MINERALS TECHNOLOGIES INC (MTX) FY 2022 MD&A

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement for “Safe Harbor” Purposes under the Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. This report contains statements that the Company believes may be “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements relating to the Company’s objectives, plans or goals, future actions, future performance or results of current and anticipated products, sales efforts, expenditures, and financial results. From time to time, the Company also provides forward-looking statements in other publicly-released materials, both written and oral. Forward-looking statements provide current expectations and forecasts of future events such as new products, revenues and financial performance, and are not limited to describing historical or current facts. They can be identified by the use of words such as “outlook,” “forecast,” “believes,” “expects,” “plans,” “intends,” “anticipates,” and other words and phrases of similar meaning.

Forward-looking statements are necessarily based on assumptions, estimates and limited information available at the time they are made. A broad variety of risks and uncertainties, both known and unknown, as well as the inaccuracy of assumptions and estimates, can affect the realization of the expectations or forecasts in these statements. Many of these risks and uncertainties are difficult to predict or are beyond the Company’s control. Consequently, no forward-looking statements can be guaranteed. Actual future results may vary materially. Significant factors affecting the expectations and forecasts are set forth under “Item 1A — Risk Factors” in this Annual Report on Form 10-K.

The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances that arise after the date hereof. Investors should refer to the Company's subsequent filings under the Securities Exchange Act of 1934 for further disclosures.

Executive Summary

Worldwide sales increased 14% in 2022 to $2.126 billion as compared with $1.858 billion in 2021.  Foreign exchange had an unfavorable impact on sales of $100 million or 6%.  Consolidated income from operations was $214.8 million, as compared with $235.7 million in the prior year.  Included in income from operations for 2022 was $32.6 million recorded for litigation costs to defend against, opportunistically settle, and establish a reserve for claims associated with certain talc products from the Company's Barretts Minerals Inc. subsidiary and $5.1 million of acquisition related transaction and integration costs. Included in income from operations in 2021 was $1.1 million for assets write-downs and severance-related costs and $4.0 million of acquisition related transaction and integration costs.  Net income was $122.2 million in 2022, as compared to $164.4 million in the prior year.  The Company reported diluted earnings of $3.73 per share in 2022 as compared with $4.86 per share in the prior year.

The Company refinanced its revolving credit facility and term loan in the third quarter of 2022, extending out maturities to 2027.  In connection with the refinancing, the Company incurred $6.9 million of debt extinguishment expenses.

In 2022, the Company continued to execute on its key growth initiatives driven by multi-year advancements in new product development, of geographic penetration, and growth from acquisitions.  On April 29, 2022, the Company completed the acquisition of Concept Pet, a European supplier of pet litter products.  The purchase of Concept Pet supports the expansion of our European pet care business as well as providing additional mineral reserves.

Our balance sheet continues to be strong.  Cash, cash equivalents and short-term investments were $252.8 million as of December 31, 2022.  Cash flow from operations for 2022 was $105.7 million.  The Company currently has more than $400 million of available liquidity, including cash on hand, as well as availability under its revolving credit facility. We believe these factors will allow us to meet our anticipated funding requirements. Our intention is to maintain a balanced approach to capital deployment, by using cash flow for investments in growth and continued debt reduction.

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Outlook

The Company will continue to focus on innovation and new product development and other opportunities for sales growth in 2023 from its existing businesses, as follows:

However, there can be no assurance that we will achieve success in implementing any one or more of these opportunities.

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Results of Operations

Consolidated Income Statement Review

*  Not meaningful

Net Sales

Worldwide net sales in 2022 increased 14.4% from the previous year to $2,125.5 million.  Included in net sales for 2022 are $14.7 million of net sales of Concept Pet and $70.0 million of incremental sales from our Normerica acquisition last year.  Foreign exchange had an unfavorable impact on sales of approximately $100 million or 6 percentage points. Net sales in the United States increased 18.3% to $1,135.6 million in 2022 and represented 53.0% of consolidated net sales.  International sales increased 10.1% to $989.9 million in 2022 and represented 47.0% of consolidated net sales.

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Worldwide net sales in 2021 increased 16.5% from the previous year to $1,858.3 million.  Included in net sales for 2021 are $48.6 million of net sales of Normerica.  Foreign exchange had a favorable impact on sales of approximately $27 million or 2 percentage point.  Net sales in the United States increased 16.7% to $959.6 million in 2021 and represented 52.0% of consolidated net sales. International sales increased 16.4% to $898.7 million in 2021 and represented 48.0% of consolidated net sales.

