The following discussion and analysis should be read in conjunction with the historical financial statements and other financial information included elsewhere in this annual report on Form 10-K. This discussion may contain forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this annual report entitled "Forward-Looking Statements" and "Risk Factors." This section generally discusses the results of our operations for the year ended
December 31, 2021compared to the year ended December 31, 2020. For a discussion on the year ended December 31, 2020compared to the year ended December 31, 2019, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2020filed with the Securities and Exchange Commissionon February 19, 2021. MSA Safety Incorporated("MSA") is organized into four geographical operating segments that are aggregated into three reportable geographic segments: Americas, International and Corporate. The Americassegment is comprised of our operations in North Americaand Latin Americageographies. The International segment is comprised of our operations of all geographies outside of the Americas. Certain global expenses are allocated to each segment in a manner consistent with where the benefits from the expenses are derived. Please refer to Note 8-Segment Information of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information. On July 1, 2021, the Company acquired Bacharach, Inc.and its affiliated companies ("Bacharach") in a transaction valued at $329.4 million, net of cash acquired. Headquartered near Pittsburghin New Kensington, Pa., Bacharach is a leader in gas detection technologies used in the heating, ventilation, air conditioning and refrigeration ("HVAC-R") markets. Bacharach's advanced instrumentation technologies help protect lives and the environment, while also increasing operational efficiency for its diversified customer base. Bacharach's portfolio of gas detection and analysis products are used to detect, measure and analyze leaks of various gases that are commonly found in both commercial and industrial settings. Bacharach has strong expertise in the refrigerant leak detection market with customers in the HVAC-R, food retail, automotive, commercial and industrial refrigeration, and military markets. Refer to Note 14-Acquisitions of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information.
January 25, 2021, the Company acquired 100% of the common stock of B T Q Limited, including Bristol Uniforms and Bell Apparel ("Bristol") in an all-cash transaction valued at $63.0 million, net of cash acquired. Bristol, which is headquartered in the United Kingdom, 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 ("PPE") products, which include breathing apparatus, firefighter helmets, thermal imaging cameras, and firefighter protective apparel, while providing an avenue to expand its business in the United Kingdom("U.K") and key European markets. The fire service equipment brands of MSA, which include Gallet Firefighter Helmets, the M1 and G1 Self-Contained Breathing Apparatus range, Cairns Helmets, Globe Manufacturing, and now Bristol, represent more than 460 combined years of innovation in the fire service industry, with a common mission: protecting the health and safety of firefighters. Bristolis 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. Refer to Note 14-Acquisitions of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information. During the fourth quarter of 2021, the Company changed its method of accounting for certain inventory in the United Statesfrom the LIFO method to the FIFO method. The FIFO method of accounting for inventory is preferable because it conforms the Company's entire inventory to a single method of accounting and improves comparability with the Company's peers. The effects of the change in accounting method from LIFO to FIFO have been retrospectively applied to all periods presented in all sections of this Annual Report, including Management's Discussion and Analysis. Refer to Note 4-Inventory of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information related to the change in accounting principle. 22
MSA is a global leader in the development, manufacture and supply of safety products that protect people and facility infrastructures. Recognized for their market leading innovation, many MSA products integrate a combination of electronics, mechanical systems and advanced materials to protect users against hazardous or life-threatening situations. The Company's comprehensive product line, which is governed by rigorous safety standards across highly regulated industries, is used by workers around the world in a broad range of markets, including fire service, oil, gas and petrochemical industry, construction, industrial manufacturing applications, utilities, mining and the military. MSA's core products include breathing apparatus, fixed gas and flame detection systems, portable gas detection instruments, industrial head protection products, firefighter helmets and protective apparel, and fall protection devices. We are committed to providing our customers with service unmatched in the safety industry and, in the process, enhancing our ability to provide a growing line of safety solutions for customers in key global markets. MSA provides safety equipment to a broad range of customers who must continue to work in times of global pandemic as is the case with COVID-19. Our customers include first responders, who are tasked with keeping citizens safe, and include industrial and utility workers tasked with maintaining critical infrastructure. For this reason, in order to successfully fulfill our mission as
