What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-19 compared with 2020-02-20 · 123 added, 150 removed, 231 unchanged (54% of the section changed)

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Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this annual report entitled “Forward-Looking Statements” and “Risk Factors.”

MSA Safety Incorporated ("MSA") is organized into six geographical operating segments that are aggregated into three reportable geographic segments:

MSA Safety Incorporated ("MSA") is organized into four geographical operating segments that are aggregated into three reportable geographic segments:

Americas, International and Corporate.

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Please refer to Note 7—Segment Information of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information.

On July 31, 2017, the Company acquired 100% of the common stock of Globe Holding Company, LLC ("Globe") for $215 million in cash plus a working capital adjustment of $1.4 million .

Based in Pittsfield, NH, Globe is a leading innovator and provider of firefighter protective clothing and boots.

This acquisition aligns with the Company's corporate strategy in that it strengthened our leading position in the North American fire service market.

The transaction was funded through borrowings on our unsecured senior revolving credit facility.

The data presented in Part II Item 6 of this Form 10-K should be read in conjunction with the following comments.

Additionally, please refer to Note 13 — Acquisitions of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information.

On May 20, 2019, the Company acquired 100% of the common stock of Sierra Monitor Corporation ("SMC") in an all-cash transaction valued at $33.2 million, net of cash acquired.

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The transaction was funded through borrowings on our unsecured senior revolving credit facility.

The data presented in Part II Item 6 of this Form 10-K should be read in conjunction with the following comments.

Additionally, please refer to Note 13 — Acquisitions of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information.

Please refer to Note 13 — Acquisitions of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information.

Subsequent Event

On January 25, 2021, we acquired 100% of the common stock of B T Q Limited, including Bristol Uniforms and Bell Apparel ("Bristol") in an all-cash transaction valued at $62.4 million, net of cash acquired.

There is no contingent consideration.

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

The acquisition strengthens MSA's position as a global leader in fire service PPE products while providing an avenue to expand its business in the U.K.

and key International markets.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Discussion of our results;

liquidity and capital resources;

and cumulative translation adjustments for the year ended December 31, 2018 compared to the year ended December 31, 2017 can be found under Part II Item 7 of our Form 10-K for the year ended December 31, 2018 as filed with the SEC.

Discussion of our results, liquidity and capital resources, and cumulative translation adjustments for the year ended December 31, 2019 compared to the year ended December 31, 2018 can be found under Part II Item 7 of our Form 10-K for the year ended December 31, 2019 as filed with the SEC.

BUSINESS OVERVIEW

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Recognized for their market leading innovation, many MSA products integrate a combination of electronics, mechanical systems and advanced materials to protect users against hazardous or life-threatening situations.

The Company's comprehensive product line, which is governed by rigorous safety standards across highly regulated industries, is used by workers around the world in a broad range of markets, including the oil, gas and petrochemical industry, fire service, construction, industrial manufacturing applications, utilities, mining and the military.

The Company's comprehensive product line, which is governed by rigorous safety standards across highly regulated industries, is used by workers around the world in a broad range of markets, including fire service, the oil, gas and petrochemical industry, construction, industrial manufacturing applications, utilities, mining and the military.

MSA's core products include breathing apparatus where self-contained breathing apparatus ("SCBA") is the principal product, fixed gas and flame detection systems, portable gas detection instruments, industrial head protection products, firefighter helmets and protective apparel, and fall protection devices.

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

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

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

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

In January 2020, the Company established a special advisory committee to evaluate ongoing concerns, risks and challenges with respect to COVID-19 across its operations and corporate headquarters.

The Company's pandemic response plan includes four key priorities:

protecting the health and safety of MSA associates, enabling business continuity, expanding manufacturing capacity of MSA’s existing air-purifying respirator portfolio, and managing its operating expenses and capital structure.

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

This process includes returning elements of our salesforce to in-person customer interactions on a limited basis, with additional employees scheduled to begin returning to the office, once deemed appropriate under the circumstances for each business location.

A phased approach to reconnect employees while adjusting the characteristics of their physical working environments, providing training and executing enhanced safety and cleaning protocols, will promote workplace safety in a manner consistent with the mission and values of MSA.

The process and timing to reconnect our workforce will continue to evolve due to the changing nature of COVID-19.

The Company expects to modify plans as necessary to respond to such changes.

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

To best serve these customer preferences, we have organized our business into six geographical operating segments that are aggregated into three reportable geographic segments:

To best serve these customer preferences, we have organized our business into four geographical operating segments that are aggregated into three reportable geographic segments:

Americas, International and Corporate.

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International .

Our International segment includes companies in Europe, Middle East, and the Asia Pacific region.

