MSA Safety Inc 10-K

Item 8. Financial Statements and Supplementary Data Management’s Reports to Shareholders Management’s Report on Responsibility for Financial Reporting Management of MSA Safety Incorporated (the Company) is responsible for the preparation of the consolidated financial statements included in this annual report. The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on the best estimates and judgments of management. The other financial information contained in this annual report is consistent with the consolidated financial statements. Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on our assessment and those criteria, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2020. The Company's independent registered public accounting firm that audited the consolidated financial statements included in this annual report issued an attestation report on the Company's internal control over financial reporting. /s/ NISHAN J. VARTANIAN Nishan J. Vartanian Chairman, President and Chief Executive Officer /s/ KENNETH D. KRAUSE Kenneth D. Krause Sr. Vice President, Chief Financial Officer and Treasurer February 19, 2021 32 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of MSA Safety Incorporated Opinion on Internal Control over Financial Reporting We have audited MSA Safety Incorporated’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, MSA Safety Incorporated (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, cash flows, and changes in retained earnings, accumulated other comprehensive loss and noncontrolling interests for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) 2. and our report dated February 19, 2021 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Pittsburgh, Pennsylvania February 19, 2021 33 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of MSA Safety Incorporated Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of MSA Safety Incorporated (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, cash flows, and changes in retained earnings, accumulated other comprehensive loss and noncontrolling interests for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) 2. (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 19, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 34 Table of Contents Valuation of cumulative trauma product liability claims Description of the Matter As more fully described in Note 19 to the consolidated financial statements, MSA LLC is named as a defendant in lawsuits comprised of cumulative trauma product liability claims involving 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. The Company believes it is probable that it will incur losses related to asserted and incurred but not reported (IBNR) claims and that the amount of loss can be reasonably estimated. At December 31, 2020, the Company’s accrual for asserted and IBNR claims was $221.5 million, representing its best estimate of the expected losses related to these claims. Auditing management’s accounting for and disclosure of loss contingencies arising from cumulative trauma product liability claims was especially challenging, as the estimate of probable loss is highly subjective. In particular, the estimate was sensitive to significant assumptions that included, among others, the number of claims asserted against MSA LLC and the counsel asserting those claims, the percentage of claims resolved through settlement and the values of settlements paid to claimants. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of relevant internal controls over the Company’s assessment and measurement of its estimate of probable loss for cumulative trauma product liability claims. Our audit procedures included testing controls over the Company’s assessment and measurement of the best estimate of the expected losses related to cumulative trauma product liability claims. To test the Company’s assessment of cumulative trauma product liability claims, we performed audit procedures which included, among others: reading the minutes of the meetings of the committees of the board of directors, requesting and receiving internal and external legal counsel letters, meeting with internal and external counsel to discuss the claims, meeting with management’s valuation consultant, testing the completeness and accuracy of data from underlying systems that are used in the Company’s assessment, performing a historical lookback analysis on claims data, performing a search for new or contrary evidence affecting the assessment, and obtaining a representation letter from the Company. Additional audit procedures to test the Company’s valuation of the expected losses related to cumulative trauma product liability claims included: evaluating significant assumptions underlying the estimate, including the number of claims asserted against MSA LLC and the counsel asserting those claims, and the percentage of claims resolved through settlement and the values of settlements paid to claimants. We engaged our actuarial specialists to assist in the analysis of the significant assumptions and methodology used by management. Our procedures also included evaluating the sufficiency of the Company’s disclosures with respect to cumulative trauma product liability claims described in Note 19 to the consolidated financial statements. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2014. Pittsburgh, Pennsylvania February 19, 2021 35 Table of Contents MSA SAFETY INCORPORATED CONSOLIDATED STATEMENTS OF INCOME Year ended December 31, (In thousands, except per share amounts) 2020 2019 2018 Net sales $ 1,348,223 $ 1,401,981 $ 1,358,104 Cost of products sold 757,775 765,369 746,241 Gross profit 590,448 636,612 611,863 Selling, general and administrative 290,334 330,502 324,784 Research and development 58,268 57,848 52,696 Restructuring charges (Note 2) 27,381 13,846 13,247 Currency exchange losses, net (Note 5) 8,578 19,814 2,330 Product liability (Note 19) and other operating expense 39,036 28,372 45,327 Operating income 166,851 186,230 173,479 Interest expense 9,432 13,589 18,881 Loss on extinguishment of debt (Note 11) — — 1,494 Other income, net (Note 15) ( 5,684 ) ( 11,094 ) ( 9,231 ) Total other expense, net 3,748 2,495 11,144 Income before income taxes 163,103 183,735 162,335 Provision for income taxes (Note 9) 41,941 46,086 37,220 Net income 121,162 137,649 125,115 Net income attributable to noncontrolling interests $ ( 1,061 ) $ ( 1,209 ) $ ( 965 ) Net income attributable to MSA Safety Incorporated $ 120,101 $ 136,440 $ 124,150 Earnings per share attributable to MSA Safety Incorporated common shareholders (Note 8): Basic $ 3.09 $ 3.52 $ 3.23 Diluted $ 3.05 $ 3.48 $ 3.18 Dividends per common share $ 1.71 $ 1.64 $ 1.49 The accompanying notes are an integral part of the consolidated financial statements. 36 Table of Contents MSA SAFETY INCORPORATED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year ended December 31, (In thousands) 2020 2019 2018 Net income $ 121,162 $ 137,649 $ 125,115 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments (Note 5) 22,260 ( 1,657 ) ( 30,103 ) Pension and post-retirement plan actuarial gains (losses), net of tax (Note 5) 9,296 ( 5,559 ) ( 17,569 ) Unrealized (losses) gains on available-for-sale securities (Note 5) ( 7 ) 578 ( 572 ) Reclassifications from accumulated other comprehensive (loss) into net income (Note 5) 216 15,261 774 Total other comprehensive income (loss), net of tax 31,765 8,623 ( 47,470 ) Comprehensive income 152,927 146,272 77,645 Comprehensive income attributable to noncontrolling interests ( 1,220 ) ( 1,136 ) ( 660 ) Comprehensive income attributable to MSA Safety Incorporated $ 151,707 $ 145,136 $ 76,985 The accompanying notes are an integral part of the consolidated financial statements. 37 Table of Contents MSA SAFETY INCORPORATED CONSOLIDATED BALANCE SHEETS December 31, (In thousands, except share amounts) 2020 2019 Assets Cash and cash equivalents $ 160,672 $ 152,195 Trade receivables, less allowance for credit loss of $ 5,344 and $ 4,860 252,283 255,082 Inventories (Note 3) 197,819 185,027 Investments, short-term (Note 18) 74,982 49,892 Prepaid income taxes 26,185 13,072 Notes receivable, insurance companies (Note 19) 3,796 3,676 Prepaid expenses and other current assets 38,541 34,419 Total current assets 754,278 693,363 Property, plant and equipment, net (Note 4) 189,620 167,038 Operating lease assets, net (Note 16) 53,451 51,675 Prepaid pension cost (Note 14) 97,545 75,066 Deferred tax assets (Note 9) 35,665 32,596 Goodwill (Note 12) 443,272 436,679 Intangible assets, net (Note 12) 161,051 171,326 Notes receivable, insurance companies, noncurrent (Note 19) 48,540 52,336 Insurance receivable (Note 19) and other noncurrent assets 89,062 59,614 Total assets $ 1,872,484 $ 1,739,693 Liabilities Notes payable and current portion of long-term debt (Note 11) $ 20,000 $ 20,000 Accounts payable 86,854 89,120 Employees’ compensation 40,277 41,882 Insurance and product liability (Note 19) 43,706 25,870 Income taxes payable (Note 9) 3,580 6,739 Accrued restructuring (Note 2) and other current liabilities 116,128 93,898 Total current liabilities 310,545 277,509 Long-term debt, net (Note 11) 287,157 328,394 Pensions and other employee benefits (Note 14) 208,068 186,697 Noncurrent operating lease liabilities (Note 16) 44,639 42,632 Deferred tax liabilities (Note 9) 10,916 9,787 Product liability (Note 19) and other noncurrent liabilities 201,268 162,101 Total liabilities $ 1,062,593 $ 1,007,120 Commitments and contingencies (Note 19) Shareholders' Equity Preferred stock, 4.5 % cumulative, $ 50 par value (Note 6) 3,569 3,569 Common stock, no par value ( 180,000,000 shares authorized; 62,081,391 shares issued; 39,067,902 and 38,841,194 shares outstanding at December 31, 2020 and 2019, respectively) 242,693 229,127 Treasury shares, at cost (Note 6) ( 327,756 ) ( 305,159 ) Accumulated other comprehensive loss (Note 5) ( 182,397 ) ( 214,003 ) Retained earnings 1,065,789 1,012,266 Total MSA Safety Incorporated shareholders’ equity 801,898 725,800 Noncontrolling interests 7,993 6,773 Total shareholders’ equity 809,891 732,573 Total liabilities and shareholders’ equity $ 1,872,484 $ 1,739,693 The accompanying notes are an integral part of the consolidated financial statements. 38 Table of Contents MSA SAFETY INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, (In thousands) 2020 2019 2018 Operating Activities Net income $ 121,162 $ 137,649 $ 125,115 Depreciation and amortization 39,674 38,020 37,852 Stock-based compensation (Note 10) 6,920 13,760 12,239 Pension expense (Note 14) and other charges 10,082 3,382 5,901 Deferred income tax (benefit) provision (Note 9) ( 3,322 ) 1,272 ( 4,065 ) Losses on asset dispositions, net 236 371 484 Pension contributions (Note 14) ( 5,596 ) ( 5,537 ) ( 4,718 ) Currency exchange losses, net (Note 5) 8,578 19,814 2,330 Product liability expense (Note 19) 39,036 26,619 45,327 Collections on insurance receivable and notes receivable, insurance companies (Note 19) 10,853 21,035 101,552 Product liability payments (Note 19) ( 23,727 ) ( 54,504 ) ( 61,500 ) Loss on extinguishment of debt (Note 11) — — 1,494 Changes in: Trade receivables 7,677 ( 8,855 ) ( 10,075 ) Inventories (Note 3) ( 8,601 ) ( 23,246 ) ( 11,122 ) Prepaid expenses and other current assets ( 8,861 ) ( 822 ) 10,866 Accounts payable and accrued liabilities 13,541 5,801 17,985 Other noncurrent assets and liabilities ( 1,097 ) ( 9,797 ) ( 5,778 ) Cash Flow From Operating Activities 206,555 164,962 263,887 Investing Activities Capital expenditures ( 48,905 ) ( 36,604 ) ( 33,960 ) Purchase of short-term investments (Note 18) ( 199,318 ) ( 169,245 ) ( 73,022 ) Proceeds from maturities of short-term investments (Note 18) 175,000 174,670 18,000 Acquisition, net of cash acquired (Note 13) — ( 33,196 ) — Property disposals and other investing 454 218 4,587 Cash Flow Used In Investing Activities ( 72,769 ) ( 64,157 ) ( 84,395 ) Financing Activities (Payments on) proceeds from short-term debt, net (Note 11) — ( 65 ) 51 Payments on long-term debt (Note 11) ( 1,031,000 ) ( 880,500 ) ( 570,167 ) Proceeds from long-term debt (Note 11) 987,000 864,000 462,500 Debt issuance costs — — ( 1,216 ) Cash dividends paid ( 66,578 ) ( 63,523 ) ( 57,248 ) Company stock purchases (Note 6) ( 29,144 ) ( 12,648 ) ( 4,824 ) Exercise of stock options (Note 6) 12,446 7,471 8,573 Employee stock purchase plan (Note 6) 747 641 556 Other, net — — ( 1,494 ) Cash Flow Used In Financing Activities ( 126,529 ) ( 84,624 ) ( 163,269 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash 1,234 ( 4,242 ) ( 13,508 ) Increase in cash, cash equivalents and restricted cash 8,491 11,939 2,715 Beginning cash, cash equivalents and restricted cash 152,543 140,604 137,889 Ending cash, cash equivalents and restricted cash $ 161,034 $ 152,543 $ 140,604 Supplemental cash flow information: Cash and cash equivalents $ 160,672 $ 152,195 $ 140,095 Restricted cash included in prepaid expenses and other current assets 362 348 509 Total cash, cash equivalents and restricted cash $ 161,034 152,543 140,604 Interest paid in cash $ 9,856 $ 14,490 $ 20,408 Income tax paid in cash 61,072 48,673 40,587 The accompanying notes are an integral part of the consolidated financial statements. 