The Safety Company, MSA is an essential business and has continued operating its manufacturing facilities during these times, to the extent practicable, while protecting the health and safety of our workforce, and complying with all applicable laws, all pursuant to an established pandemic response plan. The Company has developed a thoughtful, phased approach to reconnecting segments of our workforce that had converted to remote working conditions due to COVID-19. Through this process in 2021, we returned elements of our salesforce to in-person customer interactions on a limited basis and instituted a modified hybrid return-to-office protocol for the majority of our U.S.workforce in the third quarter, with our International segment employees planning to return to the office once deemed appropriate under the circumstances for each business location. We continue to deploy a phased approach to reconnect employees while adjusting the characteristics of their physical working environments, providing training and executing enhanced safety and cleaning protocols, which promotes workspace safety in a manner consistent with the mission and values of MSA. The Company's return-to-work plans continue to evolve as needed, such as was the case due to the Omicron variant. We tailor our product offerings and distribution strategy to satisfy distinct customer preferences that vary across geographic regions. To best serve these customer preferences, we have organized our business into four geographical operating segments that are aggregated into three reportable geographic segments: Americas, International and Corporate. In 2021, 65% and 35% of our net sales were made by our Americasand International segments, respectively. Americas. Our largest manufacturing and research and development facilities are located in the United States. We serve our markets across the Americaswith manufacturing facilities in the U.S., Mexicoand Brazil. Operations in the other countries within the Americassegment focus primarily on sales and distribution in their respective home country markets. International. Our International segment includes companies in Europe, the Middle Eastand Africa("EMEA") and the Asia Pacificregion. In our largest International subsidiaries (in Germany, France, United Kingdom, Irelandand China), we develop, manufacture and sell a wide variety of products. In China, the products manufactured are sold primarily in Chinaas well as in regional markets. Operations in other International segment countries focus primarily on sales and distribution in their respective home country markets. Although some of these companies may perform limited production, most of their sales are of products manufactured in our plants in Germany, France, the U.S., U.K., Irelandand Chinaor are purchased from third-party vendors. Corporate. The Corporate segment primarily consists of general and administrative expenses incurred in our corporate headquarters, costs associated with corporate development initiatives, legal expense, interest expense, foreign exchange gains or losses and other centrally-managed costs. Corporate general and administrative costs comprise the majority of the expense in the Corporate segment. During the years ended December 31, 2021, 2020 and 2019 corporate general and administrative costs were $37.6 million, $28.5 million, and $37.3 million, respectively. 23
Net Sales Dollar Percent Increase Increase (In millions) 2021 2020 (Decrease) (Decrease) Consolidated
$1,400.2 $1,348.2 $52.03.9% Americas 908.1 874.3 33.8 3.9% International 492.1 473.9 18.2 3.8% Net Sales. Net sales for the year ended December 31, 2021, were $1.40 billion, an increase of $52.0 million, from $1.35 billionfor the year ended December 31, 2020. Constant currency sales increased by 3% for the year ended December 31, 2021. Please refer to the Net Sales table below for a reconciliation of the year over year sales change. Net Sales Year Ended December 31, 2021 versus December 31, 2020 (Percent Change) Americas International Consolidated GAAP reported sales change 3.9% 3.8% 3.9% Currency translation effects -% (4.0)% (1.4)% Constant currency sales change 3.9% (0.2)% 2.5% Less: Acquisitions (3.2)% (7.7)% (4.8)% Organic constant currency change 0.7% (7.9)% (2.3)% Note: Organic constant currency sales change is a non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance. Organic constant currency sales change is calculated by deducting the percentage impact from acquisitions and currency