NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Significant Accounting Policies
General Information and Basis of Presentation—The consolidated financial statements of MSA Safety Incorporated ("MSA" or "the Company") are prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and require management to make certain judgments, estimates, and assumptions. These may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. They also may affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates upon subsequent resolution of identified matters.
Principles of Consolidation—The consolidated financial statements include the accounts of the Company and all subsidiaries. Intercompany accounts and transactions are eliminated.
Noncontrolling Interests—Noncontrolling interests reflect noncontrolling shareholders’ investments in certain consolidated subsidiaries and their proportionate share of the income and accumulated other comprehensive loss of those subsidiaries. During July 2021, the Company purchased the remaining noncontrolling interests in MSA (China) Safety Equipment Co., Ltd. See Note 14—Acquisitions for further detail.
Currency Translation—The functional currency of all significant non-U.S. subsidiaries is the local country currency. Assets and liabilities of these operations are translated at year-end exchange rates. Income statement accounts are translated using the average exchange rates for the reporting period. Translation adjustments for these subsidiaries are reported as a component of shareholders’ equity and are not included in net income. Foreign currency transaction gains and losses are included in net income for the reporting period.
Cash Equivalents—Cash equivalents include temporary deposits with financial institutions and highly liquid investments with original maturities of 90 days or less. Highly liquid investments consist of money market funds which were $1.9 million and $8.7 million at December 31, 2022 and 2021, respectively. These funds are valued at net asset value (“NAV”). These funds are required to price and transact at a NAV per share that fluctuates based upon the pricing of the underlying portfolio of securities. This requirement may impact the value of these fund shares.
Restricted Cash—Restricted cash, which is designated for use other than current operations, is included in prepaid expenses and other current assets in the Consolidated Balance Sheets. Restricted cash balances were $1.5 million and $0.5 million at December 31, 2022 and 2021, respectively. These balances were used to support letter of credit balances.
Inventories—Inventories are stated at the lower of cost and net realizable value, which approximates current replacement cost. Cost is determined using the FIFO method. It is the Company's general policy to write-down any inventory balance in excess of the last 24 months of consumption and any inventory identified as obsolete.
Investment securities—The Company’s investment securities, primarily consisting of fixed income securities, are classified as available-for-sale. The securities are recorded at fair market value and included in “Investments, short-term” in the accompanying Consolidated Balance Sheets with changes in fair market value recorded in other comprehensive income, net of tax. The purchases and sales of these investments are classified as investing activities in the Consolidated Statements of Cash Flows.
Property and Depreciation—Property is recorded at cost. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets, generally as follows: buildings 20 to 40 years, and machinery and equipment 3 to 10 years. Expenditures for significant renewals and improvements are capitalized. Ordinary repairs and maintenance are expensed as incurred. Gains or losses on property dispositions are included in other (income) expense, net and the cost and related accumulated depreciation are removed from the accounts. Depreciation expense for the years ended December 31, 2022, 2021 and 2020 was $36.7 million, $33.0 million and $27.7 million, respectively. Properties, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or asset groups may not be recoverable.
Software Development Costs—Software development costs are costs incurred to create, enhance and deploy the Company’s broad range of wireless technology and cloud-based computing safety services. Software development costs, other than software development costs qualifying for capitalization, are expensed as incurred. Costs of computer software developed or obtained for internal use that are incurred in the preliminary project and post implementation stages are expensed as incurred. Certain costs incurred during the application and development stage, which primarily include compensation and related expenses, are capitalized. Additionally, costs of upgrades and enhancements are capitalized when it is probable that the upgrades and enhancements will result in added functionality. During 2022, 2021 and 2020, respectively, there was approximately $8.7 million, $8.1 million and $8.2 million of software development costs capitalized. The Company has unamortized computer software development costs of $16.5 million and $15.7 million as of December 31, 2022 and 2021, respectively, included in property, plant and equipment, net.
Capitalized costs are amortized through cost of products sold using the straight-line method over the estimated useful life, which is normally three years, beginning in the period in which the software is ready for its intended use or when the upgrade or enhancement is deployed. Software development cost depreciation expense was $7.9 million, $4.9 million and $1.5 million during the years ended December 31, 2022, 2021 and 2020, respectively.
Lessee Arrangements—At the inception of our contracts, we determine if the contract is or contains a lease. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Right-of-use assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement. We use our incremental borrowing rate ("IBR") at the recognition date in determining the present value of future payments for leases that do not have a readily determinable implicit rate. Our IBR reflects a fully secured rate based on our credit rating, taking into consideration the repayment timing of the lease and any impacts due to the economic environment in which the lease operates.
Our lease payments are largely fixed. Variable lease payments that depend on an index or a rate are included in the lease payments and are measured using the prevailing index or rate at the measurement date, with differences between the calculated lease payment and the actual lease payment being expensed in the period of the change. Other variable lease payments, including utilities, consumption and common area maintenance as well as repairs, maintenance and mileage overages on vehicles, are expensed during the period incurred. A majority of our real estate leases include options to extend the lease and options to early terminate the lease. Leases with an early termination option generally involve a termination payment. If we are reasonably certain to exercise an option to extend a lease, the extension period is included as part of the right-of-use asset and the lease liability. Some of our leases contain residual value guarantees. These are guarantees made to the lessor that the value of an underlying asset returned to the lessor at the end of a lease will be at least a specified amount. Our leases do not contain restrictions or covenants that restrict us from incurring other financial obligations. For our leases, we have elected to not apply the recognition requirements to leases of less than twelve months. These leases are expensed on a straight-line basis and are not included within the Company's operating lease asset or liability.
Lease right-of-use assets and liabilities are recognized based on the present value of the fixed future lease payments over the lease term. Operating leases are included in Operating lease right-of-use assets, net, Accrued restructuring and other current liabilities, and Noncurrent operating lease liabilities in our Consolidated Balance Sheets. Finance leases are included in Property, plant and equipment, net, Accrued restructuring and other current liabilities, and Product liability and other noncurrent liabilities in our Consolidated Balance Sheets. Lease expense for all operating leases is classified in Cost of products sold or Selling, general and administrative expense in the Consolidated Statements of Income. For finance leases, the amortization of the right-of-use asset is included in depreciation and amortization, and the interest is included in interest expense.
Lessor Arrangements—The Company derives a portion of its revenue from various leasing arrangements where the Company is the lessor, primarily fire service contracts entered into by Bristol which was acquired in January 2021 (Note 14). Such arrangements provide for monthly payments covering equipment provided, maintenance and interest. These arrangements meet the criteria to be accounted for as sales-type leases under Accounting Standards Codification ("ASC") 842 and contain both lease and non-lease components. For a component to be separate, the customer would be able to benefit from the right of use of the component separately or with other resources readily available to the customer and the right of the use is not highly dependent or highly interrelated with the other rights to use the other underlying assets or components.
Revenue from equipment provided is considered a lease component and recognized with point in time revenue recognition upon lease commencement. Upon the recognition of such revenue, an asset is established for the investment in sales-type leases. Maintenance revenue, which is considered a non-lease component, and interest are recognized monthly over the lease term. Lease revenues and interest earned by the Company, included in the Consolidated Statements of Income, were not material to any of the years ended December 31, 2022, 2021 and 2020.
Net investment in sales-type leases of $5.7 million and $19.4 million were included in Prepaid expenses and other current assets and Insurance receivable and other noncurrent assets, respectively, in the Consolidated Balance Sheets as of December 31, 2022. The portion in Insurance receivable and other noncurrent assets at December 31, 2022 is expected to be collected over the next seven years.
Goodwill and Other Intangible Assets—Intangible assets with a finite useful life are amortized on a straight-line basis over their useful lives. Indefinite lived intangible assets are assessed for possible impairment annually on October 1st or whenever circumstances change such that the recorded value of the asset may not be recoverable. We performed a quantitative assessment of the indefinite lived trade name intangible asset as outlined in ASC 350 by comparing the estimated fair value of the trade name intangible asset to its carrying value. We estimate the fair value using the relief from royalty income approach. A number of assumptions and estimates are involved in the application of the relief from royalty model, including sales volumes and prices, royalty rates and tax rates. Forecasts are based on sales generated by the underlying trade name assets and are generally based on approved business unit operating plans for the early years and historical relationships in later years. Based on these assessments, no impairments were identified during the years ended December 31, 2022, 2021 or 2020.
Goodwill is not amortized, but is subject to impairment assessments. On October 1st of each year, or more frequently if indicators of impairment exist or if a decision is made to sell a business, we evaluate goodwill for impairment. Judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a decline in expected cash flows, a significant adverse change in the business climate, unanticipated competition, slower growth rates, or negative developments in equity and credit markets, among others.
All goodwill is assigned to and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. The evaluation of impairment involves using either a qualitative or quantitative approach as outlined in ASC Topic 350. In 2022, we performed a two-step quantitative test at October 1, 2022. Step 1 of the quantitative testing involves comparing the estimated fair value of each reporting unit to its carrying value. We estimate reporting unit fair value using a weighted average of fair values determined by discounted cash flow ("DCF") and market approach methodologies, as we believe both are important indicators of fair value. A number of assumptions and estimates are involved in the application of the DCF model, including sales volumes and prices, costs to produce, tax rates, capital spending, discount rates, and working capital changes. Cash flow forecasts are generally based on approved reporting unit operating plans for the early years and historical relationships in later years. The market approach methodology measures value through an analysis of peer companies. The analysis entails measuring the multiples of earnings before interest, taxes, depreciation and amortization ("EBITDA") at which peer companies are trading.
There has been no impairment of our goodwill during the years ended December 31, 2022, 2021 or 2020.
Revenue Recognition—We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. Revenue from the sale of products is recognized when there is persuasive evidence of an arrangement and control passes to the customer, which generally occurs either when product is shipped to the customer or, in the case of most U.S. distributor customers, when product is delivered to the distributor's delivery site. We establish our shipping terms according to local practice and market characteristics. We do not ship product unless we have an order or other documentation authorizing shipment to our customers. Our payment terms vary by the type and location of our customer and the products offered. The term between invoicing and when payment is due is not significant. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Amounts billed and due from our customers are classified as receivables on the Consolidated Balance Sheets. We make appropriate provisions for credit losses which have historically been insignificant in relation to our net sales. Certain contracts with customers, primarily distributor customers, have an element of variable consideration that is estimated when revenue is recognized under the contract to the extent that it is material to the individual contract. Variable consideration includes volume incentive rebates, performance guarantees, price concessions and returns. Rebates are based on achieving a certain level of purchases and other performance criteria that are documented in established distributor programs. These rebates are estimated based on projected sales to the customer and accrued as a reduction of net sales as they are earned by the customer. The rebate accrual is reviewed monthly and adjustments are made as the estimate of projected sales changes. Product returns, including an adjustment for restocking fees if it is material, are estimated based on historical return experience and revenue is adjusted. Sales, value add and other taxes collected with revenue-producing activities and remitted to governmental authorities are excluded from revenue.
Depending on the terms of the arrangement, we may defer revenue for which we have a future obligation, including training, extended warranty, maintenance and technical services, until such time that the obligation has been satisfied. We use an observable price, or a cost plus margin approach when one is not available, to determine the stand-alone selling price for separate performance obligations. We have elected to recognize the cost for shipping and handling as an expense when control of the product has passed to the customer. These costs are included within the Cost of products sold line on the Consolidated Statements of Income. Amounts billed to customers for shipping and handling are included in net sales.
Product Warranties—Estimated expenses related to product warranties and additional service actions are charged to Cost of products sold in the period in which the related revenue is recognized or when significant product quality issues are identified.
Research and Development—Research and development costs are expensed as incurred.
Income Taxes—Deferred income taxes are recognized for temporary differences between financial and tax reporting. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. We record tax benefits related to uncertain tax positions taken or expected to be taken on a tax return when such benefits meet a more likely than not threshold. We recognize interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. Deferred taxes are booked for available cash in excess of working capital for non-U.S. subsidiaries as these earnings are not considered to be permanently reinvested.
Stock-Based Compensation—We recognize expense for employee and non-employee director stock-based compensation based on the grant date fair value of the awards. Except for retirement-eligible participants, for whom there is no requisite service period, this expense is recognized ratably over the requisite service periods following the date of grant. For retirement-eligible participants, this expense is recognized over an accelerated period of at least one year.