Operating Costs and Expenses

Consolidated cost of sales was $1,660.5 million, $1,411.8 million and $1,189.4 million in 2022, 2021 and 2020, respectively.  Production margin as a percentage of net sales was 21.9% in 2022, 24.0% in 2021 and 25.4% in 2020.  Production margin decreased in 2022 primarily due to timing of pricing actions relative to higher inflationary costs, including energy and other manufacturing costs as well as supply chain and logistics challenges.

Marketing and administrative costs were $192.1 million, $186.2 million and $176.5 million in 2022, 2021 and 2020, respectively.  Marketing and administrative costs as a percentage of net sales were 9.0% in 2022, 10.0% in 2021 and 11.1% in 2020.

Research and development expenses were $20.4 million, $19.5 million and $19.9 million in 2022, 2021 and 2020, respectively.  Research and development expenses as a percentage of net sales were 1.0% in 2022, 1.0% in 2021 and 1.2% in 2020.

In 2022, the Company recorded $32.6 million of litigation costs relating to costs incurred to defend against, opportunistically settle, and establish a reserve for claims associated with certain talc products from the Company's Barretts Minerals Inc. subsidiary.  In addition, the Company recorded a $5.1 million charge for acquisition related transaction and integration costs.

In 2021, the Company recorded a $1.1 million charge for asset write-downs and other restructuring costs and $4.0 million for acquisition related transaction and integration costs.

In 2020, the Company recorded a $10.4 million charge related to litigation expenses associated with the bankruptcy of Novinda Corp.  In addition, the Company recorded a $7.6 million charge for asset write-downs and other restructuring cost and $3.1 million for acquisition related transaction and integration costs.

Income from Operations

During 2022, the Company recorded income from operations of $214.8 million, as compared with $235.7 million in the prior year.  Income from operations represented 10.1% of sales compared with 12.7% of sales in the prior year.  Income from operations in 2022 included a $32.6 million charge for litigation costs relating to costs incurred to defend against, opportunistically settle, and establish a reserve for claims associated with certain talc products from the Company's Barretts Minerals Inc. subsidiary and a $5.1 million charge for acquisition related transaction and integration costs.

During 2021, the Company recorded income from operations of $235.7 million, as compared with $187.9 million in the prior year.  Income from operations represented 12.7% of sales compared with 11.8% of sales in the prior year.  Income from operations in 2021 included $1.1 million for asset write-downs and severance-related costs and $4.0 million of acquisition related transaction and integration costs.

Non-Operating Income (Deductions)

The Company recorded non-operating deductions, net of $58.1 million in 2022 as compared with $33.4 million in the previous year.

Included in non-operating deductions was net interest expense of $43.9 million in 2022 as compared to $37.2 million in the prior year, primarily due to higher interest rates. The Company recorded debt extinguishment expenses of $6.9 million related to the refinancing of its credit facilities.  In addition, the Company recorded a non-cash pension settlement charge of $3.5 million  relating to some of the Company's retirement plans in the United States.

Included in non-operating deductions was net interest expense of $37.2 million in 2021 as compared to $38.2 million in the prior year, primarily due to lower interest rates. Additionally, the Company recorded at $1.8 million non-cash pension settlement charge relating to one of the Company's retirement plans in the United States.

Provision for Taxes on Income

Provision for taxes was $32.1 million, $36.6 million and $24.4 million in 2022, 2021 and 2020, respectively.  The effective tax rates were 20.5%, 18.1% and 17.7% during 2022, 2021 and 2020, respectively.

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The U.S. Tax Cuts and Jobs Act ("U.S. Tax Reform) legislation, enacted in December 2017, established several significant changes the U.S. tax code, such as a new Global Intangible Low-Tax Income provision (“GILTI”) that currently taxes certain income from foreign operations and Foreign-Derived Intangible Income ("FDII") which is the portion of a domestic corporation's intangible income that is derived from serving foreign jurisdictions.

The higher effective tax rate in 2022 as compared to 2021 was primarily due to the impact of GILTI and the 162(m) disallowance.  The higher effective tax rate in 2021 as compared to 2020 was primarily due to tax credits in the prior year resulting from the expiration of a tax statute of limitations.