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

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

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

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

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Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Net Sales 2020 2019 Dollar

(Decrease) Percent

(In millions)

Consolidated $1,348.2 $1,402.0 $(53.8) (3.8)%

Americas 874.3 915.1 (40.8) (4.5)%

International 473.9 486.9 (13.0) (2.7)%

Net sales for the year ended December 31, 2019 , were $1.40 billion , an increase of $43.9 million , from $1.36 billion for the year ended December 31, 2018 .

Constant currency sales increased by 5% for the year ended December 31, 2019 .

Net sales for the year ended December 31, 2020, were $1.35 billion, a decrease of $53.8 million, from $1.40 billion for the year ended December 31, 2019.

Constant currency sales decreased by 3% for the year ended December 31, 2020.

Please refer to the Net Sales table below for a reconciliation of the year over year sales change.

Year Ended December 31, 2019 versus December 31, 2018

(Percent Change)

International

Net Sales Year Ended December 31, 2020 versus December 31, 2019

(Percent Change) Americas International Consolidated

GAAP reported sales change (4.5)% (2.7)% (3.8)%

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

Net sales for the Americas segment were $915.1 million for the year ended December 31, 2019 , an increase of $60.8 million , or 7% , compared to $854.3 million for the year ended December 31, 2018 .

During 2019 , constant currency sales in the Americas segment increased 8% compared to the prior year period, driven primarily by growth across the portfolio.

Net sales for the Americas segment were $874.3 million for the year ended December 31, 2020, a decrease of $40.8 million, or 5%, compared to $915.1 million for the year ended December 31, 2019.

During 2020, constant currency sales in the Americas segment decreased 3% compared to the prior year period, driven by weakness in oil and gas and commercial construction markets due to the ongoing impact of the COVID-19 pandemic, which was partially offset by increases in Breathing Apparatus in fire service markets and APR in a broad range of end markets related primarily to pandemic response.

Net sales for the International segment were $473.9 million for the year ended December 31, 2020, a decrease of $13.0 million, or 3%, compared to $486.9 million for the year ended December 31, 2019.

Constant currency sales in the International segment increased 1% during 2019 , as we recognized higher sales throughout our industrial and gas detection product portfolio partially offset by lower breathing apparatus sales and weaker non-core sales primarily in Europe on lower ballistic helmet sales.

The decline in breathing apparatus sales year-over-year was driven by a large non-recurring order in our Pacific Asia region during 2018 .

Constant currency sales in the International segment decreased 4% during 2020, compared to the prior year period, driven by weakness in oil and gas and commercial construction markets due to the ongoing impact of the COVID-19 pandemic, which was partially offset by increases in industrial head protection and Breathing Apparatus in fire service markets.

Refer to Note 7—Segment Information to the consolidated financial statements in Part II Item 8 of this Form 10-K, for information regarding sales by product group.

We are planning for mid-single digit revenue growth on a constant currency basis for the full year of 2020.

There are a number of evolving factors that will have an impact on our revenue in 2021.

These factors include, among other things, the effectiveness of the vaccine rollout, risk of additional COVID lockdowns, the pace of economic recovery as well as the potential for government stimulus.

While the outcome is difficult to predict, the steps we are taking to improve our business model position us to return to growth and emerge a much stronger company, as conditions improve.

We are approaching the first half of 2021 cautiously, and are positioned for a stronger second half of 2021 as compared to the first half.

Our investments in organic and inorganic growth programs are driving an improved market position and that will be beneficial as we see business conditions improve.

Gross profit.

Gross profit for the year ended December 31, 2019 was $636.6 million , an increase of $24.7 million , or 4.0% , compared to $611.9 million for the year ended December 31, 2018 .

Gross profit for the year ended December 31, 2020 was $590.4 million, a decrease of $46.2 million, or 7.3%, compared to $636.6 million for the year ended December 31, 2019.

The ratio of gross profit to net sales was 43.8% in 2020 compared to 45.4% in 2019.

The higher gross profit ratio during 2019 is primarily attributable to new product launches and pricing initiatives, partially offset by higher non-cash charges associated with LIFO accounting and costs associated with our acquisition of SMC, notably the amortization of the step-up value of inventory.

See Note 13—Acquisitions of the consolidated financial statements in Part II Item 8 of this Form 10-K.

The lower gross profit ratio during 2020 is primarily attributable to costs related to lower throughput in our factories and higher inventory related charges.

During 2020, we invested in inventory to enable delivery on a meaningful pandemic-response order, which did not materialize.

As a result, we incurred $13 million of inventory-related charges and one-time costs associated with the manufacturing process in the Americas Segment.

We do not expect the inventory-related charges to repeat in 2021.

Selling, general and administrative expenses.

Selling, general and administrative expenses were $330.5 million for the year ended December 31, 2019 , an increase of $5.7 million , or 1.8% , compared to $324.8 million for the year ended December 31, 2018 .