39 Table of Contents MSA SAFETY INCORPORATED CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS, ACCUMULATED OTHER COMPREHENSIVE LOSS AND NONCONTROLLING INTERESTS (In thousands) Retained Earnings Accumulated Other Comprehensive Loss Noncontrolling Interests Balances January 1, 2018 $ 868,675 $ ( 171,762 ) $ 4,977 Net income 125,115 — — Foreign currency translation adjustments — ( 30,103 ) — Pension and post-retirement plan adjustments, net of tax of $( 6,325 ) — ( 17,569 ) — Unrecognized net losses on available-for-sale securities (Note 18) — ( 572 ) — Reclassification of currency translation from accumulated other comprehensive (loss) into net income (Note 5) — 774 — (Income) loss attributable to noncontrolling interests ( 965 ) 305 660 Acquisition of noncontrolling interests — — Common dividends ( 57,206 ) — — Preferred dividends ($ 0.5625 per share) ( 42 ) — — Balances December 31, 2018 935,577 ( 218,927 ) 5,637 Net income 137,649 — — Foreign currency translation adjustments — ( 1,657 ) — Pension and post-retirement plan adjustments, net of tax of $( 3,072 ) — ( 5,559 ) — Unrecognized net gains on available-for-sale securities (Note 18) — 578 — Reclassification of currency translation from accumulated other comprehensive (loss) into net income (Note 5) — 15,261 — (Income) loss attributable to noncontrolling interests ( 1,209 ) 73 1,136 Common dividends ( 63,481 ) — — Preferred dividends ($ 0.5625 per share) ( 42 ) — — Cumulative effect of the adoption of ASU 2016-16 (Note 1) 3,772 ( 3,772 ) — Balances December 31, 2019 1,012,266 ( 214,003 ) 6,773 Net income 121,162 — — Foreign currency translation adjustments — 22,260 — Pension and post-retirement plan adjustments, net of tax of $ 2,245 — 9,296 — Unrecognized net losses on available-for-sale securities (Note 18) — ( 7 ) — Reclassification of currency translation from accumulated other comprehensive (loss) into net income (Note 5) — 216 — Income attributable to noncontrolling interests ( 1,061 ) ( 159 ) 1,220 Common dividends ( 66,537 ) — — Preferred dividends ($ 0.5625 per share) ( 41 ) — — Balances December 31, 2020 $ 1,065,789 $ ( 182,397 ) $ 7,993 The accompanying notes are an integral part of the consolidated financial statements. 40 Table of Contents MSA SAFETY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1— Significant Accounting Policies 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 period. Actual results could differ from those estimates upon subsequent resolution of identified matters. Principles of Consolidation— The consolidated financial statements include the accounts of the Company and all subsidiaries. Intercompany accounts and transactions are eliminated. Noncontrolling Interests— Noncontrolling interests reflect noncontrolling shareholders’ investments in certain consolidated subsidiaries and their proportionate share of the income and accumulated other comprehensive income (loss) of those subsidiaries. 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 companies are reported as a component of shareholders’ equity and are not included in income. Foreign currency transaction gains and losses are included in net income for the reporting period. Cash Equivalents— Cash equivalents include temporary deposits with financial institutions and highly liquid investments with original maturities of 90 days or less. Other highly liquid investments consist of money market funds and balances were $ 0.6 million and $ 17.9 million at December 31, 2020 and 2019, respectively. These funds are valued at net asset value (“NAV”). The money market funds are required to price and transact at a NAV per share that fluctuates based upon the pricing of the underlying portfolio of securities and this requirement may impact the value of those 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 $ 0.4 million and $ 0.3 million at December 31, 2020 and 2019, respectively. These balances were used to support letter of credit balances. Inventories— Inventories are stated at the lower of cost or net realizable value. The majority of U.S. inventories are valued on the last-in, first-out (LIFO) cost method which is used since this method provides better matching of costs and revenues. Other inventories are valued at standard costs which approximate actual costs. It is the Company's general policy to write-down any inventory identified as obsolete. Additionally, it will write-down any inventory balance in excess of the last twenty-four months of consumption. Investment securities — The Company’s investment securities, primarily fixed income, are classified as available-for-sale. The securities are recorded at fair market value and reported 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, net and the cost and related depreciation are removed from the accounts. Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $ 27.7 million, $ 26.5 million and $ 26.9 million, respectively. Properties, plants, 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. 41 Table of Contents Software Development Costs— Software development costs consist primarily of costs incurred in software development and related personnel compensation to create, enhance and deploy the Company’s broad range of wireless technology and cloud-based computing safety services. Software development costs, other than software development costs qualifying for capitalization, are expensed as incurred. Costs of computer software developed or obtained for internal use that are incurred in the preliminary project and post implementation stages are expensed as incurred. Certain costs incurred during the application and development stage, which primarily include compensation and related expenses, are capitalized. Additionally, costs of upgrades and enhancements are capitalized when it is probable that the upgrades and enhancements will result in added functionality. Capitalized costs are amortized through Cost of products sold using the straight-line method over the estimated useful life, which is normally three years , beginning in the period in which the software is ready for its intended use or when the upgrade or enhancement is deployed. During 2020, 2019, and 2018 there was approximately $ 8.2 million, $ 5.0 million and $ 1.6 million, respectively, of software development costs capitalized. Goodwill and Other Intangible Assets— Intangible assets with a finite useful life are amortized on a straight-line basis over their useful lives. Indefinite lived intangible assets are assessed for possible impairment annually on October 1st or whenever circumstances change such that the recorded value of the asset may not be recoverable. We performed a quantitative assessment of the indefinite lived trade name intangible asset as outlined in Accounting Standards Codification ("ASC") 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, 2020, 2019 or 2018. 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 2020, we performed a two-step quantitative test at October 1, 2020. 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 EBITDA at which peer companies are trading. There has been no impairment of our goodwill during the years ended December 31, 2020, 2019 or 2018. Revenue Recognition— We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers , which we adopted on January 1, 2018, using the modified retrospective method. Revenue from the sale of products is recognized when there is persuasive evidence of an arrangement and control passes to the customer, which generally occurs either when product is shipped to the customer or, in the case of most U.S. distributor customers, when product is delivered to the distributor's delivery site. We establish our shipping terms according to local practice and market characteristics. We do not ship product unless we have an order or other documentation authorizing shipment to our customers. Our payment terms vary by the type and location of our customer and the products offered. The term between invoicing and when payment is due is not significant. 42 Table of Contents 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 and extended warranty and technical services, until such time that the obligation has been satisfied. We use an observable price, or a cost plus margin approach when one is not available, to determine the stand-alone selling price for separate performance obligations. We have elected to recognize the cost for shipping and handling as an expense when control of the product has passed to the customer. These costs are included within the Cost of products sold line on the Consolidated 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 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. 43 Table of Contents 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 not 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 19 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. Recently Adopted and Recently Issued Accounting Standards— In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. This ASU introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including loans, held-to-maturity debt securities, loan commitments, financial guarantees and net investments in leases, as well as reinsurance and trade receivables. This ASU was adopted on January 1, 2020, which did not have an impact on the consolidated financial statements. In January 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("AOCI"), which gives entities the option to reclassify to retained earnings the tax effects resulting from the new tax reform legislation commonly known as the Tax Cuts and Jobs Act of 2017 (the "Act") related to items in AOCI that the FASB refers to as having been stranded in AOCI. The new guidance may be applied retrospectively to each period in which the effect of the Act is recognized in the period of adoption. ASU2018-02 requires new disclosures regarding the Company’s accounting policy for releasing the tax effects in accumulated other comprehensive loss and allows the Company to reclassify the effect of remeasuring deferred tax liabilities and assets related to items within accumulated other comprehensive loss using the then newly enacted 21% federal corporate income tax rate. The Company adopted ASU 2018-02 on January 1, 2019, and this adoption resulted in a reclassification that increased retained earnings by $ 3.8 million, with an offsetting increase to accumulated other comprehensive loss for the same amount. In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement , which improves fair value disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements and adding relevant disclosure requirements. This ASU was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and was adopted in 2020. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company's adoption of ASU 2018-13 did not have an impact on the consolidated financial statements, but did change our disclosures. In August 2018, the FASB issued ASU 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans , which improves defined benefit disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements and adding relevant disclosure requirements. This ASU is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The amendments in this ASU are required to be applied on a retrospective basis to all periods presented. The Company adopted ASU 2018-14 on December 31, 2020, which did not have an impact on the consolidated financial statements, but did change our disclosures. 44 Table of Contents Note 2— Restructuring Charges During the years ended December 31, 2020, 2019 and 2018, we recorded restructuring charges of $ 27.4 million, $ 13.8 million and $ 13.2 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 $ 4.7 million during the year ended December 31, 2020, were primarily 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. Americas segment restructuring charges of $ 0.5 million during the year ended December 31, 2019, were related to severance costs for staff reductions in our Latin America Region. International segment restructuring charges of $ 12.7 million during the year ended December 31, 2019, were primarily related to severance costs for staff reductions associated with our ongoing initiatives to drive profitable growth and a non-cash settlement charge for the termination of our pension plan in the United Kingdom. Corporate segment restructuring charges of $ 0.6 million during the year ended December 31, 2019, related primarily to the legal and operational realignment of our U.S. and Canadian operations. A total of 99 positions were eliminated in 2019. There were 12 positions eliminated in the Americas segment and 87 in the International segment. Americas segment restructuring charges of $ 2.3 million during the year ended December 31, 2018, were related to severance costs for staff reductions in our Northern North America and Latin America Regions. International segment restructuring charges of $ 5.6 million during the year ended December 31, 2018, were primarily related to severance costs for staff reductions associated with our ongoing initiatives to drive profitable growth in Europe. Corporate segment restructuring charges of $ 5.3 million during the year ended December 31, 2018, related primarily to the legal and operational realignment of our U.S. and Canadian operations. A total of 45 positions were eliminated in 2018. There were 8 positions were eliminated in the Americas segment, 34 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, 2018 $ 0.5 $ 3.6 $ — $ 4.1 Restructuring charges 2.3 5.6 5.3 13.2 Currency translation and other adjustments ( 0.3 ) ( 0.3 ) — ( 0.6 ) Cash payments ( 2.0 ) ( 4.9 ) ( 5.3 ) ( 12.2 ) Reserve balances at December 31, 2018 $ 0.5 $ 4.0 $ — $ 4.5 Restructuring charges 0.5 12.7 0.6 13.8 Currency translation and other adjustments ( 0.1 ) ( 0.6 ) — ( 0.7 ) Cash payments / utilization ( 0.6 ) ( 10.2 ) ( 0.6 ) ( 11.4 ) Reserve balances at December 31, 2019 $ 0.3 $ 5.9 $ — $ 6.2 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 45 Table of Contents Note 3— Inventories The following table sets forth the components of inventory: December 31, (In thousands) 2020 2019 Finished products $ 81,048 $ 71,918 Work in process 2,618 4,083 Raw materials and supplies 161,300 151,129 Inventories at current cost 244,966 227,130 Less: LIFO valuation ( 47,147 ) ( 42,103 ) Total inventories $ 197,819 $ 185,027 Inventories stated on the LIFO basis represent 48 % and 43 % of total inventories at December 31, 2020 and 2019, respectively. We did not have any LIFO liquidations during the years ended December 31, 2020 and 2019. Note 4— Property, Plant, and Equipment The following table sets forth the components of property, plant and equipment: December 31, (In thousands) 2020 2019 Land $ 4,275 $ 4,194 Buildings 128,887 125,223 Machinery and equipment 422,333 397,287 Construction in progress 38,753 24,759 Total 594,249 551,463 Less accumulated depreciation ( 404,629 ) ( 384,425 ) Property, plant and equipment, net $ 189,620 $ 167,038 The Company has unamortized computer software costs of $ 12.6 million and $ 6.2 million as of December 31, 2020 and 2019, respectively, included in property, plant and equipment, net. 46 Table of Contents Note 5— Reclassifications Out of Accumulated Other Comprehensive Loss MSA Safety Incorporated Noncontrolling Interests (In thousands) 2020 2019 2018 2020 2019 2018 Pension and other post-retirement benefits (a) Balance at beginning of period $ ( 124,848 ) $ ( 115,517 ) $ ( 97,948 ) $ — $ — $ — Unrecognized net actuarial losses ( 6,322 ) ( 19,479 ) ( 37,977 ) — — — Tax benefit 1,997 5,847 9,936 — — — Total other comprehensive loss before reclassifications, net of tax ( 4,325 ) ( 13,632 ) ( 28,041 ) — — — Amounts reclassified from accumulated other comprehensive loss into net income: Amortization of prior service credit (Note 14) ( 216 ) ( 180 ) ( 424 ) — — — Recognized net actuarial losses (Note 14) 18,079 11,028 14,507 — — — Tax benefit ( 4,242 ) ( 2,775 ) ( 3,611 ) — — — Total amount reclassified from accumulated other comprehensive loss, net of tax, into net income 13,621 8,073 10,472 — — — Reclassification to retained earnings due to the adoption of ASU 2018-02 (Note 1) — ( 3,772 ) — — — — Total other comprehensive income (loss) $ 9,296 $ ( 9,331 ) $ ( 17,569 ) $ — $ — $ — Balance at end of period $ ( 115,552 ) $ ( 124,848 ) $ ( 115,517 ) $ — $ — $ — Available-for-sale securities Balance at beginning of period $ 6 $ ( 572 ) $ — $ — $ — $ — Unrealized (loss) gain on available-for-sale securities (Note 18) ( 7 ) 578 ( 572 ) — — — Balance at end of period $ ( 1 ) $ 6 $ ( 572 ) $ — $ — $ — Foreign currency translation Balance at beginning of period $ ( 89,161 ) $ ( 102,838 ) $ ( 73,814 ) $ 423 $ 496 $ 801 Reclassification from accumulated other comprehensive loss into net income 216 (c) 15,261 (b) 774 (c) — — — Foreign currency translation adjustments 22,101 ( 1,584 ) ( 29,798 ) 159 ( 73 ) ( 305 ) Balance at end of period $ ( 66,844 ) $ ( 89,161 ) $ ( 102,838 ) $ 582 $ 423 $ 496 (a) Reclassifications out of accumulated other comprehensive loss and into net income are included in the computation of net periodic pension and other post-retirement benefit costs (refer to Note 14—Pensions and Other Post-retirement Benefits). (b) Reclassifications out of accumulated other comprehensive loss and into net income relate primarily to the approval of our plan to close our South Africa affiliates and are included in Currency exchange losses, net, within the Consolidated Statements of Income. (c) Included in Currency exchange losses, net, on the Consolidated Statements of Income. 47 Table of Contents Note 6— Capital Stock Preferred Stock - The Company has authorized 100,000 shares of $ 50 par value 4.5 % cumulative preferred nonvoting stock which is callable at $ 52.50 . There are 71,340 shares issued at both December 31, 2020 and 2019 and 52,998 and 52,878 shares held in treasury at December 31, 2020 and 2019, respectively. The Treasury shares at cost line of the Consolidated Balance Sheet includes $ 1.8 million related to preferred stock. There were 120 shares of preferred stock purchased and subsequently held in treasury during the year ended December 31, 2020, and no treasury purchases of preferred stock during the year ended December 31, 2019. 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, 2020 or 2019. Common Stock - The Company has authorized 180,000,000 shares of no par value common stock. There were 62,081,391 shares issued as of both December 31, 2020 and December 31, 2019. There were 39,067,902 and 38,841,194 shares outstanding at December 31, 2020 and 2019, 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. There were 175,000 shares repurchased during 2020 and 33,465 shares repurchased during 2019. No shares were repurchased during 2018. We do not have any other share repurchase programs. There were 23,013,489 and 23,240,197 Treasury Shares at December 31, 2020 and 2019, 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 471,681 and 436,549 Treasury Shares issued for these purposes during the years ended December 31, 2020 and 2019, respectively. 48 Table of Contents Common stock activity is summarized as follows: Shares Dollars (Dollars in thousands) Issued Treasury Common Stock Treasury Cost Balances January 1, 2018 62,081,391 ( 23,858,463 ) $ 194,953 $ ( 296,081 ) Restricted stock awards — 92,401 ( 1,079 ) 1,079 Restricted stock expense — — 6,504 — Restricted stock forfeitures — — ( 283 ) Stock options exercised — 215,724 5,738 2,835 Stock option expense — 272 — Stock option forfeitures — — ( 55 ) — Performance stock issued — 41,660 ( 523 ) 523 Performance stock expense — — 6,186 — Performance stock forfeitures — ( 385 ) — Employee stock purchase plan — 7,725 478 78 Treasury shares purchased for stock compensation programs — ( 53,915 ) — ( 4,824 ) Balances December 31, 2018 62,081,391 ( 23,554,868 ) $ 211,806 $ ( 296,390 ) Restricted stock awards — 96,893 ( 1,253 ) 1,253 Restricted stock expense — — 7,397 — Restricted stock forfeitures — — ( 483 ) — Stock options exercised — 193,681 5,107 2,364 Stock option expense — — 492 — Stock option forfeitures — — ( 5 ) — Performance stock issued — 139,478 ( 1,778 ) 1,778 Performance stock expense — — 6,574 — Performance stock forfeitures — — ( 215 ) — Stock consideration in acquisition — — 921 — Employee stock purchase plan — 5,895 564 77 Treasury shares purchased for stock compensation programs — ( 87,811 ) — ( 9,301 ) Share repurchase program — ( 33,465 ) — ( 3,347 ) Balances December 31, 2019 62,081,391 ( 23,240,197 ) $ 229,127 $ ( 303,566 ) 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 for stock compensation programs — ( 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 ) 49 Table of Contents Note 7— Segment Information On January 1, 2020, we restructured our business from six geographical operating segments into four geographical operating segments that are based on management responsibilities: Northern North America, Latin America, Europe, Middle East & Africa ("EMEA"), and Asia Pacific ("APAC") to better serve customer needs. 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 operating segment change did not impact reportable segments as all changes were within the International reportable segment. 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, strategic transaction costs and COVID-19 related costs, consisting of a one-time bonus for essential manufacturing employees and adjusted operating margin is defined as adjusted operating income (loss) divided by segment sales to external customers. Adjusted EBITDA is defined as adjusted operating income (loss) plus depreciation and amortization and adjusted EBITDA margin is defined as adjusted EBITDA divided by segment sales to external customers. Adjusted operating income (loss), adjusted operating margin, adjusted EBITDA and adjusted EBITDA margin are not recognized terms under U.S. GAAP, and therefore, do not purport to be alternatives to operating income or operating margin as a measure of operating performance. Further, the Company's measure of adjusted operating income (loss), adjusted operating margin, adjusted EBITDA and adjusted EBITDA margin may not be comparable to similarly titled measures of other companies. Adjusted operating income (loss) and adjusted EBITDA on a consolidated basis is presented in the following table to reconcile the segment operating performance measure to operating income as presented on the Consolidated Statements of Income. The accounting principles applied at the operating segment level in determining operating income (loss) are generally the same as those applied at the consolidated financial statement level. Sales and transfers between operating segments are accounted for at market-based transaction prices and are eliminated in consolidation. 50 Table of Contents Reportable segment information is presented in the following table: (In thousands) Americas International Corporate Reconciling Items (1) Consolidated Totals 2020 Net sales to external customers $ 874,305 $ 473,918 $ — $ — $ 1,348,223 Operating income 166,851 Restructuring charges (Note 2) 27,381 Currency exchange losses, net (Note 5) 8,578 Product liability expense (Note 19) 39,036 Strategic transaction costs (Note 13) 717 COVID-19 related costs 757 Adjusted operating income (loss) 200,536 70,864 ( 28,080 ) — 243,320 Adjusted operating margin % 22.9 % 15.0 % Depreciation and amortization 26,762 12,521 391 — 39,674 Adjusted EBITDA 227,298 83,385 ( 27,689 ) — 282,994 Adjusted EBITDA % 26.0 % 17.6 % Noncash items: Pension expense 910 8,113 — — 9,023 Total Assets 1,228,739 615,114 29,761 ( 1,130 ) 1,872,484 Capital expenditures 43,181 5,724 — — 48,905 2019 Net sales to external customers $ 915,118 $ 486,863 $ — $ — $ 1,401,981 Operating income 186,230 Restructuring charges (Note 2) 13,846 Currency exchange losses, net (Note 5) 19,814 Product liability expense (Note 19) 26,619 Strategic transaction costs (Note 13) 4,400 Adjusted operating income (loss) 226,596 59,910 ( 35,597 ) — 250,909 Adjusted operating margin % 24.8 % 12.3 % Depreciation and amortization 24,691 12,938 391 — 38,020 Adjusted EBITDA 251,287 72,848 ( 35,206 ) — 288,929 Adjusted EBITDA % 27.5 % 15.0 % Noncash items: Pension (income) expense ( 6,111 ) 7,044 — — 933 Total Assets 1,131,911 584,195 22,367 1,220 1,739,693 Capital expenditures 26,823 9,781 — — 36,604 2018 Net sales to external customers $ 854,287 $ 503,817 $ — $ — $ 1,358,104 Operating income 173,479 Restructuring charges (Note 2) 13,247 Currency exchange losses, net (Note 5) 2,330 Product liability expense (Note 19) 45,327 Strategic transaction costs (Note 13) 421 Adjusted operating income (loss) 206,839 59,866 ( 31,901 ) — 234,804 Adjusted operating margin % 24.2 % 11.9 % Depreciation and amortization 24,143 13,303 406 — 37,852 Adjusted EBITDA 230,982 73,169 ( 31,495 ) — 272,656 Adjusted EBITDA % 27.0 % 14.5 % Noncash items: Pension (income) expense ( 1,201 ) 7,102 — — 5,901 Total Assets 1,077,938 522,042 10,842 ( 2,810 ) 1,608,012 Capital expenditures 25,001 8,959 — — 33,960 (1) Reconciling items consist primarily of intercompany eliminations and items not directly attributable to operating segments. 51 Table of Contents Geographic information on Net sales to external customers, based on country of origin: (In thousands) 2020 2019 2018 United States $ 750,315 $ 785,155 $ 734,033 Other 597,908 616,826 624,071 Total $ 1,348,223 $ 1,401,981 $ 1,358,104 Geographic information on tangible long-lived assets, net based on country of origin: (In thousands) 2020 2019 2018 United States $ 134,234 $ 113,528 $ 92,511 Other 108,837 105,185 65,429 Total $ 243,071 $ 218,713 $ 157,940 Total Net sales by product group was as follows: 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 (a) 197,846 15 % 120,398 14 % 77,448 16 % Total $ 1,348,223 100 % $ 874,305 100 % $ 473,918 100 % 2019 Consolidated Americas International (In thousands) Dollars Percent Dollars Percent Dollars Percent Breathing Apparatus $ 317,678 23 % $ 212,463 23 % $ 105,215 22 % Fixed Gas & Flame Detection 292,988 21 % 159,892 17 % 133,096 27 % Firefighter Helmets & Protective Apparel 178,012 13 % 142,043 16 % 35,969 7 % Portable Gas Detection 169,479 12 % 113,914 12 % 55,565 11 % Industrial Head Protection 145,403 10 % 112,673 12 % 32,730 7 % Fall Protection 125,869 9 % 78,054 9 % 47,815 10 % Other (a) 172,552 12 % 96,079 11 % 76,473 16 % Total $ 1,401,981 100 % $ 915,118 100 % $ 486,863 100 % 2018 Consolidated Americas International (In thousands) Dollars Percent Dollars Percent Dollars Percent Breathing Apparatus $ 324,672 24 % $ 205,100 24 % $ 119,572 24 % Fixed Gas & Flame Detection 262,432 19 % 135,922 16 % 126,510 25 % Firefighter Helmets & Protective Apparel 169,679 13 % 136,794 16 % 32,885 6 % Portable Gas Detection 163,716 12 % 109,401 13 % 54,315 11 % Industrial Head Protection 146,388 11 % 114,465 13 % 31,923 6 % Fall Protection 109,472 8 % 61,289 7 % 48,183 10 % Other (a) 181,745 13 % 91,316 11 % 90,429 18 % Total $ 1,358,104 100 % $ 854,287 100 % $ 503,817 100 % (a) Other products include sales of Air Purifying Respirators ("APR"). 52 Table of Contents Note 8— Earnings per Share Basic earnings per share 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 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) 2020 2019 2018 Net income $ 120,101 $ 136,440 $ 124,150 Preferred stock dividends ( 41 ) ( 42 ) ( 42 ) Net income available to common equity 120,060 136,398 124,108 Dividends and undistributed earnings allocated to participating securities ( 84 ) ( 183 ) ( 117 ) Net income available to common shareholders $ 119,976 $ 136,215 $ 123,991 Basic weighted-average shares outstanding 38,885 38,653 38,362 Stock options and other stock compensation 401 536 599 Diluted weighted-average shares outstanding 39,286 39,189 38,961 Earnings per share: Basic $ 3.09 $ 3.52 $ 3.23 Diluted $ 3.05 $ 3.48 $ 3.18 Note 9— Income Taxes (In thousands) 2020 2019 2018 Components of income before income taxes U.S. income $ 104,682 $ 126,552 $ 85,234 Non-U.S. income 58,421 57,183 77,101 Income before income taxes $ 163,103 $ 183,735 $ 162,335 Provision for income taxes Current Federal $ 23,587 $ 13,770 $ 13,574 State 4,896 5,436 4,265 Non-U.S. 16,780 25,608 23,446 Total current provision $ 45,263 $ 44,814 $ 41,285 Deferred Federal $ ( 1,493 ) $ 5,744 $ 291 State ( 727 ) 1,346 ( 1,604 ) Non-U.S. ( 1,102 ) ( 5,818 ) ( 2,752 ) Total deferred provision (benefit) ( 3,322 ) 1,272 ( 4,065 ) Provision for income taxes $ 41,941 $ 46,086 $ 37,220 The Company elected to treat Global Intangible Low Taxed Income, which was effective in 2018 for the Company, as a period cost. The Tax Cuts and Jobs Act of 2017 ("the Act"), which was signed into law on December 22, 2017, has resulted in significant changes to the U.S. corporate income tax system including reducing the U.S. corporate rate to 21 % starting in 2018. The Act also creates a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. 53 Table of Contents On December 22, 2017, SAB 118 was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company calculated its best estimate of the impact of the Act and recorded income tax expense of $ 19.8 million during the fourth quarter of 2017, the period in which the legislation was enacted. Of this amount, $ 18.0 million related to the one-time transition tax and the remaining $ 1.8 million was related to the revaluation of U.S. deferred tax assets and liabilities. The Company previously considered the earnings in non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. As as result of the Act, among other things, the Company determined it will repatriate earnings for all non-U.S. subsidiaries with cash in excess of working capital needs. The Company has estimated the associated tax to be $ 1.9 million, offset partially by $ 0.7 million of foreign tax credits. As of December 31, 2018, the Company had completed its accounting for all of the enactment-date income tax effects of the Act. Accordingly, we reduced our estimate for the one-time transition tax by $ 2.0 million and increased our estimate for the revaluation of U.S. deferred tax assets and liabilities by $ 2.5 million and a $ 2.0 million increase associated with prepaid taxes for updated regulations related to the Act. During 2018, the Company recorded $ 1.8 million of foreign income tax reserves related to the legal and operational realignment of our U.S., Canadian and European operations. During 2020, an additional reserve of $ 1.1 million was recorded related to the operating realignment of our European operations. Reconciliation of the U.S. federal income tax rates to our effective tax rate: 2020 2019 2018 U.S. federal income tax rate 21.0 % 21.0 % 21.0 % Nondeductible compensation 3.4 % 1.9 % 1.0 % Taxes on non-U.S. income 2.6 % ( 0.5 ) % 0.4 % State income taxes—U.S. 2.0 % 2.9 % 1.3 % Valuation allowances 0.8 % 0.4 % 0.5 % Taxes on non-U.S. income - U.S., Canadian & European reorganization 0.7 % 0.3 % 1.1 % Foreign exchange on entity closures — % 1.8 % — % U.S. tax reform — % — % 1.6 % Manufacturing deduction credit — % — % ( 1.0 ) % Employee share-based payments ( 3.9 ) % ( 2.6 ) % ( 1.6 ) % Research and development credit ( 1.2 ) % ( 0.6 ) % ( 0.9 ) % Other 0.3 % 0.5 % ( 0.5 ) % Effective income tax rate 25.7 % 25.1 % 22.9 % 54 Table of Contents Components of deferred tax assets and liabilities: December 31, (In thousands) 2020 2019 Deferred tax assets Product liability $ 33,689 $ 29,405 Capitalized research and development 22,915 17,886 Employee benefits 10,539 12,009 Net operating losses and tax credit carryforwards 6,310 6,026 Accrued expenses and other reserves 5,195 4,384 Share-based compensation 3,588 5,396 Other 5,287 3,828 Total deferred tax assets 87,523 78,934 Valuation allowances ( 7,188 ) ( 5,937 ) Net deferred tax assets 80,335 72,997 Deferred tax liabilities Goodwill and intangibles ( 39,040 ) ( 35,999 ) Property, plant and equipment ( 14,649 ) ( 11,714 ) Other ( 1,897 ) ( 2,475 ) Total deferred tax liabilities ( 55,586 ) ( 50,188 ) Net deferred taxes $ 24,749 $ 22,809 At December 31, 2020, we had net operating loss carryforwards of approximately $ 31.0 million, all of which are in non-U.S. tax jurisdictions. 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, 2020 and 2019 is as follows: (In thousands) 2020 2019 Beginning balance $ 5,119 $ 16,155 Adjustments for tax positions related to the current year 425 — Adjustments for tax positions related to prior years 2,950 ( 7,740 ) Statute expiration ( 402 ) ( 3,296 ) Ending balance $ 8,092 $ 5,119 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 $ 2.2 million at December 31, 2020 and 2019, 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 $ 1.0 million and $ 0.5 million at December 31, 2020 and 2019, respectively. We are subject to regular review and audit by both foreign and domestic tax authorities. While we believe our tax positions will be sustained, the final outcome of tax audits and related litigation may differ materially from the tax amounts recorded in our consolidated financial statements. We file a U.S. federal income tax return along with various state and foreign income tax returns. Examinations of our U.S. federal returns have been completed through 2013, with the 2014, 2015 and 2016 tax years closed by statute. Various state and foreign income tax returns may be subject to tax audits for periods after 2014. 55 Table of Contents Note 10— Stock Plans The 2016 Management Equity Incentive Plan provides for various forms of stock-based compensation for eligible key employees through May 2026. Management stock-based compensation includes stock options, restricted stock, restricted stock units and performance stock units. Additionally, 2019 amounts granted include outstanding Sierra Monitor Corporation awards converted into MSA awards after the acquisition. See Note 13—Acquisitions for more information. The 2017 Non-Employee Directors’ Equity Incentive Plan provides for grants of stock options and restricted stock to non-employee directors through May 2027. Stock options are granted at market prices and expire after ten years . Stock options are exercisable beginning three years after the grant date. Restricted stock and restricted stock units are granted without payment to the Company and generally vest three years after the grant date. Restricted stock and restricted stock units are valued at the market value of the stock on the grant date. Performance stock units with a market condition are valued at an estimated fair value using a Monte Carlo simulation model. The final number of shares to be issued for performance stock units may range from zero to 200 % 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 6 for further information regarding stock compensation share issuance. As of December 31, 2020, there were 802,439 and 94,020 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) 2020 2019 2018 Restricted stock units $ 6,258 $ 6,914 $ 6,221 Stock options 113 487 217 Performance stock units 549 6,359 5,801 Total stock-compensation expense before income taxes 6,920 13,760 12,239 Income tax benefit 1,668 3,357 2,974 Total stock-compensation expense, net of income tax benefit $ 5,252 $ 10,403 $ 9,265 We did not capitalize any stock-based compensation expense, and all expense is recorded in selling, general and administrative expense in 2020, 2019, and 2018. The Company utilized the Black-Scholes valuation model for estimating the fair value of stock option expense with the following weighted average assumptions. There were no stock options granted in 2020 or 2018. 2019 Fair value per option $ 59.07 Risk-free interest rate 2.3 % Expected dividend yield 1.7 % Expected volatility 31 % Expected life (years) 6.4 The risk-free interest rate is based on the U.S. Treasury yield curve. Expected dividend yield is based on the most recent annualized dividend divided by the one year average closing share price. Expected volatility is based on the historical volatility using daily stock prices. Expected life is based on historical stock option exercise data. 56 Table of Contents A summary of option activity follows: Shares Weighted Average Exercise Price Exercisable at Year-end Outstanding January 1, 2018 955,446 $ 42.75 Exercised ( 215,724 ) 39.25 Forfeited ( 4,721 ) 44.50 Outstanding December 31, 2018 735,001 43.79 638,673 Granted 23,285 43.54 Exercised ( 198,535 ) 38.16 Forfeited ( 95 ) 49.19 Outstanding December 31, 2019 559,656 45.78 552,682 Exercised ( 274,704 ) 45.31 Forfeited ( 954 ) 42.00 Outstanding December 31, 2020 283,998 $ 46.23 281,593 For various exercise price ranges, characteristics of outstanding and exercisable stock options at December 31, 2020 were as follows: Stock Options Outstanding Range of Exercise Prices Shares Weighted-Average Exercise Price Remaining Life $ 33.01 – $ 45.00 158,836 43.88 3.06 $ 45.01 – $ 57.93 125,162 49.22 2.93 $ 33.01 – $ 57.93 283,998 $ 46.23 3.00 Stock Options Exercisable Range of Exercise Prices Shares Weighted-Average Exercise Price Remaining Life $ 33.01 – $ 45.00 158,208 43.90 3.05 $ 45.01 – $ 57.93 123,385 49.22 2.87 $ 33.01 – $ 57.93 281,593 $ 46.23 2.97 Cash received from the exercise of stock options was $ 12.4 million, $ 7.5 million and $ 8.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. The tax benefit we realized from these exercises was $ 6.4 million, $ 4.8 million and $ 2.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. Stock options become exercisable when they are vested. The aggregate intrinsic value of stock options exercisable at December 31, 2020 was $ 29.0 million. The aggregate intrinsic value of all stock options outstanding at December 31, 2020 was $ 29.3 million. 57 Table of Contents A summary of restricted stock unit activity follows: Shares Weighted Average Grant Date Fair Value Unvested January 1, 2017 227,161 $ 57.50 Granted 75,430 87.36 Vested ( 92,401 ) 58.10 Forfeited ( 4,741 ) 59.61 Unvested at December 31, 2018 205,449 68.97 Granted 70,160 104.53 Vested ( 97,253 ) 56.47 Forfeited ( 5,655 ) 85.48 Unvested at December 31, 2019 172,701 90.38 Granted 51,468 124.61 Vested ( 70,399 ) 81.58 Forfeited ( 7,579 ) 106.54 Unvested at December 31, 2020 146,191 $ 105.83 A summary of performance stock unit activity follows: Shares Weighted Average Grant Date Fair Value Unvested at January 1, 2017 242,186 $ 55.06 Granted 62,775 84.79 Vested ( 41,660 ) 40.23 Performance adjustments ( 35,756 ) 45.21 Forfeited ( 8,659 ) 44.53 Unvested at December 31, 2018 218,886 68.43 Granted 83,819 101.03 Vested ( 139,478 ) 44.75 Performance adjustments 76,960 44.24 Forfeited ( 2,152 ) 99.82 Unvested at December 31, 2019 238,035 85.39 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 The 2020 performance adjustments relate to to awards that exceeded the performance targets when vested during 2020, including the final number of shares issued, which were 135.7 % of the target award based on actual results during the three year performance period. During the years ended December 31, 2020, 2019 and 2018, 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 $ 24.6 million, $ 14.6 million and $ 12.2 million, respectively. The fair values of restricted stock vested during the years ended December 31, 2020, 2019 and 2018 were $ 5.7 million, $ 5.5 million and $ 5.4 million, respectively. The fair value of performance stock units vested during the years ended December 31, 2020, 2019 and 2018 was $ 9.6 million, $ 6.2 million and $ 1.7 million, respectively. On December 31, 2020, there was $ 8.3 million of unrecognized stock-based compensation expense. The weighted average period over which this expense is expected to be recognized was approximately 1.7 years. 58 Table of Contents Note 11— Long-Term Debt Long-Term Debt December 31, (In thousands) 2020 2019 2010 Senior Notes payable through 2021, 4.00 %, net of debt issuance costs $ 20,000 $ 40,000 2016 Senior Notes payable through 2031, 3.40 %, net of debt issuance costs 74,926 72,708 Senior revolving credit facility maturing in 2023, net of debt issuance costs 212,231 235,686 Total 307,157 348,394 Short-term debt 20,000 20,000 Long-term debt $ 287,157 $ 328,394 On September 7, 2018, the Company entered into a Third Amended and Restated Credit Agreement associated with our senior revolving credit facility which extended the term of the revolving credit facility through September 2023 and increased the capacity to $ 600.0 million. Under this 2018 Amended and Restated Credit 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) 0.0%, (ii) the Prime Rate, (ii) the Federal Funds Open Rate plus one half of one percent ( 0.5 %), (iii) the Overnight Bank Funding Rate, plus one half of one percent ( 0.5 %), or (iv) 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 the elected rate (BASE or LIBOR). The facility contemplates the discontinuance of LIBOR and includes an option to replace LIBOR with a comparable rate, or if a comparable rate cannot be found, the base rate would be utilized. The Company has a weighted average revolver interest rate of 1.15 % as of December 31, 2020. At December 31, 2020, $ 385.5 million of the existing $ 600.0 million senior revolving credit facility was unused, including letters of credit. On January 22, 2016, the Company entered into a Second Amended and Restated Multi-Currency Note Purchase and Private Shelf Agreement (the "Notes"), pursuant to which MSA issued notes in an aggregate original principal amount of £ 54.9 million (approximately $ 75.1 million at December 31, 2020). The Notes are repayable in annual installments of £ 6.1 million (approximately $ 8.3 million at December 31, 2020), commencing January 22, 2023, with a final payment of any remaining amount outstanding on January 22, 2031. The interest rate on these Notes is fixed at 3.4 %. On September 7, 2018, the Company entered into a first amendment of such amended and restated agreement associated with these Notes. Under the Second Amended and Restated Multi-Currency Note Purchase and Private Shelf Agreement, as amended ("Amended Note Purchase Agreement"), the Company may request from time to time during a three-year period ending September 7, 2021, the issuance of up to $ 150 million of additional senior notes. On January 4, 2019, the Company entered into an amended and restated agreement associated with the New York Life master note facility dated June 2, 2014. Under this Amended and Restated Master Note Facility ("Amended Note Facility"), the Company may request from time to time during a three-year period ending January 4, 2022, the issuance of up to $ 150 million of additional senior promissory notes. As of the Form 10-K filing date, there are no promissory notes outstanding. Both the Amended Note Purchase Agreement and Amended Note Facility require MSA to comply with specified financial covenants, including a requirement to maintain a minimum fixed charges coverage ratio of not less than 1.50 to 1.00 and a consolidated net leverage ratio not to exceed 3.50 to 1.00, except during an acquisition period in which case the consolidated net leverage ratio shall not exceed 4.00 to 1.00; in each case calculated on the basis of the trailing four fiscal quarters. In addition, the Amended Note Purchase Agreement and Amended Note Facility both contain negative covenants limiting the ability of MSA and its subsidiaries to incur additional indebtedness or issue guarantees, create or incur liens, make loans and investments, make acquisitions, transfer or sell assets, enter into transactions with affiliated parties, make changes in its organizational documents that are materially adverse to lenders or modify the nature of MSA's or its subsidiaries' business. However, the covenants contained in the Amended Note Facility do not apply until promissory notes are issued. The revolving credit facilities require the Company to comply with specified financial covenants. In addition, the revolving credit facilities contain negative covenants limiting the ability of the Company and its subsidiaries to enter into specified transactions. The Company was in compliance with all covenants at December 31, 2020. 59 Table of Contents Approximate maturities on our long-term debt over the next five years are $ 20.0 million in 2021, none in 2022, $ 221.6 million in 2023, $ 8.3 million in 2024, $ 8.3 million in 2025 and $ 50.1 million thereafter. The Company had outstanding bank guarantees and standby letters of credit with banks as of December 31, 2020, totaling $ 9.0 million, of which $ 1.3 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, 2020, the Company has $ 0.4 million of restricted cash in support of these arrangements. Note 12— Goodwill and Intangible Assets Changes in goodwill during the years ended December 31, 2020 and 2019, were as follows: (In thousands) 2020 2019 Net balance at January 1 $ 436,679 $ 413,640 Additions (Note 13) — 19,917 Currency translation 6,593 3,122 Net balance at December 31 $ 443,272 $ 436,679 At December 31, 2020, goodwill of $ 293.2 million and $ 150.1 million related to the Americas and International reporting segments, respectively. Changes in intangible assets, net of accumulated amortization, during the years ended December 31, 2020 and 2019, were as follows: (In thousands) 2020 2019 Net balance at January 1 $ 171,326 $ 169,515 Additions and measurement period adjustments (Note 13) 121 11,100 Amortization expense ( 11,570 ) ( 11,119 ) Currency translation 1,174 1,830 Net balance at December 31 $ 161,051 $ 171,326 (In millions) December 31, 2020 December 31, 2019 Intangible Assets: Weighted Average Useful Life (years) Gross Carrying Amount Accumulated Amortization and Reserves Net Carrying Amount Gross Carrying Amount Accumulated Amortization and Reserves Net Carrying Amount Customer relationships 14 $ 59.7 $ ( 20.4 ) $ 39.3 $ 58.3 $ ( 15.3 ) $ 43.0 Distribution agreements 20 66.4 ( 20.7 ) 45.7 66.0 ( 17.3 ) 48.7 Technology related assets 8 30.2 ( 21.3 ) 8.9 30.0 ( 18.3 ) 11.7 Patents, trademarks and copyrights 12 19.4 ( 12.5 ) 6.9 19.0 ( 11.3 ) 7.7 License agreements 5 5.4 ( 5.3 ) 0.1 5.3 ( 5.3 ) — Other 2 3.0 ( 2.8 ) 0.2 3.0 ( 2.8 ) 0.2 Total 14 $ 184.1 $ ( 83.0 ) $ 101.1 $ 181.6 $ ( 70.3 ) $ 111.3 At December 31, 2020, 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 $ 12 million in 2021, $ 10 million in 2022 and $ 9 million in 2023, 2024 and 2025. 60 Table of Contents Note 13— Acquisitions Acquisition of Sierra Monitor Corporation On May 20, 2019, we acquired 100 % of the common stock in Sierra Monitor Corporation ("SMC") in an all-cash transaction valued at $ 33.2 million, net of cash acquired. Additionally, we converted outstanding stock options and restricted stock units into MSA stock options and restricted stock units which resulted in additional goodwill of approximately $ 0.9 million based on the fair value of the awards identified as transaction consideration. Based in Milpitas, California, in the heart of Silicon Valley, SMC is a leading provider of fixed gas and flame detection instruments and Industrial Internet of Things solutions that connect and help protect high-value infrastructure assets. The acquisition enables MSA to accelerate its strategy to enhance worker safety and accountability through the use of cloud technology and wireless connectivity. This acquisition enhances a key focus of the Company's recently established Safety io subsidiary, launched in 2018 primarily to leverage the capabilities of its portable gas detection portfolio as it relates to cloud connectivity. The transaction was funded through borrowings on our unsecured senior revolving credit facility. SMC operating results are included in our consolidated financial statements from the acquisition date as part of the Americas reportable segment. The acquisition qualifies as a business combination and was accounted for using the acquisition method of accounting. We finalized the purchase price allocation as of December 31, 2019. The following table summarizes the fair values of the SMC assets acquired and liabilities assumed at the date of acquisition: (In millions) May 20, 2019 Current assets (including cash of $ 2.1 million) $ 10.5 Property, plant and equipment and other noncurrent assets 1.3 Customer relationships 9.6 Acquired technology 1.4 Goodwill 19.9 Total assets acquired 42.7 Total liabilities assumed 6.5 Net assets acquired $ 36.2 Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values. Fair values were determined by management, based, in part on an independent valuation performed by a third-party valuation specialist. The valuation methods used to determine the fair value of intangible assets included the relief from royalty method for technology related intangible assets; the excess earnings approach for customer relationships using customer inputs and contributory charges; and the cost method for assembled workforce which is included in goodwill. A number of significant assumptions and estimates were involved in the application of these valuation methods, including sales volumes and prices, royalty rates, costs to produce, tax rates, capital spending, discount rates, and working capital changes. Cash flow forecasts were generally based on SMC pre-acquisition forecasts coupled with estimated MSA sales synergies. Identifiable intangible assets with finite lives are subject to amortization over their estimated useful lives. The customer relationships acquired in the SMC transaction will be amortized over a period of 10 years and the technology will be amortized over 5 years. Estimated future amortization expense related to the identifiable intangible assets is approximately $ 1.0 million in each of the next five years. The step up to fair value of acquired inventory as part of the purchase price allocation totaled $ 1.6 million which was fully recognized as amortization expense during the year ended December 31, 2019. Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired were the acquisition of an assembled workforce, the expected synergies and other benefits that we believe will result from combining the operations of SMC with our operations. Goodwill of $ 19.9 million related to the SMC acquisition has been recorded in the Americas reportable segment and is non-deductible for tax purposes. 61 Table of Contents Our results for the year ended December 31, 2020, include SMC sales and net income of $ 21.2 million and $ 2.8 million, respectively. Excluding purchase accounting amortization for intangible assets of $ 1.2 million, adjusted earnings for SMC for the year ended December 31, 2020 was $ 3.8 million. Our operating results for the year ended December 31, 2019 include SMC sales and net loss of $ 13.5 million and $ 3.3 million, respectively. Excluding purchase accounting amortization for intangible assets and inventory step up of $ 2.6 million, transaction costs of $ 2.2 million, and stock compensation cost related to converted options and excess performance on PSUs related to the acquisition of $ 1.5 million, adjusted earnings for SMC for the year ended December 31, 2019 was $ 1.5 million. The following unaudited pro forma information presents our combined results as if the SMC acquisition had occurred at the beginning of 2018. The unaudited pro forma financial information was prepared to give effect to events that are (1) directly attributable to the acquisition; (2) factually supportable; and (3) expected to have a continuing impact on the combined company’s results. There were no material transactions between MSA and SMC during the periods presented that are required to be eliminated. Intercompany transactions between SMC companies during the periods presented have been eliminated in the unaudited pro forma combined financial information. The unaudited pro forma financial information does not reflect any cost savings, operating synergies or revenue enhancements that the combined companies may achieve as a result of the acquisitions or the costs to integrate the operations or the costs necessary to achieve cost savings, operating synergies or revenue enhancements. Pro forma financial information (Unaudited) (In millions, except per share amounts) 2019 2018 Net sales $ 1,410 $ 1,380 Net Income 131 124 Basic earnings per share 3.40 3.24 Diluted earnings per share 3.35 3.19 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 acquisitions been completed as of the date and for the periods presented, and should not be taken as representative of our consolidated results of operations or financial condition following the acquisitions. In addition, the unaudited pro forma combined financial information is not intended to project the future financial position or results of operations of the combined company. The unaudited pro forma financial information was prepared using the acquisition method of accounting for both acquisitions under existing U.S. GAAP. MSA has been treated as the acquirer. Our results include strategic transaction costs of $ 0.7 million, $ 4.4 million, and $ 0.4 million for the years ended December 31, 2020, 2019, and 2018. These costs are reported in Selling, general and administrative expenses. Note 14— 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. Information pertaining to defined benefit pension plans and other post-retirement benefits plans is provided in the following tables: 62 Table of Contents Pension Benefits Other Benefits (In thousands) 2020 2019 2020 2019 Change in Benefit Obligations Benefit obligations at January 1 $ 603,551 $ 525,520 $ 28,151 $ 28,477 Service cost 12,094 10,342 396 354 Interest cost 14,905 18,803 716 996 Participant contributions 396 470 370 380 Plan amendments ( 430 ) — — — Actuarial losses (a) 54,606 81,132 5,284 1,319 Benefits paid ( 24,496 ) ( 24,452 ) ( 2,692 ) ( 3,375 ) Curtailments ( 1,559 ) — — — Settlements ( 506 ) ( 7,265 ) — — Currency translation 12,296 ( 999 ) — — Benefit obligations at December 31 $ 670,857 $ 603,551 $ 32,225 $ 28,151 Change in Plan Assets Fair value of plan assets at January 1 $ 515,858 $ 443,112 $ — $ — Actual return on plan assets 87,769 98,210 — — Employer contributions 5,596 5,537 2,322 2,995 Participant contributions 396 470 370 380 Settlements ( 506 ) ( 7,265 ) — — Benefits paid ( 24,496 ) ( 24,452 ) ( 2,692 ) ( 3,375 ) Administrative expenses paid ( 172 ) ( 297 ) — — Currency translation 2,377 543 — — Fair value of plan assets at December 31 $ 586,822 $ 515,858 $ — $ — Funded Status Funded status at December 31 $ ( 84,035 ) $ ( 87,693 ) $ ( 32,225 ) $ ( 28,151 ) Unrecognized transition losses 4 4 — — Unrecognized prior service credit 1,717 1,572 ( 1,125 ) ( 1,519 ) Unrecognized net actuarial losses 169,028 183,733 16,686 12,547 Net amount recognized $ 86,714 $ 97,616 $ ( 16,664 ) $ ( 17,123 ) Amounts Recognized in the Balance Sheets Noncurrent assets $ 97,545 $ 75,066 $ — $ — Current liabilities ( 6,600 ) ( 5,944 ) ( 2,849 ) ( 2,406 ) Noncurrent liabilities ( 174,980 ) ( 156,815 ) ( 29,376 ) ( 25,745 ) Net amount recognized $ ( 84,035 ) $ ( 87,693 ) $ ( 32,225 ) $ ( 28,151 ) Amounts Recognized in Accumulated Other Comprehensive Loss Net actuarial losses $ 169,028 $ 183,733 $ 16,686 $ 12,547 Prior service cost (credit) 1,717 1,572 ( 1,125 ) ( 1,519 ) Unrecognized net initial obligation 4 4 — — Total (before tax effects) $ 170,749 $ 185,309 $ 15,561 $ 11,028 Accumulated Benefit Obligations for all Defined Benefit Plans $ 619,167 $ 558,183 $ — $ — (a) Actuarial losses for both periods relate primarily to the decrease in discount rates used in measuring plan obligations as of December 31, 2020 and 2019, respectively. 63 Table of Contents Pension Benefits Other Benefits (In thousands) 2020 2019 2018 2020 2019 2018 Components of Net Periodic Benefit Cost Service cost $ 12,094 $ 10,342 $ 11,125 $ 396 $ 354 $ 369 Interest cost 14,905 18,803 17,214 716 996 793 Expected return on plan assets ( 34,029 ) ( 38,644 ) ( 36,352 ) — — — Amortization of transition amounts — 2 1 — — — Amortization of prior service cost (credit) 178 223 ( 21 ) ( 394 ) ( 405 ) ( 405 ) Recognized net actuarial losses 15,799 10,159 13,755 1,145 869 752 Settlement/curtailment loss 1,135 (b) 2,497 (c) 179 — — — Net periodic benefit cost (a) $ 10,082 $ 3,382 $ 5,901 $ 1,863 $ 1,814 $ 1,509 (a) Components of net periodic benefit 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" on the Consolidated Statements of Income. (c) Relates to the termination of our pension plan in the U.K. and is included in "Restructuring charges" on 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 Other Benefits (In thousands) 2020 2019 2020 2019 Aggregate accumulated benefit obligations (ABO) $ 209,351 $ 185,747 $ 32,225 $ 28,151 Aggregate fair value of plan assets 40,294 35,882 — — Information for pension plans with a projected benefit obligation in excess of plan assets: Pension Benefits (In thousands) 2020 2019 Aggregate projected benefit obligations (PBO) 223,343 198,633 Aggregate fair value of plan assets 41,764 35,882 Pension Benefits Other Benefits 2020 2019 2020 2019 Assumptions used to determine benefit obligations Average discount rate 2.28 % 2.86 % 2.21 % 3.05 % Rate of compensation increase 2.93 % 2.93 % 3.00 % — % Assumptions used to determine net periodic benefit cost Average discount rate - Service cost 3.08 % 3.10 % 2.42 % 3.15 % Average discount rate - Interest cost 2.52 % 2.52 % 1.48 % 2.61 % Expected return on plan assets 7.10 % 7.09 % — — Rate of compensation increase 2.93 % 2.93 % 3.00 % — % 64 Table of Contents Discount rates for all U.S. and foreign plans were determined using the aforementioned spot rate methodology for 2020 and 2019. 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 2020 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, 2020 2019 Equity securities 49 % 46 % Fixed income securities 25 30 Pooled investment funds 21 19 Insurance contracts 4 4 Cash and cash equivalents 1 1 Total 100 % 100 % The overall objective of our pension investment strategy is to earn a rate of return over time to satisfy the benefit obligations of the pension plans and to maintain sufficient liquidity to pay benefits and meet other cash requirements of our pension funds. Investment policies for our primary U.S. pension plan are determined by the plan’s Investment Committee and set forth in the plan’s investment policy. Asset managers are granted discretion for determining sector mix, selecting securities and timing transactions, subject to the guidelines of the investment policy. An aggressive, flexible management of the portfolio is permitted and encouraged, with shifts of emphasis among equities, fixed income securities and cash equivalents at the discretion of each manager. No target asset allocations are set forth in the investment policy. For our non-U.S. pension plans, our investment objective is generally met through the use of pooled investment funds and insurance contracts. The fair values of the Company's pension plan assets are determined using net asset value (NAV) as a practical expedient, or by information categorized in the fair value hierarchy level based on the inputs used to determine fair value, as further discussed in Note 18—Fair Value Measurements. The fair values at December 31, 2020, 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 $ 283,516 $ 66,847 $ 216,669 $ — $ — Fixed income securities 148,173 — 76,502 71,671 — Pooled investment funds 123,119 123,119 — — — Insurance contracts 24,396 — — — 24,396 Cash and cash equivalents 7,618 6,681 937 — — Total $ 586,822 $ 196,647 $ 294,108 $ 71,671 $ 24,396 65 Table of Contents The fair values of the Company's pension plan assets at December 31, 2019, 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 $ 235,491 $ 56,449 $ 179,042 $ — $ — Fixed income securities 154,640 — 73,874 80,766 — Pooled investment funds 97,373 97,373 — — — Insurance contracts 21,502 — — — 21,502 Cash and cash equivalents 6,852 5,792 1,060 — — Total $ 515,858 $ 159,614 $ 253,976 $ 80,766 $ 21,502 Equity securities consist primarily of publicly traded U.S. and non-U.S. common stocks. Equities are valued at closing prices reported on the listing stock exchange. Fixed income securities consist primarily of U.S. government and agency bonds and U.S. corporate bonds. Fixed income securities are valued at closing prices reported in active markets or based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the bond is valued under a discounted cash flow approach that maximizes observable inputs, such as current yields of similar instruments, and may include adjustments, for certain risks that may not be observable, such as credit and liquidity risks. A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Pooled investment funds consist of mutual and collective investment funds that invest primarily in publicly traded equity and fixed income securities. Pooled investment funds are valued using the net asset value (NAV) 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, 2019 $ 17,033 Net realized and unrealized losses 5,602 Net purchases, issuances and settlements ( 1,133 ) Balance December 31, 2019 21,502 Net realized and unrealized gains 2,564 Net purchases, issuances and settlements 330 Balance December 31, 2020 $ 24,396 66 Table of Contents The following table presents amounts related to Level 3 assets recognized in accumulated other comprehensive loss: (In thousands) Insurance Contracts Net actuarial losses 972 Prior service cost 1,406 Total (before tax effects) $ 2,378 We expect to make net contributions of $ 7.7 million to our pension plans in 2021, which are primarily associated with statutorily required plans in the International segment. For the 2020 beginning of the year measurement purposes (net periodic benefit expense), a 6.5 % increase in the costs of covered health care benefits was assumed, decreasing by 0.5 % for each successive year to 4.5 % in 2024 and thereafter. For the 2020 end of the year measurement purposes (benefit obligation), a 5.9 % increase in the costs of covered health care benefits was assumed, decreasing by approximately 0.2 % for each successive year to 4.5 % in 2029 and thereafter. Expense for defined contribution pension plans was $ 10.6 million in 2020, $ 8.3 million in 2019 and $ 9.0 million in 2018. Estimated pension benefits to be paid under our defined benefit pension plans during the next five years are $ 26.1 million in 2021, $ 27.0 million in 2022, $ 28.2 million in 2023, $ 28.8 million in 2024 and $ 29.9 million in 2025, and an aggregated $ 155.9 million for the five years thereafter. Estimated other post-retirement benefits to be paid during the next five years are $ 2.8 million in 2021, $ 2.7 million in 2022, $ 2.3 million in 2023, $ 2.4 million in 2024, $ 2.2 million in 2025, and an aggregated $ 10.3 million for the five years thereafter. Note 15— Other Income, Net (In thousands) 2020 2019 2018 Interest income $ 3,498 $ 4,411 $ 4,588 Components of net periodic benefit cost other than service cost (Note 14) 1,680 7,997 4,641 (Loss) Gain on asset dispositions, net ( 236 ) ( 371 ) 646 Other, net 742 ( 943 ) ( 644 ) Total other income, net $ 5,684 $ 11,094 $ 9,231 During the years ended December 31, 2020, 2019 and 2018, we recognized $ 3.5 million, $ 4.4 million and $ 4.6 million of income, respectively, related to interest earned on cash balances, short-term investments and notes receivables from insurance companies. Please refer to Note 19—Contingencies for further discussion on the Company's notes receivables from insurance companies. 67 Table of Contents Note 16— Leases Effective January 1, 2019, we implemented ASU 2016-02, Leases , which amended authoritative guidance on leases and is codified in ASC Topic 842. The amended guidance requires lessees to recognize most leases on their balance sheets as right-of-use assets along with corresponding lease liabilities. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. The FASB's authoritative guidance provides companies with the option to apply this ASU to new and existing leases within the scope of the guidance as of the beginning of the period of adoption. We elected this transition method of applying the new standard and have recognized right-of-use assets and lease liabilities as of January 1, 2019. Prior period amounts were not adjusted and will continue to be reported under the accounting standards in effect for those periods. The adoption of this standard had a material impact on our Consolidated Balance Sheet as of December 31, 2020 due to the capitalization of right-of-use assets and lease liabilities associated with our current operating leases in which we are the lessee. Adoption of the new standard resulted in the recording of additional right-of-use assets and lease liabilities of approximately $ 54 million, respectively, as of January 1, 2019. Upon adoption of the new standard on January 1, 2019, we elected the package of practical expedients provided under the guidance. The practical expedient package applies to leases that commenced prior to adoption of the new standard and permits companies not to reassess whether existing or expired contracts are or contain a lease, the lease classification and any initial direct costs for existing leases. We have elected to not separate the lease and non-lease components within our lease contracts. Therefore, all fixed costs associated with the lease are included in the right-of-use asset and the lease liability. These costs often relate to the payments for a proportionate share of real estate taxes, insurance, common area maintenance and other operating costs in addition to base rent. We did not elect the hindsight practical expedient. At the inception of our contracts we determine if the contract is or contains a lease. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Right-of-use assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement. We use our incremental borrowing rate ("IBR") at the recognition date in determining the present value of future payments for leases that do not have a readily determinable implicit rate. Our IBR reflects a fully secured rate based on our credit rating, taking into consideration the repayment timing of the lease and any impacts due to the economic environment in which the lease operates. Lease right-of-use assets and liabilities are recognized based on the present value of the fixed future lease payments over the lease term. Lease expense for all operating leases is classified in Cost of products sold or Selling, general and administrative expense in the Consolidated 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. As a lessee, we have various operating lease agreements primarily related to real estate, vehicles and office and plant equipment. Our lease payments are largely fixed. Variable lease payments that depend on an index or a rate are included in the 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. Variable lease costs were immaterial for the twelve months ended December 31, 2020. 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. We do not have any significant leases not yet commenced. For our leases, we have elected to not apply the recognition requirements to leases of less than twelve months. These leases are expensed on a straight-line basis and are not included within the Company's operating lease asset or liability. Lease costs associated with leases of less than twelve months were immaterial for the three and twelve months ended December 31, 2020. We did not have any lease transactions with related parties. 68 Table of Contents Other Information Twelve Months Ended December 31, (In thousands, except percentage amounts) 2020 2019 Lease cost: Operating lease cost recognized as rent expense $ 12,997 $ 13,364 Total lease cost 12,997 13,364 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows related to operating leases $ 13,476 $ 13,346 Non-cash other information: Right-of-use assets obtained in exchange for new operating lease liabilities $ 10,737 $ 6,637 December 31, 2020 December 31, 2019 Weighted-average remaining lease term (in years): Operating leases 11 11 Weighted-average discount rate: Operating leases 3.89 % 4.28 % Rent expense was approximately $ 13.0 million in 2020, $ 13.4 million in 2019 and $ 12.5 million in 2018. At December 31, 2020, future lease payments under operating leases were as follows: (In thousands) Operating Leases 2021 $ 11,445 2022 7,856 2023 6,266 2024 4,539 2025 4,692 After 2025 31,687 Total future minimum operating lease payments $ 66,485 Less: Imputed interest 12,258 Present value of operating lease liabilities 54,227 Less: Current portion operating lease liabilities (a) 9,588 Noncurrent operating lease liabilities $ 44,639 (a) Included in "Warranty reserve and other current liabilities" on the Consolidated Balance Sheet. 69 Table of Contents Note 17— 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, 2020, the notional amount of open forward contracts was $ 96.0 million and there was no unrealized gain/loss on these contracts. All open forward contracts will mature during the first quarter of 2021. 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) 2020 2019 Derivatives not designated as hedging instruments: Foreign exchange contracts: other current liabilities $ 157 $ 125 Foreign exchange contracts: other current assets 160 687 The following table presents the Consolidated Statements of Income location and impact of derivative financial instruments: (In thousands) Income Statement Location (Gain) Loss Recognized in Income Year ended December 31, 2020 2019 Derivatives not designated as hedging instruments: Foreign exchange contracts Currency exchange losses, net $ ( 7,457 ) $ 3,015 Note 18— Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are: Level 1—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets. Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3—Unobservable inputs for the asset or liability. The valuation methodologies we used to measure financial assets and liabilities were limited to the pension plan assets described in Note 14—Pensions and Other Post-retirement Benefits and the derivative financial instruments described in Note 17—Derivative Financial Instruments. See Note 14 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. 70 Table of Contents 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 $ 74.9 million and $ 49.7 million as of December 31, 2020, and 2019, respectively. The fair value of our investments was $ 75.0 million and $ 49.9 million as of December 31, 2020, and 2019, 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; therefore, no impairment gains or losses relating to these securities have been recognized. All investments in marketable securities have maturities of one year or less and are currently in an unrealized loss position as of December 31, 2020. The reported carrying amount of fixed rate long-term debt (including the current portion) was $ 95 million and $ 113 million at December 31, 2020, and 2019, respectively. The fair value of this debt was $ 113 million and $ 129 million at December 31, 2020, and 2019, respectively. The fair value of this debt was determined using Level 2 inputs by evaluating like rated companies with publicly traded bonds where available or current borrowing rates available for financings with similar terms and maturities. Note 19— Contingencies Product liability We face an inherent business risk of exposure to product liability claims arising from the alleged failure of our products to prevent the types of personal injury or death against which they are designed to protect. Product liability claims are categorized as either single incident or cumulative trauma. Single incident product liability claims. Single incident product liability claims involve incidents of short duration that are typically known when they occur and involve observable injuries, which provide an objective basis for quantifying damages. The Company estimates its liability for single incident product liability claims based on expected settlement costs for asserted single incident product liability claims, and an estimate of costs for single incident product liability claims incurred but not reported ("IBNR"). The estimate for IBNR claims is based on experience, sales volumes, and other relevant information. The reserve for single incident product liability claims, which includes asserted single incident product liability claims and IBNR single incident product liability claims, was $ 1.4 million at December 31, 2020 and $ 3.1 million at December 31, 2019. Single incident product liability expense was a benefit of $ 1.7 million for the year ended December 31, 2020 compared to a benefit of $ 0.5 million and expense of $ 2.0 million for the years ended December 31, 2019 and 2018, respectively. Single incident product liability exposures are evaluated on an annual basis, or more frequently if changing circumstances warrant. Adjustments are made to the reserve as appropriate. Cumulative trauma product liability claims. Cumulative trauma product liability claims involve exposures to harmful substances (e.g., silica, asbestos and coal dust) that occurred years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, mesothelioma, or coal worker’s pneumoconiosis. One of the Company's affiliates, Mine Safety Appliances Company, LLC ("MSA LLC"), was named as a defendant in 1,622 lawsuits comprised of 2,878 claims as of December 31, 2020. These lawsuits mainly involve respiratory protection products allegedly manufactured and sold by MSA LLC or its predecessors. The products at issue were manufactured many years ago and are not currently offered by MSA LLC. 71 Table of Contents A summary of cumulative trauma product liability lawsuits and asserted cumulative trauma product liability claims activity is as follows: 2020 2019 2018 Open lawsuits, beginning of period 1,605 1,481 1,420 New lawsuits 402 346 369 Settled and dismissed lawsuits ( 385 ) ( 222 ) ( 308 ) Open lawsuits, end of period 1,622 1,605 1,481 2020 2019 2018 Asserted claims, beginning of period 2,456 2,355 2,242 New claims 917 486 479 Settled, inactive and dismissed claims ( 495 ) ( 385 ) ( 366 ) Asserted claims, end of period 2,878 2,456 2,355 The increase in the number of claims in 2020 is largely attributable to an increase in claims alleging injuries from exposure to coal mine dust. More than half of the total open lawsuits at December 31, 2020 have had a de minimis level of activity over the last 5 years. It is possible that these cases could become active again at any time due to changes in circumstances. Total cumulative trauma product liability reserve was $ 221.5 million, including $ 7.8 million for claims settled but not yet paid and related defense costs, as of December 31, 2020 and $ 167.5 million, including $ 3.0 million for claims settled but not yet paid and related defense costs, as of December 31, 2019. This reserve includes estimated amounts for asserted claims and IBNR claims. Those estimated amounts reflect asbestos, silica, and coal dust claims expected to be resolved through the year 2069 and are not discounted to present value. The Company revised its estimates of MSA LLC's potential liability for cumulative trauma product liability claims for the year ended December 31, 2020 as a result of its annual review process described below. The reserve does not include amounts which will be spent to defend the claims covered by the reserve. Defense costs are recognized in the Consolidated Statements of Income as incurred. At December 31, 2020, $ 35.3 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 Sheets and the remainder, $ 186.2 million, is recorded in the Product liability and other noncurrent liabilities line. At December 31, 2019, $ 17.4 million of the total reserve for cumulative trauma product liability claims was recorded in the Insurance and product liability line within other current liabilities in the Consolidated Balance Sheet and the remainder, $ 150.1 million, was recorded in the Product liability and other noncurrent liabilities line. Total cumulative trauma liability losses were $ 77.8 million, $ 36.1 million, and $ 63.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. Uninsured cumulative trauma product liability losses which were included in Product liability and other operating expense on the Consolidated Statements of Income during the years ended December 31, 2020, 2019 and 2018, were $ 39.0 million, $ 27.1 million and $ 43.8 million, respectively, and represent the total cumulative trauma liability losses net of any estimated insurance receivables as discussed below. To develop a reasonable estimate of MSA LLC’s potential exposure to cumulative trauma product liability claims, Management performs an annual 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 developments in MSA LLC’s claims experience over the past year, developments in the tort system generally, and any other relevant information. Quarterly, management and outside legal counsel review whether significant new developments have occurred which could materially impact recorded amounts. Certain significant assumptions underlying the material components of the reserve for cumulative trauma product liability claims have been made based on MSA LLC's experience related to the following: • The types and severity, of illnesses alleged by claimants to give rise to their claims; • The venues in which claims are asserted; • The number of claims that may be asserted in the future against MSA LLC and the counsel asserting those claims; and 72 Table of Contents • The percentage of claims resolved through settlement and the values of settlements paid to claimants. Additional assumptions include the following: • MSA LLC will continue to evaluate and handle cumulative trauma product liability claims in accordance with its existing defense strategy; • The number and effect of co-defendant bankruptcies will not materially change in the future; • No material changes in medical science occur with respect to cumulative trauma product liability claims; and • No material changes in law occur with respect to cumulative trauma product liability claims including no material state or federal tort reform actions. Cumulative trauma product liability litigation is inherently unpredictable and MSA LLC's expense with respect to cumulative trauma product liability claims could vary significantly in future periods. With respect to asserted claims, this is because it is unclear at the time of filing whether a claim will be actively litigated. Even when a case is actively litigated, it is often difficult to determine if the lawsuit will be dismissed without payment or settled, because of sufficiency of product identification, statute of limitations challenges, or other defenses. As a result, it is typically unclear until late into a lawsuit whether any particular claim will result in a loss and, if so, to what extent. Actual loss amounts for settled claims are highly variable and turn on a case-by-case analysis of the relevant facts. With respect to asserted or IBNR claims, MSA LLC’s expense in future periods may vary from the reserve currently established for several reasons. In particular, MSA LLC’s actual claims experience may differ in one or more respects from the significant assumptions listed above that were used by in establishing the reserve. Factors that make MSA LLC's asserted and IBNR claims difficult to reasonably estimate include uncertainty as to the number of claims that may be asserted in the future (and over what time periods), the wide variability in the alleged severity of claims asserted, and the number of claims that ultimately will be resolved with payment. This difficulty is increased when claims are asserted by plaintiff's counsel with which MSA LLC does not have substantial prior experience (as claims experience can vary significantly among different counsel), the absence of discovery into many pending claims, the historically low volume of claims asserted and resolved, and numerous other factors. Numerous uncertainties also exist with respect to factors not specific to MSA LLC, including potential legislative or judicial changes at the federal level or in key states concerning claims adjudication, future bankruptcy proceedings involving key co-defendants, payments from trusts established to compensate claimants, and/or changes in medical science relating to the diagnosis and treatment of claims. Because cumulative trauma product liability litigation is subject to the significant modeling assumptions and inherent uncertainties described above, and unfavorable developments or rulings could occur, there can be no certainty that MSA LLC may not ultimately incur charges in excess of presently recorded liabilities. The reserve for cumulative trauma product liability claims may be adjusted from time to time based on changes to the factors and assumptions described above. If future estimates of cumulative trauma product liability claims are materially different than the accrued liability, we will record an appropriate adjustment to the Consolidated Statement of Income. These adjustments could materially impact our consolidated financial statements in future periods. Insurance Receivable and Notes Receivable, Insurance Companies Many years ago, MSA LLC purchased insurance policies from various insurance carriers that, subject to common contract exclusions, provided coverage for cumulative trauma product liability losses (the "Occurrence-Based Policies"). While we continue to pursue reimbursement under certain remaining Occurrence-Based Policies, the vast majority of these policies have been exhausted, settled or converted into either (1) negotiated settlement agreements, with scheduled payment streams (recorded as notes receivables) or (2) negotiated Coverage-in-Place Agreements (recorded as insurance receivables). As a result, MSA LLC is largely self-insured for cumulative trauma product liability claims, and additional amounts recorded as insurance receivables or notes receivables will be limited. When adjustments are made to amounts recorded in the cumulative trauma product liability reserve, we calculate amounts due to be reimbursed pursuant to the terms of the negotiated Coverage-In-Place Agreements, including cumulative trauma product liability losses and related defense costs, and we record the amounts probable of reimbursement as insurance receivables. These amounts are not subject to current coverage litigation. Insurance receivables at December 31, 2020, totaled $ 97.0 million, of which $ 12.0 million is reported in Prepaid expenses and other current assets in the Consolidated Balance Sheet and $ 85.0 million is reported in Insurance receivable and other noncurrent assets. Insurance receivables at December 31, 2019, totaled $ 63.8 million, of which $ 7.6 million was reported 73 Table of Contents in Prepaid expenses and other current assets in the Consolidated Balance Sheet and $ 56.2 million was reported in Insurance receivable and other noncurrent assets. The vast majority of the $ 97.0 million insurance receivables balance at December 31, 2020, 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) 2020 2019 Balance beginning of period $ 63.8 $ 71.7 Additions 39.0 9.1 Collections and other adjustments ( 5.8 ) ( 17.0 ) Balance end of period $ 97.0 $ 63.8 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, 2020, totaled $ 52.3 million, of which $ 3.8 million is reported in Notes receivable, insurance companies, current on the Consolidated Balance Sheet and $ 48.5 million is reported in Notes receivable, insurance companies, noncurrent. Notes receivable from insurance companies at December 31, 2019, totaled $ 56.0 million, of which $ 3.7 million was reported in Notes receivable, insurance companies, current on the Consolidated Balance Sheet and $ 52.3 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) 2020 2019 Balance beginning of period $ 56.0 $ 59.6 Additions 1.4 1.5 Collections ( 5.1 ) ( 5.1 ) Balance end of period $ 52.3 $ 56.0 The vast majority of the insurance receivables balances at December 31, 2020, is attributable to reimbursement under the terms of signed agreements with insurers and are not currently subject to litigation. The collectibility of MSA LLC's insurance receivables and notes receivables is regularly evaluated and we believe that the amounts recorded are probable of collection. The determination that the recorded insurance receivables are probable of collection is based on 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. 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. 74 Table of Contents The following table reconciles the changes in the Company's accrued warranty reserve: December 31, (In thousands) 2020 2019 2018 Beginning warranty reserve $ 12,715 $ 14,214 $ 14,753 Warranty payments ( 10,861 ) ( 12,664 ) ( 9,955 ) Warranty claims 10,233 12,033 10,585 Provision for product warranties and other adjustments ( 659 ) ( 868 ) ( 1,169 ) Ending warranty reserve $ 11,428 $ 12,715 $ 14,214 Warranty expense for the years ended December 31, 2020, 2019 and 2018 was $ 9.6 million, $ 11.2 million and $ 9.4 million, respectively and is included in Costs of products sold on the Consolidated Statements of Income. Note 20— Quarterly Financial Information (Unaudited) 2020 Quarters (In thousands, except earnings per share) 1st 2nd 3rd 4th Year Net sales $ 341,145 $ 314,438 $ 304,392 $ 388,248 $ 1,348,223 Gross profit 157,359 141,585 132,232 159,272 590,448 Net income attributable to MSA Safety Incorporated 43,674 36,055 28,034 12,338 120,101 Earnings per share (1) Basic $ 1.12 $ 0.93 $ 0.72 $ 0.32 $ 3.09 Diluted 1.11 0.92 0.71 0.31 3.05 2019 Quarters (In thousands, except earnings per share) 1st 2nd 3rd 4th Year Net sales $ 326,038 $ 349,675 $ 351,014 $ 375,254 $ 1,401,981 Gross profit 149,982 161,084 158,701 166,845 636,612 Net income attributable to MSA Safety Incorporated 23,232 39,806 42,239 31,163 136,440 Earnings per share (1) Basic $ 0.60 $ 1.03 $ 1.09 $ 0.80 $ 3.52 Diluted 0.59 1.01 1.08 0.79 3.48 (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. 75 Table of Contents Note 21 - Subsequent Event On January 25, 2021, we 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 $ 62.4 million, net of cash acquired. There is no contingent consideration. 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 leader in fire service PPE products while providing an avenue to expand its business in the U.K. and key European markets. Our results for the year ended December 31, 2020 include transaction and integration costs of $ 0.5 million related to the acquisition. These costs are reported in selling, general and administrative expenses. Bristol operating results will be included in our financial statements from the acquisition date. The acquisition qualifies as a business combination and will be accounted for using the acquisition method of accounting. At the date of issuance of these financial statements, the initial purchase accounting was not complete. We are also unable to provide pro forma revenues and earnings of the combined entity due to the limited time since the acquisition. This information will be included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021. 76 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.