The other factors having the most significant impact on our effective tax rates in recent periods are the rate differentials related to foreign earnings indefinitely invested, percentage depletion, GILTI, FDII and the tax benefits on restructuring and impairment charges at a higher rate.

Percentage depletion allowances (tax deductions for depletion that may exceed our tax basis in our mineral reserves) are available to us under the income tax laws of the United States for operations conducted in the United States.  The tax benefits from percentage depletion were $9.6 million in 2022, $10.9 million in 2021 and $8.5 million in 2020.

The Company has elected, as its accounting policy, to treat the taxes due from GILTI as a current period expense when incurred. The net charge to the Company for GILTI was $3.5 million,  $1.2 million and $0.6 million for 2022, 2021 and 2020, respectively.

We operate in various countries around the world that have tax laws, tax incentives and tax rates that are significantly different than those of the United States.  These differences combine to move our overall effective tax rate higher or lower than the United States statutory rate depending on the mix of income relative to income earned in the United States.  The effects of foreign earnings and the related foreign rate differentials resulted in increases of $3.8 million, $5.2 million and $4.6 million in 2022, 2021 and 2020, respectively.

Consolidated Net Income Attributable to MTI Shareholders

Consolidated net income was $126.3 million in 2022 and included a $37.9 million charge, net of tax.  This charge consisted of litigation costs, acquisition related transaction and integration costs, debt extinguishment expenses and a non-cash pension settlement charge.

Consolidated net income was $168.5 million in 2021 and included a $5.3 million charge, net of tax.  This charge consisted of asset write-downs, severance-related costs, acquisition-related transaction and integration costs and a non-cash pension settlement charge.

Segment Review

The following discussions highlight the operating results for each of our three segments.

Performance Materials Segment

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2022 v 2021

Net sales in the Performance Materials segment increased 15.5% to $1,127.7 million as compared with $976.0 in the prior year.  Household, Personal Care & Specialty Products sales increased 21.8% to $560.9 million from $460.5 million the prior year. This increase is driven by strong demand for consumer-oriented products and the acquisition of Concept Pet. Included within 2022 net sales for Household, Personal Care & Specialty Products are $14.7 million of net sales for Concept Pet and $70.0 million of incremental sales from our Normerica acquisition last year.  Metalcasting’s sales increased 4.6% from $319.2 million in the prior year to $334.0 million in 2022, as strength in North America and the rest of the world offset weakness in China due to  COVID-19 related restrictions and shutdowns.  Environmental Products sales grew 27.7% on strength in remediation, wastewater and filtration activity.  Building Materials sales were 2% lower than prior year on timing of projects.

Income from operations increased $2.2 million, or 14.9% to $127.2 million in 2022 and represented 11.3% of net sales as compared to $125.0 million and 12.8% of sales in 2021.  Margin was impacted by the timing of pricing actions relative to inflationary cost increases and supply chain and logistics issues.

2021 v 2020

Net sales in the Performance Materials segment increased 18.2% to $976.0 million as compared with $825.8 in the prior year. Household, Personal Care & Specialty Products sales increased 21.1% to $460.5 million from $380.2 million the prior year. Included within 2021 net sales for Household, Personal Care & Specialty Products are $48.6 million of net sales for Normerica. The acquisition of Normerica contributed 13 percent growth versus prior year. In addition, organic sales contributed an additional 8 percent driven by strong demand for consumer-oriented products.  Metalcasting’s sales increased 23.7% from $258.1 million in the prior year to $319.2 million in 2021, primarily due to increased foundry demand across a diverse set of foundry customer end markets and continued penetration in Asia.  Environmental Products and Building Materials sales grew 3.6% and 7.3%, respectively on higher levels of project activity that yielded an increase in sales from the prior year of $4.7 million and $4.1 million, respectively.

Income from operations increased $16.2 million, or 14.9% to $125.0 million in 2021 and represented 12.8% of net sales as compared to $108.8 million and 13.2% of sales in 2020.  Margin was impacted by the timing of pricing actions relative to inflationary cost increases and operational efficiencies.

Specialty Minerals Segment

2022 v 2021

Net sales in the Specialty Minerals segment increased 12.0% to $648.4 million in 2022 from $578.9 million in 2021. Worldwide sales of PCC products increased 13.0% to $482.1 million in 2022 from $426.8 million in the prior year due to the ramp-up of new paper and packaging volumes and strong demand for specialty PCC products in construction, automotive and consumer markets.  Specialty PCC sales grew 30.2% as compared with prior year. Sales of Processed Minerals products increased 9.3% to $166.3 million in 2022 from $152.1 million in the prior year due to strength in residential construction and automotive markets.

