What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-16 compared with 2022-02-18 · 96 added, 90 removed, 267 unchanged (41% of the section changed)

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Please refer to Note 8—Segment Information of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information.

On January 5, 2023, the Company divested Mine Safety Appliances LLC ("MSA LLC") a wholly owned subsidiary that holds legacy product liability claims relating to coal dust, asbestos, silica, and other exposures, to a joint venture between R&Q Insurance Holdings Ltd.

and Obra Capital, Inc.

In connection with the closing, MSA contributed $341 million in cash and cash equivalents, while R&Q and Obra contributed an additional $35 million.

As a result of the transaction, MSA will derecognize all legacy cumulative trauma product liability reserves, related insurance assets, and associated deferred tax assets of the divested subsidiary from its balance sheet in the first quarter of 2023.

R&Q and Obra have assumed management of the divested subsidiary, including the management of its claims.

Refer to Note 20—Contingencies of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information.

On July 1, 2021, the Company acquired Bacharach, Inc.

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On January 25, 2021, the Company acquired 100% of the common stock of B T Q Limited, including Bristol Uniforms and Bell Apparel ("Bristol") in an all-cash transaction valued at $63.0 million, net of cash acquired.

Bristol, which is headquartered in the United Kingdom, is a leading innovator and provider of protective apparel to the fire, rescue services, and utility sectors.

The acquisition strengthens MSA's position as a global market leader in fire service personal protective equipment ("PPE") products, which include breathing apparatus, firefighter helmets, thermal imaging cameras, and firefighter protective apparel, while providing an avenue to expand its business in the United Kingdom ("U.K") and key European markets.

Bristol, which is headquartered in the United Kingdom ("U.K."), is a leading innovator and provider of protective apparel to the fire, rescue services, and utility sectors.

and key European markets.

The fire service equipment brands of MSA, which include Gallet Firefighter Helmets, the M1 and G1 Self-Contained Breathing Apparatus range, Cairns Helmets, Globe Manufacturing, and now Bristol, represent more than 460 combined years of innovation in the fire service industry, with a common mission:

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Refer to Note 14—Acquisitions of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information.

During the fourth quarter of 2021, the Company changed its method of accounting for certain inventory in the United States from the LIFO method to the FIFO method.

The FIFO method of accounting for inventory is preferable because it conforms the Company's entire inventory to a single method of accounting and improves comparability with the Company's peers.

The effects of the change in accounting method from LIFO to FIFO have been retrospectively applied to all periods presented in all sections of this Annual Report, including Management's Discussion and Analysis .

Refer to Note 4—Inventory of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information related to the change in accounting principle.

BUSINESS OVERVIEW

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We are committed to providing our customers with service unmatched in the safety industry and, in the process, enhancing our ability to provide a growing line of safety solutions for customers in key global markets.

MSA provides safety equipment to a broad range of customers who must continue to work in times of global pandemic as is the case with COVID-19.

Our customers include first responders, who are tasked with keeping citizens safe, and include industrial and utility workers tasked with maintaining critical infrastructure.

For this reason, in order to successfully fulfill our mission as The Safety Company, MSA is an essential business and has continued operating its manufacturing facilities during these times, to the extent practicable, while protecting the health and safety of our workforce, and complying with all applicable laws, all pursuant to an established pandemic response plan.

The Company has developed a thoughtful, phased approach to reconnecting segments of our workforce that had converted to remote working conditions due to COVID-19.

Through this process in 2021, we returned elements of our salesforce to in-person customer interactions on a limited basis and instituted a modified hybrid return-to-office protocol for the majority of our U.S.

workforce in the third quarter, with our International segment employees planning to return to the office once deemed appropriate under the circumstances for each business location.

We continue to deploy a phased approach to reconnect employees while adjusting the characteristics of their physical working environments, providing training and executing enhanced safety and cleaning protocols, which promotes workspace safety in a manner consistent with the mission and values of MSA.

The Company’s return-to-work plans continue to evolve as needed, such as was the case due to the Omicron variant.

We tailor our product offerings and distribution strategy to satisfy distinct customer preferences that vary across geographic regions.

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Our International segment includes companies in Europe, the Middle East and Africa ("EMEA") and the Asia Pacific region.