Derivative Instruments—We may use derivative instruments from time to time to minimize the effects of changes in currency exchange rates. We do not enter into derivative transactions for speculative purposes and do not hold derivative instruments for trading purposes. Changes in the fair value of derivative instruments designated as fair value hedges are recorded in the balance sheet as adjustments to the underlying hedged asset or liability. Changes in the fair value of derivative instruments that do not qualify for hedge accounting treatment are recognized in the Consolidated Statements of Income and Consolidated Statements of Cash Flows as Currency exchange losses, net in the current period.
Commitments and Contingencies—For asserted claims and assessments, liabilities are recorded when a loss is deemed to be probable and the amount of the loss is reasonably estimable. Management assesses the probability of an unfavorable outcome with respect to asserted claims or assessments based on many factors such as the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters, among others. Once an unfavorable outcome is assessed to be probable, management evaluates estimates of the potential loss, and the most reasonable loss estimate is recorded (or, if the estimate of the loss is a range, and no amount within the range is considered to be a better estimate than any other amount, the minimum amount in the range is recorded). If a loss is deemed to be reasonably possible but less than probable and/or such loss cannot be reasonably estimated, then the matter is disclosed and no liability is recorded.
With respect to unasserted claims or assessments, management first determines whether it is probable that a claim or assessment may be asserted and then, if so, the degree of probability of an unfavorable outcome. If an unfavorable outcome is probable, management assesses whether the amount of potential loss can be reasonably estimated and, if so, accrues the most reasonable estimate of the loss (or, if the estimate of the loss is a range, and no amount within the range is considered to be a better estimate than any other amount, the minimum amount in the range is recorded). If an unfavorable outcome is reasonably possible but less than probable, or the amount of loss cannot be reasonably estimated, then the matter is disclosed and no liability is recorded. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood and/or estimate of a potential loss. Please refer to Note 20 — Contingencies for further details on product liability related matters.
Concentration of credit and business risks - We are exposed to credit risk in the event of nonpayment by customers, principally in the oil, gas and petrochemical, fire service, construction, utilities, and mining industries. Changes in these industries or other developments may significantly affect our financial performance and management's estimates. We mitigate our exposure to credit risk by performing ongoing credit evaluations and, when deemed necessary, requiring letters of credit, credit insurance, prepayments, guarantees or other collateral. No individual customer represented more than 10% of our sales or receivables as of December 31, 2022 or 2021 or for any of the three years ended December 31, 2022.
Note 2—Cash and Cash Equivalents
Several of the Company's affiliates 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 Consolidated Balance Sheets.
The Company's net cash pool position consisted of the following:
| | | | | | | | |
| (In thousands) | | December 31, 2022 |
| Gross cash pool position | | $ | 72,271 | |
| Less: cash pool borrowings | | (65,102) | |
| Net cash pool position | | $ | 7,169 | |
Note 3—Restructuring Charges
During the years ended December 31, 2022, 2021 and 2020, we recorded restructuring charges of $8.0 million, $16.4 million and $27.4 million, respectively. These charges were primarily related to our ongoing initiatives to drive profitable growth and right size our operations.
Americas segment restructuring charges of $2.3 million during the year ended December 31, 2022, were related to various optimization activities. International segment restructuring charges of $5.1 million during the year ended December 31, 2022, were primarily related to the implementation of our new European Shared Service Center in Warsaw, Poland. Corporate segment restructuring charges of $0.6 million during the year ended December 31, 2022, were primarily related to programs to realign the organization and adjust our operations in response to current business conditions.
A total of 151 positions were eliminated in 2022. There were 24 positions eliminated in the Americas segment, 123 in the International segment and 4 in the Corporate segment.
Americas segment restructuring charges of $4.6 million during the year ended December 31, 2021, were primarily related to integration related 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. International segment restructuring charges of $11.2 million during the year ended December 31, 2021, were primarily related to our initiatives to drive profitable growth and right size our operations. Corporate segment restructuring charges of $0.6 million during the year ended December 31, 2021, were primarily related to programs to adjust our operations in response to current business conditions.
A total of 143 positions were eliminated in 2021. There were 66 positions eliminated in the Americas segment, 71 in the International segment, and 6 in the Corporate segment.
Americas segment restructuring charges of $4.7 million during the year ended December 31, 2020, were related to costs associated with our global Fixed Gas & Flame Detection manufacturing footprint optimization as well as programs to adjust our operations in response to current business conditions. International segment restructuring charges of $21.9 million during the year ended December 31, 2020, were primarily related to severance costs for staff reductions and footprint optimization associated with our ongoing initiatives to drive profitable growth. Corporate segment restructuring charges of $0.8 million during the year ended December 31, 2020, were primarily related to programs to adjust our operations in response to current business conditions.
A total of 121 positions were eliminated in 2020. There were 42 positions eliminated in the Americas segment, 76 in the International segment, and 3 in the Corporate segment.
Activity and reserve balances for restructuring charges by segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Americas | | International | | Corporate | | Total |
| Reserve balances at January 1, 2020 | $ | 0.3 | | | $ | 5.9 | | | $ | — | | | $ | 6.2 | |
| Restructuring charges | 4.7 | | | 21.9 | | | 0.8 | | | 27.4 | |
| Currency translation and other adjustments | (0.1) | | | 0.1 | | | — | | | — | |
| Cash payments / utilization | (2.1) | | | (8.6) | | | (0.4) | | | (11.1) | |
| Reserve balances at December 31, 2020 | $ | 2.8 | | | $ | 19.3 | | | $ | 0.4 | | | $ | 22.5 | |
| Restructuring charges | 4.6 | | | 11.2 | | | 0.6 | | | 16.4 | |
| Currency translation and other adjustments | (0.1) | | | (0.2) | | | — | | | (0.3) | |
| Cash payments / utilization | (4.0) | | | (12.9) | | | (0.7) | | | (17.6) | |
| Reserve balances at December 31, 2021 | $ | 3.3 | | | $ | 17.4 | | | $ | 0.3 | | | $ | 21.0 | |
| Restructuring charges | 2.3 | | | 5.1 | | | 0.6 | | | 8.0 | |
| Currency translation and other adjustments | 0.1 | | | (1.3) | | | — | | | (1.2) | |
| Cash payments / utilization | (4.0) | | | (8.4) | | | (0.4) | | | (12.8) | |
| Reserve balances at December 31, 2022 | $ | 1.7 | | | $ | 12.8 | | | $ | 0.5 | | | $ | 15.0 | |
Restructuring reserves at December 31, 2022 and 2021 are included in Accrued restructuring and other current liabilities in our Consolidated Balance Sheets.
Note 4—Inventories
The following table sets forth the components of inventory:
| | | | | | | | | | | |
| December 31, |
| (In thousands) | 2022 | | 2021 |
| Finished products | $ | 97,142 | | | $ | 87,657 | |
| Work in process | 16,360 | | | 6,534 | |
| Raw materials and supplies | 224,814 | | | 186,426 | |
| Total inventories | $ | 338,316 | | | $ | 280,617 | |
| | | |
| | | |
Note 5—Property, Plant, and Equipment
The following table sets forth the components of property, plant and equipment:
| | | | | | | | | | | |
| December 31, |
| (In thousands) | 2022 | | 2021 |
| Land | $ | 4,884 | | | $ | 5,131 | |
| | | |
| Buildings | 138,618 | | | 136,272 | |
| Machinery and equipment | 466,394 | | | 435,652 | |
| Construction in progress | 22,097 | | | 36,552 | |
| Total | 631,993 | | | 613,607 | |
| Less accumulated depreciation | (424,441) | | | (405,814) | |
| Property, plant and equipment, net | $ | 207,552 | | | $ | 207,793 | |
| | | |
Note 6—Reclassifications Out of Accumulated Other Comprehensive Loss
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| MSA Safety Incorporated | | Noncontrolling Interests |
| (In thousands) | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Pension and other post-retirement benefits(a) | | | | | | | | | | | |
| Balance at beginning of period | $ | (57,296) | | | $ | (115,552) | | | $ | (124,848) | | | $ | — | | | $ | — | | | $ | — | |
| Unrecognized net actuarial (losses) gains | (2,862) | | | 54,384 | | | (6,322) | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Tax benefit (expense) | 703 | | | (12,804) | | | 1,997 | | | — | | | — | | | — | |
| Total other comprehensive (loss) gain before reclassifications, net of tax | (2,159) | | | 41,580 | | | (4,325) | | | — | | | — | | | — | |
| Amounts reclassified from accumulated other comprehensive loss into net income: | | | | | | | | | | | |
| Amortization of prior service credit (Note 15) | (199) | | | (95) | | | (216) | | | — | | | — | | | — | |
| Recognized net actuarial losses (Note 15) | 12,592 | | | 22,531 | | | 18,079 | | | — | | | — | | | — | |
| Tax benefit | (3,273) | | | (5,760) | | | (4,242) | | | — | | | — | | | — | |
| Total amount reclassified from accumulated other comprehensive loss, net of tax, into net income | 9,120 | | | 16,676 | | | 13,621 | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Total other comprehensive income | $ | 6,961 | | | $ | 58,256 | | | $ | 9,296 | | | $ | — | | | $ | — | | | $ | — | |
| Balance at end of period | $ | (50,335) | | | $ | (57,296) | | | $ | (115,552) | | | $ | — | | | $ | — | | | $ | — | |
| Available-for-sale securities | | | | | | | | | | | |
| Balance at beginning of period | $ | (5) | | | $ | (1) | | | $ | 6 | | | $ | — | | | $ | — | | | $ | — | |
| Unrealized gain (loss) on available-for-sale securities (Note 19) | 3 | | | (4) | | | (7) | | | — | | | — | | | — | |
| Balance at end of period | $ | (2) | | | $ | (5) | | | $ | (1) | | | $ | — | | | $ | — | | | $ | — | |
| Foreign currency translation | | | | | | | | | | | |
| Balance at beginning of period | $ | (91,839) | | | $ | (66,844) | | | $ | (89,161) | | | $ | — | | | $ | 372 | | | $ | 213 | |
Reclassification from accumulated other comprehensive loss into net income(b) | 2,912 | | (c) | 267 | | | 216 | | | — | | | — | | | — | |
| Acquisition of noncontrolling interests in consolidated subsidiaries | — | | | — | | | — | | | — | | | (280) | | | — | |
| Foreign currency translation adjustments | (19,453) | | | (25,262) | | | 22,101 | | | — | | | (92) | | | 159 | |
| Balance at end of period | $ | (108,380) | | | $ | (91,839) | | | $ | (66,844) | | | $ | — | | | $ | — | | | $ | 372 | |
(a)Reclassifications out of accumulated other comprehensive loss and into net income are included in the computation of net periodic pension and other post-retirement benefit costs (refer to Note 15—Pensions and Other Post-retirement Benefits).
(b)Included in Currency exchange losses, net, within the Consolidated Statements of Income.
(c)Reclassifications out of accumulated other comprehensive loss and into net income relate primarily to the approval of our plan to close 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 were 71,340 shares issued and 52,998 shares held in treasury at both December 31, 2022 and 2021. The Treasury shares at cost line of the Consolidated Balance Sheets includes $1.8 million related to preferred stock. There were no shares of preferred stock purchased and subsequently held in treasury during the years ended December 31, 2022, or 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 December 31, 2022 or 2021.
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, 2022 and December 31, 2021. There were 39,213,064 and 39,276,518 shares outstanding at December 31, 2022 and 2021, respectively.
Treasury Shares - The Company's stock repurchase program authorizes up to $100.0 million to repurchase MSA common stock in the open market and in private transactions. The share repurchase program has no expiration date. The maximum number of shares that may be purchased is calculated based on the dollars remaining under the program and the respective month-end closing share price. Under the program, there were 251,408 shares repurchased during 2022, no shares repurchased during 2021 and 175,000 shares repurchased during 2020. We do not have any other share repurchase programs. There were 22,868,327 and 22,804,873 Treasury shares at December 31, 2022 and 2021, respectively.
The Company issues Treasury shares for all stock based benefit plans. Shares are issued from Treasury at the average Treasury share cost on the date of the transaction. There were 219,214 and 246,376 Treasury shares issued for these purposes during the years ended December 31, 2022 and 2021, respectively.