Income from operations decreased $31.6 million, or 43.3% to $41.3 million in 2022 and represented 6.4% of net sales compared to $72.9 million and 12.6% of sales in the prior year. Included in income from operations were $32.6 million relating to costs incurred to defend against, opportunistically settle and establish a reserve for claims associated with certain talc products from the Company's Barretts Minerals Inc. subsidiary.  Operating margin was impacted by the timing of contractual and negotiated price increases relative to inflationary cost increases including energy and other manufacturing costs.

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2021 v 2020

Net sales in the Specialty Minerals segment increased 13.3% to $578.9 million in 2021 from $510.9 million in 2020. Worldwide sales of PCC products increased 13.0% to $426.8 million in 2021 from $377.7 million in the prior year due to increased paper machine operating rates, as well as the ramp-up of three new satellite plants in China, India and the U.S.  Specialty PCC sales grew 11.3% as compared with prior year driven by strength in construction and automotive markets.  Sales of Processed Minerals products increased 14.2% to $152.1 million in 2021 from $133.2 million in the prior year as demand from automotive, construction and consumer end markets remained strong.

Income from operations increased $5.1 million, or 7.5% to $72.9 million in 2021 and represented 12.6% of net sales compared to $67.8 million and 13.3% of sales in the prior year. Included in income from operations were $1.1 million of restructuring and impairment costs.  Operating margin was impacted by the timing of contractual and negotiated price increases relative to inflationary cost increases including energy and other manufacturing costs.  In addition, logistics and labor challenges impacted both sales and operating performance.

Refractories Segment

2022 v 2021

Net sales in the Refractories segment increased 15.2% to $349.4 million in 2022 from $303.4 million in the prior year  driven by improved steel market conditions, strong operating performance and new business development.

Income from operations increased $8.3 million, or 16.8% to $57.6 million and represented 16.5% of net sales in 2022 compared to $49.3 million or 16.2% of sales in 2021 due to higher sales volumes from improved steel market conditions, strong operating performance and new business development.

2021 v 2020

Net sales in the Refractories segment increased 17.6% to $303.4 million in 2021 from $258.1 million in the prior year  driven by a gradual improvement of steel mill utilization rates.  Sales of refractory products and systems to steel and other industrial applications increased 11.6% to $237.1 million from $212.3 million in the prior year and sales of metallurgical products increased 44.8% to $66.3 million from $45.8 million in the prior year.

Income from operations increased $13.8 million, or 38.9% to $49.3 million and represented 16.2% of net sales in 2021 compared to $35.5 million or 13.8% of sales in 2020 due to higher sales volumes from improved steel market conditions, strong operating performance and new business development.

Inflation

While inflation historically has not had a material impact on the Company, our financial performance was affected in 2022, and could continue to be adversely affected by increases in energy and commodity prices. Our production processes consume a significant amount of energy, primarily electricity, diesel fuel, natural gas and coal. We use diesel fuel to operate our mining and processing equipment and our freight costs are heavily dependent upon fuel prices and surcharges. Energy costs also affect the cost of raw materials. On a combined basis, these factors represent a large exposure to petrochemical and energy products which may be subject to significant price fluctuations. The contracts pursuant to which we construct and operate our satellite PCC plants generally adjust pricing to reflect the pass-through of increases in costs resulting from inflation, including lime and energy prices. However, there is a time lag before such price adjustments can be implemented. The Company and its customers will typically negotiate reasonable price adjustments in order to recover a portion of these escalating costs, but there can be no assurance that we will be able to recover increasing costs through such negotiations.

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Cyclical Nature of Customers' Businesses

The portions of our sales within Specialty Minerals, Performance Materials and Refractories segments are to customers in the paper manufacturing, metalcasting, steel manufacturing, oil and gas and construction industries, which have historically been cyclical. The pricing structure of some of our long-term PCC contracts makes our PCC business less sensitive to declines in the quantity of product purchased.  Oil and natural gas prices decreased significantly between 2014 through 2017 and again in 2020, which has caused exploration companies to reduce their capital expenditures and production and exploration activities. This has had the effect of decreasing the demand and increasing competition for the services we provide. We cannot predict the economic outlook in the countries in which we do business, nor in the key industries we serve.

