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Contingencies | 6 Months Ended
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Jun. 30, 2018
Commitments and Contingencies Disclosure [Abstract] |
Contingencies | 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. MSA LLC 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 $4.7 million at June 30, 2018, and $5.4 million at December 31, 2017. Single incident product liability expense was $0.9 million during the six months ended June 30, 2018 and $0.2 million during the six months ended June 30, 2017. 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. MSA LLC was named as a defendant in 1,470 lawsuits comprised of 2,345 claims as of June 30, 2018. 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. A summary of cumulative trauma product liability lawsuits and asserted cumulative trauma product liability claims activity follows:
|  | Six Months Ended June 30, 2018 |  | Year Ended December 31, 2017
Open lawsuits, beginning of period |  | 1,420 |  |  | 1,794 |
New lawsuits |  | 189 |  |  | 398 |
Settled and dismissed lawsuits |  | (139 | ) |  | (772 | )
Open lawsuits, end of period |  | 1,470 |  |  | 1,420 |
|  | Six Months Ended June 30, 2018 |  | Year Ended December 31, 2017
Asserted claims, beginning of period |  | 2,242 |  |  | 3,023 |
New claims |  | 258 |  |  | 455 |
Settled and dismissed claims |  | (155 | ) |  | (1,236 | )
Asserted claims, end of period |  | 2,345 |  |  | 2,242 |
More than half of the open lawsuits at June 30, 2018, 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. 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. Factors that have historically limited MSA LLC's ability to estimate potential liability for cumulative trauma product liability claims include low volumes in the number of claims asserted and resolved (both in general and with respect to particular plaintiffs’ counsel as claims experience can vary significantly among different counsel), inconsistency of claims composition, uncertainty as to if and over what time periods claims might be asserted in the future, or other factors. With respect to the risk associated with any particular case that is filed against MSA LLC, it has typically not been until very late in the legal process that it can be reasonably determined whether it is probable that such a case will ultimately result in a liability. This uncertainty is caused by many factors, including consideration of the applicable statute of limitations, the sufficiency of product identification and other defenses. The complaints initially filed generally have not provided information sufficient to determine if a lawsuit will develop into an actively litigated case. Even when a case is actively litigated, it is often difficult to determine if the lawsuit will be dismissed or otherwise resolved until late in the lawsuit. Moreover, even if it is probable that such a lawsuit will result in a loss, it is often difficult to estimate the amount of actual loss that will be incurred. These actual loss amounts are highly variable and turn on a case-by-case analysis of the relevant facts, including the nature of the injury, the jurisdiction in which the claim is filed, the counsel for the plaintiff and the number of parties in the lawsuit. In addition, there are uncertainties concerning the impact of bankruptcies of other companies that are co-defendants with respect to particular claims and uncertainties surrounding the litigation process in different jurisdictions and from case to case within a particular jurisdiction. Management works with outside legal counsel quarterly to review and assess MSA LLC's exposure to asserted cumulative trauma product liability claims not yet resolved. In addition management works with an outside valuation consultant and outside legal counsel to review MSA LLC's exposure to IBNR cumulative trauma product liability claims. The review process for asserted cumulative trauma product liability claims not yet resolved takes into account available facts for those claims, including their number and composition, outcomes of matters resolved during current and prior periods, and variances associated with different groups of claims, plaintiffs' counsel, claims filing trends, and venues, as well as any other relevant information. In August 2017, MSA LLC obtained additional detailed information about a significant number of claims that were then pending against it, including the nature and extent of the alleged injuries, product identification and other factors. MSA LLC subsequently agreed to resolve a substantial number of these claims for $75.2 million, a portion of which was insured. Amounts in excess of estimated insurance recoveries were reflected within Other operating expense in the