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Item 1A. Risk Factors

2021-02-19 compared with 2020-02-20 · 104 added, 83 removed, 128 unchanged (59% of the section changed)

Claims of injuries from our products, product defects or recalls of our products could have a material adverse effect on our business, operating results, financial condition and liquidity.

MSA and its subsidiaries 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.

In the event the parties using our products are injured or any of our products prove to be defective, we could be subject to claims with respect to such injuries.

In addition, we may be required to or may voluntarily recall or redesign certain products that could potentially be harmful to end users.

Any claim or product recall that results in significant expense or negative publicity against us could have a material adverse effect on our business, operating results, financial condition and liquidity, including any successful claim brought against us in excess or outside of available insurance coverage.

Our subsidiary, Mine Safety Appliances Company, LLC, may experience losses from cumulative trauma product liability claims.

The inability to collect insurance receivables and the transition to becoming largely self-insured for cumulative trauma product liability claims could have a material adverse effect on our business, operating results, financial condition and liquidity.

Our subsidiary, Mine Safety Appliances Company, LLC (“MSA LLC”) was named as a defendant in 1,605 cumulative trauma lawsuits comprised of 2,456 claims at December 31, 2019 .

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.

The products at issue were manufactured many years ago and are not currently offered by MSA LLC.

A reserve has been established with respect to estimated amounts for cumulative trauma product liability claims currently asserted but not yet resolved and incurred but not reported (“IBNR”) cumulative trauma product liability claims.

Because our cumulative trauma product liability risk is subject to inherent uncertainties, including unfavorable trial rulings or developments, an increase in newly filed claims, or more aggressive settlement demands, and since MSA LLC is largely self-insured, there can be no certainty that MSA LLC may not ultimately incur losses in excess of presently recorded liabilities.

These losses could have a material adverse effect on our business, operating results, financial condition and liquidity.

We will adjust the reserve from time to time based on whether the actual numbers, types and settlement values of claims asserted differ from current projections and estimates or there are significant changes in the facts underlying the assumptions used in establishing the reserve.

Each of these factors may increase or decrease significantly within an individual period depending on, among other things, the timing of claims filings or settlements, or litigation outcomes during a particular period that are especially favorable or unfavorable to MSA LLC.

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.

Any future adjustments to the reserve may be material and could materially impact future periods in which the reserve is adjusted.

In the normal course of business, MSA LLC makes payments to settle these types of cumulative trauma product liability claims and for related defense costs, and records receivables for the amounts believed to be recoverable under insurance.

MSA LLC has recorded insurance receivables totaling $63.8 million and notes receivables of $56.0 million at December 31, 2019 .

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.

Various factors could affect the timing and amount of recovery of the insurance receivables, including assumptions regarding claims composition (which are relevant to calculating reimbursement under the terms of certain Coverage-In-Place Agreements) and the extent to which the issuing insurers may become insolvent in the future.

RISKS RELATED TO ECONOMIC, MARKET AND COMPETITIVE CONDITIONS

Unfavorable economic and market conditions could materially and adversely affect our business, results of operations and financial condition.

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It is possible that the volatility in the oil, gas and petrochemical industry could negatively impact our business and could result in declines in our consolidated results of operations and cash flow.

Pandemics or disease outbreaks, such as COVID-19, may cause unfavorable economic or market conditions which could impact demand patterns and/or disrupt global supply chains and manufacturing operations.

Collectively, these outcomes could materially and adversely affect our business, results of operations and financial condition.

Pandemics or disease outbreaks such as the novel coronavirus (COVID-19) could result in a widespread health crisis that could adversely affect the economies of developed and emerging markets, potentially resulting in an economic downturn that could affect customers’ demand for our products in certain industrial-based end-markets.

The spread of pandemics or disease outbreaks may also disrupt the Company’s manufacturing operations, supply chain, or logistics necessary to import, export and deliver products to our customers.

During a pandemic or crisis, applicable laws and response directives could, in some circumstances, adversely affect our ability to operate our plants, or to deliver our products in a timely manner.

Some laws and directives may also hinder our ability to move certain products across borders.

Economic conditions can also influence order patterns.

These factors could negatively impact our consolidated results of operations and cash flow.

A reduction in the spending patterns of government agencies or delays in obtaining government approval for our products could materially and adversely affect our net sales, earnings and cash flow.

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A significant reduction in available government funding could result in declines in our consolidated results of operations and cash flow.

The markets in which we compete are highly competitive, and some of our competitors have greater financial and other resources than we do.

The competitive pressures faced by us could materially and adversely affect our business, results of operations and financial condition.