Selling, general and administrative expenses were $290.3 million for the year ended December 31, 2020, a decrease of $40.2 million, or 12.2%, compared to $330.5 million for the year ended December 31, 2019.

Selling, general and administrative expenses were 21.5% of net sales in 2020 compared to 23.6% of net sales in 2019.

The decrease was the result of ongoing productivity improvements in the Americas segment and savings from restructuring programs in the International Segment, partially offset by higher costs associated with our SMC acquisition.

The decrease was the result of returns from previously executed restructuring programs and discretionary cost controls implemented earlier in the year, in response to the COVID-19 pandemic and slowdown in certain end markets.

Discretionary cost controls provided approximately $15 million of cost savings in 2020.

Additionally, a decrease in variable compensation expense provided approximately $15 million of cost savings.

While we expect variable compensation expense to reset and increase in 2021 as compared to 2020, we intend on closely managing discretionary spend to ensure our investments are aligned with economic and business conditions.

The following table presents a reconciliation of the year-over-year expense change for selling, general, and administrative expenses.

Selling, general, and administrative expenses

Selling, general, and administrative expenses Year Ended

December 31, 2020 versus December 31, 2019

(Percent Change)

(Percent Change) Consolidated

GAAP reported change (12.2)%

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Constant currency change (11.5)%

Acquisitions and related strategic transaction costs

Organic constant currency change

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

Organic constant currency change in selling, general, and administrative expenses is calculated by removing the percentage impact from acquisitions and related strategic transaction costs as well as currency translation effects from the overall percentage change in GAAP selling, general, and administrative expense.

Management believes excluding acquisitions and currency translation effects provide investors with a greater level of clarity into spending levels on a year-over-year basis.

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

Constant currency change in selling, general, and administrative expenses is calculated by deducting the percentage impact of currency translation effects from the overall percentage change in selling, general, and administrative expense.

Management believes excluding currency translation effects provide investors with a greater level of clarity into spending levels on a year-over-year basis.

Research and development expense.

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Research and development expense was 4.3% of net sales in 2020, compared to 4.1% of net sales in 2019.

We continue to develop new products for global safety markets, including the recently launched V-Gard H1 Safety Helmet and V-Series family of fall protection products.

In 2020, MSA plans to launch its connected firefighter ecosystem powered by LUNAR as well as the Altair io 360 Gas Detector, an area monitor that operates with the simplicity of a smart-home device.

During 2020, we launched the Altair io 360 Gas Detector, an area monitor that operates with the simplicity of a smart-home device;

a Personal Fall Limiter with a smart hook connector that using RFID technology alerts wearers when they are not secured to an anchorage point;

and an innovative reusable Elastomeric Half-Mask Respirator designed for healthcare environments.

MSA plans to launch its connected firefighter ecosystem powered by LUNAR in the first half of 2021.

We capitalized approximately $8.2 million and $5.0 million of software development costs during the years ended December 31, 2020 and 2019, respectively.

Restructuring charges.

During the year ended December 31, 2019 , the Company recorded restructuring charges of $13.8 million , primarily related to footprint rationalization and other restructuring programs associated with our ongoing initiatives to drive profitable growth in our International segment.

During the year ended December 31, 2020, the Company recorded restructuring charges of $27.4 million, primarily due to severance costs related to a plan which addresses weakened global economic conditions and is designed to improve our business model during the downturn.

Included as part of restructuring charges in 2020, we recognized a non-cash settlement charge of $1.5 million for the termination of our pension plan in the Netherlands.

We expect the restructuring programs to collectively deliver $15 million of savings throughout the income statement in 2021, and annual savings of $20 million thereafter.

This compared to charges of $13.8 million during the year ended December 31, 2019, primarily related to footprint rationalization and other restructuring programs associated with our ongoing initiatives to drive profitable growth in our International segment.

Included as part of restructuring charges in 2019, we recognized a non-cash settlement charge of $2.5 million for the termination of our pension plan in the United Kingdom.

This compared to charges of $13.2 million during the year ended December 31, 2018 , primarily related to severance costs for staff reductions associated with our ongoing initiatives to drive profitable growth in Europe and the legal and operational realignment of our U.S.

and Canadian operations.

Currency exchange .

Currency exchange losses were $8.6 million during the year ended December 31, 2020, compared to $19.8 million during the year ended December 31, 2019.

The increase in currency exchange losses was primarily due to the recognition of non-cash cumulative translation losses of approximately $15.3 million as a result of the approval of our plan to close our South Africa affiliates during the first quarter of 2019.

The decrease in currency exchange losses was primarily due to the recognition of non-cash cumulative translation losses of approximately $15.3 million as a result of the approval of our plan to close our South Africa affiliates during the first quarter of 2019.