Liquidity and Capital Resources

Cash provided from continuing operations in 2022 was $105.7 million, compared with $232.4 million in prior year. Cash flows from operations in 2022 were significantly lower than prior year driven by a deliberate, strategic inventory build, the impact of higher pricing on accounts receivable, and inflation on inventory and other assets. Cash flows provided from operations in 2022 were principally used to fund acquisitions and capital expenditures, repay debt, repurchase shares and to pay the Company's dividend to common shareholders. The Company’s intention is to use excess cash flow for investments in growth, continued debt reduction and selective share repurchases.

On August 11, 2022, the Company entered into a Refinancing Facility Agreement (the “Amendment”) to amend the Company’s previous credit agreement (the “Previous Credit Agreement”; the previous credit agreement, as amended by the Amendment, being the “Amended Credit Agreement”). The Amendment provides for, among other things, a new senior secured revolving credit facility with aggregate commitments of $300 million (the “Revolving Facility”), a portion of which may be used for the issuance of letters of credit and swingline loans, and a new senior secured term loan facility with aggregate commitments of $550 million (the “Term Loan Facility” and, together with the Revolving Facility, the “Senior Secured Credit Facilities”). The Revolving Facility and the Term Loan Facility replace the facilities under the Previous Credit Agreement, which provided for, among other things, a $788 million senior secured floating rate term loan facility and a $300 million senior secured revolving credit facility. The maturity date for loans under the Senior Secured Credit Facilities is August 11, 2027.

In the third quarter of 2022, the Company recorded $6.9 million in non-cash debt extinguishment expenses related to the refinancing of our credit facilities, which represents the difference between the redemption payment and the carrying value of the debt at the refinancing date. All lenders under the previous facility were repaid in full.

Loans under the Senior Secured Credit Facilities will bear interest at a rate equal to, at the election of the Company, Term SOFR plus a credit spread adjustment equal to 0.100% plus an applicable margin equal to 1.500% per annum or a base rate plus an applicable margin equal to 0.500% per annum, subject in each case to (a) an increase of 25 basis points in the event that, and for so long as, the net leverage ratio (as defined in the Amended Credit Agreement) is greater than or equal to 3.00 to 1.00 as of the last day of the preceding fiscal quarter, (b) a decrease of 12.5 basis points in the event that, and for so long as, the net leverage ratio is less than 2.00 to 1.00 and greater than or equal to 1.00 to 1.00 as of the last day of the preceding fiscal quarter and (c) an decrease of 25 basis points in the event that, and for so long as, the net leverage ratio is less than 1.00 to 1.00 as of the last day of the preceding fiscal quarter.  The Company will pay certain fees under the Amended Credit Agreement, including (a) a commitment fee of 0.250% per annum on the undrawn portion of the Revolving Facility (subject to a step-up to 0.300% and step-downs to 0.175% and 0.150% at the same levels described above), (b) a fronting fee of 0.125% per annum on the average daily undrawn amount of, plus unreimbursed amounts in respect of disbursements under, letters of credit issued under the Revolving Facility and (c) customary annual administration fees. The obligations of the Company under the Senior Secured Credit Facilities are unconditionally guaranteed jointly and severally by, subject to certain exceptions, all material domestic subsidiaries of the Company (the “Guarantors”) and secured, subject to certain exceptions, by a security interest in substantially all of the tangible and intangible assets of the Company and the Guarantors.

As of December 31, 2022, there were $115.0 million in loans and $10.5 million in letters of credit outstanding under the Revolving Facility.

On June 30, 2020, the Company issued $400 million aggregate principal amount of 5.0% Senior Notes due 2028 (the “Notes”).  The Notes were issued pursuant to an indenture, dated as of June 30, 2020, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Indenture”).  The Notes bear an interest rate of 5.0% per annum payable semi-annually on January 1 and July 1 of each year, beginning on January 1, 2021.  The Notes are unconditionally guaranteed on a senior unsecured basis by each of the Company’s existing and future wholly owned domestic restricted subsidiaries that is a borrower under or that guarantees the Company’s obligations under its Senior Secured Credit Facilities or that guarantees the Company’s or any of the Company’s wholly owned domestic subsidiaries’ long-term indebtedness in an aggregate amount in excess of $50 million.