The safety products market is highly competitive, with participants ranging in size from small companies focusing on single types of safety products, to large multinational corporations that manufacture and supply many types of safety products.

Our main competitors vary by region and product.

We believe that participants in this industry compete primarily on the basis of product characteristics (such as functional performance, technology, cost of ownership, comfort, design and style), price, service and delivery, customer support, the ability to meet the special requirements of customers, brand name trust and recognition, and e-business capabilities.

Some of our competitors have greater financial and other resources than we do and our business could be adversely affected by competitors’ new product innovations, technological advances made to competing products and pricing changes made by us in response to competition from existing or new competitors.

We may not be able to compete successfully against current and future competitors and the competitive pressures faced by us could have a material adverse effect our business, consolidated results of operations and financial condition.

In addition, e-business is a rapidly developing area, and the execution of a successful e-business strategy involves significant time, investment and resources.

If we are unable to successfully expand e-business capabilities in support of our customer needs, our brands may lose market share, which could negatively impact revenue and profitability.

RISKS RELATED TO LEGAL AND REGULATORY CHALLENGES

Claims of injuries from products, product defects or recalls of products against our various subsidiaries could have a material adverse effect on our business, operating results, financial condition and liquidity.

MSA and its subsidiaries face an inherent business risk of exposure to product liability claims.

In the event the parties using our products are injured or any of our products prove to be defective, we could be subject to claims with respect to such injuries.

In addition, we may be required to or may voluntarily recall or redesign certain products that could potentially be harmful to end users.

Our subsidiaries, including Mine Safety Appliances Company, LLC, may experience losses from product liability claims.

Losses from product liability claims could have a material adverse effect on our business, operating results;

financial condition and liquidity, which could introduce volatility from period-to-period in our financial results.

From time to time, product liability claims are made against our various subsidiaries for current or historical products.

In most instances the products at issue were manufactured many years ago and are not currently offered for sale.

One subsidiary, Mine Safety Appliances Company, LLC (“MSA LLC”) was named as a defendant in 1,622 cumulative trauma lawsuits comprised of 2,878 claims at December 31, 2020.

A reserve has been established with respect to estimated amounts for cumulative trauma product liability claims currently asserted and incurred but not reported (“IBNR”) cumulative trauma product liability claims.

Because our cumulative trauma product liability risk is subject to inherent uncertainties, and since MSA LLC is largely self-insured, there can be no certainty that MSA LLC may not ultimately incur losses in excess of presently recorded liabilities.

These factors may develop over time or may be the result of sudden unfavorable events within a single reporting period.

Associated losses could have a material adverse effect on our business, operating results, financial condition and liquidity, or could result in volatility from period to period.

We will adjust the reserve from time to time based on developments in MSA LLC's actual claims experience, the claims environment or other significant changes in the factors underlying the assumptions used in establishing the reserve.

Any future adjustments to the reserve may be material and could materially impact future periods in which the reserve is adjusted.

MSA LLC has recorded insurance receivables totaling $97.0 million and notes receivables of $52.3 million at December 31, 2020.

Since MSA LLC is now largely self-insured for cumulative trauma claims, additional amounts recorded as insurance receivables will be limited.

Amounts recorded as insurance receivables are based on the amount of future losses presently recorded in the cumulative trauma product liability reserve.

These projected future losses are used to calculate contingent reimbursements deemed probable of collection under negotiated Coverage-in-Place Agreements.

Reimbursements are calculated based on modeled assumptions, including claims composition, claims characteristics, and timing (each of which are relevant to calculating reimbursement under the terms of Coverage-In-Place Agreements).

These factors, and the potential for future insurer insolvencies, could affect the timing and amount of receivables actually collected in any given period or in total.

Our ability to market and sell our products is subject to existing government laws, regulations and standards.

Changes in such laws, regulations and standards or our failure to comply with them could materially and adversely affect our results of operations.

Most of our products are required to meet performance and test standards designed to protect the safety of people and infrastructures around the world.

Our inability to comply with these standards could result in declines in revenue, profitability and cash flow.

Changes in laws and regulations could reduce the demand for our products or require us to re-engineer our products, thereby creating opportunities for our competitors.

Regulatory approvals for our products may be delayed or denied for a variety of reasons that are outside of our control.

Additionally, market anticipation of significant new standards can cause customers to accelerate or delay buying decisions.

We are subject to various federal, state and local laws and regulations across our global organization and any violation of these laws and regulations could adversely affect our results of operations.

We are subject to numerous, and sometimes conflicting, laws and regulations on matters as diverse as anti-corruption, import/export controls, product content requirements, trade restrictions, tariffs, taxation, sanctions, internal and disclosure control obligations, securities regulation, anti-competition, data privacy, Brexit changes and labor relations, among others.