This charge is related to the historical translation of the elements of the financial statements for the business from the functional currency to the U.S.

The translation impact has been historically recorded as currency translation adjustment, a separate component of accumulated other comprehensive loss within the shareholders' equity section of the Consolidated Balance Sheet.

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

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Product liability and other operating expense during the year ended December 31, 2020 was $39.0 million compared to $28.4 million for the year ended December 31, 2019.

The expense in both periods primarily relates to an increase in our reserve for cumulative trauma product liability claims resulting from the Company’s revision of its estimates of potential liability for cumulative trauma product liability claims as part of its annual review process, as well as defense costs incurred for uninsured asserted cumulative trauma product liability claims.

Please refer to Note 19—Contingencies of the consolidated financial statements in Part II Item 8 of this Form 10-K for additional information.

The expense in both periods primarily relates to an increase in MSA LLC's reserve for cumulative trauma product liability claims resulting from the Company’s revision of estimates of potential liability for cumulative trauma product liability claims as part of its annual review process, and to a far lesser extent, defense costs incurred for uninsured asserted cumulative trauma product liability claims.

The increase in MSA LLC's reserve for cumulative trauma product liability claims is largely attributable to an increase in the number of claims alleging injuries from exposure to coal mine dust.

Please refer to Note 19—Contingencies of the

consolidated financial statements in Part II Item 8 of this Form 10-K for additional information.

GAAP operating income.

Consolidated operating income for the year ended December 31, 2020 was $166.9 million compared to $186.2 million for the year ended December 31, 2019.

The increase in operating results was driven by higher sales volumes and lower product liability and other operating expense partially offset by higher currency exchange losses, as well as higher R&D costs related to new product launches.

The decrease in operating results was driven by lower sales volumes and higher product liability expense partially offset by lower currency exchange losses and improved SG&A leverage.

On a consolidated basis, SG&A expenses declined by 12% while sales declined 4%.

Adjusted operating income.

Americas adjusted operating income for the year ended December 31, 2019 was $226.6 million , an increase of $19.8 million , or 10% , compared to $206.8 million for the year ended December 31, 2018 .

The increase was related to the higher level of sales and margin expansion driven by new product launches and pricing initiatives as well as savings realized from previously executed restructuring programs.

International adjusted operating income for the year ended December 31, 2019 was $59.9 million , consistent with adjusted operating income of $59.9 million for the year ended December 31, 2018 .

Despite realizing a lower level of sales, cost reduction programs helped to maintain adjusted operating income and improved adjusted operating margin.

Corporate segment adjusted operating loss for the year ended December 31, 2019 was $35.6 million , an increase of $3.7 million , or 12% , compared to an operating loss of $31.9 million for the year ended December 31, 2018 , primarily due to higher professional service expenses partially offset by lower legal expenses.

Americas adjusted operating income for the year ended December 31, 2020 was $200.5 million, a decrease of $26.1 million, or 12%, compared to $226.6 million for the year ended December 31, 2019.

The decrease was related to the lower level of sales, higher costs related to lower throughput in our factories, and higher inventory-related charges, partially offset by improved SG&A leverage.

International adjusted operating income for the year ended December 31, 2020 was $70.9 million, an increase of $11.0 million, or 18%, compared to adjusted operating income of $59.9 million for the year ended December 31, 2019.

The increase in adjusted operating income is primarily attributable to improved gross profit associated with strategic pricing improvements and benefits we continue to realize from restructuring programs executed over the past 12 to 18 months, which more than offset the 3% decrease in sales.

The most significant improvement in adjusted operating income was attributable to our EMEA operating segment.

Corporate segment adjusted operating loss for the year ended December 31, 2020 was $28.1 million, an improvement of $7.5 million, or 21%, compared to an adjusted operating loss of $35.6 million for the year ended December 31, 2019, due primarily to lower variable compensation expense as well as lower professional service and other expenses related to cost control initiatives.

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

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Year Ended December 31, 2020

(In thousands)

International

(In thousands) Americas International Corporate Consolidated

Net sales $ 874,305 $ 473,918 $ — $ 1,348,223

GAAP operating income 166,851

Restructuring charges (Note 2) 27,381

Currency exchange losses, net

Currency exchange losses, net (Note 5) 8,578

Product liability expense (Note 19) 39,036

Strategic transaction costs (Note 13) 717

COVID-19 related costs 757

Adjusted operating income (loss) 200,536 70,864 (28,080) 243,320

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Year Ended December 31, 2019

(In thousands)

International

(In thousands) Americas International Corporate Consolidated

Net sales $ 915,118 $ 486,863 $ — $ 1,401,981

GAAP operating income 186,230

Restructuring charges (Note 2) 13,846

Currency exchange losses, net

Currency exchange losses, net (Note 5) 19,814

Product liability expense (Note 19) 26,619

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Total other expense, net.