Common stock activity is summarized as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares | | Dollars | | |
| (Dollars in thousands) | | Issued | | Treasury | | Common
Stock | | Treasury
Cost | | |
| Balance at January 1, 2020 | | 62,081,391 | | | (23,240,197) | | | $ | 229,127 | | | $ | (303,566) | | | |
| Restricted stock awards | | — | | | 55,691 | | | (773) | | | 773 | | | |
| Restricted stock expense | | — | | | — | | | 7,065 | | | — | | | |
| Restricted stock forfeitures | | — | | | — | | | (807) | | | — | | | |
| Stock options exercised | | — | | | 274,672 | | | 8,590 | | | 3,856 | | | |
| Stock option expense | | — | | | — | | | 153 | | | — | | | |
| Stock option forfeitures | | — | | | — | | | (40) | | | — | | | |
| Performance stock issued | | — | | | 134,824 | | | (1,826) | | | 1,826 | | | |
| Performance stock expense | | — | | | — | | | 1,305 | | | — | | | |
| Performance stock forfeitures | | — | | | — | | | (755) | | | — | | | |
| | | | | | | | | | |
| Employee stock purchase plan | | — | | | 6,494 | | | 654 | | | 93 | | | |
| Treasury shares purchased | | — | | | (69,973) | | | — | | | (9,025) | | | |
| Share repurchase program | | — | | | (175,000) | | | — | | | (20,113) | | | |
| | | | | | | | | | |
| Balances December 31, 2020 | | 62,081,391 | | | (23,013,489) | | | $ | 242,693 | | | $ | (326,156) | | | |
| Restricted stock awards | | — | | | 53,934 | | | (762) | | | 762 | | | |
| Restricted stock expense | | — | | | — | | | 6,562 | | | — | | | |
| Restricted stock forfeitures | | — | | | — | | | (765) | | | — | | | |
| Stock options exercised | | — | | | 122,119 | | | 4,003 | | | 1,767 | | | |
| Stock option expense | | — | | | — | | | 90 | | | — | | | |
| Stock option forfeitures | | — | | | — | | | (9) | | | — | | | |
| Performance stock issued | | — | | | 64,543 | | | (939) | | | 939 | | | |
| Performance stock expense | | — | | | — | | | 13,227 | | | — | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Employee stock purchase plan | | — | | | 5,730 | | | 772 | | | 83 | | | |
| Treasury shares purchased | | — | | | (37,710) | | | — | | | (6,171) | | | |
| Acquisition of noncontrolling interests in consolidated subsidiaries | | — | | | — | | | (4,751) | | | — | | | |
| Balances December 31, 2021 | | 62,081,391 | | | (22,804,873) | | | $ | 260,121 | | | $ | (328,776) | | | |
| Restricted stock awards | | — | | | 52,810 | | | (711) | | | 711 | | | |
| Restricted stock expense | | — | | | — | | | 7,715 | | | — | | | |
| Restricted stock forfeitures | | — | | | — | | | (1,227) | | | — | | | |
| Stock options exercised | | — | | | 103,545 | | | 3,021 | | | 1,629 | | | |
| Stock option expense | | — | | | — | | | 49 | | | — | | | |
| | | | | | | | | | |
| Performance stock issued | | — | | | 55,447 | | | (880) | | | 880 | | | |
| Performance stock expense | | — | | | — | | | 15,843 | | | — | | | |
| Performance stock forfeitures | | — | | | — | | | (2,730) | | | — | | | |
| | | | | | | | | | |
| Employee stock purchase plan | | — | | | 7,412 | | | 779 | | | 112 | | | |
| Treasury shares purchased | | — | | | (31,260) | | | — | | | (4,021) | | | |
| Share repurchase program | | — | | | (251,408) | | | — | | | (30,373) | | | |
| Balances December 31, 2022 | | 62,081,391 | | | (22,868,327) | | | $ | 281,980 | | | $ | (359,838) | | | |
| | | | | | | | | | |
| | | | | | | | | | |
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 North America and Latin America geographies. The International segment is comprised of our operations in all geographies outside of the Americas. Certain global expenses are allocated to each segment in a manner consistent with where the benefits from the expenses are derived.
The Company's sales are allocated to each segment based primarily on the country destination of the end-customer.
Adjusted operating income (loss), adjusted operating margin, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and adjusted EBITDA margin are the measures used by the chief operating decision maker to evaluate segment performance and allocate resources. Adjusted operating income (loss) is defined as operating income excluding restructuring charges, currency exchange gains (losses), product liability expense, 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 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 Items(1) | | Consolidated
Totals |
| 2022 | | | | | | | | | |
| Net sales to external customers | $ | 1,043,238 | | | $ | 484,715 | | | $ | — | | | $ | — | | | $ | 1,527,953 | |
| | | | | | | | | |
| Operating income | | | | | | | | | 239,137 | |
| Restructuring charges (Note 3) | | | | | | | | | 7,965 | |
| Currency exchange losses, net (Note 6) | | | | | | | | | 10,255 | |
| Product liability expense (Note 20) | | | | | | | | | 20,590 | |
Acquisition related costs(a) (Note 14) | | | | | | | | | 12,440 | |
| | | | | | | | | |
| Adjusted operating income (loss) | 267,392 | | | 60,923 | | | (37,928) | | | | | 290,387 | |
| Adjusted operating margin % | 25.6 | % | | 12.6 | % | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Depreciation and amortization | 34,334 | | | 12,256 | | | 520 | | | | | 47,110 | |
| Adjusted EBITDA | 301,726 | | | 73,179 | | | (37,408) | | | | | 337,497 | |
| Adjusted EBITDA margin % | 28.9 | % | | 15.1 | % | | | | | | |
| Noncash items: | | | | | | | | | |
| Pension (income) expense | $ | (18,368) | | | $ | 6,869 | | | $ | — | | | $ | — | | | $ | (11,499) | |
| | | | | | | | | |
| Total Assets | 1,660,776 | | | 703,444 | | | 11,673 | | | 1,083 | | | 2,376,976 | |
| Capital expenditures | 33,324 | | | 9,229 | | | — | | | — | | | 42,553 | |
| | | | | | | | | |
| 2021 | | | | | | | | | |
| Net sales to external customers | $ | 908,068 | | | $ | 492,114 | | | $ | — | | | $ | — | | | $ | 1,400,182 | |
| | | | | | | | | |
| Operating income | | | | | | | | | 22,780 | |
| Restructuring charges (Note 3) | | | | | | | | | 16,433 | |
| Currency exchange losses, net (Note 6) | | | | | | | | | 216 | |
| Product liability expense (Note 20) | | | | | | | | | 185,264 | |
Acquisition related costs(a) (Note 14) | | | | | | | | | 15,884 | |
| | | | | | | | | |
| Adjusted operating income (loss) | 202,496 | | | 73,279 | | | (35,198) | | | — | | | 240,577 | |
| Adjusted operating margin % | 22.3 | % | | 14.9 | % | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Depreciation and amortization | 31,236 | | | 13,718 | | | 463 | | | — | | | 45,417 | |
| Adjusted EBITDA | 233,732 | | | 86,997 | | | (34,735) | | | — | | | 285,994 | |
| Adjusted EBITDA margin % | 25.7 | % | | 17.7 | % | | | | | | |
| Noncash items: | | | | | | | | | |
| Pension (income) expense | $ | (2,916) | | | $ | 5,790 | | | $ | — | | | $ | — | | | $ | 2,874 | |
| | | | | | | | | |
| Total Assets | 1,661,619 | | | 720,257 | | | 13,034 | | | 1,486 | | | 2,396,396 | |
| Capital expenditures | 25,148 | | | 11,408 | | | 7,281 | | | — | | | 43,837 | |
| | | | | | | | | |
| 2020 | | | | | | | | | |
| Net sales to external customers | $ | 874,305 | | | $ | 473,918 | | | $ | — | | | $ | — | | | $ | 1,348,223 | |
| | | | | | | | | |
| Operating income | | | | | | | | | 171,895 | |
| Restructuring charges (Note 3) | | | | | | | | | 27,381 | |
| Currency exchange losses, net (Note 6) | | | | | | | | | 8,578 | |
| Product liability expense (Note 20) | | | | | | | | | 39,036 | |
Acquisition related costs(a) (Note 14) | | | | | | | | | 717 | |
| COVID-19 related costs | | | | | | | | | 757 | |
| Adjusted operating income (loss) | 205,304 | | | 71,140 | | | (28,080) | | | — | | | 248,364 | |
| Adjusted operating margin % | 23.5 | % | | 15.0 | % | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Depreciation and amortization | 26,762 | | | 12,521 | | | 391 | | | — | | | 39,674 | |
| Adjusted EBITDA | 232,066 | | | 83,661 | | | (27,689) | | | — | | | 288,038 | |
| Adjusted EBITDA margin % | 26.5 | % | | 17.7 | % | | | | | | |
| Noncash items: | | | | | | | | | |
| Pension expense | $ | 910 | | | $ | 8,113 | | | $ | — | | | $ | — | | | $ | 9,023 | |
| | | | | | | | | |
| Total Assets | 1,273,302 | | | 617,698 | | | 29,761 | | | (1,130) | | | 1,919,631 | |
| Capital expenditures | 43,181 | | | 5,724 | | | — | | | — | | | 48,905 | |
| | | | | | | | | |
(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 Consolidated Statements of Income. Acquisition-related costs also include the acquisition related amortization, which is included in Cost of products sold in the Consolidated Statements of Income.
(1)Reconciling items consist primarily of intercompany eliminations and items not directly attributable to operating segments.
Geographic information on Net sales to external customers, based on country of origin:
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 | | 2020 |
| United States | $ | 876,945 | | | $ | 746,825 | | | $ | 750,315 | |
| Other | 651,008 | | | 653,357 | | | 597,908 | |
| Total | $ | 1,527,953 | | | $ | 1,400,182 | | | $ | 1,348,223 | |
Geographic information on tangible long-lived assets, net, based on country of origin:
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 | | 2020 |
| United States | $ | 159,345 | | | $ | 155,667 | | | $ | 134,234 | |
| | | | | |
| | | | | |
| | | | | |
| Other | 92,349 | | | 102,304 | | | 108,837 | |
| Total | $ | 251,694 | | | $ | 257,971 | | | $ | 243,071 | |
Total Net sales by product group was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | Consolidated | | Americas | | International |
| (In thousands) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
| Breathing Apparatus | $ | 371,176 | | 24% | | $ | 265,558 | | 25% | | $ | 105,618 | | 22% |
Fixed Gas & Flame Detection (a) | 356,075 | | 23% | | 227,609 | | 22% | | 128,466 | | 27% |
Firefighter Helmets & Protective Apparel (b) | 207,759 | | 14% | | 150,869 | | 14% | | 56,890 | | 12% |
| Portable Gas Detection | 173,660 | | 11% | | 121,934 | | 12% | | 51,726 | | 11% |
| Industrial Head Protection | 163,253 | | 11% | | 127,485 | | 12% | | 35,768 | | 7% |
| Fall Protection | 110,094 | | 7% | | 69,225 | | 7% | | 40,869 | | 8% |
Other (c) | 145,936 | | 10% | | 80,558 | | 8% | | 65,378 | | 13% |
| Total | $ | 1,527,953 | | 100% | | $ | 1,043,238 | | 100% | | $ | 484,715 | | 100% |
| | | | | | | | |
| 2021 | Consolidated | | Americas | | International |
| (In thousands) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
| Breathing Apparatus | $ | 322,412 | | 23% | | $ | 217,340 | | 24% | | $ | 105,072 | | 21% |
Fixed Gas & Flame Detection (a) | 299,018 | | 21% | | 182,515 | | 20% | | 116,503 | | 24% |
Firefighter Helmets & Protective Apparel (b) | 203,914 | | 15% | | 137,086 | | 15% | | 66,828 | | 14% |
| Portable Gas Detection | 162,761 | | 12% | | 109,543 | | 12% | | 53,218 | | 11% |
| Industrial Head Protection | 143,601 | | 10% | | 108,869 | | 12% | | 34,732 | | 7% |
| Fall Protection | 117,731 | | 8% | | 69,108 | | 8% | | 48,623 | | 10% |
Other (c) | 150,745 | | 11% | | 83,607 | | 9% | | 67,138 | | 13% |
| Total | $ | 1,400,182 | | 100% | | $ | 908,068 | | 100% | | $ | 492,114 | | 100% |
| | | | | | | | |
| 2020 | Consolidated | | Americas | | International |
| (In thousands) | Dollars | Percent | | Dollars | Percent | | Dollars | Percent |
| Breathing Apparatus | $ | 329,179 | | 24% | | $ | 220,650 | | 25% | | $ | 108,529 | | 23% |
| Fixed Gas & Flame Detection | 287,414 | | 21% | | 158,924 | | 18% | | 128,490 | | 27% |
| Firefighter Helmets & Protective Apparel | 162,207 | | 12% | | 133,653 | | 15% | | 28,554 | | 6% |
| Portable Gas Detection | 142,581 | | 11% | | 90,545 | | 10% | | 52,036 | | 11% |
| Industrial Head Protection | 125,921 | | 9% | | 92,075 | | 11% | | 33,846 | | 7% |
| Fall Protection | 103,075 | | 8% | | 58,060 | | 7% | | 45,015 | | 10% |
Other (c) | 197,846 | | 15% | | 120,398 | | 14% | | 77,448 | | 16% |
| Total | $ | 1,348,223 | | 100% | | $ | 874,305 | | 100% | | $ | 473,918 | | 100% |
(a) Fixed Gas & Flame Detection include sales from the Bacharach acquisition from July 1, 2021 onward (Americas and International).