This includes laws and regulations in emerging markets where legal systems may be less developed or familiar to us.

Compliance with diverse legal requirements is costly, time consuming and requires significant resources.

Violations of one or more of these laws or regulations in the conduct of our business could result in significant fines, criminal sanctions against us or our officers, prohibitions on doing business and damage to our reputation.

These actions could result in liability for significant monetary damages, fines and/or criminal prosecution, unfavorable publicity and other reputational damage and have a material adverse effect on our business, consolidated results of operations and financial condition.

We are subject to various environmental laws and any violation of these laws could adversely affect our results of operations.

Included in the extensive laws, regulations and ordinances, to which we are subject, are those relating to the protection of the environment.

Examples include those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes and the maintenance of a safe workplace.

These laws impose penalties for noncompliance and liability for response costs and certain damages resulting from past and current spills, disposals, or other releases of hazardous materials.

We could incur substantial costs as a result of noncompliance with or liability for cleanup pursuant to these environmental laws.

Such laws continue to change, and we may be subject to more stringent environmental laws in the future.

If more stringent environmental laws are enacted, these future laws could have a material adverse effect on our business, consolidated results of operations and financial condition.

We are subject to various U.S and foreign tax laws and any changes in these laws related to the taxation of businesses and resolutions of tax disputes could adversely affect our results of operations.

Congress, the Organization for Economic Co-operation and Development (or, OECD) and other government agencies in jurisdictions in which we and our affiliates invest or do business have maintained a focus on issues related to the taxation of multinational companies.

The OECD has changed numerous long-standing tax principles through its base erosion and profit shifting (“BEPS”) project which could adversely impact our effective tax rate.

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

While we believe our tax positions will be sustained, the final outcome of tax audits and related litigation may differ materially from the tax amounts recorded in our consolidated financial statements, which could have a material adverse effect on our consolidated results of operations, financial condition and cash flows.

RISKS RELATED TO SUPPLY AND MANUFACTURING

Our future results are subject to the risk that purchased components and materials are unavailable or available at excessive cost due to material shortages, excessive demand, currency fluctuation, inflationary pressure and other factors.

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It is also possible that other major productivity and streamlining programs may be required in the future.

RISKS RELATED TO NEW AND ADJACENT INITIATIVES

Our plans to improve future profitability through restructuring programs may not be successful and could lead to unintended consequences.

We have incurred and may incur restructuring charges primarily related to severance costs for staff reductions associated with our ongoing initiatives to drive profitable growth and right size our operations.

For example in 2016, certain employees in the Americas segment were offered a voluntary retirement incentive package (“VRIP”).

Non-cash special termination benefit expense of approximately $11.4 million was recorded in the first quarter of 2017 related to elections under the VRIP.

For example, in 2020, 121 positions were eliminated in response to the changing business environment.

Our cost structure in future periods is somewhat dependent upon our ability to maintain increased productivity without backfilling certain positions.

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One of our operating strategies is to selectively pursue acquisitions.

On May 20, 2019, we completed the acquisition of Sierra Monitor Corporation ("SMC"), which is a leading provider of fixed gas and flame detection instruments and Industrial Internet of Things solutions that connect and help protect high-value infrastructure assets.

For example, on January 25, 2021, we completed the acquisition of B T Q Limited, which is a leading innovator and provider of protective apparel to the fire and rescue services sector.

Please refer to Note 21 of the consolidated financial statements in Part II Item 8 of this Form 10-K for further details.

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• customer dissatisfaction or performance problems at the acquired businesses.

If we are unable to integrate or successfully manage businesses that we have recently acquired, including SMC, or may acquire in the future, we may not realize anticipated cost savings, improved manufacturing efficiencies and increased revenue, which may result in material adverse short- and long-term effects on our consolidated operating results, financial condition and liquidity.

If we are unable to integrate or successfully manage businesses that we have recently acquired, including Bristol, or may acquire in the future, we may not realize anticipated cost savings, improved manufacturing efficiencies and increased revenue, which may result in material adverse short and long-term effects on our consolidated operating results, financial condition and liquidity.

Even if we are able to integrate the operations of our acquired businesses into our operations, we may not realize the full benefits of the cost savings, revenue enhancements or other benefits that we may have expected at the time of acquisition.

In addition, even if we achieve the expected benefits, we may not be able to achieve them within the anticipated time frame, and such benefits may be offset by costs incurred in integrating the acquired companies and increases in other expenses.

If we fail to introduce successful new products or extend our existing product lines, we could lose our market position and our financial performance could be materially and adversely affected.

In the safety products market, there are frequent introductions of new products and product line extensions.