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At any time and from time to time prior to July 1, 2023, the Company may redeem some or all of the Notes for cash at a redemption price equal to 100% of their principal amount, plus the “make-whole” premium described in the Indenture and accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. Beginning on July 1, 2023, the Company may redeem some or all of the Notes at any time and from time to time at the applicable redemption prices listed in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, at any time and from time to time prior to July 1, 2023, the Company may redeem up to 40% of the aggregate principal amount of the Notes with funds from one or more equity offerings at a redemption price equal to 105% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.

If the Company experiences a change of control (as defined in the indenture), the Company is required to offer to repurchase the Notes at 101% of the principal amount of such Notes, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.

The Amended Credit Agreement and the Indenture both contain certain customary affirmative and negative covenants that limit or restrict the ability of the Company and its restricted subsidiaries to enter into certain transactions or take certain actions, as well as customary events of default. In addition, the Amended Credit Agreement contains financial covenants that require the Company to maintain, as of the last day of any fiscal quarter, (x) a maximum net leverage ratio (as defined in the Amended Credit Agreement) of 4.00 to 1.00 for the four fiscal quarter period preceding such day (subject to an increase to 5.00 to 1.00 for four quarters in connection with certain significant acquisitions) and (y) a minimum interest coverage ratio (as defined in the Amended Credit Agreement) of 3.00 to 1.00. The Company is in compliance with all the covenants contained in the Amended Credit Agreement throughout the period covered by this report.

As part of the Company's acquisition of Sivomatic in 2018, the Company assumed $10.7 million in long-term debt, recorded at fair value, consisting of two term loans, one of which matured in the third quarter of 2020 and the other of which matured in the first quarter of 2022.  During 2022, the Company repaid $0.2 million on this loan.

The Company has a committed loan facility in Japan. As of December 31, 2022, there was an outstanding balance of $2.0 million on this facility.  Principal will be repaid in accordance with the payment schedule ending in 2026.  The Company repaid $0.5 million on these loans in 2022.

As part of the Concept Pet acquisition, the Company assumed $1.9 million in long-term debt, recorded at fair value, consisting of two terms loans, one that matures in 2025 and one that matures in 2027.  Both loans have annual payments and carry a variable interest rate.

As of December 31, 2022, the Company had $25.3 million in uncommitted short-term bank credit lines, $4.7 million of which were in use. The credit lines are primarily outside the U.S. and are generally one year in term at competitive market rates at large, well-established institutions.  The Company typically uses its available credit lines to fund working capital requirements or local capital spending needs.  We anticipate that capital expenditures for 2023 should be between $80 million and $90 million, principally related to opportunities to improve our operations and meet our strategic growth objectives. We expect to meet our other long-term financing requirements from internally generated funds, committed and uncommitted bank credit lines and, where appropriate, project financing of certain satellite plants.

During the second quarter of 2018, the Company entered into a floating to fixed interest rate swap for a notional amount of $150 million.  The fair value of this instrument at December 31, 2022 is an asset of $1.0 million. Additionally, the Company entered into a cross currency rate swap with a total notional value of $150 million to exchange monthly fixed-rate interest rate payments in U.S. dollars for monthly fixed-rate interest rate payments in Euros.  The fair value of this instrument at December 31, 2022 is an asset of $13.8 million. These swaps mature in May 2023.  As a result of these swaps, the Company's effective fixed interest rate on the notional floating rate indebtedness will be 2.5%.

In addition to long-term debt, the Company has committed cash outflow related to pension and post-retirement benefit obligations, non-cancelable operating leases, primarily for office space and equipment, and other long-term contractual obligations. Other long-term liabilities include tax liabilities, including contingent obligations associated with gross unrecognized tax benefits for uncertain tax positions and a tax liability for the one-time transition tax on accumulated foreign subsidiary earnings under U.S. Tax Reform, asset retirement obligations relating to the retirement of certain tangible long-lived assets and land restoration obligations at the Company’s PCC satellite facilities and mining operations.  See Notes 2, 8, 15, 16 and 20 to the Consolidated Financial Statements.

On October 20, 2021, the Company's Board of Directors authorized the Company's management to repurchase, at its discretion, up to $75 million of the Company's shares over a one-year period.  Over this program's one-year period, 1,027,768 shares were repurchased for $67.8 million, or an average price of approximately $65.99 per share.  This program is now complete.

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On January 25, 2023, the Company's Board of Directors declared a regular quarterly dividend on its common stock of $0.05 per share.  No dividend will be payable unless declared by the Board and unless funds are legally available for payment thereof.