In our largest International subsidiaries (in Germany, France, United Kingdom, Ireland and China), we develop, manufacture and sell a wide variety of products.

In our largest International subsidiaries (in Germany, France, U.K., Ireland and China), we develop, manufacture and sell a wide variety of products.

In China, the products manufactured are sold primarily in China as well as in regional markets.

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During the years ended December 31, 2022, 2021 and 2020 corporate general and administrative costs were $40.3 million, $37.6 million, and $28.5 million, respectively.

These increases primarily reflect an increase in centrally managed functions.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

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International 484.7 492.1 (7.4) (1.5)%

Net sales for the year ended December 31, 2021, were $1.40 billion, an increase of $52.0 million, from $1.35 billion for the year ended December 31, 2020.

Net sales for the year ended December 31, 2022, were $1.53 billion, an increase of $127.7 million, from $1.40 billion for the year ended December 31, 2021, driven by strategic price increases, volume growth, and acquisitions, partially offset by foreign currency translation.

We saw strong growth across most of our core products and across both reporting segments.

Constant currency sales increased by 12.2% for the year ended December 31, 2022.

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Organic constant currency change 12.3% 5.4% 9.9%

Organic constant currency sales change is a non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance.

Constant currency sales change and Organic constant currency sales change are non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance.

Constant currency sales change is calculated by deducting the percentage impact from currency translation effects from the overall percentage change in net sales.

Organic constant currency sales change is calculated by deducting the percentage impact from acquisitions and currency translation effects from the overall percentage change in net sales.

Net sales for the Americas segment were $1,043.2 million for the year ended December 31, 2022, an increase of $135.1 million, or 14.9%, compared to $908.1 million for the year ended December 31, 2021.

During 2021, constant currency sales in the Americas segment increased 4% compared to the prior year period, driven by $28 million of Bacharach sales and a general improvement in business conditions driving a higher level of sales of head protection, portable gas detection and fall protection;

partially offset by APR sales moderating to pre-pandemic levels.

Net sales for the International segment were $492.1 million for the year ended December 31, 2021, an increase of $18.2 million, or 4%, compared to $473.9 million for the year ended December 31, 2020.

Constant currency sales in the International segment was consistent with 2020, due to weaker organic sales volumes across the segment, with more significant weakness in emerging markets due to an uneven economic recovery due to COVID-19 and lower project business in the Middle East FGFD market.

This weakness was partially offset by $39 million of acquisition related sales, primarily related to Bristol.

Order activity was healthy as we finished the fourth quarter, and continued to show year-over-year improvements to start 2022.

Our backlog remains at an elevated level, as a result of an uptick in order pace and ongoing supply chain constraints in certain product groups.

Looking ahead, we continue to operate in a dynamic environment.

There are a number of other evolving factors that will continue to influence our revenue outlook.

These factors include, among other things, supply chain constraints, including electronic components impacting our fixed and portable gas detection product groups, which have intensified to start 2022;

availability of labor, especially at Globe;

the effectiveness/pace of the vaccine rollout globally;

risk of additional COVID outbreaks and/or lockdowns;

industrial employment rates;

and the pace of economic recovery.

These conditions could impact our future results and growth expectations well into 2022.

During 2022, constant currency sales in the Americas segment increased 15.1% or on an organic constant currency basis increased 12.3%, excluding acquisitions.

Growth was driven by favorable unit growth, new products, pricing and this volume growth was across most product categories.

The inclusion of Bacharach drove the acquisition related sales.

Net sales for the International segment were $484.7 million for the year ended December 31, 2022, a decrease of $7.4 million, or 1.5%, compared to $492.1 million for the year ended December 31, 2021.

Constant currency sales in the International segment increased 7.0% compared to the prior year period with organic constant currency growth of 5.4%.

Growth was driven by favorable unit growth, new products, pricing and this volume growth was across most product categories;

however, the unfavorable impact of foreign currency translation offset this growth on a reported basis.

The inclusion of Bacharach drove acquisition related sales.

Looking ahead, we continue to operate in a very dynamic environment.

There are a number of other evolving factors that will continue to influence our revenue and earnings outlook.