translation effects from the overall percentage change in net sales. Net sales for the Americassegment were $908.1 millionfor the year ended December 31, 2021, an increase of $33.8 million, or 4%, compared to $874.3 millionfor the year ended December 31, 2020. During 2021, constant currency sales in the Americassegment increased 4% compared to the prior year period, driven by $28 millionof Bacharach sales and a general improvement in business conditions driving a higher level of sales of head protection, portable gas detection and fall protection; partially offset by APR sales moderating to pre-pandemic levels. Net sales for the International segment were $492.1 millionfor the year ended December 31, 2021, an increase of $18.2 million, or 4%, compared to $473.9 millionfor the year ended December 31, 2020. Constant currency sales in the International segment was consistent with 2020, due to weaker organic sales volumes across the segment, with more significant weakness in emerging markets due to an uneven economic recovery due to COVID-19 and lower project business in the Middle East FGFD market. This weakness was partially offset by $39 millionof acquisition related sales, primarily related to Bristol. Order activity was healthy as we finished the fourth quarter, and continued to show year-over-year improvements to start 2022. Our backlog remains at an elevated level, as a result of an uptick in order pace and ongoing supply chain constraints in certain product groups. Looking ahead, we continue to operate in a dynamic environment. There are a number of other evolving factors that will continue to influence our revenue outlook. These factors include, among other things, supply chain constraints, including electronic components impacting our fixed and portable gas detection product groups, which have intensified to start 2022; availability of labor, especially at Globe; the effectiveness/pace of the vaccine rollout globally; risk of additional COVID outbreaks and/or lockdowns; industrial employment rates; and the pace of economic recovery. These conditions could impact our future results and growth expectations well into 2022. Refer to Note 8-Segment Information to the consolidated financial statements in Part II Item 8 of this Form 10-K, for information regarding sales by product group. 24
-------------------------------------------------------------------------------- Table of Contents Gross profit. Gross profit for the year ended
December 31, 2021was $615.3 million, an increase of $19.8 million, or 3.3%, compared to $595.5 millionfor the year ended December 31, 2020. The ratio of gross profit to net sales was 43.9% in 2021 compared to 44.2% in 2020. Strategic pricing, stronger throughput in our factories and lower inventory charges associated with APR products offset the impacts of $3.8 millionof inventory step-up amortization and $5.0 millionof intangible asset amortization related to our 2021 acquisitions, and higher material costs. We have continued to take pricing actions across our business and will continue to take additional actions to respond to the inflation we are seeing, especially in the U.S.across electronic components, resins and other inputs. While there could be a number of scenarios on the length of time that these challenges may persist, we could see these impact our business for the foreseeable future with more meaningful impact well into 2022. Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses were $332.9 millionfor the year ended December 31, 2021, an increase of $42.6 million, or 14.7%, compared to $290.3 millionfor the year ended December 31, 2020. Overall, selling, general and administrative expenses were 23.8% of net sales in 2021 compared to 21.5% of net sales in 2020. Improved business conditions drove $17.7 millionof additional variable compensation and $2.6 millionof higher discretionary expense during the period as the business exited the peak pandemic state. SG&A includes $22.3 millionof expenses associated with Bacharach and Bristoloperations, which includes $7.1 millionof non-recurring deal costs related to these acquisitions.
Please refer to the Selling, General and Administrative Expenses table for a reconciliation of the change in expenses from year to year.
December 31, 2021versus December Selling, general, and administrative expenses 31, 2020 (Percent Change) Consolidated GAAP reported change 14.7% Currency translation effects (1.0)% Constant currency change 13.7% Less: Acquisitions and related strategic transaction costs
Organic constant currency change
Note: Organic change in constant currency general and administrative expenses is a non-GAAP financial measure provided by the Company to provide a better understanding of the Company’s underlying business performance. The organic change in constant currency general and administrative expenses is calculated by deducting the percentage impact of acquisitions and related strategic transaction costs and currency translation effects from the overall percentage change in general and administrative expenses.