The Company and certain of the Company’s subsidiaries are among numerous defendants in over four hundred cases seeking damages for alleged exposure to asbestos-containing materials related to talc products sold by the Company’s subsidiary Barretts Minerals Inc.  Based on its evaluation of available information, the Company accrued $31 million for litigation costs during the third quarter of 2022.  The litigation costs were incurred to defend against, opportunistically settle, and establish a reserve for such cases. The Company’s position is that these cases are meritless, and all talc products sold by Barretts Minerals Inc. are safe.  However, we cannot predict the ultimate outcome of pending litigation. The Company could in the future be required to pay significant amounts as a result of settlements or judgments in these matters, potentially in excess of liabilities accrued to date.  See Note 17 to the consolidated financial statements included in this report for more information.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, valuation of long-lived assets, goodwill and other intangible assets, income taxes, including valuation allowances and pension plan assumptions. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that cannot readily be determined from other sources.  There can be no assurance that actual results will not differ from those estimates.

We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements.

Revenue Recognition

Revenue is recognized at the point in time when the customer obtains control of the promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services.  The Company's revenues are primarily derived from the sale of products.  Our primary performance obligation is satisfied upon shipment or delivery to our customer based on written sales terms, which is also when control is transferred.   Revenue, where our performance obligations are satisfied in phases, is recognized over time using certain input measures based on the measurement of the value transferred to the customer, including milestones achieved.  Revenues from sales of equipment are recorded upon completion of installation and transfer of control to the customer.   Revenues from services are recorded when the services are performed.

In most of our PCC contracts, the price per ton is based upon the total number of tons sold to the customer during the year. Under those contracts, the price billed to the customer for shipments during the year is based on periodic estimates of the total annual volume that will be sold to the customer. Revenues are adjusted at the end of each year to reflect the actual volume sold. There were no significant revenue adjustments in the fourth quarter of 2022 and 2021, respectively. We have consignment arrangements with certain customers in our Refractories segment.  Revenues for these transactions are recorded when the consigned products are consumed by the customer.

Valuation of Long-lived Assets, Goodwill and Other Intangible Assets

We assess the possible impairment of long-lived assets and identifiable amortizable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Goodwill is evaluated for impairment at least annually.  Factors we consider important that could trigger an impairment review include the following:

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Annually, the Company performs a qualitative assessment for each of its reporting units to determine if the two-step process for impairment testing is required.  If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company then evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level.  Step one involves a) developing the fair value of total invested capital of each reporting unit in which goodwill is assigned; and b) comparing the fair value of total invested capital for each reporting unit to its carrying amount, to determine if there is goodwill impairment.  Should the carrying amount for a reporting unit exceed its fair value, then the step one test is failed, and the magnitude of any goodwill impairment is determined under step two.  The amount of impairment loss is determined in step two by comparing the implied fair value of reporting unit goodwill with the carrying amount of goodwill.

The Company has four reporting units; Performance Materials, PCC, Processed Minerals and Refractories. We identify our reporting units by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available, and management regularly reviews the operating results of those components.  In the fourth quarter of 2022, the Company performed a qualitative assessment of each of its reporting units and determined it was not more likely than not that the fair value of any of its reporting units was less than their carrying values.

Property, plant and equipment are depreciated over their useful lives. Useful lives are based on management’s estimates of the period that the assets can generate revenue, which does not necessarily coincide with the remaining term of a customer’s contractual obligation to purchase products made using those assets.  Our sales of PCC are predominately pursuant to long-term evergreen contracts, initially ten years in length, with paper mills at which we operate satellite PCC plants.  The terms of many of these agreements have been extended, often in connection with an expansion of the satellite PCC plant.  Failure of a PCC customer to renew an agreement or continue to purchase PCC from our facility could result in an impairment of assets or accelerated depreciation at such facility.

We evaluate the recoverability of our property, plant and equipment whenever events or change in circumstances indicate that the carrying value of the assets may not be recoverable.  For testing the recoverability, we primarily use discounted cash flow models or cost approach to estimate the fair value of these assets.  Critical assumptions used in conducting these tests included expectations of our business performance and financial results, useful lives of assets, discount rates and comparable market data.

When we acquire a company, we determine fair value on the acquisition date of assets acquired and liabilities assumed.  We use the income, market or cost approach (or a combination thereof) for the valuation and use valuation inputs and analyses that are based on market participant assumptions. Changes in assumptions can have a significant impact on the fair value of tangible assets. Goodwill is calculated as the excess of the consideration transferred over the assets acquired and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate.  This process involves estimating current tax expense together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet.  We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance.  To the extent we establish a valuation allowance or change this allowance in a period, we must include an expense within the tax provision in the Consolidated Statements of Income.

Deferred tax liabilities represent the amount of income taxes payable in future periods.  Such liabilities arise because of temporary differences between the financial reporting and tax bases of assets and liabilities.  Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years.  Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating losses.  We evaluate the recoverability of these future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences and forecasted operating earnings.  These sources of income inherently rely heavily on estimates. We use our historical experience and business forecasts to provide insight.  The amount recorded for the net deferred tax liability was $156.0 million and $165.1 million at December 31, 2022 and 2021, respectively.

The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations. See Note 8 to the Consolidated Financial Statements for additional detail on our uncertain tax positions.

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Pension Benefits

We sponsor pension and other retirement plans in various forms covering the majority of employees who meet eligibility requirements.  Several statistical and actuarial models which attempt to estimate future events are used in calculating the expense and liability related to the plans.  These models include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by us, within certain guidelines.  Our assumptions reflect our historical experience and management's best judgment regarding future expectations.  In addition, our actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate these assumptions.  The actuarial assumptions used by us may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, or longer or shorter life spans of participants, among other things.

The investment strategy for pension plan assets is to maintain a broadly diversified portfolio designed to both preserve and grow plan assets to meet future plan obligations. The Company's average rate of return on assets from inception through December 31, 2022 was approximately 9%.  The Company’s assets are strategically allocated among equity, debt and other investments to achieve a diversification level that dampens fluctuations in investment returns.  The Company’s long-term investment strategy is an investment portfolio mix of approximately 55%-65% in equity securities, 30%-35% in fixed income securities and 0%-15% in other securities.  As of December 31, 2022, the Company had approximately 54% of its pension assets in equity securities, 32% in fixed income securities and 14% in other securities.

The Company recognized pension expense of $4.9 million in 2022 as compared to $9.1 million in 2021.  Accounting guidance on retirement benefits requires companies to discount future benefit obligations back to today’s dollars using a discount rate that is based on high-quality fixed-income investments.  A decrease in the discount rate increases the pension benefit obligation, while an increase in the discount rate decreases the pension benefit obligation.  This increase or decrease in the pension benefit obligation is recognized in Accumulated other comprehensive income (loss) and subsequently amortized into earnings as an actuarial gain or loss.  The guidance also requires companies to use an expected long-term rate of return on plan assets for computing current year pension expense.  Differences between the actual and expected returns are also recognized in Accumulated other comprehensive income (loss) and subsequently amortized into earnings as actuarial gains and losses.  At the end of 2022, total actuarial losses recognized in Accumulated other comprehensive income (loss) for pension plans were ($38.1) million as compared to ($73.3) million in 2021.  The majority of the actuarial losses were due to decreases in the discount rate and lower actual rates of return on assets than expected during the financial crisis of 2008.

A net gain of $46.3 million ($35.3 million after-tax) primarily due to actuarial gains, driven by a change in discount rates is included in other comprehensive income in 2022. In 2021, a net gain of $60.6 million ($45.2 million after-tax) was recorded in other comprehensive income, primarily due to a change in discount rates. In 2020, a net loss of $24.5 million ($18.7 million after-tax) was recorded in other comprehensive income, primarily due to a change in discount rates and updated mortality tables.

Actuarial losses for pensions will be impacted in future periods by actual asset returns, discount rate changes, actual demographic experience and other factors that impact these expenses.  These losses, reported in Accumulated other comprehensive income (loss), will generally be amortized as a component of net periodic benefit cost on a straight-line basis over the average remaining service period of active employees expected to receive benefits under the benefit plans.  At the end of 2022, the average remaining service period of active employees or life expectancy for fully eligible employees was 9 years.

For a detailed discussion on the application of these and other accounting policies, see "Summary of Significant Accounting Policies" in Note 1 to the Consolidated Financial Statements. This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report.

Recently Issued Accounting Standards

Changes to accounting principles generally accepted in the United States of America (U.S. GAAP) are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASUs) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. All recently issued ASUs were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position and results of operations.