These factors include, among other things, supply chain constraints, raw material or semiconductor availability, the risk of additional COVID lockdowns, industrial employment rates, interest rate changes, military conflict, currency exchange volatility, the pace of economic recovery, as well as geopolitical risk, particularly as it relates to energy uncertainty which could affect operations and suppliers based in Germany and broader Europe.

These or other conditions could impact our future results and growth expectations well into 2023.

Refer to Note 8—Segment Information to the consolidated financial statements in Part II Item 8 of this Form 10-K, for information regarding sales by product group.

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The ratio of gross profit to net sales was 44.1% in 2022 compared to 43.9% in 2021.

Strategic pricing, stronger throughput in our factories and lower inventory charges associated with APR products offset the impacts of $3.8 million of inventory step-up amortization and $5.0 million of intangible asset amortization related to our 2021 acquisitions, and higher material costs.

We have continued to take pricing actions across our business and will continue to take additional actions to respond to the inflation we are seeing, especially in the U.S.

across electronic components, resins and other inputs.

While there could be a number of scenarios on the length of time that these challenges may persist, we could see these impact our business for the foreseeable future with more meaningful impact well into 2022.

Pricing and productivity efforts were partially offset by inflation, inventory and product warranty charges.

Selling, general and administrative expenses.

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Overall, selling, general and administrative expenses were 22.2% of net sales in 2022 compared to 23.8% of net sales in 2021.

Improved business conditions drove $17.7 million of additional variable compensation and $2.6 million of higher discretionary expense during the period as the business exited the peak pandemic state.

SG&A includes $22.3 million of expenses associated with Bacharach and Bristol operations, which includes $7.1 million of non-recurring deal costs related to these acquisitions.

Organic constant currency SG&A increased $13 million or 4.0%, demonstrating leverage on revenue growth.

This increase was driven by wage inflation and strategic investments to support revenue growth.

Areas of savings included lower acquisition related costs and savings from our restructuring programs in our International segment.

Please refer to the Selling, general and administrative expenses table for a reconciliation of the year-over-year expense change.

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Constant currency change 4.7%

Acquisitions and related strategic transaction costs (7.3)%

Acquisitions and strategic transaction costs (0.7)%

Organic constant currency change 4.0%

Organic constant currency SG&A change is a non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance.

Constant currency SG&A change and Organic constant currency SG&A change are non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance.

Constant currency SG&A change is calculated by deducting the percentage impact from currency translation effects from the overall percentage change in SG&A.

Organic constant currency SG&A change is calculated by deducting the percentage impact from acquisitions and related strategic transaction costs and currency translation effects from the overall percentage change in SG&A.

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Research and development expense was 3.7% of net sales in 2022, compared to 4.1% of net sales in 2021.

We continue to develop new products for global safety markets, including the recently announced launch of the Altair io4.

We capitalized approximately $8.7 million and $8.1 million of software development costs during the years ended December 31, 2022 and 2021, respectively.

Depreciation expense for capitalized software development cost of $7.9 million and $4.9 million during the years ended December 31, 2022 and 2021, was recorded in costs of products sold on the Consolidated Statements of Income.

Refer to Note 1—Significant Accounting Policies of the consolidated financial statements in Part II Item 8 of this Form 10-K for further details regarding our software development costs.

MSA remains committed to dedicating significant resources to research and development activities, including the development of technology-based safety solutions.

As we continue to invest a significant portion of our new product development into technology-based safety solutions, we anticipate that the historical relationship of research and development expense to net sales will continue to evolve;

however, we do not anticipate reductions in the relative level of total spend on research and development activities on an annual basis.

Total spend on both software development and research and development activities was $65.7 million and $65.9 million during the years ended December 31, 2022 and 2021.

Restructuring charges.

During the year ended December 31, 2021, the Company recorded restructuring charges of $16.4 million primarily related to our ongoing initiatives to drive profitable growth and acquisition integration activities.

Together with cost reduction programs executed throughout 2020 and 2021, these programs collectively delivered approximately $15 million of savings throughout the income statement in 2021, and expect to generate annual savings of $25-$30 million thereafter.

