividends | | (10) | | | (10) | | | (30) | | | (30) | |
| Net income available to common equity | | 44,896 | | | 21,170 | | | 128,111 | | | 82,786 | |
| Dividends and undistributed earnings allocated to participating securities | | (8) | | | (3) | | | (21) | | | (25) | |
| Net income available to common shareholders | | 44,888 | | | 21,167 | | | 128,090 | | | 82,761 | |
| | | | | | | | |
| Basic weighted-average shares outstanding | | 39,172 | | | 39,194 | | | 39,243 | | | 39,152 | |
| Stock-based compensation awards | | 127 | | | 236 | | | 171 | | | 272 | |
| Diluted weighted-average shares outstanding | | 39,299 | | | 39,430 | | | 39,414 | | | 39,424 | |
| | | | | | | | |
| | | | | | | | |
| Earnings per share: | | | | | | | | |
| Basic | | $ | 1.15 | | | $ | 0.54 | | | $ | 3.26 | | | $ | 2.11 | |
| Diluted | | $ | 1.14 | | | $ | 0.54 | | | $ | 3.25 | | | $ | 2.10 | |
| | | | | | | | |
| *Prior periods have been adjusted to reflect the change in inventory accounting method, as described in the Company's fiscal 2021 Annual Report on Form 10-K. |
Note 10—Income Taxes
The Company's effective tax rate for the third quarter of 2022 was 26.0%, which differs from the United States of America ("U.S.") federal statutory rate of 21% primarily due to state income taxes and nondeductible foreign exchange on entity closures. The Company's effective tax rate for the third quarter of 2021 was 31.5%, which differs from the U.S. federal statutory rate of 21% primarily due to state income taxes, U.S. tax on foreign dividends, and nondeductible transaction costs, partially offset by tax benefits on certain share-based payments.
The Company's effective tax rate for the nine months ended September 30, 2022, was 24.4% which differs from the U.S. federal statutory rate of 21% primarily due to state income taxes and nondeductible foreign exchange on entity closures. The Company's effective tax rate for the nine months ended September 30, 2021, was 26.0%, which differs from the U.S. federal statutory rate of 21% primarily due to statutory rate increases in foreign jurisdictions and nondeductible executive compensation, partially offset by tax benefits on certain share-based payments.
At September 30, 2022, the Company had a gross liability for unrecognized tax benefits of $4.6 million. The Company has recognized tax benefits associated with these liabilities of $2.2 million at September 30, 2022. The gross liability includes amounts associated with foreign tax exposure in prior periods.
The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense and operating expenses, respectively. The Company's liability for accrued interest related to uncertain tax positions was $1.0 million at September 30, 2022.
We are subject to regular review and audit by both foreign and domestic tax authorities. While we believe our tax positions will be sustained, the final outcome of tax audits and related litigation may differ materially from the tax amounts recorded in our unaudited condensed consolidated financial statements.
Note 11—Stock Plans
The 2016 Management Equity Incentive Plan provides for various forms of stock-based compensation for eligible employees through May 2026 including stock options, restricted stock awards, restricted stock units and performance stock units. The 2017 Non-Employee Directors’ Equity Incentive Plan provides for grants of stock options and restricted stock to non-employee directors through May 2027.
Stock compensation expense is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Stock compensation expense | | $ | 2,967 | | | $ | 2,867 | | | $ | 11,325 | | | $ | 13,562 | |
| Income tax benefit | | 727 | | | 691 | | | 2,775 | | | 3,269 | |
| Stock compensation expense, net of tax | | $ | 2,240 | | | $ | 2,176 | | | $ | 8,550 | | | $ | 10,293 | |
A summary of stock option activity for the nine months ended September 30, 2022, is as follows:
| | | | | | | | | | | | | | |
| | Shares | | Weighted Average
Exercise Price |
| Outstanding at January 1, 2022 | | 161,701 | | | $ | 45.47 | |
| | | | |
| Exercised | | (92,833) | | | 44.84 | |
| | | | |
| | | | |
| Outstanding at September 30, 2022 | | 68,868 | | | 46.32 | |
| Exercisable at September 30, 2022 | | 68,861 | | | $ | 46.32 | |
Restricted stock awards and restricted stock units are valued at the market value of the stock on the grant date. A summary of restricted stock activity for the nine months ended September 30, 2022, is as follows:
| | | | | | | | | | | | | | |
| | Shares | | Weighted Average
Grant Date Fair Value |
| Unvested at January 1, 2022 | | 118,343 | | | $ | 132.62 | |
| Granted | | 78,023 | | | 130.77 | |
| Vested | | (49,661) | | | 113.52 | |
| Forfeited | | (8,041) | | | 138.63 | |
| Unvested at September 30, 2022 | | 138,664 | | | $ | 138.07 | |
Performance stock units that have a market condition modifier are valued at an estimated fair value using a Monte Carlo model. The final number of shares to be issued for performance stock units granted in 2022 may range from 0% to 200% of the target award based on achieving the specified performance targets over the performance period plus an additional modifier based on total shareholder return ("TSR") over the performance period. The following weighted average assumptions were used in estimating the fair value of the performance stock units granted in the first quarter of 2022.