Other expense for the year ended December 31, 2019 was $2.5 million , a decrease of $8.6 million , or 77.6% , compared to $11.1 million for the year ended December 31, 2018 due to lower interest expense primarily as a result of a favorable adjustment related to a foreign uncertain tax position for which the statute of limitations has expired, higher pension income and the absence of the loss on extinguishment of debt recognized in 2018.

Lower discount rates are expected to drive an $8 million unfavorable swing in pension expense in 2020, compared to 2019.

The majority of this impact will be reflected in the Other income, net line on our Consolidated Statement of Income.

The increase in expense is non-cash.

qualified plan remains overfunded and our funding status is expected to improve in 2020 based on higher returns on our investments in 2019.

Other expense for the year ended December 31, 2020 was $3.7 million, an increase of $1.3 million, or 50.2%, compared to $2.5 million for the year ended December 31, 2019, primarily due to lower pension income driven by lower discount rates and lower expected rate of return partially offset by lower interest expense.

Improved return on plan assets is expected to drive a $4 million to $5 million favorable comparison in nonoperating pension income in 2021, compared to 2020.

Income taxes.

The reported effective tax rate for the year ended December 31, 2019 was 25.1% , which included a benefit of 2.6% for share-based payments, an expense of 1.8% due to non-deductible foreign currency exchange losses on entity closures, an expense of 1.9% due to nondeductible compensation and expense related to an increase in profitability in higher tax jurisdictions.

This compared to a reported effective tax rate for the year ended December 31, 2018 , of 22.9% , which included a benefit of 1.6% for certain share-based payments and a charge of 1.1% associated with exit taxes related to our U.S., Canadian, and European realignment.

The reported effective tax rate for the year ended December 31, 2020 was 25.7%, which included a benefit of 3.9% for share-based payments, an expense of 3.4% due to nondeductible compensation, and expense of 1.5% related to a foreign audit.

This compared to a reported effective tax rate for the year ended December 31, 2019 of 25.1%, which included a benefit of 2.6% for share-based payments, an expense of 1.8% due to non-deductible foreign currency exchange losses on entity closures, an expense of 1.9% due to nondeductible compensation and expense related to an increase in profitability in higher tax jurisdictions.

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.

During 2018, the Company recorded $1.8 million of foreign income tax reserves related to legal and operational realignment of our U.S., Canadian and European operations.

As of December 31, 2018 , the Company had completed its accounting for all of the enactment-date income tax effects of the Tax Cuts and Jobs Act of 2017 (the "Act").

Accordingly, we reduced our estimate for the one-time transition tax by $2.0 million and increased our estimate for the revaluation of U.S.

deferred tax assets and liabilities by $2.5 million and a $2.0 million increase associated with prepaid taxes for updated regulations related to the Act.

Net income attributable to MSA Safety Incorporated .

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Non-GAAP Financial Information

We may provide information regarding financial measures such as organic constant currency changes, financial measures excluding the impact of acquisitions and related strategic transaction costs, adjusted operating income, adjusted operating margin percentage, adjusted EBITDA and adjusted EBITDA margin percentage, which are not recognized terms under U.S.

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

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

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Our main source of liquidity is operating cash flows, supplemented by borrowings.

Our principal liquidity requirements are for working capital, capital expenditures, principal and interest payments on debt, dividend payments, and acquisitions.

Our principal liquidity requirements are for working capital, capital expenditures, principal and interest payments on debt, declared dividend payments, and as applicable, acquisitions.

At December 31, 2020, approximately 31% of our long-term debt is at fixed interest rates with repayment schedules through 2031.

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At December 31, 2020, approximately 74% of our borrowings are denominated in US dollars, which limits our exposure to currency exchange rate fluctuations.

In January 2021, we borrowed on our U.K.

credit facility in connection with the Bristol acquisition.

At December 31, 2020, we had cash, cash equivalents and restricted cash totaling $161.0 million, which included $150.1 million of cash, cash equivalents and restricted cash held by our foreign subsidiaries.

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At December 31, 2020, $385.5 million of the $600.0 million senior revolving credit facility was unused, including letters of credit.

The Company currently has access to approximately $663.0 million of capital at December 31, 2019 .

Refer to Note 11—Short and Long-Term Debt to the consolidated financial statements in Part II Item 8 of this Form 10-K.

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Operating activities provided cash of $206.6 million in 2020, compared to providing cash of $165.0 million in 2019.

The decrease in operating cash flows during the period was primarily attributable lower collections on insurance receivables and a higher use of cash for working capital to support our higher level of sales and backlog.

We made product liability payments of $33.5 million , net of collections on insurance receivables, in the year ended December 31, 2019 , while we collected $ 40.1 million from insurance companies, net of product liability settlements paid, in the same period of 2018 largely the result of resolving a long outstanding carrier.