Research and development expense. Research and development expense was
$57.8 millionfor the year ended December 31, 2021, a decrease of $0.5 million, or 0.8%, compared to $58.3 millionfor the year ended December 31, 2020. Research and development expense was 4.1% of net sales in 2021, compared to 4.3% of net sales in 2020. We continue to develop new products for global safety markets, including the recently announced launch of the Altair io4. We capitalized approximately $8.1 millionand $8.2 millionof software development costs during the years ended December 31, 2021and 2020, respectively. Restructuring charges. During the year ended December 31, 2021, the Company recorded restructuring charges of $16.4 millionprimarily related to our ongoing initiatives to drive profitable growth and acquisition integration activities. Together with cost reduction programs executed throughout 2020 and 2021, these programs collectively delivered approximately $15 millionof savings throughout the income statement in 2021, and expect to generate annual savings of $25-$30 millionthereafter. This compared to restructuring charges of $27.4 millionduring the year ended December 31, 2020, primarily related to footprint rationalization projects including the Company's FGFD manufacturing footprint optimization and the acceleration of cost reduction programs associated with our ongoing initiatives to drive profitable growth in our International segment. We remain focused on executing programs to optimize our cost structure and to drive improvements in productivity. Currency exchange. Currency exchange losses were $0.2 millionduring the year ended December 31, 2021, compared to $8.6 millionduring the year ended December 31, 2020. Currency exchange in both periods were related to foreign currency exposure on unsettled inter-company balances. Refer to Note 18-Derivative Financial Instruments of the consolidated financial statements in Part II Item 8 of this Form 10-K for information regarding our currency exchange rate risk management strategy. 25
Product liability expense. Product liability expense during the year ended
December 31, 2021was $185.3 millioncompared to $39.0 millionfor the year ended December 31, 2020. The expense in both periods primarily relates to increases in MSA LLC'sreserve for cumulative trauma product liability claims, and to a far lesser extent, incurred defense costs. Adjustments to the reserve for the year ended December 31, 2021totaled $219.0 millionnet of insurance receivable of $42.9 million. These adjustments were largely a result of incorporating the increased number of newly filed claims during the year into long term trends used in the estimate, particularly, the number of newly filed coal claims, which were well in excess of historical experience. The reserve includes estimated amounts for claims expected to be resolved through the year 2074. Please refer to Note 20-Contingencies of the consolidated financial statements in Part II Item 8 of this Form 10-K for additional information.
GAAP operating profit. Consolidated operating profit for the year ended
Adjusted operating income.
Americasadjusted operating income for the year ended December 31, 2021was $202.5 million, a decrease of $2.8 millionor 1%, compared to $205.3 millionfor the year ended December 31, 2020. The decrease was related to variable compensation resets and higher SG&A due to the Bacharach acquisition, as well as higher input costs, which was mostly offset by higher revenue.
International adjusted operating profit for the year ended
Corporate segment adjusted operating loss for the year ended
December 31, 2021was $35.2 million, an increase of $7.1 million, or 25%, compared to an adjusted operating loss of $28.1 millionfor the year ended December 31, 2020, due primarily to higher variable compensation expenses related to improved business conditions and the impact of the Bacharach acquisition. The following tables represent a reconciliation from GAAP operating income to adjusted operating income (loss) and adjusted EBITDA. Adjusted operating margin % is calculated as adjusted operating income (loss) divided by net sales and adjusted EBITDA margin % is calculated as adjusted EBITDA divided by net sales. Adjusted operating income Year Ended December 31, 2021 (In thousands) Americas International Corporate Consolidated Net sales $ 908,068 $ 492,114$ - $ 1,400,182GAAP operating income 22,780 Restructuring charges (Note 3) 16,433 Currency exchange losses, net 216 Product liability expense (Note 20) 185,264 Acquisition related costs (Note 14)(a) 15,884 Adjusted operating income (loss) 202,496 73,279 (35,198) 240,577 Adjusted operating margin % 22.3 % 14.9 % Depreciation and amortization(a) 31,236 13,718 463 45,417 Adjusted EBITDA 233,732 86,997 (34,735) 285,994 Adjusted EBITDA % 25.7 % 17.7 % 26