| | | | | | | | |
| Fair value per unit | $143.60 | | | |
| Risk-free interest rate | 1.72% | | | |
| Expected dividend yield | 1.14% | | | |
| Expected volatility | 34.4% | | | |
| MSA stock beta | 0.890 | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
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 three year historical volatility preceding the grant date using daily stock prices. Expected life is based on historical stock option exercise data.
A summary of performance stock unit activity for the nine months ended September 30, 2022, is as follows:
| | | | | | | | | | | | | | |
| | Shares | | Weighted Average
Grant Date Fair Value |
| Unvested at January 1, 2022 | | 193,335 | | | $ | 129.86 | |
| Granted | | 81,504 | | | 142.38 | |
| Performance adjustments | | (22,147) | | | 99.84 | |
| Vested | | (55,447) | | | 101.38 | |
| Forfeited | | (18,180) | | | 147.81 | |
| Unvested at September 30, 2022 | | 179,065 | | | $ | 146.27 | |
The performance adjustments above relate primarily to the final number of shares issued for the 2019 performance unit awards which vested in the first quarter of 2022 at 64.2% of the target award based on both cumulative performance against the EBITDA margin and revenue growth targets and MSA's TSR during the three-year performance period.
Note 12—Long-Term Debt
| | | | | | | | | | | |
| (In thousands) | September 30, 2022 | | December 31, 2021 |
2016 Senior Notes payable through 2031, 3.40%, net of debt issuance costs | $ | 61,267 | | | $ | 74,203 | |
2021 Senior Notes payable through 2036, 2.69%, net of debt issuance costs | 99,706 | | | 99,694 | |
2021 Senior Notes payable through 2036, 2.69%, net of debt issuance costs | 99,706 | | | 99,694 | |
| Senior revolving credit facility maturing in 2026, net of debt issuance costs | 343,985 | | | 324,060 | |
| Total | 604,664 | | | 597,651 | |
| Amounts due within one year | 6,820 | | | — | |
| Long-term debt, net of debt issuance costs | $ | 597,844 | | | $ | 597,651 | |
On May 24, 2021, the Company entered into a Fourth Amended and Restated Credit Agreement (the “Revolving Credit Facility" or "Facility”) that extended its term through May 24, 2026 and increased the capacity to $900.0 million. Under the amended agreement, the Company may elect either a Base rate of interest (“BASE”) or an interest rate based on the London Interbank Offered Rate (“LIBOR”). The BASE is a daily fluctuating per annum rate equal to the highest of (i) 0.00%, (ii) the Prime Rate, (iii) the Federal Funds Open Rate plus one half of one percent (0.5%), (iv) the Overnight Bank Funding Rate, plus one half of one percent (0.5%), or (v) the Daily LIBOR Rate plus one percent (1.00%). The Company pays a credit spread of 0 to 175 basis points based on the Company’s net EBITDA leverage ratio and elected rate (BASE or LIBOR). The Company has a weighted average revolver interest rate of 3.69% as of September 30, 2022. At September 30, 2022, $552.8 million of the existing $900.0 million Revolving Credit Facility was unused, including letters of credit issued under the Facility. The Facility also provides an accordion feature that allows the Company to access an additional $400.0 million of capacity pending approval by MSA’s board of directors and from the bank group.
On July 1, 2021 the Company entered into a Third Amended and Restated Multi-Currency Note Purchase and Private Shelf Agreement (the “Prudential Note Agreement”) with PGIM, Inc. (“Prudential”). The Prudential Note Agreement provided for (i) the issuance of $100.0 million of 2.69% Series C Senior Notes due July 1, 2036 and (ii) the establishment of an uncommitted note issuance facility whereby the Company may request, subject to Prudential’s acceptance in its sole discretion, the issuance of up to $335.0 million aggregate principal amount of senior unsecured notes. As of September 30, 2022, the Company had issued £54.9 million (approximately $61.4 million at September 30, 2022) of 3.4% Series B Senior Notes due January 22, 2031. Maturities of this note are £6.1 million (approximately $6.8 million at September 30, 2022) due January 22, 2023 with annual maturities of £6.1 million through January 2031.