Consolidated Statement of Income. MSA LLC paid a total of $25.2 million during 2017 and $14.3 million during the six months ended June 30, 2018, related to these settlements. MSA LLC expects to pay $7.1 million ratably over the next five quarters ending in the third quarter of 2019. As a result of these developments, the cumulative trauma product liability reserve covers all cumulative trauma product liability claims that have been asserted against MSA LLC, both those that have been settled but not yet paid and an estimated amount for asserted cumulated trauma product liability claims not yet resolved. In the fourth quarter of 2017, MSA LLC, in consultation with an outside valuation consultant and outside legal counsel, performed a review for IBNR cumulative trauma product liability claims. Based on that review process, which concluded in early 2018, it was determined that a reasonable estimate for the liability of MSA LLC's IBNR claims was $111.1 million. Accordingly, the cumulative trauma product liability reserve was increased by $111.1 million at December 31, 2017, for estimated IBNR cumulative trauma product liability claims and the balance is $107.8 million at June 30, 2018. This estimated amount is not discounted to present value. This amount represents estimated liability relating to asbestos, silica and coal dust claims projected to be asserted through 2060. The ability to make a reasonable estimate of the potential liability for IBNR cumulative trauma product liability claims reflects recent developments affecting asbestos claims, recent developments affecting silica claims, and recent developments affecting coal dust claims. Significant changes in MSA LLC’s claims experience over the last few years have resulted in stabilization of a number of factors important to the estimation process and enabled greater predictability of IBNR claims. These developments occurred as a result of changes in defense strategy implemented in recent years, increased experience in defending, negotiating, and resolving key groups of claims, and resolutions of a substantial number of cumulative trauma product liability claims in the last few years. These changes have collectively resulted in MSA LLC having a more stable recent claims history that could be extrapolated into the future and greater certainty as to the number of claims that might be asserted against MSA LLC in the future, the percentage of those claims that might be resolved without payment, and the potential settlement value of those claims that are not resolved without payment. All of these factors were considered by MSA LLC’s valuation consultant in estimating the IBNR cumulative trauma product liability claims. MSA LLC, taking into account the analysis and estimates developed by its consultant, concluded in the fourth quarter of 2017 that reasonable estimates for its IBNR asbestos, silica and coal dust claims could be made and that the liability described above should be accrued. Notwithstanding these developments, there remains considerable uncertainty in numerous aspects of MSA LLC's potential future claims experience, such as with respect to the number of claims that might be asserted, the alleged severity of those claims and the average settlement values of those claims, and that uncertainty may cause actual claims experience in the future to vary from the current estimate. Numerous uncertainties also exist with respect to factors not specific to MSA LLC’s claims experience, 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 cumulative trauma product liability claims. If future estimates of asserted cumulative trauma product liability claims not yet resolved and/or IBNR cumulative trauma product liability claims are materially higher (lower) than the accrued liability, we will record an appropriate charge (credit) to the Consolidated Statement of Income to increase (decrease) the accrued liability. Certain significant assumptions underlying the material components of the accrual for IBNR cumulative trauma product liability claims include MSA LLC's experience related to the following:
• | The types of illnesses alleged by claimants to give rise to their claims;
• | The number of claims asserted against MSA LLC;
• | The propensity of claimants and their counsel asserting cumulative trauma claims to name MSA LLC as a defendant;
• | The percentage of cumulative trauma product liability claims asserted against MSA LLC that are dismissed without payment; and
• | The average value of settlements paid to claimants.
Additional assumptions include the following:
• | MSA LLC will continue to evaluate and handle cumulative trauma 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, in particular, no material state or federal tort reform actions affecting such claims.