(b) Firefighter Helmets & Protective Apparel include sales from the Bristol acquisition from January 25, 2021 onward (International).
(c) Other products include sales of Air Purifying Respirators.
Note 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: | | | | | |
| (In thousands, except per share amounts) | 2022 | | 2021 | | 2020 |
| Net income | $ | 179,630 | | | $ | 21,340 | | | $ | 124,077 | |
| Preferred stock dividends | (41) | | | (41) | | | (41) | |
| Net income available to common equity | 179,589 | | | 21,299 | | | 124,036 | |
| Dividends and undistributed earnings allocated to participating securities | (30) | | | (24) | | | (84) | |
| Net income available to common shareholders | $ | 179,559 | | | $ | 21,275 | | | $ | 123,952 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Basic weighted-average shares outstanding | 39,232 | | | 39,173 | | | 38,885 | |
| Stock options and other stock-based awards | 175 | | | 276 | | | 401 | |
| Diluted weighted-average shares outstanding | 39,407 | | | 39,449 | | | 39,286 | |
| Antidilutive stock options | — | | | — | | | — | |
| | | | | |
| Earnings per share: | | | | | |
| Basic | $ | 4.58 | | | $ | 0.54 | | | $ | 3.19 | |
| Diluted | $ | 4.56 | | | $ | 0.54 | | | $ | 3.15 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Note 10—Income Taxes
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 | | 2020 |
| Components of income before income taxes | | | | | |
| U.S. income (loss) | $ | 170,426 | | | $ | (59,746) | | | $ | 109,726 | |
| Non-U.S. income | 68,107 | | | 83,350 | | | 58,421 | |
| Income before income taxes | $ | 238,533 | | | $ | 23,604 | | | $ | 168,147 | |
| Provision for income taxes | | | | | |
| Current | | | | | |
| Federal | $ | 26,022 | | | $ | 13,179 | | | $ | 23,587 | |
| State | 7,708 | | | 5,000 | | | 4,896 | |
| Non-U.S. | 20,002 | | | 22,487 | | | 16,780 | |
| Total current provision | $ | 53,732 | | | $ | 40,666 | | | $ | 45,263 | |
| Deferred | | | | | |
| Federal | $ | 7,350 | | | $ | (29,631) | | | $ | (573) | |
| State | 862 | | | (7,204) | | | (579) | |
| Non-U.S. | (3,041) | | | (2,015) | | | (1,102) | |
| Total deferred provision (benefit) | 5,171 | | | (38,850) | | | (2,254) | |
| Provision for income taxes | $ | 58,903 | | | $ | 1,816 | | | $ | 43,009 | |
On June 10, 2021 the United Kingdom ("U.K.") Parliament announced royal assent for Bill No. 12, on the Finance Act of 2021. This bill will increase the statutory rate from 19% to 25% in April 2023. The Company recorded this impact on its deferred tax balances in the second quarter of 2021.
Reconciliation of the U.S. federal income tax rates to our effective tax rate:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| U.S. federal income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes-U.S. | 2.9 | % | | (7.0) | % | | 2.0 | % |
| Nondeductible compensation | 1.2 | % | | 15.3 | % | | 3.4 | % |
| Valuation allowances | 0.8 | % | | 7.0 | % | | 0.8 | % |
| Foreign exchange on entity closures | 0.3 | % | | (0.4) | % | | — | % |
| Taxes on non-U.S. income | 0.1 | % | | (10.9) | % | | 2.6 | % |
| Employee share-based payments | (0.8) | % | | (18.3) | % | | (3.9) | % |
| Research and development credit | (0.4) | % | | (5.3) | % | | (1.2) | % |
| Taxes on non-U.S. income - U.S., Canadian & European reorganization | — | % | | — | % | | 0.7 | % |
| | | | | |
| | | | | |
| Other | (0.4) | % | | 6.3 | % | | 0.2 | % |
| Effective income tax rate | 24.7 | % | | 7.7 | % | | 25.6 | % |
Components of deferred tax assets and liabilities: | | | | | | | | | | | |
| December 31, |
| (In thousands) | 2022 | | 2021 |
| Deferred tax assets | | | |
| Product liability | $ | 72,950 | | | $ | 71,709 | |
| Capitalized research and development | 26,988 | | | 25,644 | |
| | | |
| Net operating losses and tax credit carryforwards | 10,696 | | | 9,404 | |
| Accrued expenses and other reserves | 5,738 | | | 4,627 | |
| Share-based compensation | 4,562 | | | 3,619 | |
| | | |
| | | |
| Other | 5,068 | | | 4,785 | |
| Total deferred tax assets | 126,002 | | | 119,788 | |
| Valuation allowances | (10,017) | | | (8,812) | |
| Net deferred tax assets | 115,985 | | | 110,976 | |
| Deferred tax liabilities | | | |
| Goodwill and intangibles | (80,383) | | | (79,285) | |
| Property, plant and equipment | (18,735) | | | (17,088) | |
| Employee benefits | (18,899) | | | (8,985) | |
| Inventory | — | | | (1,264) | |
| Other | (4,359) | | | (2,434) | |
| Total deferred tax liabilities | (122,376) | | | (109,056) | |
| Net deferred taxes | $ | (6,391) | | | $ | 1,920 | |
At December 31, 2022, we had net operating loss carryforwards of approximately $49.0 million. All net operating loss carryforwards without a valuation allowance may be carried forward for a period of at least six years.
A reconciliation of the change in the tax liability for unrecognized tax benefits for the years ended December 31, 2022 and 2021 is as follows:
| | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 |
| Beginning balance | $ | 4,937 | | | $ | 8,092 | |
| Adjustments for tax positions related to the current year | 100 | | | 182 | |
| Adjustments for tax positions related to prior years | 155 | | | 733 | |
| Settlements | — | | | (3,211) | |
| Statute expiration | — | | | (859) | |
| Ending balance | $ | 5,192 | | | $ | 4,937 | |
The total amount of unrecognized tax benefits, if recognized, would reduce our future effective tax rate. We have recognized tax benefits associated with these liabilities in the amount of $2.7 million and $2.5 million at December 31, 2022 and 2021, respectively.
We recognize interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. Our liability for accrued interest and penalties related to uncertain tax positions was $1.1 million and $0.8 million at December 31, 2022 and 2021, respectively.
We are subject to regular review and audit by both foreign and domestic tax authorities. While we believe our tax positions will be sustained, the final outcome of tax audits and related litigation may differ materially from the tax amounts recorded in our consolidated financial statements.
We file a U.S. federal income tax return along with various state and foreign income tax returns. Examinations of our U.S. federal returns have been completed through 2018. Various state and foreign income tax returns may be subject to tax audits for periods after 2015.
On August 16, 2022, President Biden signed the Inflation Reduction Act which includes a new minimum tax on certain large corporations and an excise tax on stock buybacks. We do not anticipate this legislation will have a material impact for the company.
Note 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 options are granted at market prices and expire after ten years. Stock options are exercisable beginning three years after the grant date. Restricted stock and restricted stock units are granted without payment to the Company and generally vest three years after the grant date. Restricted stock and restricted stock units are valued at the market value of the stock on the grant date. Performance stock units with a market condition are valued at an estimated fair value using a Monte Carlo simulation model. The final number of shares to be issued for performance stock units may range from zero to 240% of the target award based on achieving the specified performance targets over the performance period and further range based upon the achieved market metric over the performance period. In general, unvested stock options, restricted stock and performance stock units are forfeited if the participant’s employment with the Company terminates for any reason other than retirement, death or disability. We issue Treasury shares for stock option exercises and grants of restricted stock and performance stock. Please refer to Note 7—Capital Stock for further information regarding stock compensation share issuance. As of December 31, 2022, there were 598,813 and 76,890 shares, respectively, reserved for future grants under the management and non-employee directors’ equity incentive plans.
Stock-based compensation expense was as follows:
| | | | | | | | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 | | 2020 |
| Restricted stock units | $ | 6,488 | | | $ | 5,797 | | | $ | 6,258 | |
| Stock options | 49 | | | 81 | | | 113 | |
| Performance stock units | 13,113 | | | 13,030 | | | 549 | |
| Total stock-compensation expense before income taxes | 19,650 | | | 18,908 | | | 6,920 | |
| Income tax benefit | 4,814 | | | 4,633 | | | 1,668 | |
| Total stock-compensation expense, net of income tax benefit | $ | 14,836 | | | $ | 14,275 | | | $ | 5,252 | |
We did not capitalize any stock-based compensation expense, and all expense is included in Selling, general and administrative expense in the Consolidated Statements of Income.
A summary of option activity follows:
| | | | | | | | | | | | | | | | | |
| Shares | | Weighted
Average
Exercise Price | | Exercisable at
Year-end |
| Outstanding January 1, 2020 | 559,656 | | | $ | 45.78 | | | |
| | | | | |
| Exercised | (274,704) | | | 45.31 | | | |
| | | | | |
| Forfeited | (954) | | | 42.00 | | | |
| Outstanding December 31, 2020 | 283,998 | | | 46.23 | | | 281,593 | |
| | | | | |
| Exercised | (122,087) | | | 47.25 | | | |
| | | | | |
| Forfeited | (210) | | | 43.75 | | | |
| Outstanding December 31, 2021 | 161,701 | | | 45.47 | | | 161,347 | |
| | | | | |
| Exercised | (103,545) | | | 44.91 | | | |
| Outstanding December 31, 2022 | 58,156 | | | $ | 46.48 | | | 58,156 | |
For various exercise price ranges, characteristics of outstanding and exercisable stock options at December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | |
| Stock Options Outstanding |
| Range of Exercise Prices | Shares | | Weighted-Average |
| Exercise Price | | Remaining Life |
| | | | | |
$33.01 – $45.00 | 33,148 | | | $ | 44.50 | | | 2.41 |
$45.01 – $57.93 | 25,008 | | | 49.10 | | | 2.21 |
$33.01 – $57.93 | 58,156 | | | $ | 46.48 | | | 2.32 |
| | | | | | | | | | | | | | | | | |
| | Stock Options Exercisable |
| Range of Exercise Prices | Shares | | Weighted-Average |
| Exercise Price | | Remaining Life |
| | | | | |
$33.01 – $45.00 | 33,148 | | | $ | 44.50 | | | 2.41 |
$45.01 – $57.93 | 25,008 | | | 49.10 | | | 2.21 |
$33.01 – $57.93 | 58,156 | | | $ | 46.48 | | | 2.32 |
Cash received from the exercise of stock options was $4.7 million, $5.8 million and $12.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. The tax benefit we realized from these exercises was $1.9 million, $4.3 million and $6.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Stock options become exercisable when they are vested. The aggregate intrinsic value of stock options exercisable and outstanding at December 31, 2022 was $5.7 million.
Restricted stock awards and restricted stock units are valued at the market value of the stock on the grant date. A summary of restricted stock unit activity follows:
| | | | | | | | | | | |
| Shares | | Weighted Average
Grant Date
Fair Value |
| Unvested January 1, 2020 | 172,701 | | | $ | 90.38 | |
| Granted | 51,468 | | | 124.61 | |
| Vested | (70,399) | | | 81.58 | |
| Forfeited | (7,579) | | | 106.54 | |
| Unvested at December 31, 2020 | 146,191 | | | 105.83 | |
| Granted | 43,146 | | | 167.13 | |
| Vested | (65,225) | | | 95.43 | |
| Forfeited | (5,769) | | | 132.54 | |
| Unvested at December 31, 2021 | 118,343 | | | 132.62 | |
| Granted | 87,697 | | | 130.28 | |
| Vested | (51,369) | | | 113.96 | |
| Forfeited | (8,785) | | | 139.66 | |
| Unvested at December 31, 2022 | 145,886 | | | $ | 137.36 | |
A summary of performance stock unit activity follows:
| | | | | | | | | | | |
| Shares | | Weighted Average
Grant Date
Fair Value |
| Unvested at January 1, 2020 | 238,035 | | | $ | 85.39 | |
| Granted | 67,479 | | | 127.48 | |
| Vested | (132,036) | | | 73.00 | |
| Performance adjustments | 33,499 | | | 72.36 | |
| Forfeited | (6,765) | | | 111.60 | |
| Unvested at December 31, 2020 | 200,212 | | | 104.69 | |
| Granted | 52,309 | | | 175.59 | |
| Vested | (64,543) | | | 85.41 | |
| Performance adjustments | 5,357 | | | 88.45 | |
| | | |
| Unvested at December 31, 2021 | 193,335 | | | 129.86 | |
| Granted | 81,504 | | | 142.38 | |
| Vested | (55,447) | | | 101.38 | |
| Performance adjustments | (22,147) | | | 99.84 | |
| Forfeited | (18,485) | | | 147.66 | |
| Unvested at December 31, 2022 | 178,760 | | | $ | 146.28 | |
The 2022 performance adjustments above relate primarily to 2019 performance unit awards that were below the performance targets when vested during 2022, including the final number of shares issued, which were 64.2% of the target award based on actual results during the three year performance period.
During the years ended December 31, 2022, 2021 and 2020, the total intrinsic value of stock options exercised (the difference between the market price on the date of exercise and the option price paid to exercise the option) was $8.6 million, $13.0 million and $24.6 million, respectively. The fair values of restricted stock vested during the years ended December 31, 2022, 2021 and 2020 were $5.9 million, $6.2 million and $5.7 million, respectively. The fair value of performance stock units vested during the years ended December 31, 2022, 2021 and 2020 was $5.6 million, $5.5 million and $9.6 million, respectively.
On December 31, 2022, there was $16.4 million of unrecognized stock-based compensation expense. The weighted average period over which this expense is expected to be recognized was approximately 1.8 years.
Note 12—Long-Term Debt
Long-Term Debt
| | | | | | | | | | | |
| | December 31, |
| (In thousands) | 2022 | | 2021 |
2016 Senior Notes payable through 2031, 3.40%, net of debt issuance costs | $ | 66,379 | | | $ | 74,203 | |
2021 Senior Notes payable through 2036, 2.69%, net of debt issuance costs | 99,711 | | | 99,694 | |
2021 Senior Notes payable through 2036, 2.69%, net of debt issuance costs | 99,711 | | | 99,694 | |
| Senior revolving credit facility maturing in 2026, net of debt issuance costs | 307,031 | | | 324,060 | |
| Total | 572,832 | | | 597,651 | |
| Amounts due within one year | 7,387 | | | — | |
| Long-term debt, net of debt issuance costs | $ | 565,445 | | | $ | 597,651 | |
On 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 5.13% as of December 31, 2022. At December 31, 2022, $589.9 million of the existing $900.0 million senior 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 December 31, 2022, the Company had issued £54.9 million (approximately $66.5 million at December 31, 2022) of 3.4% Series B Senior Notes due January 22, 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 consolidated financial statements. Management continues to evaluate the Company’s other outstanding U.S. LIBOR based contracts to determine whether reference rate modifications are necessary.
As of December 31, 2022, MSA was in full compliance with the restrictive covenants under its various credit agreements.
Approximate maturities on our long-term debt over the next five years are $7.4 million in 2023, $7.4 million in 2024, $7.4 million in 2025, $316.0 million in 2026, $7.4 million in 2027 and $229.6 million thereafter.
The Company had outstanding bank guarantees and standby letters of credit with banks as of December 31, 2022, totaling $9.3 million, of which $1.5 million relate to the senior revolving credit facility. The letters of credit serve to cover customer requirements in connection with certain sales orders and insurance companies. The Company is also required to provide cash collateral in connection with certain arrangements. At December 31, 2022, the Company has $1.5 million of restricted cash in support of these arrangements.
In January 2023, we entered into a new $250 million term loan and $65 million was drawn down from our revolving credit facility to fund the divestiture of MSA LLC, a wholly owned subsidiary that holds legacy product liability claims relating to coal dust, asbestos, silica, and other exposures. Please refer to Note 20—Contingencies for additional information.
Note 13—Goodwill and Intangible Assets
Changes in goodwill during the years ended December 31, 2022 and 2021, were as follows:
| | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 |
| Balance at January 1, 2022 | $ | 636,858 | | | $ | 443,272 | |
| Additions | — | | | 199,454 | |
| Measurement period adjustment | (1,041) | | | — | |
| | | |
| Currency translation | (15,195) | | | (5,868) | |
| Balance at December 31. 2022 | $ | 620,622 | | | $ | 636,858 | |
At December 31, 2022, goodwill of $447.6 million and $173.0 million related to the Americas and International reportable segments, respectively.
Changes in intangible assets, net of accumulated amortization, during the years ended December 31, 2022 and 2021, were as follows:
| | | | | | | | | | | |
| (In thousands) | 2022 | | 2021 |
| Net balance at January 1, 2022 | $ | 306,948 | | | $ | 161,051 | |
| Additions | — | | | 164,426 | |
| Amortization expense | (19,137) | | | (16,814) | |
| Currency translation | (5,958) | | | (1,715) | |
| Net balance at December 31, 2022 | $ | 281,853 | | | $ | 306,948 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | December 31, 2022 | | December 31, 2021 |
| Intangible Assets: | Weighted Average Useful Life (years) | Gross Carrying Amount | | Accumulated Amortization and Reserves | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization and Reserves | | Net Carrying Amount |
| Customer relationships | 19 | $ | 178.7 | | | $ | (35.3) | | | $ | 143.4 | | | $ | 185.7 | | | $ | (27.9) | | | $ | 157.8 | |
| Distribution agreements | 20 | 65.8 | | | (26.9) | | | 38.9 | | | 66.1 | | | (23.8) | | | 42.3 | |
| Technology related assets | 8 | 49.5 | | | (29.3) | | | 20.2 | | | 50.4 | | | (25.5) | | | 24.9 | |
| Patents, trademarks and copyrights | 16 | 34.0 | | | (14.8) | | | 19.2 | | | 35.2 | | | (13.6) | | | 21.6 | |
| License agreements | 5 | 5.4 | | | (5.3) | | | 0.1 | | | 5.4 | | | (5.3) | | | 0.1 | |
| Other | 3 | 3.3 | | | (3.2) | | | 0.1 | | | 3.3 | | | (3.0) | | | 0.3 | |
| Total | 17 | $ | 336.7 | | | $ | (114.8) | | | $ | 221.9 | | | $ | 346.1 | | | $ | (99.1) | | | $ | 247.0 | |
At December 31, 2022, the above intangible assets balance includes a trade name related to the Globe acquisition with an indefinite life totaling $60.0 million.
Intangible asset amortization expense over the next five years is expected to be approximately $18.0 million in both 2023 and 2024 and $17.1 million annually from 2025 to 2027.
Note 14—Acquisitions
Acquisition of Bacharach
On July 1, 2021, we acquired 100% of the common stock of Bacharach in an all cash transaction valued at $329.4 million, net of cash acquired.
Headquartered near Pittsburgh in New Kensington, PA, Bacharach is a leader in gas detection technologies used in the heating, ventilation, air conditioning, and refrigeration ("HVAC-R") markets. This acquisition expanded MSA’s gas detection portfolio and leverages MSA’s product and manufacturing expertise into new markets.
Bacharach's operating results are included in our consolidated financial statements from the acquisition date within the Americas, International and Corporate reportable segments. The acquisition qualified as a business combination and was accounted for using the acquisition method of accounting.
The following table summarizes the fair values of the 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 | |
Assets acquired and liabilities assumed in connection with the acquisition were recorded at fair values. Fair values were determined by management, based in part on an independent valuation performed by a third party valuation specialist. The valuation methods used to determine the fair value of intangible assets included the excess earnings approach for customer relationships using customer inputs and contributory charges; the relief from royalty method for trade name and developed technologies; and the cost method for assembled workforce was included in goodwill. A number of significant assumptions and estimates were involved in the application of these valuation methods, including forecasted sales volumes and prices, royalty rates, costs to produce, tax rates, capital spending, discount rates, attrition rates and working capital changes. Cash flow forecasts were generally based on Bacharach 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, developed technology and trade name acquired in the Bacharach transaction are being amortized over periods of 21 years, 7 to 9 years and 20 years, respectively. The step up to fair value of acquired inventory as part of the purchase price allocation totaled $2.3 million. The amortization of the inventory step up was included in Cost of products sold in the Consolidated Statements of Income for the year ended December 31, 2021.
Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired were the acquisition of an assembled workforce, the expected synergies and other benefits that we believe will result from combining the operations of Bacharach with our operations. Goodwill of $193.5 million related to the Bacharach acquisition was recorded, with $154.6 million and $38.9 million allocated to the Americas reportable segment and International reportable segment, respectively. This Goodwill is non-deductible for tax purposes.
Acquisition of Bristol Uniforms and Bell Apparel
On January 25, 2021, we acquired 100% of the common stock of B T Q Limited, including Bristol in an all-cash transaction valued at $63.0 million, net of cash acquired.
Bristol, which is headquartered in the U.K., is a leading innovator and provider of protective apparel to the fire, rescue services, and utility sectors. The acquisition strengthens MSA's position as a global market leader in fire service personal protective equipment products, which include breathing apparatus, firefighter helmets, thermal imaging cameras, and firefighter protective apparel, while providing an avenue to expand its business in the U.K. and key European markets. Bristol is also a leading manufacturer of flame-retardant, waterproof, and other protective work wear for the utility industry. Marketed under the Bell Apparel brand, this line complements MSA's existing and broad range of offerings for the global utilities market.
Bristol's operating results are included in our consolidated financial statements from the acquisition date as part of the International reportable segment. The acquisition qualified as a business combination and was accounted for using the acquisition method of accounting.
The following table summarizes the fair values of the Bristol assets acquired and liabilities assumed at the date of the acquisition:
| | | | | |
| (In millions) | January 25, 2021 |
Current assets (including cash of $13.3 million) | $ | 37.1 | |
| Net investment in sales-type leases, noncurrent | 29.0 | |
| Property, plant and equipment and other noncurrent assets | 12.0 | |
| Customer relationships | 4.5 | |
| Trade name and other intangible assets | 1.4 | |
| Goodwill | 4.9 | |
| Total assets acquired | 88.9 | |
| Total liabilities assumed | (12.6) | |
| Net assets acquired | $ | 76.3 | |
Assets acquired and liabilities assumed in connection with the acquisition were recorded at fair values. Fair values were determined by management, based in part on an independent valuation performed by a third party valuation specialist. The valuation methods used to determine the fair value of intangible assets included the excess earnings approach for customer relationships using customer inputs and contributory charges; the relief from royalty method for trade name; and the cost method for assembled workforce which is included in goodwill. A number of significant assumptions and estimates were involved in the application of these valuation methods, including forecasted sales volumes and prices, royalty rates, costs to produce, tax rates, capital spending, discount rates, attrition rates and working capital changes. Cash flow forecasts were generally based on Bristol pre-acquisition forecasts, coupled with estimated MSA sales synergies. Identifiable intangible assets with finite lives are subject to amortization over their estimated useful lives. The customer relationships and trade name acquired in the Bristol transaction will be amortized over a period of 15 years. The step up to fair value of acquired inventory as part of the purchase price allocation totaled $1.5 million. The amortization of the inventory step up was included in Cost of products sold in the Consolidated Statements of Income for the year ended December 31, 2021.
Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired were the acquisition of an assembled workforce, the expected synergies and other benefits that we believe will result from combining the operations of Bristol with our operations. Goodwill of $4.9 million related to the Bristol acquisition has been recorded in the International reportable segment and is non-deductible for tax purposes.
The operating results of the Bristol and Bacharach acquisitions have been included in our consolidated financial statements from their respective acquisition dates. Our results for the year ended December 31, 2021, include combined net sales and net loss of $67.2 million and $6.3 million, respectively.
The following unaudited pro forma information presents our combined results as if the Bristol and Bacharach acquisitions had occurred at the beginning of 2020. The unaudited pro forma financial information was prepared to give effect to events that are (1) directly attributable to the acquisition; (2) factually supportable; and (3) expected to have a continuing impact on the combined company's results. There were no material transactions between MSA and Bristol or Bacharach during the periods presented that are required to be eliminated. The unaudited pro forma combined financial information does not reflect cost savings, operating synergies or revenue enhancements that the combined companies may achieve or the costs to integrate the operations or the costs necessary to achieve cost savings, operating synergies or revenue enhancements.
Pro forma combined financial information (Unaudited)
| | | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions, except per share amounts) | | 2021 | | 2020 |
| Net sales | | $ | 1,437.9 | | | $ | 1,470.4 | |
| Net income | | 10.2 | | | 114.6 | |
| Basic earnings per share | | 0.26 | | | 2.94 | |
| Diluted earnings per share | | 0.26 | | | 2.91 | |
| | | | |
The unaudited pro forma combined financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations or financial position that we would have reported had the acquisition been completed as of the date and for the periods presented, and should not be taken as representative of our consolidated results of operations or financial condition following the acquisition. In addition, the unaudited pro forma combined financial information is not intended to project the future results of the combined company.
The unaudited pro forma combined financial information was prepared using the acquisition method of accounting under existing U.S. GAAP. MSA has been treated as the acquirer.
Total acquisition related costs were $12.4 million, $15.9 million and $0.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. Transactional costs are included in Selling, general and administrative expenses and acquisition-related amortization is included in Cost of products sold in the Consolidated Statements of Income.
Acquisition of Noncontrolling Interest
During July 2021, the Company purchased the remaining 10% noncontrolling interest in MSA (China) Safety Equipment Co., Ltd. from our partner in China for $19.0 million, inclusive of a $5.6 million distribution.
Note 15—Pensions and Other Post-retirement Benefits
We maintain various defined benefit and defined contribution plans covering the majority of our employees. Our principal U.S. plan is funded in compliance with the Employee Retirement Income Security Act ("ERISA"). It is our general policy to fund current costs for the international plans, except in Germany and Mexico, where it is common practice and permissible under tax laws to maintain an unfunded liability.
We provide health care benefits and limited life insurance for certain retired employees who are covered by our principal U.S. defined benefit pension plan until they become Medicare-eligible.
Defined benefit pension plan and other post-retirement benefits plan information is provided in the following tables:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| (In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| Change in Benefit Obligations | | | | | | | |
| Benefit obligations at January 1 | $ | 654,362 | | | $ | 670,857 | | | $ | 29,831 | | | $ | 32,225 | |
| Service cost | 12,281 | | | 12,910 | | | 327 | | | 398 | |
| Interest cost | 14,377 | | | 11,518 | | | 590 | | | 476 | |
| Participant contributions | 257 | | | 287 | | | 259 | | | 345 | |
| Plan amendments | 154 | | | (243) | | | — | | | — | |
Actuarial gains(a) | (156,214) | | | (10,277) | | | (5,884) | | | (1,518) | |
| Benefits paid | (26,377) | | | (25,117) | | | (2,585) | | | (3,021) | |
| Curtailments | (286) | | | (439) | | | — | | | — | |
| Settlements | (260) | | | (3,190) | | | — | | | — | |
| | | | | | | |
Transfers(b) | — | | | (19,312) | | | — | | | — | |
| Acquisitions | — | | | 26,231 | | | — | | | 926 | |
| Currency translation | (7,929) | | | (8,863) | | | — | | | — | |
| Benefit obligations at December 31 | $ | 490,365 | | | $ | 654,362 | | | $ | 22,538 | | | $ | 29,831 | |
| Change in Plan Assets | | | | | | | |
| Fair value of plan assets at January 1 | $ | 651,986 | | | $ | 586,822 | | | $ | — | | | $ | — | |
| Actual return on plan assets | (115,105) | | | 80,366 | | | — | | | — | |
| Employer contributions | 5,032 | | | 5,543 | | | 2,326 | | | 2,676 | |
| Participant contributions | 257 | | | 287 | | | 259 | | | 345 | |
| Acquisitions | — | | | 25,476 | | | — | | | — | |
| Settlements | (260) | | | (1,365) | | | — | | | — | |
| Benefits paid | (26,377) | | | (25,117) | | | (2,585) | | | (3,021) | |
| | | | | | | |
Transfers(b) | — | | | (19,312) | | | — | | | — | |
| Administrative expenses paid | (54) | | | (67) | | | — | | | — | |
| Currency translation | (1,261) | | | (647) | | | — | | | — | |
| Fair value of plan assets at December 31 | $ | 514,218 | | | $ | 651,986 | | | $ | — | | | $ | — | |
| Funded Status | | | | | | | |
| Funded status at December 31 | $ | 23,853 | | | $ | (2,376) | | | $ | (22,538) | | | $ | (29,831) | |
| | | | | | | |
| Unrecognized prior service credit (cost) | 1,224 | | | 1,186 | | | (429) | | | (767) | |
| Unrecognized net actuarial losses | 90,212 | | | 95,674 | | | 6,445 | | | 13,570 | |
| Net amount recognized | $ | 115,289 | | | $ | 94,484 | | | $ | (16,522) | | | $ | (17,028) | |
| Amounts Recognized in the Balance Sheets | | | | | | | |
| Noncurrent assets | $ | 141,643 | | | $ | 163,283 | | | $ | — | | | $ | — | |
| Current liabilities | (3,712) | | | (6,569) | | | (2,226) | | | (2,739) | |
| Noncurrent liabilities | (114,078) | | | (159,090) | | | (20,312) | | | (27,092) | |
| Net amount recognized | $ | 23,853 | | | $ | (2,376) | | | $ | (22,538) | | | $ | (29,831) | |
| Amounts Recognized in Accumulated Other Comprehensive Loss | | | | | | | |
| Net actuarial losses | $ | 90,212 | | | $ | 95,674 | | | $ | 6,445 | | | $ | 13,570 | |
| Prior service cost (credit) | 1,224 | | | 1,186 | | | (429) | | | (767) | |
| | | | | | | |
| Total (before tax effects) | $ | 91,436 | | | $ | 96,860 | | | $ | 6,016 | | | $ | 12,803 | |
| Accumulated Benefit Obligations for all Defined Benefit Plans | $ | 459,630 | | | $ | 608,436 | | | $ | — | | | $ | — | |
(a)Actuarial gains for both periods relate primarily to the increase/decrease in discount rates used in measuring plan obligations as of December 31, 2022 and 2021, respectively.
(b)Transfers consist of Netherlands defined benefit plan conversion to a defined contribution plan.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| (In thousands) | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Components of Net Periodic Benefit (Income) Cost | | | | | | | | | | | |
| Service cost | $ | 12,281 | | | $ | 12,910 | | | $ | 12,094 | | | $ | 327 | | | $ | 398 | | | $ | 396 | |
| Interest cost | 14,377 | | | 11,518 | | | 14,905 | | | 590 | | | 476 | | | 716 | |
| Expected return on plan assets | (49,646) | | | (37,368) | | | (34,029) | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Amortization of prior service cost (credit) | 139 | | | 164 | | | 178 | | | (338) | | | (358) | | | (394) | |
| Recognized net actuarial losses | 11,704 | | | 17,458 | | | 15,799 | | | 1,242 | | | 1,597 | | | 1,145 | |
| Settlement/curtailment (gain) loss | (354) | | | (2,234) | | (b) | 1,135 | | (b) | — | | | — | | | — | |
| | | | | | | | | | | |
Net periodic benefit (income) cost(a) | $ | (11,499) | | | $ | 2,448 | | | $ | 10,082 | | | $ | 1,821 | | | $ | 2,113 | | | $ | 1,863 | |
(a) Components of net periodic benefit (income) cost other than service cost are included in the line item Other income, net, and service costs are included in the line items Cost of products sold and Selling, general and administrative in the Consolidated Statements of Income.
(b) Relates primarily to the conversion of our Netherlands pension plan into a defined contribution plan and is included in "Restructuring charges" in the Consolidated Statements of Income.
The Company utilizes a spot rate approach, which discounts the individual plan specific expected cash flows underlying the service and interest cost using the applicable spot rates derived from a yield curve used in the determination of the benefit obligation to the relevant projected cash flows. For plans where the discount rate is not derived from plan specific expected cash flows, the Company uses a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period for measuring both the projected benefit obligations and the service and interest cost components of net periodic benefit cost for pension and other post-retirement benefits.
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
| | | | | | | | | | | |
| Pension Benefits |
| (In thousands) | 2022 | | 2021 |
| Aggregate accumulated benefit obligations (ABO) | $ | 116,531 | | | $ | 181,511 | |
| | | |
| Aggregate fair value of plan assets | 4,454 | | | 22,265 | |
Information for pension plans with a projected benefit obligation in excess of plan assets:
| | | | | | | | | | | |
| Pension Benefits |
| (In thousands) | 2022 | | 2021 |
| | | |
| Aggregate projected benefit obligations (PBO) | $ | 122,229 | | | $ | 187,924 | |
| Aggregate fair value of plan assets | 4,454 | | | 22,265 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
| Assumptions used to determine benefit obligations | | | | | | | |
| Average discount rate | 5.01 | % | | 2.70 | % | | 5.09 | % | | 2.66 | % |
| Rate of compensation increase | 4.61 | % | | 4.58 | % | | 3.00 | % | | 2.91 | % |
| Assumptions used to determine net periodic benefit cost | | | | | | | |
| Average discount rate - Service cost | 3.12 | % | | 2.80 | % | | 2.84 | % | | 2.42 | % |
| Average discount rate - Interest cost | 2.17 | % | | 1.69 | % | | 2.04 | % | | 1.48 | % |
| Expected return on plan assets | 8.77 | % | | 7.13 | % | | — | | | — | |
| Rate of compensation increase | 4.58 | % | | 2.90 | % | | 2.91 | % | | 3.00 | % |
Discount rates for all U.S. and foreign plans were determined using the aforementioned spot rate methodology for 2022 and 2021. Aside from sovereign bonds used in Mexico, the remaining plans' discount rates were determined using various corporate bonds and by matching our projected benefit obligation payment stream to current yields on high quality bonds.
The expected return on assets for the 2022 net periodic pension cost was determined by multiplying the expected returns of each asset class (based on capital market expectations) by the expected percentage of the total portfolio invested in that asset class. A total return was determined by summing the expected returns over all asset classes.
| | | | | | | | | | | |
| Pension Plan Assets at
December 31, |
| 2022 | | 2021 |
| Equity securities | 56 | % | | 51 | % |
| Fixed income securities | 26 | | | 25 | |
| Pooled investment funds | 15 | | | 22 | |
| Cash and cash equivalents | 2 | | | 1 | |
| Insurance contracts | 1 | | | 1 | |
| Total | 100 | % | | 100 | % |
The overall objective of our pension investment strategy is to earn a rate of return over time to satisfy the benefit obligations of the pension plans and to maintain sufficient liquidity to pay benefits and meet other cash requirements of our pension funds. Investment policies for our primary U.S. pension plan are determined by the plan’s Investment Committee and set forth in the plan’s investment policy. Asset managers are granted discretion for determining sector mix, selecting securities and timing transactions, subject to the guidelines of the investment policy. An aggressive, flexible management of the portfolio is permitted and encouraged, with shifts of emphasis among equities, fixed income securities and cash equivalents at the discretion of each manager. No target asset allocations are set forth in the investment policy. For our non-U.S. pension plans, our investment objective is generally met through the use of pooled investment funds and insurance contracts.