Table of Contents Adjusted operating income Year Ended December 31, 2020 (In thousands) Americas International Corporate Consolidated Net sales
$ 874,305 $ 473,918$ - $ 1,348,223GAAP operating income 171,895 Restructuring charges (Note 3) 27,381 Currency exchange losses, net 8,578 Product liability expense (Note 20) 39,036 Acquisition related costs (Note 14)(a) 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(a) 26,762 12,521 391 39,674 Adjusted EBITDA 232,066 83,661 (27,689) 288,038 Adjusted EBITDA % 26.5 % 17.7 %
* Year ended
(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 during 2021 also include
$8.8 millionof amortization which is included in Cost of products sold in the Consolidated Statements of Income. Note: Adjusted operating income (loss) and adjusted EBITDA are non-GAAP financial measures used by the chief operating decision maker to evaluate segment performance and allocate resources. Adjusted operating income (loss) is reconciled above to the nearest GAAP financial measure, Operating income (loss), and excludes restructuring, currency exchange, product liability expense, and acquisition related costs. Adjusted EBITDA is reconciled above to the nearest GAAP financial measure, Operating income (loss) and excludes depreciation and amortization expense. Total other (income) expense, net. Total other income, net, for the year ended December 31, 2021, was $0.8 million, an increase of $4.5 millioncompared to other expense, net, of $3.7 millionfor the year ended December 31, 2020, due primarily to higher pension income driven by a one-time pension settlement and a higher expected rate of return on plan assets. Income taxes. The reported effective tax rate for the year ended December 31, 2021was 7.7%, which includes a benefit of 18.3% for share-based payments, a benefit of 10.9% related to higher profits in foreign jurisdictions and settlement of a foreign audit, and an expense of 15.3% due to nondeductible compensation. This compared to a reported effective tax rate for the year ended December 31, 2020of 25.6%, which included a benefit of 3.9% for share-based payments, an expense of 3.4% due to nondeductible compensation, and expense of 1.5% related to a foreign audit. 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. Net income attributable to MSA Safety Incorporated. Net income was $21.3 millionfor the year ended December 31, 2021, or $0.54per diluted share, compared to $124.1 million, or $3.15per diluted share, for the year ended December 31, 2020, as positive momentum in the business was offset by the product liability reserve adjustment. 27
Non-GAAP Financial Information
We may provide information regarding financial measures such as organic constant currency changes, financial measures excluding the impact of acquisitions and related acquisition related costs (including acquisition related amortization and COVID-19 related costs, consisting of a one-time bonus for essential manufacturing employees), adjusted operating income, adjusted operating margin percentage, adjusted EBITDA and adjusted EBITDA margin percentage, which are not recognized terms under
U.S.GAAP and do not purport to be alternatives to net sales, selling, general and administrative expense, operating income or net income as a measure of operating performance. We believe that the use of these non-GAAP financial measures provide investors with additional useful information and provide a more complete understanding of the underlying results. Because not all companies use identical calculations, these presentations may not be comparable to similarly titled measures from other companies. For more information about these non-GAAP measures and a reconciliation to the nearest U.S.GAAP measure, please refer to the reconciliations referenced above in Management's Discussion & Analysis section and in Note 8-Segment Information of the consolidated financial statements in Part II Item 8 of this Form 10-K. We may also provide financial information on a constant currency basis, which is a non-GAAP financial measure. These references to a constant currency basis do not include operational impacts that could result from fluctuations in foreign currency rates, which are outside of management's control. To provide information on a constant currency basis, the applicable financial results are adjusted by translating current and prior period results in local currency to a fixed foreign exchange rate. This approach is used for countries where the functional currency is the local country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance. Constant currency information is not recognized under U.S.GAAP and it is not intended as an alternative to U.S.GAAP measures.