This compared to restructuring charges of $27.4 million during the year ended December 31, 2020, primarily related to footprint rationalization projects including the Company's FGFD manufacturing footprint optimization and the acceleration of cost reduction programs associated with our ongoing initiatives to drive profitable growth in our International segment.

We remain focused on executing programs to optimize our cost structure and to drive improvements in productivity.

During the year ended December 31, 2022, the Company recorded restructuring charges of $8.0 million primarily related to our ongoing international initiatives to drive profitable growth and right size operations.

This compared to restructuring charges of $16.4 million during the year ended December 31, 2021, primarily related to our ongoing initiatives to drive profitable growth and acquisition integration activities.

We remain focused on executing programs to optimize our cost structure.

Currency exchange .

Currency exchange losses were $10.3 million during the year ended December 31, 2022, compared to $0.2 million during the year ended December 31, 2021.

Currency exchange in both periods were related to foreign currency exposure on unsettled inter-company balances.

The currency exchange losses for the current period related primarily due to foreign currency exposure on unsettled inter-company balances and the recognition of non-cash cumulative translation losses as result of our plan to close a foreign subsidiary.

Currency exchange in 2021 related to foreign currency exposure on unsettled inter-company balances.

Refer to Note 18—Derivative Financial Instruments of the consolidated financial statements in Part II Item 8 of this Form 10-K for information regarding our currency exchange rate risk management strategy.

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Product liability expense during the year ended December 31, 2022 was $20.6 million compared to $185.3 million for the year ended December 31, 2021.

The expense in both periods primarily relates to increases in MSA LLC's reserve for cumulative trauma product liability claims, and to a far lesser extent, incurred defense costs.

Product liability expense for both periods primarily relates to increases in MSA LLC's reserve for cumulative trauma product liability claims and defense costs incurred for these claims.

Adjustments to the reserve for the year ended December 31, 2022 totaled $8.4 million net of insurance receivable of $1.6 million.

These adjustments were largely a result of incorporating the increased number of newly filed claims during the year into long term trends used in the estimate, particularly, the number of newly filed coal claims, which were well in excess of historical experience.

The reserve includes estimated amounts for claims expected to be resolved through the year 2075.

On January 5, 2023, the Company divested MSA LLC, a wholly owned subsidiary that holds legacy product liability claims relating to coal dust, asbestos, silica, and other exposures.

As a result of the transaction, we will derecognize in the first quarter of 2023 all legacy cumulative trauma product liability reserves, related insurance assets, and associated deferred tax assets of the divested subsidiary from our balance sheet and recognize a loss of approximately $200 million.

Please refer to Note 20—Contingencies of the consolidated financial statements in Part II Item 8 of this Form 10-K for additional information.

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Consolidated operating income for the year ended December 31, 2022 was $239.1 million compared to $22.8 million for the year ended December 31, 2021.

The decrease in operating results was driven by the factors described in the preceding sections.

The increase in operating results was driven by the factors described in the preceding sections.

Adjusted operating income.

Americas adjusted operating income for the year ended December 31, 2021 was $202.5 million, a decrease of $2.8 million or 1%, compared to $205.3 million for the year ended December 31, 2020.

The decrease was related to variable compensation resets and higher SG&A due to the Bacharach acquisition, as well as higher input costs, which was mostly offset by higher revenue.

International adjusted operating income for the year ended December 31, 2021 was $73.3 million, an increase of $2.2 million, or 3%, compared to adjusted operating income of $71.1 million for the year ended December 31, 2020.

The increase in adjusted operating income is primarily attributable to higher revenue.

Corporate segment adjusted operating loss for the year ended December 31, 2021 was $35.2 million, an increase of $7.1 million, or 25%, compared to an adjusted operating loss of $28.1 million for the year ended December 31, 2020, due primarily to higher variable compensation expenses related to improved business conditions and the impact of the Bacharach acquisition.

Americas adjusted operating income for the year ended December 31, 2022 was $267.4 million, an increase of $64.9 million or 32%, compared to $202.5 million for the year ended December 31, 2021.

The increase in adjusted operating income is primarily attributable to higher sales volumes driven by the full year impact of the Bacharach acquisition and organic business activity, partially offset by higher SG&A expenses to support business growth.