The fair values of the Company's pension plan assets are determined using NAV as a practical expedient, or by information categorized in the fair value hierarchy level based on the inputs used to determine fair value, as further discussed in Note 19—Fair Value Measurements.
The fair values at December 31, 2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value |
| (In thousands) | Total | | NAV | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Equity securities | $ | 288,006 | | | $ | 44,583 | | | $ | 243,423 | | | $ | — | | | $ | — | |
| Fixed income securities | 132,659 | | | — | | | 63,522 | | | 69,137 | | | — | |
| Pooled investment funds | 79,853 | | | 79,853 | | | — | | | — | | | — | |
| Cash and cash equivalents | 9,246 | | | 7,954 | | | 1,292 | | | — | | | — | |
| Insurance contracts | 4,454 | | | — | | | — | | | — | | | 4,454 | |
| Total | $ | 514,218 | | | $ | 132,390 | | | $ | 308,237 | | | $ | 69,137 | | | $ | 4,454 | |
The fair values of the Company's pension plan assets at December 31, 2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value |
| (In thousands) | Total | | NAV | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Equity securities | $ | 329,795 | | | $ | 66,897 | | | $ | 262,898 | | | $ | — | | | $ | — | |
| Fixed income securities | 161,965 | | | — | | | 86,543 | | | 75,422 | | | — | |
| Pooled investment funds | 146,081 | | | 146,081 | | | — | | | — | | | — | |
| Cash and cash equivalents | 9,934 | | | 8,637 | | | 1,297 | | | — | | | — | |
| Insurance contracts | 4,211 | | | — | | | — | | | — | | | 4,211 | |
| Total | $ | 651,986 | | | $ | 221,615 | | | $ | 350,738 | | | $ | 75,422 | | | $ | 4,211 | |
Equity securities consist primarily of publicly traded U.S. and non-U.S. common stocks. Equities are valued at closing prices reported on the listing stock exchange.
Fixed income securities consist primarily of U.S. government and agency bonds and U.S. corporate bonds. Fixed income securities are valued at closing prices reported in active markets or based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the bond is valued under a discounted cash flow approach that maximizes observable inputs, such as current yields of similar instruments, and may include adjustments, for certain risks that may not be observable, such as credit and liquidity risks.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Pooled investment funds consist of mutual and collective investment funds that invest primarily in publicly traded equity and fixed income securities. Pooled investment funds are valued using the NAV provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, divided by the number of shares outstanding. The underlying securities are generally valued at closing prices reported in active markets, quoted prices of similar securities, or discounted cash flows approach that maximizes observable inputs such as current value measurement at the reporting date. These investments are not classified in the fair value hierarchy in accordance with guidance in ASU 2015-07.
Insurance contracts are valued in accordance with the terms of the applicable collective pension contract. The fair value of the plan assets equals the discounted value of the expected cash flows of the accrued pensions which are guaranteed by the counterparty insurer.
Cash equivalents consist primarily of money market and similar temporary investment funds. Cash equivalents are valued at closing prices reported in active markets.
The preceding methods may produce fair value measurements that are not indicative of net realizable value or reflective of future fair values. Although we believe the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table presents a reconciliation of Level 3 assets:
| | | | | | | |
| (In thousands) | Insurance
Contracts | | |
| Balance January 1, 2021 | $ | 24,396 | | | |
| Net realized and unrealized gains | (881) | | | |
| Net purchases, issuances and settlements | (19,304) | | | |
| | | |
| Balance December 31, 2021 | 4,211 | | | |
| Net realized and unrealized gains | (119) | | | |
| Net purchases, issuances and settlements | 362 | | | |
| | | |
| Balance December 31, 2022 | $ | 4,454 | | | |
The following table presents amounts related to Level 3 assets recognized in accumulated other comprehensive loss:
| | | | | |
| (In thousands) | Insurance
Contracts |
| Net actuarial losses | $ | (1,781) | |
| Prior service cost | 744 | |
| Total (before tax effects) | $ | (1,037) | |
We expect to make net contributions of $8.2 million to our pension plans in 2023, which are primarily associated with statutorily required plans in the International reporting segment.
For the 2022 beginning of the year measurement purposes (net periodic benefit expense), a 5.9% increase in the costs of covered health care benefits was assumed, decreasing by 0.2% for each successive year to 4.5% in 2030 and thereafter. For the 2022 end of the year measurement purposes (benefit obligation), a 6.5% increase in the costs of covered health care benefits was assumed, decreasing by approximately 0.2% for each successive year to 4.4% in 2032 and thereafter.
Expense for defined contribution pension plans was $12.6 million in 2022, $11.7 million in 2021 and $10.6 million in 2020.
Estimated pension benefits to be paid under our defined benefit pension plans during the next five years are $30.2 million in 2023, $29.6 million in 2024, $30.7 million in 2025, $31.1 million in 2026 and $31.5 million in 2027, and an aggregated $164.3 million for the five years thereafter. Estimated other post-retirement benefits to be paid during the next five years are $2.2 million in 2023, $2.2 million in 2024, $2.0 million in 2025, $1.9 million in 2026, $2.0 million in 2027, and an aggregated $9.5 million for the five years thereafter.
Note 16—Other Income, Net
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| (In thousands) | 2022 | | 2021 | | 2020 |
| Components of net periodic benefit (income) cost other than service cost (Note 15) | $ | 22,286 | | | $ | 8,321 | | | $ | 1,680 | |
| Interest income | 4,155 | | | 3,256 | | | 3,498 | |
| Loss on asset write-down and dispositions, net | (6,290) | | | (788) | | | (236) | |
| Other, net | 905 | | | 793 | | | 742 | |
| | | | | |
| | | | | |
| Total other income, net | $ | 21,056 | | | $ | 11,582 | | | $ | 5,684 | |
During the years ended December 31, 2022, 2021 and 2020, we recognized $4.2 million, $3.3 million and $3.5 million of other income, respectively, related to interest earned on cash balances, short-term investments and notes receivable from insurance companies. The short-term investments and notes receivables from insurance companies were divested as of January 5, 2023. Please refer to Note 20—Contingencies for further discussion on the Company's notes receivables from insurance companies.
Note 17—Leases
As a lessee, we have various operating lease agreements primarily related to real estate, vehicles and office and plant equipment. The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | |
| | | | | | Year Ended December 31, |
| (In thousands, except percentage and year amounts) | | | | 2022 | | 2021 |
| Lease cost: | | | | | | |
| Operating lease cost recognized as rent expense | | | | $ | 14,970 | | | $ | 14,230 | |
| Total lease cost | | | | $ | 14,970 | | | $ | 14,230 | |
| | | | | | | |
| | | | Other Information |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows related to operating leases | | | | $ | 14,906 | | | $ | 14,440 | |
| | | | | | | |
| Non-cash other information: | | | | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | | | $ | 6,418 | | | $ | 21,857 | |
| Right-of-use assets obtained in acquisitions | | | | $ | — | | | $ | 4,795 | |
| | | | | | | |
| | | | | December 31, |
| | | | | 2022 | | 2021 |
| Weighted-average remaining lease term (in years): | | | | |
| Operating leases | | | | 14 | | 14 |
| | | | | | | |
| Weighted-average discount rate: | | | | |
| Operating leases | | | | 2.66 | % | | 2.49 | % |
Rent expense was $15.0 million, $14.2 million and $13.0 million in 2022, 2021 and 2020, respectively. We did not have any lease transactions with related parties. We did not have any significant leases not yet commenced.
At December 31, 2022, future lease payments under operating leases were as follows: | | | | | | | | | | | |
| | | |
| (In thousands) | | | Operating Leases |
| | | |
| 2023 | | | $ | 10,043 | |
| 2024 | | | 7,480 | |
| 2025 | | | 5,200 | |
| 2026 | | | 4,061 | |
| 2027 | | | 3,428 | |
| After 2027 | | | 22,031 | |
| | | $ | 52,243 | |
| Less: Imputed interest | | | 7,938 | |
| Present value of operating lease liabilities | | | 44,305 | |
Less: Current portion operating lease liabilities(a) | | | 8,960 | |
| Noncurrent operating lease liabilities | | | $ | 35,345 | |
(a) Included in Accrued restructuring and other current liabilities on the Consolidated Balance Sheets.
Note 18—Derivative Financial Instruments
As part of our currency exchange rate risk management strategy, we enter into certain derivative foreign currency forward contracts that do not meet the U.S. GAAP criteria for hedge accounting but have the impact of partially offsetting certain foreign currency exposures. We account for these forward contracts at fair value and report the related gains or losses in currency exchange losses, net, in the Consolidated Statements of Income. At December 31, 2022, the notional amount of open forward contracts was $103.0 million and there were no unrealized gains/losses on these contracts. All open forward contracts will mature during the first quarter of 2023.
The following table presents the Consolidated Balance Sheets location and fair value of assets and liabilities associated with derivative financial instruments:
| | | | | | | | | | | | | | |
| | | December 31, |
| (In thousands) | | 2022 | | 2021 |
| Derivatives not designated as hedging instruments: | | | | |
| Foreign exchange contracts: prepaid expenses and other current assets | | $ | 724 | | | $ | 619 | |
| Foreign exchange contracts: accrued restructuring and other current liabilities | | $ | 85 | | | $ | 128 | |
The following table presents the Consolidated Statements of Income and Consolidated Statements of Cash Flows location and impact of derivative financial instruments: | | | | | | | | | | | | | | |
| | Year ended
December 31, |
| 2022 | | 2021 |
| Derivatives not designated as hedging instruments: | | | | |
| Foreign exchange contracts: currency exchange losses, net | | $ | 6,656 | | | $ | 5,107 | |
Note 19—Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:
Level 1—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3—Unobservable inputs for the asset or liability.
The valuation methodologies we used to measure financial assets and liabilities were limited to the pension plan assets and the derivative financial instruments described in Note 15—Pensions and Other Post-retirement Benefits and Note 18—Derivative Financial Instruments, respectively. See Note 15 for the fair value hierarchy classification of pension plan assets. We estimate the fair value of the derivative financial instruments, consisting of foreign currency forward contracts, based upon valuation models with inputs that generally can be verified by observable market conditions and do not involve significant management judgment. Accordingly, the fair values of the derivative financial instruments are classified within Level 2 of the fair value hierarchy. With the exception of our investments in marketable securities and fixed rate long-term debt both as disclosed below, we believe that the reported carrying amounts of our remaining financial assets and liabilities approximate their fair values.
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 $9.9 million and $49.0 million as of December 31, 2022, and 2021, respectively. The fair value of our investments was $9.9 million and $49.0 million as of December 31, 2022, and 2021, respectively, which was reported in Investments, short-term in the accompanying 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 gains or losses relating to these securities have been recognized. All investments in marketable securities have maturities of one year or less and are currently in an unrealized loss position as of December 31, 2022.
The reported carrying amount of fixed rate long-term debt, including the current portion of long-term debt, was $266.5 million and $274.3 million at December 31, 2022, and 2021, respectively. The fair value of this debt was $218.3 million and $279.8 million at December 31, 2022, and 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 20—Contingencies
Product liability
The Company and its subsidiaries face an inherent business risk of exposure to product liability claims arising from the alleged failure of our products to prevent the types of personal injury or death against which they are designed to protect. Product liability claims are categorized as either single incident or cumulative trauma.
Single incident product liability claims. Single incident product liability claims involve incidents of short duration that are typically known when they occur and involve observable injuries, which provide an objective basis for quantifying damages. 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 December 31, 2022 and December 31, 2021. Single incident product liability expense was nominal for the years ended December 31, 2022 and 2021, compared to a benefit of $1.7 million for the year ended December 31, 2020. Single incident product liability exposures are evaluated on an annual basis, or more frequently if changing circumstances warrant. Adjustments are made to the reserve as appropriate. The reserve has not been discounted to present value and does not include future amounts which will be spent to defend the claims.
Cumulative trauma product liability claims. Cumulative trauma product liability claims involve potential exposures to substances that are alleged to have occurred over a number of years. In recent periods, this has included the asbestos, silica, and coal dust claims of one of the Company's affiliates, Mine Safety Appliances Company, LLC ("MSA LLC"). As of December 31, 2022, MSA LLC was named as a defendant in 1,500 lawsuits comprised of 4,054 claims. 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.
While pending as of December 31, 2022, all of the asserted claims listed in the summary table below are the sole responsibility of MSA LLC. MSA LLC was divested on January 5, 2023 and following that divestiture, neither the Company nor any of its subsidiaries have any responsibility for these claims, or the types of claims, listed in the following. See "Subsequent Event," below.
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Open lawsuits, beginning of period | 1,675 | | | 1,622 | | | 1,605 | |
| New lawsuits | 300 | | | 432 | | | 402 | |
| Settled and dismissed lawsuits | (475) | | | (379) | | | (385) | |
| Open lawsuits, end of period | 1,500 | | | 1,675 | | | 1,622 | |
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Asserted claims, beginning of period | 4,554 | | | 2,878 | | | 2,456 | |
| New claims | 520 | | | 2,134 | | | 917 | |
| Settled, inactive and dismissed claims | (1,020) | | | (458) | | | (495) | |
| Asserted claims, end of period | 4,054 | | | 4,554 | | | 2,878 | |
As of December 31, 2022, MSA LLC is defending an action filed in 2003 by the State of West Virginia, through its Attorney General, in the Circuit Court of Lincoln County, West Virginia, against MSA LLC and two other manufacturers of respiratory protection products. The State asserts several causes of action and seeks substantial compensatory damages—primarily for reimbursement of costs the State allegedly has incurred for worker’s compensation and healthcare benefits provided to individuals with occupational pneumoconiosis—as well as unspecified punitive damages. The State also asserts a claim under the West Virginia Consumer Credit and Protection Act (“CCPA”), alleging that the defendants made willful misrepresentations regarding product performance in connection with sales and advertisement of respirators in West Virginia and seeks substantial civil penalties. The claims against MSA LLC were severed from the claims against the other defendants and the trial date against MSA LLC was continued indefinitely in November 2022. No reserve has been recorded for this matter because the Company believes that liability is unsupportable under West Virginia law, and therefore, has concluded that the loss is not probable. In addition, the Company is not able to estimate a reasonably possible loss or range of reasonably possible losses given significant unresolved legal and factual matters. MSA LLC is the named defendant in this matter and responsibility for the matter passed along with the divestiture of MSA LLC on January 5, 2023. See "Subsequent Event," below.
Management previously established a reserve for MSA LLC's potential exposure to cumulative trauma product liability claims. Prior to divestiture of the subsidiary, as of December 31, 2022, MSA LLC's total cumulative trauma product liability reserve was $395.1 million, including $13.4 million for claims settled but not yet paid and related defense costs and $409.8 million, including $2.5 million for claims settled but not yet paid and related defense costs, as of December 31, 2021. The reserve included estimated amounts related to asserted and IBNR asbestos, silica, and coal dust claims expected to be resolved through the year 2075. The reserve was not discounted to present value and did not include estimated future amounts relating to defense of the claims. Defense costs are recognized in the Consolidated Statements of Income as incurred.
At December 31, 2022, $65.1 million of the total reserve for cumulative trauma product liability claims is recorded in the Insurance and product liability line within other current liabilities in the Consolidated Balance Sheet and the remainder, $330.0 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 Consolidated Balance Sheet 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. Amounts to resolve the unpaid portion of these claims have been accrued as part of the product liability reserve and as of December 31, 2022, $10.5 million remained unpaid with the final payments made during the first quarter of 2023.
Total cumulative trauma liability losses were $22.2 million, $228.2 million, and $77.8 million for the years ended December 31, 2022, 2021 and 2020, respectively, and related to updates to our cumulative trauma product liability reserve as well as the defense of cumulative trauma product liability claims for all periods. Uninsured cumulative trauma product liability losses, which were included in Product liability and other operating expense on the Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020, were $20.6 million, $185.3 million and $39.0 million, respectively, and represent the total cumulative trauma product liability losses net of any estimated insurance receivables as discussed below.
MSA LLC's cumulative trauma product liability reserve is based upon a reasonable estimate of MSA LLC’s current and potential future liability for cumulative trauma product liability claims, in accordance with applicable accounting principles. To develop a reasonable estimate of MSA LLC’s potential exposure to cumulative trauma product liability claims, 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. Adjustments to the reserve for the year ended December 31, 2022 totaled $8.4 million, resulting from our annual comprehensive review of MSA LLC’s claims exposure, including review of activity experienced during the year.
The estimate of MSA LLC’s potential liability for cumulative trauma product liability claims, 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.
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 have continued to pursue reimbursement under certain remaining Occurrence-Based Policies, the vast majority of these policies have been exhausted, settled or converted into either (1) negotiated 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. These policies, as well as the negotiated settlement agreements and Coverage-in-Place Agreements, together with all associated receivables are property of MSA LLC, which was divested on January 5, 2023. See "Subsequent Event," below.
When adjustments are made to amounts recorded in the cumulative trauma product liability reserve, we calculate amounts due to be reimbursed pursuant to the terms of the negotiated Coverage-In-Place Agreements, including cumulative trauma product liability losses and related defense costs, and we record the amounts probable of reimbursement as insurance receivables. These amounts are not subject to current coverage litigation.
Insurance receivables at December 31, 2022 totaled $127.6 million, of which $17.3 million is reported in Prepaid expenses and other current assets in the Consolidated Balance Sheet and $110.3 million is reported in Insurance receivable 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 Consolidated Balance Sheet and $121.6 million was reported in Insurance receivable and other noncurrent assets. The vast majority of the $127.6 million insurance receivables balance at December 31, 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) | | 2022 | | 2021 | | |
| Balance beginning of period | | $ | 130.2 | | | $ | 97.0 | | | |
| Additions | | 1.8 | | | 43.5 | | | |
| Collections | | (4.4) | | | (10.3) | | | |
| Balance end of period | | $ | 127.6 | | | $ | 130.2 | | | |
We record formal notes receivables 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 December 31, 2022 totaled $44.6 million, of which $5.9 million is reported in Notes receivable, insurance companies, current on the Consolidated Balance Sheet and $38.7 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 on the Consolidated Balance Sheet and $44.6 million was reported in Notes receivable, insurance companies, noncurrent.
A summary of notes receivables from insurance companies balance is as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| (In millions) | | 2022 | | 2021 |
| Balance beginning of period | | $ | 48.5 | | | $ | 52.3 | |
| Additions | | 1.2 | | | 1.3 | |
| Collections | | (5.1) | | | (5.1) | |
| Balance end of period | | $ | 44.6 | | | $ | 48.5 | |
The vast majority of the insurance receivables balances at both December 31, 2022 and 2021, is attributable to reimbursement under the terms of signed agreements with insurers and is not currently subject to litigation. The collectability of MSA LLC's insurance receivables and notes receivables is regularly evaluated and the Company believes that the amounts recorded are probable of collection. The determination that the recorded insurance receivables are probable of collection is based on the terms of the settlement agreements reached with the insurers, our history of collection, and the advice of MSA LLC's outside legal counsel and consultants. Various factors could affect the timing and amount of recovery of the insurance and notes receivables, including assumptions regarding various aspects of the composition and characteristics of future claims (which are relevant to calculating reimbursement under the terms of certain Coverage-In-Place Agreements) and the extent to which the issuing insurers may become insolvent in the future.
Subsequent Event
On January 5, 2023, the Company divested MSA LLC, a wholly-owned subsidiary that holds legacy product liability claims relating to coal dust, asbestos, silica, and other exposures, to a joint venture between R&Q Insurance Holdings Ltd. and Obra Capital, Inc. In connection with the closing, the Company contributed $341 million in cash and cash equivalents, while R&Q and Obra contributed an additional $35 million.
As a result of the transaction in the first quarter of 2023, we will derecognize all legacy cumulative trauma product liability reserves, related insurance assets, and associated deferred tax assets of the divested subsidiary from our balance sheet and will recognize a loss of approximately $200 million. R&Q and Obra's joint venture has assumed management of the divested subsidiary, including the management of its claims and associated assets.
Other Litigation
Two subsidiaries of the Company, Globe Manufacturing Company, LLC ("Globe") and MSA LLC, are defending a number of lawsuits in which plaintiffs assert that certain of those entities’ products allegedly containing per- and polyfluoroalkyl substances (“PFAS”) have caused injury, health issues, or environmental issues. PFAS are a large class of substances that are widely used in everyday products. Specifically, Globe builds turnout gear from technical fabrics sourced from a small pool of specialty textile manufacturers. These protective fabrics have been tested and certified to meet industry standards, and some of them contain PFAS to achieve water, oil, or chemical resistance. No manufacturer of firefighter protective clothing is currently able to meet National Fire Protection Association safety standards while offering coats or pants that are completely PFAS free.
Globe and MSA LLC believe they have valid defenses to these lawsuits. These matters are at a very early stage with numerous factual and legal issues to be resolved. Defense costs relating to these lawsuits are recognized in the Consolidated Statement of Income as incurred. Globe and MSA LLC are also pursuing insurance coverage and indemnification related to the lawsuits. The PFAS claims against MSA LLC were included in the divestiture of MSA LLC on January 5, 2023 as discussed above under the Subsequent Event header. In total, Globe was named as a defendant in 34 lawsuits comprised of approximately 1,865 claims as of February 16, 2023.
Product Warranty
The Company provides warranties on certain product sales. Product warranty reserves are established in the same period that revenue from the sale of the related products is recognized, or in the period that a specific issue arises as to the functionality of the Company's product. The determination of such reserves requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under warranty.
The amounts of the reserves are based on established terms and the Company's best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. If actual return rates and/or repair and replacement costs differ significantly from estimates, adjustments to recognize additional cost of sales may be required in future periods.
The following table reconciles the changes in the Company's accrued warranty reserve:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Beginning warranty reserve | | $ | 12,423 | | | $ | 11,428 | | | $ | 12,715 | |
| Warranty payments | | (10,631) | | | (8,987) | | | (10,861) | |
| Warranty claims | | 14,544 | | | 10,225 | | | 10,233 | |
| Provision for product warranties and other adjustments | | (1,106) | | | (243) | | | (659) | |
| Ending warranty reserve | | $ | 15,230 | | | $ | 12,423 | | | $ | 11,428 | |
Warranty expense for the years ended December 31, 2022, 2021 and 2020 was $13.4 million, $10.0 million and $9.6 million, respectively and is included in Costs of products sold on the Consolidated Statements of Income.
Note 21—Quarterly Financial Information (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Quarters | | |
| (In thousands, except per share amounts) | 1st | | 2nd | | 3rd | | 4th | | Year |
| Net sales | $ | 330,692 | | | $ | 372,313 | | | $ | 381,694 | | | $ | 443,254 | | | $ | 1,527,953 | |
| Gross profit | 142,784 | | | 164,400 | | | 169,395 | | | 197,252 | | | 673,831 | |
| Net income attributable to MSA Safety Incorporated | 35,542 | | | 47,693 | | | 44,906 | | | 51,489 | | | 179,630 | |
| | | | | | | | | |
Earnings per share(1) | | | | | | | | | |
| Basic | $ | 0.90 | | | $ | 1.21 | | | $ | 1.15 | | | $ | 1.31 | | | $ | 4.58 | |
| Diluted | 0.90 | | | 1.21 | | | 1.14 | | | 1.31 | | | 4.56 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Quarters | | |
| (In thousands, except earnings per share) | 1st | | 2nd | | 3rd | | 4th | | Year |
| Net sales | $ | 308,428 | | | $ | 341,289 | | | $ | 340,197 | | | $ | 410,268 | | | $ | 1,400,182 | |
| Gross profit | 134,785 | | | 153,000 | | | 149,439 | | | 178,124 | | | 615,348 | |
| Net income (loss) attributable to MSA Safety Incorporated | 36,450 | | | 25,186 | | | 21,180 | | | (61,476) | | | 21,340 | |
| | | | | | | | | |
Earnings (loss) per share(1) | | | | | | | | | |
| Basic | $ | 0.93 | | | $ | 0.64 | | | $ | 0.54 | | | $ | (1.57) | | | $ | 0.54 | |
| Diluted | 0.92 | | | 0.64 | | | 0.54 | | | (1.57) | | | 0.54 | |
(1) Per share amounts are calculated independently for each period presented; therefore, the sum of the quarterly per share amounts may not equal the per share amounts for the year.