Historically, cumulative trauma liability payments were funded with the Company's operating cash flow, pending resolution of disputed insurance coverage.

For more than a decade, we have funded product liability settlements from operating cash flow.

The vast majority of the insurance receivables and notes receivables - insurance companies balances at December 31, 2019 , is attributable to reimbursement believed to be due under the terms of signed agreements with insurers and are not currently subject to litigation.

While the timing of cash flows for product liability and insurance receivables can and do vary from quarter to quarter, we have been successful in establishing cash flow streams that have allowed us to fund these liabilities without a material impact on our capital allocation priorities.

The improved operating cash flows during the period was primarily attributable to improved working capital performance primarily related to accounts receivable and inventory as well as lower net payments related to MSA LLC's cumulative trauma product liability.

Our subsidiary MSA LLC made product liability payments of $12.9 million, net of collections on insurance receivables, in the year ended December 31, 2020, compared to payments of $33.5 million, net of collections on insurance receivables, in the same period of 2019.

MSA LLC funds its operating expenses and legal liabilities from its own operating cash flow and other investments, as well as insurance reimbursements, and not from borrowings under the Company’s credit facility, to which it is not a party.

We have established cash flow streams that have allowed us to fund these liabilities without a material impact on our capital allocation priorities but the timing of such cash flows can and does vary from quarter to quarter.

Please refer to Note 19—Contingencies of the consolidated financial statements in Part II Item 8 of this Form 10-K for additional information.

Investing activities.

Investing activities used cash of $72.8 million for the year ended December 31, 2020, compared to using $64.2 million in 2019.

The acquisition of Sierra Monitor Corporation, purchase of short-term investments, net of proceeds from maturities and capital expenditures drove cash outflows from investing activities during the year ended December 31, 2019 .

Purchases of short-term investments and capital expenditures drove cash outflows from investing in the same period in 2018 .

Capital expenditures and purchase of short-term investments, net of proceeds from maturities drove cash outflows from investing activities during the year ended December 31, 2020.

The acquisition of Sierra Monitor Corporation capital expenditures drove cash outflows from investing in the same period in 2019.

During 2020 we spent $48.9 million on capital expenditures including approximately $8.2 million associated with software development, which was a $3.2 million increase compared to 2019.

We expect capital expenditures to approximate $45 million in 2020, within the Company’s annual capital expenditure expectations of 2.5% - 3.5% of revenue.

We expect to invest 2.5% to 3.5% of sales in capital expenditures in 2021.

Financing activities.

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During 2020, we had net payments on long-term debt of $44.0 million compared to net payments of $16.5 million in the same period in 2019.

In August 2018, we repaid our 5.41% 2006 Senior Notes in the amount of $28.0 million, which included $1.5 million related to a make-whole provision and accrued interest through the date of repayment.

We made dividend payments of $66.6 million during 2020, compared to $63.5 million during 2019.

Dividends paid on our common stock during 2020 were $1.71 per share.

Dividends paid on our common stock in 2018 were $1.49 .

Dividends paid on our common stock in 2019 were $1.64 per share.

In January 2021, we used $62.4 million of cash to fund the acquisition of Bristol.

Restricted cash balances were $0.4 million at December 31, 2020 compared to $0.3 million at December 31, 2019, and were primarily used to support letter of credit balances.

The MSA Board of Directors has authorized the Company to repurchase up to $100.0 million in shares of MSA common stock.

There were $3.3 million in repurchases made in 2019 and no share repurchases in 2018.

The program seeks to offset equity dilution associated with employee stock compensation.

The Board of Directors did not set a time limitation on the repurchase program.

We used $29.1 million during 2020 to repurchase shares, including $20.1 million related to purchases under our 2015 stock repurchase program, compared to $12.6 million during 2019 to repurchase shares, including $3.3 million related to purchases under our 2015 stock repurchase program.

CUMULATIVE TRANSLATION ADJUSTMENTS

The year-end position of the U.S.

dollar relative to international currencies resulted in a translation loss of $1.6 million being recorded to cumulative translation adjustments for the year ended December 31, 2019 compared to a loss of $29.8 million in 2018 .

dollar relative to international currencies resulted in a translation gain of $22.3 million being recorded to cumulative translation adjustments for the year ended December 31, 2020 compared to a loss of $1.7 million in 2019.

The translation gain during 2020 was primarily related to the weakening of the U.S.

dollar relative to the euro.

The translation loss during 2019 was primarily related to the strengthening of the U.S.

dollar relative to the euro.

The translation loss in 2018 was primarily related to the strengthening of the U.S.

dollar relative to the euro and British pound.

During the year ended December 31, 2020, we recognized approximately $8.6 million of currency exchange losses, net, in our Consolidated Statements of Income.