International adjusted operating income for the year ended December 31, 2022 was $60.9 million, a decrease of $12.4 million, or 17%, compared to adjusted operating income of $73.3 million for the year ended December 31, 2021.

The decrease in adjusted operating income is primarily attributable to lower revenue and gross margins as a result of unfavorable currency translation and transactional impact, inflationary pressures, partially offset by lower SG&A expenses.

Corporate segment adjusted operating loss for the year ended December 31, 2022 was $37.9 million, an increase of $2.7 million, or 8%, compared to an adjusted operating loss of $35.2 million for the year ended December 31, 2021 due primarily to increased costs to support higher business activity.

The following tables represent a reconciliation from GAAP operating income to adjusted operating income (loss) and adjusted EBITDA.

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Acquisition related costs (Note 14) (a)

COVID-19 related costs 757

Adjusted operating income (loss) 202,496 73,279 (35,198) 240,577

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Adjusted EBITDA % 25.7 % 17.7 %

* The year ended December 31, 2020 amounts were adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 4 to the consolidated financial statements.

(a) Acquisition related costs include advisory, legal, accounting, valuation, and other professional or consulting fees incurred during due diligence and integration.

These costs are included in selling, general and administrative expense in the Consolidated Statements of Income.

Acquisition-related costs during 2021 also include $8.8 million of amortization which is included in Cost of products sold in the Consolidated Statements of Income.

Adjusted operating income (loss) and adjusted EBITDA are non-GAAP financial measures used by the chief operating decision maker to evaluate segment performance and allocate resources.

These costs are included in SG&A expense in the unaudited Condensed Consolidated Statements of Income.

Acquisition-related costs also include the acquisition related amortization, which is included in Cost of products sold in the Consolidated Statements of Income.

Adjusted operating income (loss) and adjusted EBITDA are non-GAAP financial measures.

Adjusted operating income (loss) is reconciled above to the nearest GAAP financial measure, Operating income (loss), and excludes restructuring, currency exchange, product liability expense, and acquisition related costs.

Adjusted EBITDA is reconciled above to the nearest GAAP financial measure, Operating income (loss) and excludes depreciation and amortization expense.

Total other (income) expense, net.

Total other income, net, for the year ended December 31, 2021, was $0.8 million, an increase of $4.5 million compared to other expense, net, of $3.7 million for the year ended December 31, 2020, due primarily to higher pension income driven by a one-time pension settlement and a higher expected rate of return on plan assets.

Adjusted operating margin % and Adjusted EBITDA % are operating ratios derived from non-GAAP financial measures.

Total other expense (income), net.

Total other expense, net, for the year ended December 31, 2022, was $0.6 million, a decrease of $1.4 million compared to other income, net, of $0.8 million for the year ended December 31, 2021, driven primarily by higher interest expense, related to rising interest rate environment, and a write-down of an equity investment, partially offset by higher pension income, resulting from higher expected rate of return on plan assets.

We expect total interest expense for 2023 to be between $48 million and $50 million, this increase is primarily related to the additional long-term debt to divest MSA LLC as of January 5, 2023.

We expect non-cash pension income to decline by $8 million compared to 2022.

Income taxes.

The reported effective tax rate for the year ended December 31, 2021 was 7.7%, which includes a benefit of 18.3% for share-based payments, a benefit of 10.9% related to higher profits in foreign jurisdictions and settlement of a foreign audit, and an expense of 15.3% due to nondeductible compensation.

This compared to a reported effective tax rate for the year ended December 31, 2020 of 25.6%, which included a benefit of 3.9% for share-based payments, an expense of 3.4% due to nondeductible compensation, and expense of 1.5% related to a foreign audit.

The reported effective tax rate for the year ended December 31, 2022 was 24.7%, which includes a benefit of 0.8% for share-based payments, expense of 0.1% related to higher profits in foreign jurisdictions, and an expense of 1.2% due to nondeductible compensation.

This compared to a reported effective tax rate for the year ended December 31, 2021 of 7.7%, which included a benefit of 18.3% for share-based payments, a benefit of 10.9% related to higher profits in foreign jurisdictions and settlement of a foreign audit, and an expense of 15.3% due to nondeductible compensation.

We are subject to regular review and audit by both foreign and domestic tax authorities.