On July 1, 2021, the Company entered into a Second Amended and Restated Master Note Facility (the “NYL Note Facility”) with NYL Investors. The NYL Note Facility provided for (i) the issuance of $100.0 million of 2.69% Series A Senior Notes due July 1, 2036 and (ii) the establishment of an uncommitted note issuance facility whereby the Company may request, subject to NYL Investors’ acceptance in its sole discretion, the issuance of up to $200.0 million aggregate principal amount of senior unsecured notes.
The Revolving Credit Facility, Prudential Note Agreement and NYL Note Facility require the Company to comply with specified financial covenants, including a requirement to maintain a minimum fixed charges coverage ratio of not less than 1.50 to 1.00 and a consolidated leverage ratio not to exceed 3.50 to 1.00; except during an acquisition period, defined as four consecutive fiscal quarters beginning with the quarter of acquisition, in which case the consolidated net leverage ratio shall not exceed 4.00 to 1.00; in each case calculated on the basis of the trailing four fiscal quarters. In addition, the agreements contain negative covenants limiting the ability of the Company and its subsidiaries to incur additional indebtedness or issue guarantees, create or incur liens, make loans and investments, make acquisitions, transfer or sell assets, enter into transactions with affiliated parties, make changes in its organizational documents that are materially adverse to lenders or modify the nature of the Company's or its subsidiaries' business. All credit facilities exclude the subsidiary, Mine Safety Appliances Company,
LLC.
On July 1, 2021, the Company acquired Bacharach in a transaction valued at $329.4 million, net of cash acquired. The acquisition was partially financed by $200.0 million of 2.69% Senior Notes from the Prudential Note Agreement and NYL Note Facility. The remaining purchase price was financed under the Revolving Credit Facility.
During August 2021, the Company amended its Revolving Credit Facility to transition from Sterling LIBOR reference rates to Sterling Overnight Interbank Average Rate ("SONIA") reference rates. The Company will apply the optional expedients in ASC 848, Reference Rate Reform, to this modification and potential future modifications driven by reference rate reform, accounting for the modifications as a continuation of the existing contracts. Therefore, these modifications will not require remeasurement at the modification date or a reassessment of previous accounting determinations. As such, the Company does not anticipate the change in reference rates will have an impact on the Company’s unaudited condensed consolidated financial statements. Management continues to evaluate the Company’s other outstanding U.S. LIBOR based contracts to determine whether reference rate modifications are necessary.
As of September 30, 2022, the Company was in full compliance with the restrictive covenants under its various credit agreements.
The Company had outstanding bank guarantees and standby letters of credit with banks as of September 30, 2022, totaling $9.2 million, of which $1.5 million relate to the Revolving Credit Facility. The letters of credit serve to cover customer requirements in connection with certain sales orders and insurance companies. The Company is also required to provide cash collateral in connection with certain arrangements. At September 30, 2022, the Company has $1.7 million of restricted cash in support of these arrangements.
Note 13—Goodwill and Intangible Assets, Net
Changes in goodwill during the nine months ended September 30, 2022 were as follows:
| | | | | |
| |
| (In thousands) | Goodwill |
| Balance at January 1, 2022 | $ | 636,858 | |
| Measurement Period Adjustment | (1,041) | |
| Currency translation | (28,656) | |
| Balance at September 30, 2022 | $ | 607,161 | |
At September 30, 2022, goodwill of $447.6 million and $159.6 million related to the Americas and International reportable segments, respectively.
Changes in intangible assets, net, during the nine months ended September 30, 2022, were as follows:
| | | | | |
| |
| (In thousands) | Intangible Assets |
| Net balance at January 1, 2022 | $ | 306,948 | |
| |
| Amortization expense | (14,701) | |
| Currency translation | (10,786) | |
| Net balance at September 30, 2022 | $ | 281,461 | |
At September 30, 2022, intangible assets, net, includes a trade name related to the Globe acquisition with an indefinite life totaling $60.0 million.