CASH AND CAPITAL RESOURCES
Our main source of liquidity is operating cash flows, supplemented by borrowings. Our principal liquidity requirements are for working capital, capital expenditures, principal and interest payments on debt, declared dividend payments and acquisitions. At
December 31, 2021, approximately 46% of our long-term debt is at fixed interest rates with repayment schedules through 2036. The remainder of our long-term debt is at variable rates on an unsecured revolving credit facility that is due in 2026. At December 31, 2021, approximately 81% of our borrowings are denominated in US dollars, which limits our exposure to currency exchange rate fluctuations. At December 31, 2021, the Company had cash and cash equivalents totaling $141.4 million, and access to sufficient capital, providing ample liquidity and flexibility to continue to maintain our balanced capital allocation strategy. At December 31, 2021, $572.4 millionof the existing $900.0 millionsenior 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 millionof capacity pending approval by MSA's board of directors and from the bank group. The Company believes our healthy balance sheet and access to significant capital at the year ended December 31, 2021, positions us well to navigate through challenging business conditions. Operating activities. Operating activities provided cash of $199.1 millionin 2021, compared to providing cash of $206.6 millionin 2020. The reduced operating cash flow as compared to the same period in 2020 was primarily related to increased working capital and payments for subsidiary MSA LLC'sproduct liability claims exceeding collections from insurance companies by $24.1 millionin the year ended December 31, 2021, compared to $12.9 millionin 2020. MSA LLCpresently funds its operating expenses and legal liabilities from its own operating cash flow and other investments, as well as limited amounts of insurance reimbursements and intercompany notes. The subsidiary is not party to the Company's credit facility. Now that MSA LLCis largely self-insured for its historical cumulative trauma product liability claims, associated insurance reimbursements received in any given period are limited, and generally do not fully offset cash outlay in that same period. In recent years, MSA LLC'scontingent liabilities have been funded without a material impact on the Company's consolidated capital allocation priorities. Please refer to Note 20-Contingencies of the consolidated financial statements in Part II Item 8 of this Form 10-K for additional information. 28
Investing activities. Investing activities used cash of
$415.5 millionfor the year ended December 31, 2021, compared to using $72.8 millionin 2020. The acquisitions of Bacharach and Bristoland capital expenditures, partially offset by maturities of short-term investments, net of purchases, drove cash outflows from investing activities during the year ended December 31, 2021, while capital expenditures and the purchase of short-term investments, net of proceeds from maturities, drove cash outflows from investing activities during the same period in 2020. During 2021 we incurred capital expenditures of $43.8 million, including approximately $8.1 millionassociated with software development and other growth programs, compared to capital expenditures of $48.9 million, including $8.2 millionassociated with software development and other growth programs, in the same period in 2020. The reduced capital expenditures in 2021 was a result of MSA's ramping up APR production in our Jacksonville, NCfacility in 2020. We remain active in evaluating additional acquisition opportunities that will allow us to continue to grow in key end markets and geographies. Financing activities. Financing activities provided cash of $203.9 millionfor the year ended December 31, 2021, compared to using cash of $126.5 millionin 2020. During 2021, we had net proceeds on long-term debt of $293.2 millionto fund the acquisitions of Bacharach and Bristoland buy-out our minority partner in our Chinabusiness, as compared to net payments on long-term debt of $44.0 millionduring the same period in 2020. We paid cash dividends, exclusive of a $5.6 milliondividend to our former noncontrolling interest partner in Chinaas part of the buy-out, of $68.6 millionduring 2021, compared to $66.6 millionduring 2020. We also used cash of $6.2 millionduring 2021 to repurchase shares, compared to using $29.1 millionduring the same period in 2020. In 2020, $20.1 millionof our repurchase activity was related to purchases under our 2015 stock repurchase program.
CUMULATIVE TRANSLATION ADJUSTMENTS
The year-end position of the
U.S.dollar relative to international currencies at December 31, 2021, resulted in a translation loss of $25.4 millionbeing recorded to cumulative translation adjustments shareholders' equity account for the year ended December 31, 2021, compared to a $22.3 milliontranslation gain being recorded to the cumulative translation adjustments account during 2020.
COMMITMENTS AND CONTINGENCIES
We are obligated to make future payments under various contracts, including debt and lease agreements. Our significant cash obligations as of
December 31, 2021, are as follows: (In millions) Total 2022 2023 2024 2025 2026 Thereafter Long-term debt $ 600.4$ - $ 8.3 $ 8.3 $ 8.3 $ 334.3 $ 241.2Operating leases 59.2 10.6 8.5 6.4 4.2 3.7 25.8 Inventory costing method change tax 10.7 2.7 2.7 2.7 2.6 - - Transition tax 2.0 - 0.7 1.3 - - - Totals $ 672.3 $ 13.3 $ 20.2 $ 18.7 $ 15.1 $ 338.0 $ 267.0
The table of significant obligations does not include obligations to tax authorities due to the uncertainty surrounding the ultimate settlement of the amounts and the timing of these obligations.