During the year ended December 31, 2019, we recognized approximately $19.8 million of currency exchange losses, net, in our Consolidated Statement of Income of which $15.3 million relates to non-cash currency exchange losses due primarily to an approved plan to close our South Africa affiliates.

This charge is related to the historical translation of the elements of the financial statements for the business from the functional currency to the U.S.

The translation impact has been

historically recorded as currency translation adjustment, a separate component of accumulated other comprehensive loss within the shareholders' equity section of the Consolidated Balance Sheet.

Brexit has caused, and may continue to create, volatility in global stock markets and regional and global economic uncertainty particularly in the U.K.

financial and banking markets.

Weakening of economic conditions or economic uncertainties tend to harm our business, and if such conditions worsen in the U.K.

or in the rest of Europe, it may have an adverse effect on our consolidated operations and sales.

The Company continues to monitor the economic situation related to Brexit and current analysis indicates that exposure in our supply chain related to additional duties and sourcing costs is not material.

We have approximately $45 million of annual sales denominated in the British pound which are subject to exchange rate risk associated with any volatility in the British pound.

We have long-term debt of $78.4 million at December 31, 2019 that is denominated in British pounds.

Because the debt is denominated in local currency, the value of the debt and local cash flows are aligned with respect to movements in the exchange rate between the British pound and U.S.

COMMITMENTS AND CONTINGENCIES

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Our significant cash obligations as of December 31, 2020, are as follows:

(In millions)

(In millions) Total 2021 2022 2023 2024 2025 Thereafter

Long-term debt $ 308.3 $ 20.0 $ — $ 221.6 $ 8.3 $ 8.3 $ 50.1

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Transition tax 6.6 0.8 1.5 1.9 2.4 — —

Totals $ 381.4 $ 32.2 $ 9.4 $ 229.8 $ 15.2 $ 13.0 $ 81.8

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

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Interest expense on fixed rate debt over the next five years is expected to be approximately $3.2 million in 2021, $2.6 million in 2022, $2.3 million in 2023, $2.1 million in 2024, and $1.8 million in 2025.

We expect total interest expense for 2020 to be between $12 million - $14 million.

We expect total interest expense for 2021 to be between $8 million and $9 million.

The Company had outstanding bank guarantees and standby letters of credit with banks as of December 31, 2020 totaling $9.0 million, of which $1.3 million relate to the senior revolving credit facility.

These letters of credit serve to cover customer requirements in connection with certain sales orders and insurance companies.

No amounts were drawn on these arrangements at December 31, 2019 .

The Company is also required to provide cash collateral in connection with certain arrangements.

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We prepare our consolidated financial statements in accordance with U.S.

generally accepted accounting principles (GAAP).

generally accepted accounting principles (U.S.

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 the related disclosures.

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and foreign plans were based on the spot rate method at December 31, 2020.

Expected returns on plan assets are based on our historical returns by asset class.

Expected returns on plan assets are based on capital market expectations by asset class.

The following table summarizes the impact of changes in significant actuarial assumptions on our December 31, 2020 actuarial valuations.

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Change in Discount

Change in Expected

Change in Market Value of Assets

Rate Change in Expected

Return Change in Market Value of Assets

(In thousands) 1% (1)% 1% (1)% 5% (5)%

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Increase (decrease) in funded status 88,742 (115,339) — — 29,341 (29,341)

Revenue Recognition.

Revenue from the sale of products is recognized when there is persuasive evidence of an arrangement and control passes to the customer, which generally occurs either when product is shipped to the customer or, in the case of most U.S.

distributor customers, when product is delivered to the distributor's delivery site.

We establish our shipping terms according to local practice and market characteristics.

We do not ship product unless we have an order or other documentation authorizing shipment to our customers.

Our payment terms vary by the type and location of our customer and the products offered.

The term between invoicing and when payment is due is not significant.

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services.

Amounts billed and due from our customers are classified as receivables on the Consolidated Balance Sheet.

We make appropriate provisions for uncollectible accounts receivable which have historically been insignificant in relation to our net sales.

Certain contracts with customers, primarily distributor customers, have an element of variable consideration that is estimated when revenue is recognized under the contract to the extent that it is material to the individual contract.

Variable consideration includes volume incentive rebates, performance guarantees, price concessions and returns.

Rebates are based on achieving a certain level of purchases and other performance criteria that are documented in established distributor programs.

These rebates are estimated based on projected sales to the customer and accrued as a reduction of net sales as they are earned by the customer.

The rebate accrual is reviewed monthly and adjustments are made as the estimate of projected sales changes.

Product returns, including an adjustment for restocking fees if it is material, are estimated based on historical return experience and revenue is adjusted.

Sales, value add and other taxes collected with revenue-producing activities and remitted to governmental authorities are excluded from revenue.