The total cumulative trauma product liability reserve was $162.3 million at June 30, 2018, of which $54.5 million related to asserted cumulative trauma product liability claims ($39.0 million for claims settled and related defense costs not yet paid and $15.5 million for the estimated value of claims asserted but not yet resolved) and $107.8 million related to estimated IBNR cumulative trauma product liability claims. The total cumulative trauma product liability reserve was $181.1 million at December 31, 2017, of which $70.0 million related to asserted cumulative trauma product liability claims ($54.5 million for claims settled but not yet paid and $15.5 million for the estimated value of claims asserted but not yet resolved) and $111.1 million related to estimated IBNR cumulative trauma product liability claims. The majority of the reserve relating to claims settled but not yet paid for both periods relates to the August 2017 settlement of certain coal dust claims described above. The amount included in the reserve for IBNR cumulative trauma product liability claims represents the estimated value of such claims if the most likely potential outcome with respect to each of the assumptions described above is applied. The reserve does not include amounts which will be spent to defend the claims covered by the reserve. Defense costs are recognized in the Condensed Consolidated Statement of Income as incurred. At June 30, 2018, $47.4 million of the cumulative trauma product liability reserve for asserted cumulative trauma product liability claims is recorded in the Insurance and product liability line within other current liabilities in the Condensed Consolidated Balance Sheet and the remainder, $7.1 million, is recorded in the Other noncurrent liabilities line. At December 31, 2017, $48.6 million of the reserve for asserted cumulative trauma product liability claims is recorded in the Insurance and product liability line within other current liabilities in the Condensed Consolidated Balance Sheet and the remainder, $21.4 million, is recorded in the Other noncurrent liabilities line. All of the reserve for IBNR claims as of both June 30, 2018, and December 31, 2017, is recorded in the Other noncurrent liabilities line. Because litigation is subject to inherent uncertainties, and unfavorable rulings or developments could occur, there can be no certainty that MSA LLC may not ultimately incur charges in excess of presently recorded liabilities. The reserve for liabilities relating to cumulative trauma product liability claims may be adjusted from time to time based on whether the actual number, types, and settlement value of claims differs from current projections and estimates and other developing facts and circumstances. These adjustments may reflect changes in estimates for asserted cumulative trauma product liability claims not yet resolved and/or IBNR cumulative trauma product liability claims. These adjustments may be material and could materially impact our consolidated financial statements in future periods. Insurance Receivable and Notes Receivable, Insurance Companies MSA LLC purchased insurance policies for the policy years from 1952-1986 from over 20 different insurance carriers that, subject to some common contract exclusions, provide coverage for cumulative trauma product liability losses and, in many instances, related defense costs (the "Occurrence-Based Policies"). MSA LLC’s insurance policies have significant per claim retentions and applicable exclusions for claims after April 1986. In the normal course of business, MSA LLC makes payments to settle product liability claims and for related defense costs and records receivables for the estimated amounts that are covered by insurance. Since MSA LLC is now largely self-insured for cumulative trauma claims, additional amounts recorded as insurance receivables will be limited and based on calculating the amounts to be reimbursed pursuant to negotiated Coverage-in-Place Agreements (as defined below). Various factors could affect the timing and amount of recovery of the insurance receivable, including assumptions regarding claims composition (which are relevant to calculating reimbursement under the terms of certain Coverage-In-Place Arrangements) and the extent to which the issuing insurers may become insolvent in the future. Insurance receivables at June 30, 2018, totaled $125.7 million, of which, $10.6 million is reported in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet and $115.1 million is reported in Insurance receivable and other noncurrent assets. Insurance receivables at December 31, 2017, totaled $134.7 million, of which $11.6 million was reported in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet and $123.1 million was reported in Insurance receivable and other noncurrent assets. A summary of Insurance receivable balances and activity related to cumulative trauma product liability losses follows:
(In millions) |  | Six Months Ended June 30, 2018 |  | Year Ended December 31, 2017
Balance beginning of period |  | $ | 134.7 |  |  | $ | 159.9 |
Additions |  | 1.0 |  |  | 94.6 |
Collections, settlements converted to notes receivable and other adjustments |  | (10.0 | ) |  | (119.8 | )
Balance end of period |  | $ | 125.7 |  |  | $ | 134.7 |
Additions to insurance receivables in the above table represent insured cumulative trauma product liability losses and related defense costs which we believe are covered by the Occurrence-Based Policies or applicable Coverage-in-Place Agreements. Collections of the receivable primarily occur upon settlement of the coverage litigation, per the terms of the negotiated agreements with the insurance companies, either in a lump sum, in installments over time, or to reimburse a portion of future expense once incurred (i.e. pursuant to a Coverage-in-Place Agreement). Collections and settlements primarily represent agreements with insurance companies to pay amounts due that are applicable to cumulative trauma claims. When there are contingencies embedded in these agreements, we apply payments to the undiscounted receivable in the period when the contingency is met. In some cases, payment streams due pursuant to negotiated settlement agreements are converted to formal notes receivable from insurance companies. The notes receivable are recorded as a transfer from the Insurance receivable balance to the Notes receivable, insurance companies (current and noncurrent) in the Condensed Consolidated Balance Sheet. In cases where the payment stream covers multiple years and there are no contingencies, the present value of the payments is recorded as a transfer from the insurance receivable balance to the Notes receivable, insurance companies (current and long-term) in the Condensed Consolidated Balance Sheet. Provided the remaining insurance receivable is recoverable through the insurance carriers, no gain or loss is recognized at the time of transfer from Insurance receivable to Notes receivable, insurance companies. Notes receivable from insurance companies at June 30, 2018, totaled $63.8 million, of which $3.5 million is reported in Notes receivable, insurance companies, current on the Condensed Consolidated Balance Sheet and $60.3 million is reported in Notes receivable, insurance companies, noncurrent. Notes receivable from insurance companies at December 31, 2017, totaled $76.9 million, of which $17.3 million was reported in Notes receivable, insurance companies, current on the Condensed Consolidated Balance Sheet and $59.6 million was reported in Notes receivable, insurance companies, noncurrent. A summary of Notes receivable, insurance companies balances is as follows:
(In millions) |  | Six Months Ended June 30, 2018 |  | Year Ended December 31, 2017
Balance beginning of period |  | $ | 76.9 |  |  | $ | 67.3 |
Additions |  | 0.8 |  |  | 35.1 |
Collections |  | (13.9 | ) |  | (25.5 | )
Balance end of period |  | $ | 63.8 |  |  | $ | 76.9 |
The collectibility of MSA LLC's insurance receivables and notes receivable 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 analysis of the terms of the underlying insurance policies, experience in successfully recovering cumulative trauma product liability claims from MSA LLC's insurers under other policies during coverage litigation, the financial ability of the insurance carriers to pay the claims, understanding and interpretation of the relevant facts and applicable law and the advice of MSA LLC's outside legal counsel. We believe that successful resolution of insurance litigation with substantially all of our insurance carriers over the years, most recently in July 2018 with North River, as well as the October 2016 trial verdict, which resulted in a favorable outcome, demonstrate that MSA LLC has strong legal positions concerning its rights to coverage. The trial verdict is described below. Approximately $51.0 million of the $125.7 million insurance receivable balance at June 30, 2018, is attributable to coverage in place agreements or negotiated installment payments. Total cumulative trauma liability losses were $11.8 million for the six months ended June 30, 2018, primarily related to the defense of cumulative trauma product liability claims. Total cumulative trauma liability losses were $97.6 million for the six months ended June 30, 2017, primarily related to the defense and settlement of cumulative trauma product liability claims. Uninsured cumulative trauma product liability losses, which were included in Other operating expense on the Condensed Consolidated Statement of Income, were $10.8 million for the six months ended June 30, 2018 and $29.6 million for the six months ended June 30, 2017. Insurance Litigation For more than a decade, MSA LLC has been involved in coverage litigation with many of its insurance carriers that issued Occurrence-Based Policies. MSA LLC has reached resolution