We expect to meet our future debt service obligations through cash provided by operations. Approximately
$334.4 millionof debt payable in 2026 relates to our unsecured senior revolving credit facility. We expect to generate sufficient operating cash flow to make payments against this amount each year. To the extent that a balance remains when the facility matures in 2026, we expect to refinance the remaining balance through new borrowing facilities. Interest expense on fixed rate debt over the next five years is expected to be approximately $7.9 millionin 2022, $7.8 millionin 2023, $7.6 millionin 2024, $7.1 millionin 2025, and $7.0 millionin 2026. We expect total interest expense for 2022 to be between $13 millionand $15 million. 29
The Company had outstanding bank guarantees and standby letters of credit with banks as of
December 31, 2021totaling $10.9 million, of which $1.5 millionrelate to the senior revolving credit facility. These 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, 2021, the Company has $0.5 millionof restricted cash in support of these arrangements. We expect to make net contributions of $7.7 millionto our pension plans in 2022 which are primarily associated with our International segment. We have not been required to make contributions to our U.S.based qualified defined benefit pension plan in many years.
We have purchase commitments for materials, supplies, services and property, plant and equipment in the normal course of our business.
Please refer to Note 20 – Contingencies to the consolidated financial statements in Part II, Item 8 of this Form 10-K for more information on the Company’s product liabilities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with
U.S.generally accepted accounting principles ( U.S.GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. We evaluate these estimates and judgments on an on-going basis based on historical experience and various assumptions that we believe to be reasonable under the circumstances. However, different amounts could be reported if we had used different assumptions and in light of different facts and circumstances. Actual amounts could differ from the estimates and judgments reflected in our consolidated financial statements. A summary of the Company's significant accounting policies is included in Note 1-Significant Accounting Policies to the consolidated financial statements in Part II, Item 8 of this Form 10-K. The more critical judgments and estimates used in the preparation of our consolidated financial statements are discussed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for the year ended December 31, 2021. During 2021, the Company made acquisitions that raised business combinations to a critical accounting policy and estimate. Business combinations. In accordance with the accounting guidance for business combinations, the Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed will be recognized as goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. In addition to using management estimates and negotiated amounts, the Company uses a variety of information sources to determine the estimated fair values of acquired assets and liabilities including: third-party appraisals for the estimated value and lives of identifiable intangible assets and property, plant and equipment; third-party actuaries for the estimated obligations of defined benefit pension plans and similar benefit obligations; and legal counsel or other experts to assess the obligations associated with legal, environmental and other contingent liabilities. The business and technical judgment of management was used in determining which intangible assets have indefinite lives and in determining the useful lives of finite-lived intangible assets in accordance with the accounting guidance for goodwill and other intangible assets. Cumulative trauma product liability. 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 involve incidents of short duration that are typically known when they occur and involve observable injuries, which provide an objective basis for quantifying damages. The Company estimates its subsidiaries' liability for single incident product liability claims based on expected settlement costs for asserted single incident product liability claims and an estimate of costs for single incident product liability claims incurred but not reported ("IBNR"). Single incident product liability exposures are evaluated on an annual basis, or more frequently if changing circumstances warrant. Adjustments are made to the reserve as appropriate. 30
Cumulative trauma product liability claims involve exposures to harmful substances (e.g., silica, asbestos and coal dust) that occurred years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, mesothelioma, or coal worker's pneumoconiosis.
MSA LLC'scombined cumulative trauma product liability reserve is based upon estimates of its liability for asserted and IBNR cumulative trauma product liability claims. In addition, in connection with finalizing and reporting the Company's results of operations, management works annually (unless significant changes in trends or new developments warrant an earlier review) with an outside valuation consultant and outside legal counsel to review MSA LLC'spotential exposure to all cumulative trauma product liability claims. Each of these factors may increase or decrease significantly within an individual period depending on, among other things, the timing of claims filings or settlements, or litigation outcomes during a particular period that are especially favorable or unfavorable to MSA LLC. We accordingly consider MSA LLC'sclaims experience over multiple periods and/or whether there are changes in MSA LLC'sclaims experience and trends that are likely to continue for a significant time into the future in determining whether to make an adjustment to the reserve, rather than evaluating such factors solely in the short term.
