Good day, and welcome to the MSA Safety special call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please also note this event is being recorded. I would now like to turn the conference over to Chris Hepler. Please go ahead.
Good morning, and welcome to today's webcast regarding the divestiture we announced yesterday afternoon. This is Chris Hepler, Executive Director of Corporate Development and Investor Relations. I'm here with Nish Vartanian, Chairman, President, and CEO, and Lee McChesney, Senior Vice President and CFO. Before we begin, I'd like to remind everyone that the matters discussed during this call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to all projections and anticipated levels of future performance. Forward-looking statements involve a number of risks, uncertainties, and other factors that may cause our actual results to differ materially from those discussed today. These risks, uncertainties, and other factors are detailed in our SEC filings. MSA Safety undertakes no duty to publicly update any forward-looking statements made on this call except as required by law.
We have included certain non-GAAP financial measures as part of our discussion this morning. The non-GAAP reconciliations are included in the appendix of today's presentation. The presentation and the press release regarding the transaction are available on our investor relations website at investors.msasafety.com. A replay of this conference call will be made available later today. Following our prepared remarks, we will open a call for questions. At this time, I'll turn the call over to Nish.
Thanks, Chris, good morning, everyone. We're here today to discuss the transaction and how it helps position MSA Safety for sustained success in the next stage of our journey. First, I'd like to thank the MSA team for their unwavering dedication to our mission to keep both our associates and our customers safe. MSA Safety is the leading global safety technology company. For over 100 years, we've designed and manufactured safety products and solutions. Today, MSA is an enterprise with 4,800 employees and approximately $1.5 billion in sales. Since our founding in 1914, we've grown into a company with leading positions across firefighter safety, gas detection, and industrial personal protective equipment sold around the world in a broad range of markets. These diversified markets are characterized by steady demand and resilient organic growth.
Safety is a growing sector and is far less cyclical than broad industrial spending, given the many mission-critical applications. We augment that foundation of stable demand and organic growth through focused reinvestment in innovation that is complemented by disciplined inorganic growth to strengthen our customer value proposition. In the last few years, we've worked to build on our foundational strengths to accelerate our value creation engine. We invest more than $60 million in R&D each year, and that has translated to an industry-leading product vitality of approximately 35%. We complemented our organic growth by investing approximately $400 million in recent acquisitions to acquire Bacharach and Bristol Uniforms, both of which build on our core platforms of gas detection and firefighter safety. I'm encouraged by our rich history and recent progress.
I believe that this transaction is another step toward creating value for all of our stakeholders. I'll now turn the call over to Lee, who will talk about the transaction in more detail.
Thanks, Nish. On slide 5, we have an overview of the transaction. As we announced yesterday, we sold a wholly owned subsidiary holding legacy product liability claims related to coal dust, asbestos, silica, and other exposures to a joint venture between R&Q Insurance Holdings and Obra Capital. R&Q is an insurance company with a proven track record of managing legacy liability matters. Obra is an investment firm with a history of focusing on insurance special situations. Together, they have directly applicable capabilities. The R&Q and Obra joint venture acquired 100% of the equity interest of the divested subsidiary. At the time of the transaction, the subsidiary held legacy product liabilities along with related insurance and deferred tax assets. At closing, the divested subsidiary was capitalized with $376 million in cash and cash equivalents.
We contributed $341 million in cash and cash equivalents, while R&Q and Obra contributed an additional $35 million. We financed the transaction through available cash and cash equivalents and $315 million of incremental borrowings, inclusive of a new $250 million term loan facility. The term loan was arranged with our existing bank group, and the terms are similar to our existing credit facility. The completion of the transaction, which closed yesterday, will result in MSA's pro forma net debt adjusted EBITDA rising to 2.4x . We anticipate that excess free cash flow in the next 12 months to 18 months will be used for deleveraging. Importantly, all current operations have been retained, and there's no impact to our revenue as a result of the transaction. The benefits of this transaction align well with MSA's value creation strategy.
The divestiture reduces MSA Safety's risk profile as these legacy product liability claims were subject to inherent risks and uncertainties. Further, as a result of the transaction, our balance sheet will be meaningfully simplified through the elimination of associated claims reserve and related insurance and tax assets. The elimination of the costs associated with defending and settling claims results in improved certainty and clarity around future free cash flow to reinvest in our business. Lastly, the management team can enhance its focus on executing our growth strategy to drive long-term value creation. Moving on to slide 6. Gaining the benefits of a clearer and more predictable forward cash flow profile does require an investment. As mentioned, funding the divestment will temporarily increase MSA's net leverage to 2.4x based on the incremental borrowing.
We will prioritize deleveraging and anticipate returning to our historical leverage range within 12 months - 18 months. We have a long history of flexing our balance sheet to complete important transactions, followed by disciplined deleveraging, and we see this transaction following that same historical pattern. We expect the continued strong operating cash flow performance and our investment in inventories during 2022 will serve as an additional cash flow opportunity in the year ahead as supply chains normalize. However, it is worth noting the accounting for this transaction is expected to result in a GAAP loss in Q1 of 2023. We remain deeply committed to our decades-long track record of paying a dividend and after our initial debt paydown, believe that our capital allocation flexibility will be augmented by our more predictable cash flow profile. With that, I will hand the call back to Nish.
Moving to slide 7. As Lee discussed, today's transaction supports greater cash flow predictability, further strengthening continued investment in each aspect of our of our growth engine. We drive steady and profitable organic growth through our market leading portfolio, which we enhance with strategic acquisitions. We combine that with a commitment to operational excellence and our resilient balance sheet and strong cash generation fund these investments. It's a disciplined strategy as we remain focused on providing industry leading safety technologies. Moving to slide 8. I'm inspired by the future prospects for MSA. We're committed to driving superior results for our shareholders as we deliver on our mission of safety. As we've discussed throughout this presentation, the benefits of reduced risk, balance sheet simplification, and greater cash flow predictability provided by this transaction are highly supportive of our strategy.