with the majority of its insurance carriers through negotiated settlements regarding these policies. North River In 2009, MSA LLC (as Mine Safety Appliances Company) sued North River in the United States District Court for the Western District of Pennsylvania, alleging that North River breached one of its insurance policies by failing to pay amounts owed to MSA LLC and that it engaged in bad-faith claims handling. In 2010, North River sued MSA LLC (as Mine Safety Appliances Company) in the Court of Common Pleas of Allegheny County, Pennsylvania seeking a declaratory judgment concerning their responsibilities under three additional policies. MSA LLC asserted claims against North River for breaches of contract for failures to pay amounts owed to MSA LLC. MSA LLC also alleged that North River engaged in bad-faith claims handling. In the fourth quarter of 2016, a Pennsylvania state court jury found that North River breached the three insurance policies at issue in the case. As a result of the jury's findings, the court entered a verdict in favor of MSA LLC and against North River for $10.9 million, the full amount of the contractual damages at issue in the case. In December 2016 and January 2017, the Pennsylvania state court heard evidence regarding the statutory bad faith claim. In the first and second quarters of 2017, the Court of Common Pleas of Allegheny County awarded MSA LLC an additional $48.9 million in damages related to this statutory bad faith claim. In the first quarter of 2017, MSA LLC received payments of approximately $80.9 million (the "Payment") pursuant to insurance policies issued by North River. The Payment reflects amounts previously invoiced to North River for reimbursement on cumulative trauma product liability claims and therefore was recorded as a reduction to the insurance receivable. In July 2018, MSA LLC resolved through a negotiated settlement its remaining coverage litigation with North River. As part of this settlement, MSA LLC dismissed all claims and appeals against North River in each of the pending coverage actions. This represents a settlement with MSA LLC’s last major Occurrence-Based insurance carrier. We anticipate payment under the settlement to be received in the third quarter of 2018. The payment is expected to be accounted for as a reduction of the insurance receivable balance and will satisfy the portion of the insurance receivable balance that has been subject to litigation. The settlement is not expected to have an impact on our operating results. Delaware Matter In July 2010, MSA LLC (as Mine Safety Appliances Company) filed a lawsuit in the Superior Court of the State of Delaware seeking declaratory and other relief concerning the future rights and obligations of MSA LLC and its excess insurance carriers under various insurance policies. Since 2010, from time to time, MSA LLC has resolved its disputes with the vast majority of the carriers once named in this action, including the recent July 2018 settlement with North River mentioned above. The case is on appeal with two remaining defendant insurance carriers. In February 2017, MSA LLC resolved through a negotiated settlement its coverage litigation with The Hartford ("Hartford"). Additionally, in April 2017, MSA LLC resolved through negotiated settlements its coverage litigation with Travelers Insurance Company ("Travelers") and Wausau Indemnity Company ("Wausau"). Each of the settling carriers agreed to cash payments which were made in 2017 or January 2018. In addition, Travelers has agreed to pay a percentage of future cumulative trauma product liability settlements paid as incurred on a claim-by-claim basis. As part of these settlements, MSA LLC dismissed all claims against Hartford, Travelers and Wausau in the coverage litigation in the Superior Court of the State of Delaware. 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 a Company's product. The determination of such reserves requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under warranty. The amounts of the reserves are based on established terms and the Company's best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. If actual return rates and/or repair and replacement costs differ significantly from estimates, adjustments to recognize additional cost of sales may be required in future periods. The following table reconciles the changes in the Company's accrued warranty reserve:
(In thousands) |  | Six Months Ended June 30, 2018 |  | Year Ended December 31, 2017
Beginning warranty reserve |  | $ | 14,753 |  |  | $ | 11,821 |
Warranty payments |  | (315 | ) |  | (550 | )
Warranty claims |  | 1,217 |  |  | 2,116 |
Provision for product warranties |  | (392 | ) |  | 1,366 |
Ending warranty reserve |  | $ | 15,263 |  |  | $ | 14,753 |
Warranty expense for the six months ended June 30, 2018 and 2017, was $5.5 million and $3.6 million, respectively.

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