Please refer to Note 20 – Contingencies to the consolidated financial statements in Part II, Item 8 of this Form 10-K for more information on the Company’s product liabilities.
Income taxes. We recognize deferred tax assets and liabilities using enacted tax rates to record the tax effect of temporary differences between the book and tax basis of recorded assets and liabilities. We record valuation allowances to reduce deferred tax assets to the amounts that we estimate are probable to be realized. When assessing the need for valuation allowances, we consider projected future taxable income and prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in our judgments about the realizability of deferred tax assets in future years, we adjust the related valuation allowances in the period that the change in circumstances occurs. We record an estimated income tax liability based on our best judgment of the amounts likely to be paid in the various tax jurisdictions in which we operate. We record tax benefits related to uncertain tax positions taken or expected to be taken on a tax return when such benefits meet a more likely than not threshold. We recognize interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The tax liabilities ultimately paid are dependent on a number of factors, including the resolution of tax audits, and may differ from the amounts recorded. Tax liabilities are adjusted through income when it becomes probable that the actual liability differs from the amount recorded. Pensions and other post-retirement benefits. We sponsor certain pension and other post-retirement benefit plans. Accounting for the net periodic benefit costs and credits for these plans requires us to estimate the cost of benefits to be provided well into the future and to attribute these costs over the expected work life of the employees participating in these plans. These estimates require our judgment about discount rates used to determine these obligations, expected returns on plan assets, rates of future compensation increases, rates of increase in future health care costs, participant withdrawal and mortality rates and participant retirement ages. Differences between our estimates and actual results may significantly affect the cost of our obligations under these plans and could cause net periodic benefit costs and credits to change materially from year-to-year. Discount rates and plan asset valuations are point-in-time measures. The discount rate assumptions used in determining projected benefit obligations for our
U.S.and foreign plans were based on the spot rate method at December 31, 2021.
Expected returns on plan assets are based on financial market expectations by asset class.
The following table summarizes the impact of changes in key actuarial assumptions on our
Impact of Changes in Actuarial Assumptions Change in Discount Change in Expected Rate Return Change in Market Value of Assets (In thousands) 1% (1)% 1% (1)% 5%
(Decrease) increase in net benefit cost
$ (7,600) $ 9,302 $ (4,958) $ 4,958$ (1,028) $ 1,050(Decrease) increase in projected benefit obligation (86,513) 109,624 - - -
Increase (decrease) in funded status 86,513 (109,624) - - 32,514 (32,514) 31
Goodwilland Indefinite-lived Intangible Assets. On October 1stof 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. 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 Accounting Standards Codification ("ASC") Topic 350. In 2021, we performed a quantitative test at October 1, 2021. 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 business 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 EBITDA at which peer companies are trading. In the event the carrying value is in excess of the estimated fair value of a reporting unit per the weighted average of the DCF and market approach models, an impairment loss equal to such excess would be recognized, which could materially and adversely affect reported consolidated results of operations and shareholders' equity. At October 1, 2021, based on our quantitative test, the fair values of each of our reporting units exceeded their carrying value by at least 56%. The intangible asset with an indefinite life is also subject to impairment testing on October 1stof each year, or more frequently if indicators of impairment exist. The impairment test compares the fair value of the intangible asset with its carrying amount. We perform a quantitative assessment of the indefinite lived trade name intangible asset as outlined in ASC 350 by comparing the estimated fair value of the trade name intangible asset to its carrying value. We estimate the fair value using the relief from royalty income approach. A number of significant assumptions and estimates are involved in the application of the relief from royalty model, including sales volumes and prices, royalty rates and tax rates. Forecasts are based on sales generated by the underlying trade name assets and are generally based on approved business unit operating plans for the early years and historical relationships in later years. At October 1, 2021, based on our quantitative test, the fair value of the trade name asset exceeded its carrying value by approximately 29%.
RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS
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