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Net income attributable to MSA Safety Incorporated .

Net income was $21.3 million for the year ended December 31, 2021, or $0.54 per diluted share, compared to $124.1 million, or $3.15 per diluted share, for the year ended December 31, 2020, as positive momentum in the business was offset by the product liability reserve adjustment.

Net income was $179.6 million for the year ended December 31, 2022, or $4.56 per diluted share, compared to $21.3 million, or $0.54 per diluted share, for the year ended December 31, 2021.

Non-GAAP Financial Information

We may provide information regarding financial measures such as organic constant currency changes, financial measures excluding the impact of acquisitions and related acquisition related costs (including acquisition related amortization and COVID-19 related costs, consisting of a one-time bonus for essential manufacturing employees), adjusted operating income, adjusted operating margin percentage, adjusted EBITDA and adjusted EBITDA margin percentage, which are not recognized terms under U.S.

GAAP and do not purport to be alternatives to net sales, selling, general and administrative expense, operating income or net income as a measure of operating performance.

We believe that the use of these non-GAAP financial measures provide investors with additional useful information and provide a more complete understanding of the underlying results.

Because not all companies use identical calculations, these presentations may not be comparable to similarly titled measures from other companies.

For more information about these non-GAAP measures and a reconciliation to the nearest U.S.

GAAP measure, please refer to the reconciliations referenced above in Management's Discussion & Analysis section and in Note 8—Segment Information of the consolidated financial statements in Part II Item 8 of this Form 10-K.

To supplement our Consolidated Financial Statements presented in accordance with generally accepted accounting principles (“GAAP”), we use, and this report includes, certain non-GAAP financial measures.

These financial measures include organic constant currency changes, financial measures excluding the impact of acquisitions and related acquisition related costs (including acquisition related amortization), adjusted operating income, adjusted operating margin percentage, adjusted EBITDA and adjusted EBITDA margin percentage.

We believe that the use of these non-GAAP financial measures provide investors with additional useful information and provide a more complete understanding of our operating performance and trends, and facilitate comparisons with the performance of our peers.

Management also uses these measures internally to assess and better understand our underlying business performance and trends related to core business activities.

The non-GAAP financial measures and key performance indicators we use, and computational methods with respect thereto, may differ from the non-GAAP financial measures and key performance indicators, and computational methods, that our peers use to assess their performance and trends.

The presentation of these non-GAAP financial measures does not comply with U.S.

These non-GAAP financial measures should be viewed as supplemental in nature, and not as a substitute for, or superior to, our reported results prepared in accordance with GAAP.

When non-GAAP financial measures are disclosed, the Securities and Exchange Commission's Regulation G requires:

(i) the presentation of the most directly comparable financial measure calculated and presented in accordance with GAAP and (ii) a reconciliation of the differences between the non-GAAP financial measure presented and the most directly comparable financial measure calculated and presented in accordance with GAAP.

For an explanation of these measures, together with a reconciliation to the most directly comparable GAAP financial measure, please refer to the reconciliations referenced above in Management's Discussion & Analysis.

We may also provide financial information on a constant currency basis, which is a non-GAAP financial measure.

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At December 31, 2022, approximately 82% of our borrowings are denominated in US dollars, which limits our exposure to currency exchange rate fluctuations.

At December 31, 2021, the Company had cash and cash equivalents totaling $141.4 million, and access to sufficient capital, providing ample liquidity and flexibility to continue to maintain our balanced capital allocation strategy.

At December 31, 2022, the Company had cash and cash equivalents, including restricted cash, totaling $164.4 million, and access to sufficient capital, providing ample liquidity and flexibility to continue to maintain our balanced capital allocation strategy.

At December 31, 2022, $589.9 million of the existing $900.0 million senior revolving credit facility was unused, including letters of credit issued under the facility.

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Operating activities provided cash of $157.5 million in 2022, compared to providing cash of $199.1 million in 2021.

The reduced operating cash flow as compared to the same period in 2020 was primarily related to increased working capital and payments for subsidiary MSA LLC's product liability claims exceeding collections from insurance companies by $24.1 million in the year ended December 31, 2021, compared to $12.9 million in 2020.