If we are unable to identify emerging customer and technological trends, maintain and improve the competitiveness of our products and introduce new products, we may lose our market position, which could have a material adverse effect on our business, financial condition and results of operations.

We continue to invest significant resources in research and development and market research.

However, continued product development and marketing efforts are subject to the risks inherent in the development process.

These risks include delays, the failure of new products and product line extensions to achieve anticipated levels of market acceptance and the risk of failed product introductions.

RISKS RELATED TO CYBERSECURITY OR MISAPPROPRIATION OF OUR CRITICAL INFORMATION

A failure of our information systems or a cybersecurity breach could materially and adversely affect our business, results of operations and financial condition.

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If our information systems or security fail, or if there is any compromise or breach of our security, it could result in a violation of applicable privacy and other laws, legal and financial exposure, remediation costs, negative impacts on our customers' willingness to transact business with us, or a loss of confidence in our security measures, which could have an adverse effect on our business, our reputation and our consolidated results of operations and financial condition.

Like many companies, from time to time, we have experienced attacks on our computer systems by unauthorized outside parties.

Like many companies, from time to time, we have experienced attempts on our computer systems by unauthorized outside parties.

Because the techniques used by computer hackers and others to access or sabotage networks continually evolve and generally are not recognized until launched against a target, we may be unable to anticipate, prevent or detect these attacks.

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We routinely implement improvements to our network security safeguards as well as cybersecurity initiatives.

We also maintain a robust cyber response plan, including an assessment of triggers for internal and external reporting of cyber incidents.

We also maintain a robust cyber response plan, including an assessment of triggers for internal and external reporting of cyber incidents, along with ongoing employee awareness and training activities.

We expect to continue devoting substantial resources to the security of our information technology systems.

We cannot assure that such system improvements will be sufficient to prevent or limit the damage from any future cyber-attack or disruption to our information systems.

Our continued success depends on our ability to protect our intellectual property.

If we are unable to protect our intellectual property, our business could be materially and adversely affected.

Our success depends, in part, on our ability to obtain and enforce patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties .

We have been issued patents and have registered trademarks with respect to many of our products, but our competitors could independently develop similar or superior products or technologies, duplicate any of our designs, trademarks, processes or other intellectual property or design around any processes or designs on which we have or may obtain patents or trademark protection.

In addition, it is possible that third parties may have, or will acquire, licenses for patents or trademarks that we may use or desire to use, so that we may need to acquire licenses to, or to contest the validity of, such patents or trademarks of third parties.

Such licenses may not be made available to us on acceptable terms, if at all, and we may not prevail in contesting the validity of third party rights.

We also protect trade secrets, know-how and other confidential information against unauthorized use by others or disclosure by persons who have access to them, such as our employees, through contractual arrangements .

These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information.

Our inability to maintain the proprietary nature of our technologies could have a material adverse effect on our consolidated results of operations and financial condition.

RISKS RELATED TO HUMAN CAPITAL MANAGEMENT

If we lose any of our key personnel or are unable to attract, train and/or retain qualified personnel or plan the succession of senior management, our ability to manage our business and continue our growth could be negatively impacted.

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While we strive to reduce the negative impact of such changes, the loss of any key employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of company initiatives, the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, and the results of our operations.

If we fail to introduce successful new products or extend our existing product lines, we could lose our market position and our financial performance could be materially and adversely affected.

In the safety products market, there are frequent introductions of new products and product line extensions.

If we are unable to identify emerging consumer and technological trends, maintain and improve the competitiveness of our products and introduce new products, we may lose our market position, which could have a material adverse effect on our business, financial condition and results of operations.

We continue to invest significant resources in research and development and market research.

However, continued product development and marketing efforts are subject to the risks inherent in the development process.

These risks include delays, the failure of new products and product line extensions to achieve anticipated levels of market acceptance and the risk of failed product introductions.

Damage to the reputation of MSA or to one or more of our product brands could adversely affect our business.

Developing and maintaining our reputation, as well as the reputation of our brands, is a critical factor in our relationship with customers, distributors and others.

Our inability to address negative publicity or other issues, including concerns about product safety or quality, real or perceived, could negatively impact our business which could have a material adverse effect on our business, consolidated results of operations and financial condition.

Our ability to market and sell our products is subject to existing government regulations and standards.

Changes in such regulations and standards or our failure to comply with them could materially and adversely affect our results of operations.

Most of our products are required to meet performance and test standards designed to protect the safety of people and infrastructures around the world.

Our inability to comply with these standards could result in declines in revenue, profitability and cash flow.

Changes in regulations could reduce the demand for our products or require us to re-engineer our products, thereby creating opportunities for our competitors.