Note 14—Acquisitions
Acquisition of Bacharach
On July 1, 2021, we acquired 100% of the common stock of Bacharach. Bacharach, which is headquartered in New Kensington, PA, is a leader in gas detection technologies used in the heating, ventilation, air conditioning, and refrigeration markets. This acquisition expanded MSA’s gas detection portfolio and leverages MSA’s product and manufacturing expertise into new markets.
The Company finalized the purchase price allocation during the second quarter of 2022. The following table summarizes the fair values of the Bacharach assets acquired and liabilities assumed at the date of the acquisition:
| | | | | |
| (In millions) | July 1, 2021 |
Current assets (including cash of $11.7 million) | $ | 32.1 | |
| Property, plant and equipment and other noncurrent assets | 4.3 | |
| Customer relationships | 123.0 | |
| Developed technology | 20.5 | |
| Trade name | 15.0 | |
| Goodwill | 193.5 | |
| Total assets acquired | 388.4 | |
| Total liabilities assumed | (47.3) | |
| Net assets acquired | $ | 341.1 | |
Acquisition of Bristol Uniforms and Bell Apparel ("Bristol")
On January 25, 2021, we acquired 100% of the common stock of B T Q Limited, including Bristol. Bristol, which is headquartered in the U.K., is a leading innovator and provider of protective apparel to the fire, rescue services, and utility sectors.
The Company finalized the purchase price allocation during the first quarter of 2022. The following table summarizes the fair values of the Bristol assets acquired and liabilities assumed at the date of the acquisition:
| | | | | |
| (In millions) | January 25, 2021 |
Current assets (including cash of $13.3 million) | $ | 37.1 | |
| Net investment in sales-type leases, noncurrent | 29.0 | |
| Property, plant and equipment and other noncurrent assets | 12.0 | |
| Customer relationships | 4.5 | |
| Trade name and other intangible assets | 1.4 | |
| Goodwill | 4.9 | |
| Total assets acquired | 88.9 | |
| Total liabilities assumed | (12.6) | |
| Net assets acquired | $ | 76.3 | |
Acquisition of Noncontrolling Interest
During July 2021, the Company purchased the remaining noncontrolling interest in MSA (China) Safety Equipment Co., Ltd. from our China partner for $19 million, inclusive of a $6 million dividend.
Note 15—Pensions and Other Post-retirement Benefits
Components of net periodic benefit (income) cost consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Benefits |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Three Months Ended September 30, | | | | | | | | |
| Service cost | | $ | 3,099 | | | $ | 3,264 | | | $ | 82 | | | $ | 99 | |
| Interest cost | | 3,613 | | | 2,941 | | | 148 | | | 121 | |
| Expected return on plan assets | | (12,418) | | | (9,532) | | | — | | | — | |
| Amortization of prior service cost (credit) | | 36 | | | 66 | | | (84) | | | (90) | |
| Recognized net actuarial losses | | 3,018 | | | 4,421 | | | 310 | | | 399 | |
| | | | | | | | |
Net periodic benefit (income) cost (a) | | $ | (2,652) | | | $ | 1,160 | | | $ | 456 | | | $ | 529 | |
| | | | | | | | |
| | | | | | | | |
| Nine Months Ended September 30, | | | | | | | | |
| Service cost | | $ | 9,297 | | | $ | 9,748 | | | $ | 246 | | | $ | 297 | |
| Interest cost | | 10,839 | | | 8,575 | | | 444 | | | 353 | |
| Expected return on plan assets | | (37,254) | | | (27,826) | | | — | | | — | |
| Amortization of prior service cost (credit) | | 108 | | | 198 | | | (252) | | | (270) | |
| Recognized net actuarial losses | | 9,054 | | | 13,263 | | | 930 | | | 1,197 | |
| Settlements | | — | | | (1,879) | |
| — | | | — | |
Net periodic benefit (income) cost (a) | | $ | (7,956) | | | $ | 2,079 | | | $ | 1,368 | | | $ | 1,577 | |
(a) Components of net periodic benefit (income) cost other than service cost are included in the line item Other income, net, and service costs are included in the line items Cost of products sold and Selling, general and administrative in the unaudited Condensed Consolidated Statements of Income.
We made contributions of $5.7 million and $5.8 million to our pension plans during the nine months ended September 30, 2022 and 2021, respectively. We expect to make total contributions of $7.7 million to our pension plans in 2022, which are primarily associated with statutorily required plans in the International reporting segment.
Note 16—Derivative Financial Instruments
As part of our currency exchange rate risk management strategy, we enter into certain derivative foreign currency forward contracts that do not meet the U.S. GAAP criteria for hedge accounting but have the impact of partially offsetting certain of our 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 Statements of Income. The notional amount of open forward contracts was $96.3 million and $99.0 million at September 30, 2022, and December 31, 2021, respectively.
The following table presents the unaudited Condensed Consolidated Balance Sheets location and fair value of assets and liabilities associated with derivative financial instruments:
| | | | | | | | | | | | | | |
| (In thousands) | | September 30, 2022 | | December 31, 2021 |
| Derivatives not designated as hedging instruments: | | | | |
| Foreign exchange contracts: prepaid expenses and other current assets | | $ | 417 | | | $ | 619 | |
| Foreign exchange contracts: accrued restructuring and other current liabilities | | 1,843 | | | 128 | |
The following table presents the unaudited Condensed Consolidated Statements of Income and unaudited Condensed Consolidated Statements of Cash Flows location and impact of derivative financial instruments:
| | | | | | | | | | | | | | |
| | | Loss Recognized in Income |
| | | Nine Months Ended September 30, |
| (In thousands) | | 2022 | | 2021 |
| Derivatives not designated as hedging instruments: | | | | |
| Foreign exchange contracts: currency exchange losses (gains), net | | $ | 13,586 | | | $ | 3,275 | |
Note 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 include the derivative financial instruments described in Note 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. With the exception of our investments in marketable securities and fixed rate long-term debt, we believe that the reported carrying amounts of our financial assets and liabilities approximate their fair values.
We value our investments in available-for-sale marketable securities, primarily fixed income, at fair value using quoted market prices for similar securities or pricing models. Accordingly, the fair values of the investments are classified within Level 2 of the fair value hierarchy. The amortized cost basis of our investments was $24.9 million and $49.0 million as of September 30, 2022 and December 31, 2021, respectively. The fair value was $24.9 million and $49.0 million as of September 30, 2022 and December 31, 2021, respectively, which was reported in Investments, short-term in the accompanying unaudited Condensed Consolidated Balance Sheets. The change in fair value is recorded in Other comprehensive income, net of tax. The Company does not intend to sell, nor is it more likely than not that we will be required to sell, these securities prior to recovery of their cost. As such, management believes that any unrealized gains or losses are temporary and to the extent that unrealized losses are present, management has not identified such losses to be other than temporary in nature. Accordingly, no impairment 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 gain position as of September 30, 2022.
The reported carrying amount of our fixed rate long-term debt was $261.4 million and $274.3 million at September 30, 2022, and December 31, 2021, respectively. The fair value of this debt was $207.4 million and $279.8 million at September 30, 2022, and December 31, 2021, 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 18—Contingencies
Product liability
The Company and its subsidiaries face an inherent business risk of exposure to legal 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. Management has established reserves for the single incident product liability claims of its various subsidiaries, including, asserted single incident product liability claims and incurred but not reported ("IBNR") single incident claims. To determine the reserves, Management makes reasonable estimates of losses for single incident claims based on the number and characteristics of asserted claims, historical experience, sales volumes, expected settlement costs, and other relevant information. The reserve for single incident product liability claims was $1.4 million at both September 30, 2022 and December 31, 2021. Single incident product liability expense was minimal during the nine months ended September 30, 2022 and a benefit of $0.1 million during the nine months ended September 30, 2021. Single incident product liability exposures are evaluated on an annual basis, or more frequently if changing circumstances warrant. Adjustments are made to the reserve as appropriate. The reserve has not been discounted to present value and does not include future amounts which will be spent to defend the claims.
Cumulative trauma product liability claims. Cumulative trauma product liability claims involve alleged 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 subsidiaries, Mine Safety Appliances Company, LLC ("MSA LLC"), was named as a defendant in 1,544 lawsuits comprised of 4,193 claims as of September 30, 2022. These lawsuits mainly involve respiratory protection products allegedly manufactured and sold by MSA LLC or its predecessors. The product models alleged were manufactured many years ago by MSA LLC and are no longer sold.
A summary of cumulative trauma product liability lawsuits and asserted cumulative trauma product liability claims activity is as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2022 | | Year Ended
December 31, 2021 |
| Open lawsuits, beginning of period | | 1,675 | | | 1,622 | |
| New lawsuits | | 204 | | | 432 | |
| Settled and dismissed lawsuits | | (335) | | | (379) | |
| Open lawsuits, end of period | | 1,544 | | | 1,675 | |
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2022 | | Year Ended
December 31, 2021 |
| Asserted claims, beginning of period | | 4,554 | | | 2,878 | |
| New claims | | 405 | | | 2,134 | |
| Settled and dismissed claims | | (766) | | | (458) | |
| Asserted claims, end of period | | 4,193 | | | 4,554 | |
The increases in the number of claims in 2021 were largely driven by an increase in claims alleging injuries from exposure to coal dust, including claims brought by plaintiffs' counsel with which MSA LLC does not have substantial prior experience.
MSA LLC is also defending an action filed in 2003 by the State of West Virginia, through its Attorney General, in the Circuit Court of Lincoln County, West Virginia, against MSA LLC and two other manufacturers of respiratory protection products. The State asserts several causes of action and seeks substantial compensatory damages—primarily for reimbursement of costs the State allegedly has incurred for worker’s compensation and healthcare benefits provided to individuals with occupational pneumoconiosis—as well as unspecified punitive damages. The State also asserts a claim under the West Virginia Consumer Credit and Protection Act (“CCPA”), alleging that the defendants made willful misrepresentations regarding product performance in connection with sales and advertisement of respirators in West Virginia and seeks substantial civil penalties. Although activity in the case has been minimal in the many years since inception, the CCPA claim has been severed and expedited for trial. MSA LLC contends that the November 28, 2022 trial date is premature and has sought a continuance. No reserve has been recorded for this matter because the Company believes that liability is unsupportable under West Virginia law, and therefore, has concluded that the loss is not probable. In addition, the Company is not able to estimate a reasonably possible loss or range of reasonably possible losses given significant unresolved legal and factual matters.
Management has established a reserve for MSA LLC's potential exposure to cumulative trauma product liability claims. MSA LLC's total cumulative trauma product liability reserve was $410.3 million, including $33.5 million for claims settled but not yet paid and related defense costs, as of September 30, 2022 and $409.8 million, including $2.5 million for claims settled but not yet paid and related defense costs, as of December 31, 2021. The reserve includes estimated amounts related to asserted and IBNR asbestos, silica, and coal dust claims expected to be resolved through the year 2074. The reserve has not been discounted to present value and does not include future amounts which will be spent to defend the claims. Defense costs are recognized in the unaudited Condensed Consolidated Statements of Income as incurred.
At September 30, 2022, $58.1 million of the total reserve for cumulative trauma product liability claims is recorded in the Insurance and product liability line within other current liabilities in the unaudited Condensed Consolidated Balance Sheets and the remainder, $352.2 million, is recorded in the Product liability and other noncurrent liabilities line. At December 31, 2021, $46.7 million of the total reserve for cumulative trauma product liability claims is recorded in the Insurance and product liability line within other current liabilities in the unaudited Condensed Consolidated Balance Sheets and the remainder, $363.1 million, is recorded in the Product liability and other noncurrent liabilities line.
During the quarter ended June 30, 2022, MSA LLC finalized a process that will result in settlements to resolve and dismiss several hundred claims for up to $26.3 million with payments potentially spread across the fourth quarter of 2022 through the first quarter of 2023. Amounts to resolve these claims have already been accrued as part of the product liability reserve.
Total cumulative trauma liability losses were $4.0 million and $9.7 million for the three and nine months ended September 30, 2022 and primarily related to defense of cumulative trauma product liability claims. Total cumulative trauma liability losses were $16.4 million and $43.9 million for the three and nine months ended September 30, 2021 and related to an update to our asserted cumulative trauma product liability reserve as well as the defense of cumulative trauma product liability claims. Uninsured cumulative trauma product liability losses, which were included in Product liability expense on the unaudited Condensed Consolidated Statements of Income, were $4.0 million and $9.7 million for the three and nine months ended September 30, 2022 and $10.7 million and $25.2 million for the three and nine months ended September 30, 2021, respectively, and represent the total cumulative trauma liability losses net of any estimated insurance receivables as discussed below. We will complete our annual review of MSA LLC's cumulative trauma product liability reserve in the fourth quarter as described below.
MSA LLC's cumulative trauma product liability reserve is based upon a reasonable estimate of MSA LLC’s current and potential future liability for cumulative trauma product liability claims, in accordance with applicable accounting principles. To develop a reasonable estimate of MSA LLC’s potential exposure to cumulative trauma product liability claims, management performs an annual comprehensive review of MSA LLC’s cumulative trauma product liability claims in consultation with an outside valuation consultant and outside legal counsel. The review process takes into account MSA LLC’s historical claims experience, developments in MSA LLC’s claims experience over the past year, developments in the tort system generally, and any other relevant information. Quarterly, management and outside legal counsel review whether significant new developments have occurred which could materially impact recorded amounts, and if warranted, management reviews changes with an outside valuation consultant. Numerous additional factors, data points, and developments are analyzed during the annual review process.
The estimate of MSA LLC’s potential liability for cumulative trauma product liability claims, and the corresponding reserve, are based upon numerous assumptions derived from MSA LLC’s historical experience. Those assumptions include the incidence of applicable diseases in the general population, the number of claims that may be asserted against MSA LLC in the future, the years in which such claims may be asserted, the counsel asserting those claims, the percentage of claims resolved through settlement, the types and severity of illnesses alleged by claimants to give rise to their claims, the venues in which the claims are asserted, and numerous other factors, which influence how many claims may be brought against MSA LLC, whether those claims ultimately are resolved for payment, and at what values.
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. It is difficult to reasonably estimate how many claims will be newly asserted against MSA LLC in any given period or over the lifetime of MSA LLC's claims experience. Case solicitation and filing activity, in our experience, is unique to each plaintiffs’ counsel and also influenced by external factors. Once asserted it is unclear at the time of filing whether a claim will be actively litigated, or the extent of ultimate loss, if any, in the absence of discovery at initial case stages. Even when a case is actively litigated, it is often difficult to determine if the lawsuit will be dismissed without payment or settled, because of sufficiency of product identification, statute of limitations challenges, or other defenses. This difficulty is increased when claims are asserted by plaintiffs’ counsel with which MSA LLC does not have substantial prior experience, as claims experience can vary significantly among different plaintiffs' counsel. As a result of all of these factors, it is typically unclear until late into litigation the extent of loss that will be experienced on account of any particular claim, or inventories of claims. Actual loss amounts for settled claims are highly variable and turn on a case-by-case analysis of the relevant facts. As more information is learned about asserted claims and potential future trends, adjustments may be made to the cumulative trauma product liability reserve as appropriate.
As a result of such uncertainties, MSA LLC’s actual claims experience may differ in one or more respects from the assumptions used in establishing the reserve, and there can be no assurance that the actuarial models or analysis employed will accurately predict future experience. MSA LLC’s experience in future periods may vary from the reserve currently established, and MSA LLC may ultimately incur losses in excess of presently recorded liabilities. Any adjustments as a result of this experience could materially impact our consolidated financial statements in future periods.
Insurance Receivable and Notes Receivable, Insurance Companies
Many years ago, MSA LLC purchased insurance policies from various insurance carriers that, subject to common contract exclusions, provided coverage for cumulative trauma product liability losses (the "Occurrence-Based Policies"). While we continue to pursue reimbursement under certain remaining Occurrence-Based Policies, the vast majority of these policies have been exhausted, settled or converted into either (1) negotiated settlement agreements with scheduled payment streams (recorded as notes receivables), or (2) negotiated Coverage-in-Place Agreements (recorded as insurance receivables). As a result, MSA LLC is largely self-insured for cumulative trauma product liability claims, and additional amounts recorded as insurance receivables or notes receivables will be limited.
When adjustments are made to amounts recorded in the cumulative trauma product liability reserve, we calculate amounts due to be reimbursed pursuant to the terms of the negotiated Coverage-In-Place Agreements, including cumulative trauma product liability losses and related defense costs, and we record the amounts probable of reimbursement as insurance receivables. These amounts are not subject to current coverage litigation.
Insurance receivables at September 30, 2022 totaled $125.9 million, of which $10.6 million is reported in Prepaid expenses and other current assets in the unaudited Condensed Consolidated Balance Sheets and $115.3 million is reported in Insurance receivables and other noncurrent assets. Insurance receivables at December 31, 2021 totaled $130.2 million, of which $8.6 million was reported in Prepaid expenses and other current assets in the unaudited Condensed Consolidated Balance Sheets and $121.6 million was reported in Insurance receivables and other noncurrent assets. The vast majority of the $125.9 million insurance receivables balance at September 30, 2022 is attributable to reimbursement believed to be due under the terms of signed Coverage-In-Place Agreements and a portion of this amount represents the estimated recovery of IBNR amounts not yet incurred.