This transaction is another step in our journey to make our company, our associates, and our customers fit for the future. We appreciate you joining us today. We'll now open up the call for any questions you may have.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question will be from Stanley Elliott with Stifel. Please go ahead.
Hey, good morning, everyone. Thank you guys for taking the call.
Good morning, Stanley. Thanks for calling.
I guess just to start it off, was there any reason why you guys decided to do this now? You've had kind of the liabilities out there for some time. Was there anything you were seeing in trends with, you know, claims picking up or anything along those lines? Just curious how you came to the decision.
You know, Stanley, we continuously evaluate strategies for managing these, you know, liabilities held by our subsidiary. You know, we observe that the, you know, the growing market interest for legacy liability transactions and ultimately decided to run a process and, you know, with the help of some professional advisors, obviously. You know, that process that we ran, which was a thorough process, resulted in the transaction that we announced yesterday. We're very pleased with the conclusion of this process and believe that, you know, R&Q and Obra are well qualified to manage the assets and liabilities held by the divested subsidiary.
You know, in the release, you all mentioned, you know, leverage 2.4 and paying that down and then organic and then inorganic investments. Should we think that the M&A part of the strategy right now will take a bit of a pause as you make some progress on the leverage? It's totally manageable, but just curious how you're thinking about balancing all of those moving parts.
Correct, Stanley. The leverage is very manageable for us. We think that we can pay that down in 12 months to 18 months. I think it's safe to say that for any major acquisitions, you know, we're out of that for a period of time. We're just gonna focus on paying that debt down and hopefully in a short period of time, be back in the game for another significant acquisition like we made with Bacharach or some other. We're gonna focus on paying down this debt and we're gonna continue to work that pipeline when it comes to acquisitions. You know, there's a, you know, pipeline we have out there, and we'll continue to work that.
I think I would also add, Stanley. Go ahead, Stan.
Yeah. Oh, I was gonna say, go ahead. I have one more follow-up.
I was just gonna add to Nish's point that, you know, for this year, you know, the threshold to do a deal is pretty high anyway. You know, this is also another reason why the timing's, you know, good timing to do this as well. You know, we're gonna still be very actively involved in the market and, you know, we'll be ready to go. Again, we're very confident that we'll be able to deleverage here like we have in the past.
Lastly, you mentioned, you know, better predictability on the cash flow. The cash flow is a big question on. Is there anything else in terms of the P&L impact, like, you know, was there, you know, expense in the SG&A line or anything like that going to roll off, just trying to kind of fine-tune the estimate?
I mean, a couple of things. Obviously we'll be taking out this incremental debt. Probably the first thing to think about is just the interest related to that. There'll be about $20 million of interest in 2023 related to the incremental debt. You know, obviously the faster we work it down, that number could come down. I'd also note, Stanley, you know, that is directly linked to this transaction. Just with the higher interest rates, we're also gonna see about $10 million just on our existing debt before. You're gonna see about a $50 million interest charge in 2023.
Obviously, you know, as we'll talk about in another month, we'll talk to you about, you know, how it all balances out with what we think we can do in growth and margin expansion and things like that. You know, there is, you know, some benefit potentially that comes, but from the transaction, but it's pretty neutral for 2023 is kind of my perspective for you.
Thanks, guys. Appreciate the time and, congratulations.
Thank you, Stanley.
Once again, if you have a question, please press star then one. The next question will be from Rob Mason from Baird. Please go ahead.
Yes, good morning, thanks for hosting the call on this. Just a couple of detailed questions. I think you covered a lot of ground already. There was mention during last year of a structured settlement also related to the liabilities, and I think that the amount talked about was around $26 million. Does this agreement supersede that, or did that settlement also take place?
Rob, I think the answer to your question on that is if I'm taking it in the way you're asking it, that goes along with the transaction. So that one-
Okay.
... Is over. Yes.
That cash did not get paid out, in other words, in 2022.
Yeah. That's correct.
Okay. Okay. The, also in your filings, you've referenced. I'm assuming that the entity that the subsidiary that sold here is MSA LLC. And also there was mention of Globe LLC in past filings as well. Does anything tied to Globe LLC also go with this transaction?
No, this is, all, MSA LLC, which was, you know, housed in the Jacksonville facility.
Okay.
I think the way to think about it is anything that, you know, with legacy product lines is part of what's in the Q and K references. Anything we still do business with, you know, so as, you know, as we go forward, single point product liability, things like that's part of our business on a go forward basis.
Understood. Okay. Just maybe last question is, I think I can tease out, you know, some of the value, the balance sheet, values on the asset liability side, reserve side. What was, what's the amount of, deferred tax assets that are going with the transaction?
Yeah. We just filed the full, document to it. It's about $75 million, Rob.
Okay.
You're gonna see approximately about a $200 million GAAP loss in Q1 from this transaction.
Very good. Okay. Very good. You know, maybe I'll take a shot at this, you know, public forum. Nish, just, you know, any comment on business trends as you exited the year?
Yeah. You know, we're in a quiet period right now, as you know. You know, we're looking forward to February when we can announce the Q4 results and looking forward to visiting with you on that call.
Very good. I'll join in then. Thank you.
You bet. Thanks for calling in, Rob.
Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Chris Hepler for any closing remarks.
Thank you for joining us this morning. If you missed a portion of the conference call, a replay will be available on our investor relations website for the next 90 days. We look forward to speaking with you again soon. Thanks for joining.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.