Depending on the terms of the arrangement, we may defer revenue for which we have a future obligation, including training and extended warranty and technical services, until such time that the obligation has been satisfied.

We use an observable price, or a cost plus margin approach when one is not available, to determine the stand-alone selling price for separate performance obligations.

We have elected to recognize the cost for shipping and handling as an expense when control of the product has passed to the customer.

These costs are included within the Cost of Products Sold line on the Consolidated Statement of Income.

Amounts billed to customers for shipping and handling are included in net sales.

We typically receive interim milestone payments under certain contracts, including our fixed gas and flame detection projects, as work progresses.

For some of these contracts, we may be entitled to receive an advance payment.

Revenue for these contracts is generally recognized as control passes to the customer, which is a point in time upon shipment of the product, and if applicable, acceptance by the customer.

We recognize a liability for these advance payments in excess of revenue recognized and present it as contract liabilities on the Consolidated Balance Sheet.

The advance payment is typically not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract.

In some cases, the customer retains a small portion of the contract price, typically 10%, until completion of the contract, which we present as contract assets on the Consolidated Balance Sheet.

Accordingly, during the period of contract performance, billings and costs are accumulated on the Consolidated Balance Sheet as contract assets or contract liabilities, but no income is recognized until completion of the project and control has passed to the customer.

As of December 31, 2019 , there were no material contract assets or contract liabilities recorded on the Consolidated Balance Sheet.

Goodwill and Indefinite-lived Intangible Assets.

On October 1st of each year, or more frequently if indicators of impairment exist or if a decision is made to sell a business, we evaluate goodwill for impairment.

A significant amount of judgment is involved in determining if an indicator of impairment has occurred.

Such indicators may include a decline in expected cash flows, a significant adverse change in the business climate, unanticipated competition, slower growth rates, or negative developments in equity and credit markets, among others.

All goodwill is assigned to and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment.

For goodwill impairment testing purposes, we consider our operating segments to be our reporting units.

The evaluation of impairment involves using either a qualitative or quantitative approach as outlined in Accounting Standards Codification (ASC) Topic 350.

The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill.

Factors considered as part of the qualitative assessment include entity-specific industry, market and general economic conditions.

In 2019 , we elected to bypass the qualitative evaluation for all of our reporting units and performed a two-step quantitative test at October 1, 2019 .

In 2020, we performed a two-step quantitative test at October 1, 2020.

Quantitative testing involves comparing the estimated fair value of each reporting unit to its carrying value.

We estimate reporting unit fair value using a weighted average of fair values determined by discounted cash flow (DCF) and market approach methodologies, as we believe both are equally important indicators of fair value.

A number of significant assumptions and estimates are involved in the application of the DCF model, including sales volumes and prices, costs to produce, tax rates, capital spending, discount rates, and working capital changes.

We estimate reporting unit fair value using a weighted average of fair values determined by discounted cash flow (DCF) and market approach methodologies, as we believe both are important indicators of fair value.

A number of assumptions and estimates are involved in the application of the DCF model, including sales volumes and prices, costs to produce, tax rates, capital spending, discount rates, and working capital changes.

Cash flow forecasts are generally based on approved business unit operating plans for the early years and historical relationships in later years.

The betas used in calculating the individual reporting units’ weighted average cost of capital (WACC) rate are estimated for each reporting unit based on peer data.

The market approach methodology measures value through an analysis of peer companies.

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

At October 1, 2019 , based on our quantitative test, the fair values of all of our reporting units exceeded their carrying value by at least 93%.

Intangible assets with indefinite lives are also subject to impairment testing on October 1st of each year, or more frequently if indicators of impairment exist.

The impairment test compares the fair value of the intangible assets with their carrying amounts.

We performed a quantitative assessment of the indefinite lived trade name intangible asset as outlined in ASC 350 by comparing the estimated fair value of the trade name intangible asset to its carrying value.

At October 1, 2020, based on our quantitative test, the fair values of each of our reporting units exceeded their carrying value by at least 109%.

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

The impairment test compares the fair value of the intangible asset with its carrying amount.

We perform a quantitative assessment of the indefinite lived trade name intangible asset as outlined in ASC 350 by comparing the estimated fair value of the trade name intangible asset to its carrying value.

We estimate the fair value using the relief from royalty income approach.

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Forecasts are based on sales generated by the underlying trade name assets and are generally based on approved business unit operating plans for the early years and historical relationships in later years.

At October 1, 2019 , based on our quantitative test, the fair value of the trade name asset exceeded their carrying value by approximately 25%.

At October 1, 2020, based on our quantitative test, the fair value of the trade name asset exceeded its carrying value by approximately 22%.

RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

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

What changed 10-K

Item 7. Management’s Discussion and Analysis