MSA LLC presently funds its operating expenses and legal liabilities from its own operating cash flow and other investments, as well as limited amounts of insurance reimbursements and intercompany notes.

The subsidiary is not party to the Company's credit facility.

Now that MSA LLC is largely self-insured for its historical cumulative trauma product liability claims, associated insurance reimbursements received in any given period are limited, and generally do not fully offset cash outlay in that same period.

In recent years, MSA LLC’s contingent liabilities have been funded without a material impact on the Company’s consolidated capital allocation priorities.

The reduced operating cash flow as compared to the same period in 2021 was primarily related to increased working capital requirements, notably increased inventory balances at year-end 2022 to support the higher backlog and accounts receivable related to stronger fourth quarter 2022 revenue.

Payments for subsidiary MSA LLC's product liability claims exceeded collections from insurance companies by $27.2 million in the year ended December 31, 2022, compared to $24.1 million in 2021.

On January 5, 2023, the Company divested MSA LLC and as a result, will derecognize all legacy cumulative trauma product liability reserves, related insurance assets, and associated deferred tax assets of the divested subsidiary from our balance sheet and will recognize a loss of approximately $200 million in the first quarter of 2023 and expect related cash outflows to be recognized within operating activities in the consolidated statements of cash flows.

R&Q and Obra have assumed management of the divested subsidiary, including the management of its claims.

The divestiture enhances operating cash flow predictability by eliminating costs associated with defending and settling the transferred claims.

Please refer to Note 20—Contingencies of the consolidated financial statements in Part II Item 8 of this Form 10-K for additional information.

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Investing activities used cash of $4.5 million for the year ended December 31, 2022, compared to using $415.5 million in 2021.

The acquisitions of Bacharach and Bristol and capital expenditures, partially offset by maturities of short-term investments, net of purchases, drove cash outflows from investing activities during the year ended December 31, 2021, while capital expenditures and the purchase of short-term investments, net of proceeds from maturities, drove cash outflows from investing activities during the same period in 2020.

During 2021 we incurred capital expenditures of $43.8 million, including approximately $8.1 million associated with software development and other growth programs, compared to capital expenditures of $48.9 million, including $8.2 million associated with software development and other growth programs, in the same period in 2020.

The reduced capital expenditures in 2021 was a result of MSA's ramping up APR production in our Jacksonville, NC facility in 2020.

The decrease in cash used in investing activities as compared to the same period in 2021 was primarily related to the absence of acquisitions.

We remain active in evaluating additional acquisition opportunities that will allow us to continue to grow in key end markets and geographies.

Financing activities.

Financing activities provided cash of $203.9 million for the year ended December 31, 2021, compared to using cash of $126.5 million in 2020.

During 2021, we had net proceeds on long-term debt of $293.2 million to fund the acquisitions of Bacharach and Bristol and buy-out our minority partner in our China business, as compared to net payments on long-term debt of $44.0 million during the same period in 2020.

We paid cash dividends, exclusive of a $5.6 million dividend to our former noncontrolling interest partner in China as part of the buy-out, of $68.6 million during 2021, compared to $66.6 million during 2020.

Financing activities used cash of $113.4 million for the year ended December 31, 2022, compared to providing cash of $203.9 million in 2021.

During 2022, we had net payments on long-term debt of $13.0 million as compared to net proceeds on long-term debt of $293.2 million during the same period in 2021 to fund the acquisitions of Bacharach and Bristol and buy-out our minority partner in our China business.

We paid cash dividends of $71.5 million during 2022, compared to $68.6 million, exclusive of a $5.6 million dividend to our former noncontrolling interest partner in China as part of the buy-out, during 2021.

We also used cash of $34.4 million during 2022 to repurchase shares, compared to using $6.2 million during the same period in 2021.

In 2022, $30.4 million of our repurchase activity was related to purchases under our 2015 stock repurchase program.

In January 2023, we entered into a new $250 million term loan and $65 million was drawn down from our revolving credit facility to fund the divestiture of MSA LLC, a wholly owned subsidiary that, at the time of divestiture held legacy product liability claims relating to coal dust, asbestos, silica, and other exposures.

Subsequent to this transaction, we have more than $500 million of availability remaining on our revolving credit facility.