A summary of insurance receivables balance and activity related to cumulative trauma product liability losses is as follows:
| | | | | | | | | | | | | | |
| (In millions) | | Nine Months Ended September 30, 2022 | | Year Ended
December 31, 2021 |
| Balance beginning of period | | $ | 130.2 | | | $ | 97.0 | |
| Additions | | 0.1 | | | 43.5 | |
| Collections and other adjustments | | (4.4) | | | (10.3) | |
| Balance end of period | | $ | 125.9 | | | $ | 130.2 | |
We record formal notes receivable due from scheduled payment streams according to negotiated settlement agreements with insurers. These amounts are not subject to current coverage litigation.
Notes receivable from insurance companies at September 30, 2022, totaled $44.3 million, of which $5.9 million is reported in Notes receivable, insurance companies, current in the unaudited Condensed Consolidated Balance Sheets and $38.4 million is reported in Notes receivable, insurance companies, noncurrent. Notes receivable from insurance companies at December 31, 2021 totaled $48.5 million of which $3.9 million was reported in Notes receivable, insurance companies, current in the unaudited Condensed Consolidated Balance Sheets and $44.6 million was reported in Notes receivable, insurance companies, noncurrent.
A summary of notes receivables from insurance companies balance is as follows:
| | | | | | | | | | | | | | |
| (In millions) | | Nine Months Ended September 30, 2022 | | Year Ended
December 31, 2021 |
| Balance beginning of period | | $ | 48.5 | | | $ | 52.3 | |
| Additions | | 0.9 | | | 1.3 | |
| Collections | | (5.1) | | | (5.1) | |
| Balance end of period | | $ | 44.3 | | | $ | 48.5 | |
The vast majority of the insurance and notes receivables balances at September 30, 2022, are attributable to reimbursement under the terms of signed agreements with insurers and are not currently subject to litigation. The collectibility of MSA LLC's insurance and notes receivables is regularly evaluated and we believe that the amounts recorded are probable of collection. The determination that the recorded insurance and notes receivables are probable of collection is based on the terms of the settlement agreements reached with the insurers, our history of collection, and the advice of MSA LLC's outside legal counsel and consultants. Various factors could affect the timing and amount of recovery of the insurance and notes receivables, including assumptions regarding various aspects of the composition and characteristics of future claims (which are relevant to calculating reimbursement under the terms of certain Coverage-In-Place Agreements) and the extent to which the issuing insurers may become insolvent in the future.
Other Litigation
Two subsidiaries of the Company, Globe Manufacturing Company, LLC ("Globe") and MSA LLC, are defending claims in which plaintiffs assert that certain of those entities’ products allegedly containing per- and polyfluoroalkyl substances (“PFAS”) have caused injury, health issues, or environmental issues. PFAS are a large class of substances that are widely used in everyday products. Specifically, Globe builds turnout gear from technical fabrics sourced from a small pool of specialty textile manufacturers. These protective fabrics have been tested and certified to meet industry standards, and some of them contain PFAS to achieve water, oil, or chemical resistance. At this time, no manufacturer of firefighter protective clothing is able to meet current National Fire Protection Association safety standards while offering coats or pants that are completely PFAS free.
Globe and MSA LLC believe they have valid defenses to these claims. These matters are at a very early stage with numerous factual and legal issues to be resolved. Defense costs relating to these lawsuits are recognized in the unaudited Condensed Consolidated Statements of Income as incurred. Globe and MSA LLC are also pursuing insurance coverage and indemnification related to the lawsuits.
Product Warranty
The Company provides warranties on certain product sales. Product warranty reserves are established in the same period that revenue from the sale of the related products is recognized, or in the period that a specific issue arises as to the functionality of the Company's product. The determination of such reserves requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under warranty.
The amounts of the reserves are based on established terms and the Company's best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. If actual return rates and/or repair and replacement costs differ significantly from estimates, adjustments to recognize additional cost of sales may be required in future periods.
The following table reconciles the changes in the Company's accrued warranty reserve:
| | | | | | | | | | | | | | |
| (In thousands) | | Nine Months Ended September 30, 2022 | | Year Ended
December 31, 2021 |
| Beginning warranty reserve | | $ | 12,423 | | | $ | 11,428 | |
| Warranty payments | | (7,429) | | | (8,987) | |
| Warranty claims | | 10,270 | | | 10,225 | |
| Provision for product warranties and other adjustments | | (1,275) | | | (243) | |
| Ending warranty reserve | | $ | 13,989 | | | $ | 12,423 | |
Warranty expense was $9.0 million and $6.8 million for the nine months ended September 30, 2022 and 2021, respectively, and is included in Costs of products sold on the unaudited Condensed Consolidated Statements of Income.