CUMULATIVE TRANSLATION ADJUSTMENTS

The year-end position of the U.S.

dollar relative to international currencies at December 31, 2021, resulted in a translation loss of $25.4 million being recorded to cumulative translation adjustments shareholders' equity account for the year ended December 31, 2021, compared to a $22.3 million translation gain being recorded to the cumulative translation adjustments account during 2020.

dollar relative to international currencies at December 31, 2022, resulted in a translation loss of $19.5 million being recorded to cumulative translation adjustments shareholders' equity account for the year ended December 31, 2022, compared to a translation loss of $25.4 million being recorded to the cumulative translation adjustments account during 2021.

COMMITMENTS AND CONTINGENCIES

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The significant obligations table does not include obligations to taxing authorities due to uncertainty surrounding the ultimate settlement of amounts and timing of these obligations.

It also does not include $315 million of variable rate debt related to the January 5, 2023, divestiture of MSA LLC.

We expect to meet our future debt service obligations through cash provided by operations.

Approximately $334.4 million of debt payable in 2026 relates to our unsecured senior revolving credit facility.

Approximately $308.6 million of debt payable in 2026, included in the table above, relates to our unsecured senior revolving credit facility that has a weighted average interest rate of 5.13% as of December 31, 2022.

We expect to generate sufficient operating cash flow to make payments against this amount each year.

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During 2021, the Company made acquisitions that raised business combinations to a critical accounting policy and estimate.

There were no business combinations during 2022.

Business combinations.

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Product liability claims are categorized as either single incident or cumulative trauma.

Single incident product liability claims involve incidents of short duration that are typically known when they occur and involve observable injuries, which provide an objective basis for quantifying damages.

Single incident product liability claims involve incidents of short duration that are typically known when they occur and involve observable injuries, which provide a more objective basis for quantifying damages.

The Company estimates its subsidiaries' liability for single incident product liability claims based on expected settlement costs for asserted single incident product liability claims and an estimate of costs for single incident product liability claims incurred but not reported ("IBNR").

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Adjustments are made to the reserve as appropriate.

Cumulative trauma product liability claims involve exposures to harmful substances (e.g., silica, asbestos and coal dust) that occurred years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, mesothelioma, or coal worker’s pneumoconiosis.

MSA LLC's combined cumulative trauma product liability reserve is based upon estimates of its liability for asserted and IBNR cumulative trauma product liability claims.

Cumulative trauma product liability claims involve exposures to harmful substances that occurred over many years and may have developed over long periods of time into diseases.

In the case of MSA LLC, the subsidiary's combined cumulative trauma product liability reserve is based upon estimates of its liability for asserted and IBNR cumulative trauma product liability claims.

In addition, in connection with finalizing and reporting the Company's results of operations, management works annually (unless significant changes in trends or new developments warrant an earlier review) with an outside valuation consultant and outside legal counsel to review MSA LLC's potential exposure to all cumulative trauma product liability claims.

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We accordingly consider MSA LLC’s claims experience over multiple periods and/or whether there are changes in MSA LLC’s claims experience and trends that are likely to continue for a significant time into the future in determining whether to make an adjustment to the reserve, rather than evaluating such factors solely in the short term.

Please refer to Note 20—Contingencies to the consolidated financial statements in Part II Item 8 of this Form 10-K for further discussion on the Company's product liabilities.

Please refer to Note 20—Contingencies to the consolidated financial statements in Part II Item 8 of this Form 10-K for further discussion on the Company's product liabilities and divestiture of MSA LLC on January 5, 2023.

Income taxes.

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In the event the carrying value is in excess of the estimated fair value of a reporting unit per the weighted average of the DCF and market approach models, an impairment loss equal to such excess would be recognized, which could materially and adversely affect reported consolidated results of operations and shareholders’ equity.

At October 1, 2021, based on our quantitative test, the fair values of each of our reporting units exceeded their carrying value by at least 56%.

At October 1, 2022, based on our quantitative test, the fair values of each of our reporting units exceeded their respective carrying value by at least 42%.

The intangible asset with an indefinite life is also subject to impairment testing on October 1st of each year, or more frequently if indicators of impairment exist.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis