What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-29 compared with 2020-10-30 · 120 added, 251 removed, 141 unchanged (72% of the section changed)

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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.

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 $63.0 million, net of cash acquired.

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 market leader in fire service personal protective equipment (PPE) products, which include breathing apparatus, firefighter helmets, thermal imaging cameras, and firefighter protective apparel, while providing an avenue to expand its business in the U.K.

and key European markets.

The fire service equipment brands of MSA, which include Gallet Firefighter Helmets, the M1 and G1 Self-Contained Breathing Apparatus range, Cairns Helmets, Globe Manufacturing, and now Bristol Uniforms, represent more than 460 combined years of innovation in the fire service industry, with a common mission:

protecting the health and safety of firefighters.

Bristol is also a leading manufacturer of flame-retardant, waterproof, and other protective work wear for the utility industry.

Marketed under the Bell Apparel brand, this line complements MSA's existing and broad range of offerings for the global utilities market.

Refer to Note - 18 Acquisitions to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further information.

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.

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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 during these times, to the extent practicable, while protecting the health and safety of our workforce, and complying with all applicable laws.

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

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.

During the second quarter the Company 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 reengaging elements of our salesforce in in-person customer interactions on a limited basis, with additional functions scheduled to begin returning to the office, once deemed appropriate under the circumstances for each geography.

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 way consistent with the mission of MSA.

The process and timing to reconnect our workforce will continue to evolve due to the changing nature of COVID-19, and the Company expects to modify plans as necessary to respond to such changes.

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 workspace 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.

On January 1, 2020, to best serve these customer preferences, we restructured our business from six geographical operating segments into four:

Northern North America, Latin America, Europe, Middle East & Africa ("EMEA"), and Asia Pacific ("APAC").

These four operating segments are further 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.

This change did not impact reportable segments as all changes were within the International segment.

In 2019, 65% and 35% of our net sales were made by our Americas and International segments, respectively.

Our largest manufacturing and research and development facilities are located in the United States (U.S.).

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International .

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

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

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

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Core products, as mentioned above, include breathing apparatus, fixed gas and flame detection systems, portable gas detection instruments, industrial head protection products, firefighter helmets and protective apparel, and fall protection devices.

Core products comprised approximately 85% and 87% of sales for the nine months ended September 30, 2020 and 2019.

Core products comprised approximately 88% and 85% of sales for the three months ended March 31, 2021 and 2020.

MSA also maintains a portfolio of non-core products.

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These products have historically been used in many industrial and first responder applications.

APR products represented 9% of our consolidated sales for the nine months ended September 30, 2020 with over 75% of this business being in our Americas segment.

In the first quarter of 2020, Emergency Use Authorizations ("EUA") were issued by the FDA to expand the types of respiratory protection available to the medical community in response to COVID-19.

APR products represented 6% and 8% of our consolidated sales for the three months ended March 31, 2021 and 2020, with over 74% and 70% of this business being in our Americas segment for the three months ended March 31, 2021 and 2020.

During 2020, Emergency Use Authorizations ("EUA") were issued by the FDA to expand the types of respiratory protection available to the medical community in response to COVID-19.

Those include an EUA that continues to temporarily permit the use of NIOSH-approved respirators in healthcare settings, including elastomeric APR that are part of MSA's existing portfolio.

MSA LLC is committed to increasing production of masks within the existing portfolio to support our customer base and other response efforts.

MSA maintains a diversified portfolio of safety products that protect workers and facility infrastructure across a broad array of end markets.

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2020, Compared to Three Months Ended September 30, 2019

Net sales for the three months ended September 30, 2020, were $304.4 million, a decrease of $46.6 million, or 13.3%, driven by lower sales across most of the core product groups compared to $351.0 million for the three months ended September 30, 2019.

Three Months Ended March 31, 2021, Compared to Three Months Ended March 31, 2020

Net sales for the three months ended March 31, 2021, were $308.4 million, a decrease of $32.7 million, or 9.6%, driven by lower sales across most of the core product groups compared to $341.1 million for the three months ended March 31, 2020.

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

Net Sales Three Months Ended September, Dollar

Net Sales Three Months Ended March 31, Dollar

Decrease Percent

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International 100.1 109.9 (9.8) (8.9)%

Net Sales Three Months Ended September 30, 2020 versus September 30, 2019

Net Sales Three Months Ended March 31, 2021 versus March 31, 2020

(Percent Change) Americas International Consolidated

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

Net sales for the Americas segment were $194.3 million in the third quarter of 2020, a decrease of $40.3 million, or 17.2%, compared to $234.6 million in the third quarter of 2019.

During the quarter, constant currency sales in the Americas segment decreased 15.3% compared to the prior year period, with significant weakness during July and August.

This weakness was driven predominately by weaker business conditions in the U.S., our largest and most profitable geographical area, with sales down 25% in July and August as the COVID-19 pandemic continued to have an impact on demand for our products in key markets, most notably oil and gas and commercial construction.

Employment based industrial PPE products such as head protection, fall protection and portable gas detection experienced challenges based on continuing high unemployment rates and closed worksites.

The decline was partially offset by increased sales of APR.

Business conditions started to improve in September.

Sales were up 1% in the Americas segment in September on improving conditions in the U.S.

after seeing significant declines in July and August.

Net sales for the International segment were $110.1 million in the third quarter of 2020, a decrease of $6.3 million, or 5.4%, compared to $116.4 million for the third quarter of 2019.

Constant currency sales in the International segment decreased 8.6% during the quarter on weaker revenues across the segment, with more significant declines in the Middle East.

Following weak demand in key markets in July and August due to the ongoing impact of COVID-19 and global economic challenges, order pace improved in September with orders up 11% as compared the same month a year ago.

October orders also remained relatively healthy compared to July and August.

While a great deal of uncertainty remains with the upcoming U.S.

Presidential election, the global economy and our Company’s key end markets, we expect sequential quarterly invoicing to improve in the fourth quarter.

Our backlog is relatively consistent compared to the end of the second quarter of 2020.

Backlog is trending considerably higher than a year ago on increases in SCBA, Turnout Gear, and APR.

While backlog continues to be healthy, we remain disciplined in managing our cost structure and executing on long term margin improvement projects.

We have been proactive managing through a challenging environment, and we are committed to continuing that approach.

We are well positioned to manage through and emerge from this downturn as a stronger organization.

Net sales for the Americas segment were $208.3 million in the first quarter of 2021, a decrease of $22.9 million, or 9.9%, compared to $231.2 million in the first quarter of 2020.

During the quarter, constant currency sales in the Americas segment decreased 9.3% compared to the prior year period.

After a weak January and February, order pace and invoicing strengthened in March.

The quarterly revenue decline was driven by economic challenges as well as a difficult comparison from a year ago, which reflected a pre-pandemic environment for MSA.

Areas that were particularly impacted include industrial PPE and FGFD.

Additionally, demand levels in the APR business moderated and returned to pre-pandemic levels.

Americas segment business conditions and order activity improved in March and into April and that provides a sense of optimism to start the second quarter.

Net sales for the International segment were $100.1 million in the first quarter of 2021, a decrease of $9.8 million, or 8.9%, compared to $109.9 million for the first quarter of 2020.

Constant currency sales in the International segment decreased 15.6% during the quarter on weaker revenues across the segment, with more significant declines in the EMEA operating segment due to COVID-19 lockdowns in Europe and lower project business in the Middle East FGFD market.

This weakness was partially offset by improving conditions in China and the acquisition of Bristol.

Our order book improved in March and into April across a number of areas in our business.

Our backlog is healthy to start the second quarter.

Looking ahead, we continue to operate in a very dynamic environment.

There are a number of evolving factors that will continue to influence our revenue outlook.

These factors include, among other things, the effectiveness of the vaccine rollout, risk of additional COVID lockdowns, industrial employment rates, the pace of economic recovery and the supply chain challenges as economies open up.

While the outcome is hard to predict, our recent order pace provides a sense of optimism to start the second quarter.

Refer to Note 7—Segment Information to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q, for information regarding sales by product group.

Gross profit .

Gross profit for the third quarter of 2020 was $132.2 million, a decrease of $26.5 million or 16.7%, compared to $158.7 million for the third quarter of 2019.

The ratio of gross profit to net sales was 43.4% in the third quarter of 2020 compared to 45.2% in the same quarter last year.

The lower gross profit ratio during the current quarter is primarily attributable to inefficiencies associated with lower throughput in our factories associated with a lower level of demand and to a lesser extent, additional cost of implementing COVID-19 safety protocols across our worksites, partially offset by strategic pricing improvements.

Gross profit for the first quarter of 2021 was $134.7 million, a decrease of $22.7 million or 14.4%, compared to $157.4 million for the first quarter of 2020.

The ratio of gross profit to net sales was 43.7% in the first quarter of 2021 compared to 46.1% in the same quarter last year.

The lower gross profit ratio during the current quarter is primarily attributable to a couple of primary drivers.

Lower throughput in our factories drove inefficiencies and inventory charges.

Inventory charges were primarily due to lower levels of demand for respiratory protection.

The remaining items that impacted gross profit were a less favorable product mix and higher input costs.

We have made adjustments to certain pricing actions and continue to evaluate additional pricing opportunities as we navigate the supply chain inflationary pressures.

The Bristol acquisition also negatively impacted mix because gross margins for turnout gear are lower than the corporate average.

We expect to improve Bristol margins as we execute our integration plans.

Selling, general and administrative expenses .

Selling, general and administrative ("SG&A") expenses were $64.8 million during the third quarter of 2020, a decrease of $18.1 million or 21.8%, compared to $82.9 million in the third quarter of 2019.

Overall, selling, general and administrative expenses were 21.3% of net sales during the third quarter of 2020, compared to 23.6% of net sales during the same period in 2019.

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.

These actions provided approximately $8 million to $10 million of cost savings in the quarter.

A decrease in variable compensation expense related to bonus and performance-based stock awards provided approximately $6 million of cost savings due to weaker business conditions and the impact on revenue.

Additionally, we saw favorable adjustments to medical costs and other accruals that reduced SG&A expenses for the quarter by approximately $3 million as compared to the same period a year ago.

While we expect certain costs like variable compensation expense to reset and increase in 2021 as compared to 2020, we are focused on mitigating the amount of costs that might come back into the business as we see an improvement in our end markets and recover from the pandemic.

Please refer to the Selling, general and administrative expenses table for a reconciliation of the period over period expense change.

Selling, general, and administrative expenses Three Months Ended

September 30, 2020 versus September 30, 2019

(Percent Change) Consolidated

GAAP reported change (21.8)%

Currency translation effects (0.1)%

Constant currency change (21.9)%

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 provides investors with a greater level of clarity into spending levels on a year-over-year basis.

Selling, general and administrative ("SG&A") expenses were $75.5 million during the first quarter of 2021, a decrease of $4.7 million or 5.9%, compared to $80.2 million in the first quarter of 2020.

SG&A costs declined despite $1.8 million of additional SG&A expenses related to the Bristol acquisition.

Overall, selling, general and administrative expenses were 24.5% of net sales during the first quarter of 2021, compared to 23.5% of net sales during the same period in 2020.

We delivered $7.0 million to $8.0 million of savings from restructuring programs and discretionary cost savings associated with reduced travel, controlled hiring, professional services and other costs.

Approximately half of these savings are temporary and will return to some extent slowly as the business improves and travel resumes, while half are structural in nature.

We expect the year over year SG&A comparison to become more difficult as the second quarter of 2020 reflected the initial cost reduction activities that occurred at the onset of the pandemic.

Research and development expense .

Research and development expense was $13.9 million during the third quarter of 2020, an increase of $0.4 million, compared to $13.5 million during the third quarter of 2019.

Research and development expense was 4.6% of net sales in the third quarter of 2020 compared to 3.9% in the same period of 2019.

We continue to invest in research and development in order to bring to market the most advanced safety solutions for our customers.

During the third quarter of 2020, we capitalized $2 million of software development costs.

Research and development expense was $13.2 million during the first quarter of 2021, a decrease of $0.9 million, compared to $14.1 million during the first quarter of 2020.

Research and development expense was 4.3% of net sales in the first quarter of 2021 compared to 4.1% in the same period of 2020.

We continue to develop new products for global safety markets, including the recently launched connected firefighter ecosystem powered by LUNAR.

During the first quarter of 2021, we capitalized $2.0 million of software development costs.

Restructuring charges .

Restructuring charges during the third quarter of 2020, were $7.6 million primarily due to severance costs related to a plan to reduce our global cost structure.

The plan addresses weakened global economic conditions and is designed to improve our business model during the downturn.

Together with cost reduction programs executed throughout 2020, we expect these programs to collectively deliver $10 million to $15 million of savings in 2021, and annual savings of $15 million to $20 million thereafter.

This compared to restructuring charges of $1.9 million during the third quarter of 2019, primarily related to footprint rationalization and other restructuring programs associated with our ongoing initiatives to drive profitable growth in our International segment.

Restructuring charges during the first quarter of 2021, were $1.3 million primarily related to our ongoing initiatives to drive profitable growth and right size our operations.

Together with cost reduction programs executed throughout 2020, we expect these programs to collectively deliver $15 million of savings throughout the income statement in 2021, and annual savings of $20 million thereafter.

This compared to restructuring charges of $2.0 million during the first quarter of 2020, primarily related to footprint rationalization and other restructuring programs associated with our ongoing initiatives to drive profitable growth in our International segment.

We remain focused on executing programs that will optimize our cost structure.

Currency exchange .

Currency exchange losses were $2.8 million in the third quarter of 2020 compared to gains of $0.9 million in the third quarter of 2019.

Currency exchange gains were $2.1 million in the first quarter of 2021 compared to losses of $0.3 million in the first quarter of 2020.

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

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Product liability expense.

Product liability expense for the three months ended September 30, 2020 was $2.1 million compared to $1.7 million in the same period last year.

Product liability expense for the three months ended March 31, 2021 was $2.8 million compared to $2.0 million in the same period last year.

Product liability expense for both periods related primarily to defense costs incurred for cumulative trauma product liability claims.

GAAP operating income.

Consolidated operating income for the third quarter of 2020 was $41.1 million compared to $59.6 million in the same period last year.

The decrease in operating results was driven by lower sales volumes and lower gross profit for the reasons noted above and increased restructuring charges partially offset by improved SG&A expense leverage.

Consolidated operating income for the first quarter of 2021 was $44.0 million compared to $58.8 million in the same period last year.

The decrease in operating results was driven by lower sales volumes and lower gross profit for the reasons noted above partially offset by lower SG&A expenses.

Adjusted operating income.

Americas adjusted operating income for the third quarter of 2020 was $40.9 million, a decrease of $18.1 million, or 31%, compared to $59.0 million in the prior year quarter.

The decrease was related to the lower level of sales and lower gross profit for reasons noted above partially offset by improved SG&A leverage.

Sales for the quarter declined 13% as compared to the prior year while SG&A expenses declined 22%.

International adjusted operating income for the third quarter of 2020 was $15.7 million, an increase of $1.9 million, or 14%, compared to $13.8 million in the prior year quarter.

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 decrease in sales volumes.

Corporate segment adjusted operating loss for the third quarter of 2020 was $2.9 million, an improvement of $6.6 million compared to an adjusted operating loss of $9.5 million in the third quarter of 2019 due to lower variable compensation expense, as well as lower professional service and other expenses related to cost control initiatives.

We expect corporate adjusted operating loss to moderate back up to a more normalized range of $6 million to $8 million in future quarters.

Americas adjusted operating income for the first quarter of 2021 was $45.2 million, a decrease of $14.6 million, or 25%, compared to $59.8 million in the prior year quarter.

The decrease was related to the lower level of sales and lower gross profit for reasons noted above, partially offset by lower SG&A expenses.

International adjusted operating income for the first quarter of 2021 was $8.8 million, a decrease of $3.9 million, or 31%, compared to $12.7 million in the prior year quarter.

The decrease in adjusted operating income is primarily attributable to lower sales volumes.

Corporate segment adjusted operating loss for the first quarter of 2021 was $6.5 million, an improvement of $2.1 million compared to an adjusted operating loss of $8.6 million in the first quarter of 2020 due to lower professional services fees and discretionary cost control initiatives.

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

Adjusted operating margin % is calculated as adjusted operating income (loss) divided by net sales and adjusted EBITDA margin % is calculated as adjusted EBITDA divided by net sales.

Adjusted operating income Three Months Ended September 30, 2020

(In thousands) Americas International Corporate Consolidated

Net sales $ 194,303 $ 110,089 $ — $ 304,392

GAAP operating income 41,149

Restructuring charges (Note 4) 7,603

Currency exchange losses, net (Note 6) 2,759

Product liability expense (Note 17) 2,077

Strategic transaction costs 41

Adjusted operating income (loss) 40,898 15,658 (2,927) 53,629

Adjusted operating margin % 21.0 % 14.2 %

Depreciation and amortization 9,856

Adjusted EBITDA 47,465 18,848 (2,828) 63,485

Adjusted EBITDA % 24.4 % 17.1 %

Adjusted operating income Three Months Ended September 30, 2019

Adjusted operating income Three Months Ended March 31, 2021

(In thousands) Americas International Corporate Consolidated

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Product liability expense (Note 17) 2,796

Strategic transaction costs 952

Acquisition related costs (Note 18) (a)

Adjusted operating income (loss) 45,152 8,790 (6,526) 47,416

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Adjusted EBITDA % 25.0 % 12.2 %

Adjusted operating income (loss) and adjusted EBITDA are a non-GAAP financial measures used by the chief operating decision maker to evaluate segment performance and allocate resources.

Adjusted operating income (loss) is reconciled above to the nearest GAAP financial measure, Operating income (loss), and excludes restructuring, currency exchange, product liability expense, and strategic transaction costs.

Adjusted EBITDA is reconciled above to the nearest GAAP financial measure, Operating income (loss) and excludes depreciation and amortization expense.

Total other expense, net.

Total other expense, net, for the third quarter of 2020 was $1.2 million, compared to $1.3 million for the same period in 2019.

Lower interest expense was mostly offset by lower pension income driven by lower discount rates and lower expected rate of return.

Income taxes.

The reported effective tax rate for the third quarter of 2020 was 29.3% compared to 26.9% for the third quarter of 2019.

This increase from the prior year is attributable to state income taxes, increased statutory rates in foreign jurisdictions, nondeductible executive compensation, and a reduction in the benefit related to domestic goods sold into foreign markets, partially offset by benefits associated with the research and development tax credit.

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.

Net income attributable to MSA Safety Incorporated .

Net income was $28.0 million for the third quarter of 2020, or $0.71 per diluted share compared to income of $42.2 million, or $1.08 per diluted share, for the same period last year.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Net sales for the nine months ended September 30, 2020, were $960.0 million, a decrease of $66.7 million, or 6.5%, compared to $1,026.7 million for the nine months ended September 30, 2019.

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

Net Sales Nine Months Ended September 30, Dollar

Decrease Percent

(In millions) 2020 2019

Consolidated $960.0 $1,026.7 $(66.7) (6.5)%

Americas 629.8 679.7 (49.9) (7.3)%

International 330.2 347.0 (16.8) (4.8)%

Net Sales Nine Months Ended September 30, 2020 versus September 30, 2019

(Percent Change) Americas International Consolidated

GAAP reported sales change (7.3)% (4.8)% (6.5)%

Currency translation effects 1.8% 0.7% 1.5%

Constant currency sales change (5.5)% (4.1)% (5.0)%

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

Net sales for the Americas segment were $629.8 million during the nine months ended September 30, 2020, a decrease of $49.9 million, or 7.3%, compared to $679.7 million during the same period last year.

During the nine months ended September 30, 2020, constant currency sales in the Americas segment decreased 5.5% 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 APR.

Net sales for the International segment were $330.2 million during the nine months ended September 30, 2020, a decrease of $16.8 million, or 4.8%, compared to $347.0 million during the same period last year.

Constant currency sales in the International segment decreased 4.1% during the period.

Weaker fall protection and portable gas detection product sales in the EMEA region were only partially offset by higher industrial head protection sales.

APAC sales declined across our core product groups driven by the shutdowns tied to the COVID-19 pandemic.

Refer to Note 8—Segment Information to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q, for information regarding sales by product group.

Gross profit .

Gross profit for the nine months ended September 30, 2020, was $431.2 million, a decrease of $38.6 million or 8.2%, compared to $469.8 million during the same period last year.

The ratio of gross profit to net sales was 44.9% in the nine months ended September 30, 2020, compared to 45.8% during the same period last year.

The lower gross profit ratio during the nine month period is primarily attributable inefficiencies associated with lower throughput in our factories associated with a lower level of demand and to a lesser extent, additional cost of implementing COVID-19 safety protocols across our worksites, partially offset by strategic pricing improvements.

Selling, general and administrative expenses .

SG&A expenses were $214.1 million during the nine months ended September 30, 2020, a decrease of $31.3 million or 12.7%, compared to $245.3 million during the same period last year.

Overall, selling, general and administrative expenses were 22.3% of net sales during the nine months ended September 30, 2020, compared to 23.9% of net sales during the same period in 2019.

These actions provided approximately $15 million to $17 million of cost savings in the nine month period.

Additionally, a decrease in variable compensation expense related to bonus and performance-based stock awards provided approximately $11 million of cost savings.

Please refer to the Selling, general and administrative expenses table for a reconciliation of the period over period expense change.

Selling, general, and administrative expenses Nine Months Ended

September 30, 2020 versus September 30, 2019

(Percent Change) Consolidated

GAAP reported change (12.7)%

Currency translation effects 1.1%

Constant currency change (11.6)%

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.

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

Research and development expense .

Research and development expense was $41.7 million during the nine months ended September 30, 2020 compared to $41.5 million during the same period last year.

Research and development expense was 4.3% of net sales in the nine months ended September 30, 2020, compared to 4.0% in the same period of 2019.

We launched the Altair io 360 Gas Detector, an area monitor that operates with the simplicity of a smart-home device during the first quarter.

During the nine months ended September 30, 2020, we capitalized $6 million of software development costs.

Restructuring charges .

Restructuring charges during the nine months ended September 30, 2020, were $18.5 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.

This compared to restructuring charges of $11.2 million during the same period in 2019, primarily related to footprint rationalization and other restructuring programs associated with our ongoing initiatives to drive profitable growth in our International segment.

We remain focused on executing programs that will optimize our cost structure.

Currency exchange .

Currency exchange losses were $3.8 million in the nine months ended September 30, 2020, compared to $17.3 million in the same period of 2019.

The decrease in currency exchange losses from prior year was primarily due to the recognition of non-cash cumulative translation losses of approximately $15.4 million during the first quarter of 2019 as a result of the approval of our plan to close our South Africa subsidiaries.

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 (“CTA”), a separate component of accumulated other comprehensive loss within the equity section of the unaudited Condensed Consolidated Balance Sheet.

Refer to Note 15—Derivative Financial Instruments to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q, for information regarding our currency exchange rate risk management strategy.

Product liability expense.

Product liability expense for the nine months ended September 30, 2020, was $4.9 million compared to $8.2 million in the same period last year.

Product liability expense for both periods related primarily to defense costs incurred for cumulative trauma product liability claims.

GAAP operating income.

Consolidated operating income for the nine months ended September 30, 2020, was $148.2 million compared to $146.3 million in the same period last year.

The increase in operating results was primarily driven by lower currency exchange losses and improved SG&A leverage.

On a consolidated basis, SG&A expenses declined by 13% while sales declined 7%.

Adjusted operating income.

Americas adjusted operating income for the nine months ended September 30, 2020, was $149.7 million, a decrease of $21.8 million, or 12.7%, compared to $171.5 million in the prior year.

The decrease was related to the lower level of sales partially offset by improved SG&A leverage.

International adjusted operating income for the nine months ended September 30, 2020, was $45.7 million, an increase of $5.8 million, or 14.6%, compared to $39.9 million in the prior year.

The increase in adjusted operating income is primarily attributable to improved gross profit associated with strategic pricing improvements and benefits we continue to realize s from restructuring programs executed over the past 12 to 18 months, which more than offset the 5% decrease in sales.

Corporate segment adjusted operating loss for the nine months ended September 30, 2020, was $19.1 million, an improvement of $6.4 million, or 25.1%, compared to an adjusted operating loss of $25.5 million in the same period of 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.

Adjusted operating margin % is calculated as adjusted operating income (loss) divided by net sales and adjusted EBITDA margin % is calculated as adjusted EBITDA divided by net sales.

Adjusted operating income Nine Months Ended September 30, 2020

Adjusted operating income Three Months Ended March 31, 2020

(In thousands) Americas International Corporate Consolidated

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Product liability expense (Note 17) 1,951

Strategic transaction costs 202

Acquisition related costs (Note 18) (a)

COVID-19 related costs 757

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Adjusted EBITDA % 28.7 % 14.3 %

Adjusted operating income Nine Months Ended September 30, 2019

(In thousands) Americas International Corporate Consolidated

Net sales $ 679,699 $ 347,027 $ — $ 1,026,726

GAAP operating income 146,252

Restructuring charges (Note 4) 11,203

Currency exchange losses, net (Note 6) 17,338

Product liability expense (Note 17) 8,155

Strategic transaction costs 2,937

Adjusted operating income (loss) 171,463 39,888 (25,466) 185,885

Adjusted operating margin % 25.2 % 11.5 %

Depreciation and amortization 28,339

Adjusted EBITDA 190,084 49,313 (25,173) 214,224

Adjusted EBITDA % 28.0 % 14.2 %

(a) Acquisition related costs include advisory, legal, accounting, valuation, and other professional or consulting fees incurred.

These costs are included in Selling, general and administrative expense in the unaudited condensed consolidated statement of income.

Acquisition-related costs also include the acquisition related amortization which is included in Cost of products sold in the Condensed Consolidated Statements of Income.

Adjusted operating income (loss) and adjusted EBITDA are a non-GAAP financial measures used by the chief operating decision maker to evaluate segment performance and allocate resources.

Adjusted EBITDA is reconciled above to the nearest GAAP financial measure, Operating income (loss) and excludes depreciation and amortization expense.

Total other expense, net.

Total other expense, net, for the nine months ended September 30, 2020, was $3.5 million, compared to $2.2 million for the same period in 2019, primarily due to lower pension income driven by lower discount rates and lower expected rate of return partially offset by lower interest expense.

Total other (income) expense, net.

Total other income, net, for the first quarter of 2021 was $2.3 million, compared to other expense, net, of $1.9 million for the same period in 2020 driven primarily by lower interest expense and higher pension income driven by a one-time pension settlement and a higher expected rate of return.

Income taxes.

The reported effective tax rate for the nine months ended September 30, 2020, was 25.1% compared to 26.3% for the same period in 2019.

This decrease from the prior year is attributable to a large non-deductible loss in 2019 related to foreign exchange on entity closures, partially offset by an increase in state income taxes and increased statutory rates in foreign jurisdictions.

The adjusted effective tax rate, which excludes the tax benefit associated with ASU 2016-09, Improvements to Employee Share-Based Payment Accounting , is expected to be in the range of 25% – 26% for the full year ending December 31, 2020.

The reported effective tax rate for the first quarter of 2021 was 21.0% compared to 23.0% for the first quarter of 2020.

This decrease from the prior year is attributable to higher profits in foreign jurisdictions with favorable statutory tax rates.

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

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Net income attributable to MSA Safety Incorporated .

Net income was $107.8 million for the nine months ended September 30, 2020, or $2.74 per diluted share compared to income of $105.3 million, or $2.69 per diluted share, for the same period in 2019.

Net income was $36.4 million for the first quarter of 2021, or $0.92 per diluted share compared to income of $43.7 million, or $1.11 per diluted share, for the same period last year.

Non-GAAP Financial Information

We may provide information regarding financial measures such as constant currency changes, 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 and 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 constant currency changes, financial measures excluding the impact of acquisitions and related acquisition related costs, including acquisition related amortization and COVID-19 related costs, consisting of a one-time bonus for essential manufacturing employees and 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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LIQUIDITY AND CAPITAL RESOURCES

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

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.

At September 30, 2020, approximately 32% of our long-term debt is at fixed interest rates with repayment schedules through 2031.

At March 31, 2021, approximately 26% of our long-term debt is at fixed interest rates with repayment schedules through 2031.

The remainder of our long-term debt is at variable rates on an unsecured revolving credit facility that is due in 2023.

At September 30, 2020, approximately 78% of our borrowings are denominated in U.S.

At March 31, 2021, approximately 56% of our borrowings are denominated in U.S.

dollars, which limits our exposure to currency exchange rate fluctuations.

At September 30, 2020, the Company had cash, cash equivalents and restricted cash totaling $133.2 million, including $111.7 million held by our foreign subsidiaries, and access to sufficient capital, providing ample liquidity and flexibility to continue to maintain our balanced capital allocation strategy.

We believe MSA's healthy balance sheet and access to significant capital at September 30, 2020, positions us well to navigate through the COVID-19 pandemic and challenging business conditions.

Cash, cash equivalents and restricted cash decreased $19.4 million during the nine months ended September 30, 2020, compared to decreasing $31.7 million during the same period in 2019.

At March 31, 2021, the Company had cash, cash equivalents and restricted cash totaling $185.1 million, including $160.1 million held by our foreign subsidiaries, and access to sufficient capital, providing ample liquidity and flexibility to continue to maintain our balanced capital allocation strategy.

We believe MSA's healthy balance sheet and access to significant capital at March 31, 2021, positions us well to navigate through challenging business conditions.

Cash, cash equivalents and restricted cash increased $24.0 million during the three months ended March 31, 2021, compared to decreasing $29.6 million during the same period in 2020.

We continue to employ a balanced capital allocation strategy that prioritizes growth investments, funding our dividend and servicing debt obligations.

Operating activities.

Operating activities provided cash of $110.2 million during the nine months ended September 30, 2020, compared to providing $88.3 million during the same period in 2019.

The improved operating cash flow during the period was primarily related to lower net product liability payments.

Working capital improvement related to accounts receivable were offset by increased inventory levels to support our backlog levels heading into the fourth quarter.

Our collections from insurance companies exceeded payments for product liability claims by $4.2 million, in the nine months ended September 30, 2020, compared to product liability payments of $25.1 million, net of collections on insurance receivables, in the same period of 2019.

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 receivable and notes receivable - insurance companies balances at September 30, 2020, 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 receivable 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.

On March 25, 2020, the U.S.

Senate passed the Coronavirus Aid, Relief, and Economic Security Act, (the “CARES Act”).

The CARES Act includes a number of tax provisions relevant to business.

As permitted under the CARES Act, MSA deferred estimated payments of U.S.

income taxes of $13.5 million from the first and second quarters of 2020 to July 15, 2020.

This income tax payment was reflected as a use of operating cash in the third quarter.

As is also permitted under the CARES Act, MSA will defer the remittance of the employer portion of the social security tax.

The provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.

We expect to defer approximately $6 million of payments related to the employer’s portion of social security tax in 2020 and have deferred $4 million year to date through September 30, 2020.

Operating activities provided cash of $45.6 million during the three months ended March 31, 2021, compared to providing $13.6 million during the same period in 2020.

The improved operating cash flow as compared to the same period in 2020 was primarily related to working capital improvements.

Payments for subsidiary MSA LLC's product liability claims exceeded collections from insurance companies by $5.7 million in the three months ended March 31, 2021, compared to collections from insurance companies of $0.7 million, net of product liability claim payments, in the same period of 2020.

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

Now that MSA LLC is largely self-insured for its historical cumulative trauma product liability claims, associated insurance reimbursements received in any given period are limited, and generally do not offset cash outlay in that same period in full.

In recent years, MSA LLC’s contingent liabilities have been funded without a material impact on the Company’s consolidated capital allocation priorities.

Investing activities.

Investing activities used cash of $51.7 million during the nine months ended September 30, 2020, compared to using $73.8 million during the same period in 2019.

Capital expenditures and the purchase of short-term investments, net of proceeds from maturities drove cash outflows from investing activities during the nine months ended September 30, 2020, while 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 same period in 2019.

During 2020, we incurred capital expenditures of $32.7 million, including $6 million associated with software development and other growth programs, compared to capital expenditures of $23.5 million, including $3.5 million associated with software development and other growth programs, in the same period in 2019.

MSA LLC, one of the Company's subsidiaries, is continuing to ramp up the capacity for its APR production in the U.S.

in response to demand created by the global pandemic.

MSA LLC has increased its available workforce for APR production and expects to invest between $11 million to $13 million of capital expenditures to modernize and improve our APR production capacity in the U.S.

Approximately $8 million has been spent on this project through September 30, 2020.

The Company expects to invest between $45 million to $50 million in total capital expenditures for the full year ending December 31, 2020.

Investing activities used cash of $52.5 million during the three months ended March 31, 2021, compared to using $26.1 million during the same period in 2020.

The acquisition of Bristol and capital expenditures, partially offset by maturities of short-term investments, net of purchases, drove cash outflows from investing activities during the three months ended March 31, 2021, while capital expenditures and the purchase of short-term investments, net of proceeds from maturities drove cash outflows from investing activities during the same period in 2020.

During the first quarter of 2021, we incurred capital expenditures of $9.6 million, including $2.0 million associated with software development and other growth programs, compared to capital expenditures of $6.6 million, including $1.8 million associated with software development and other growth programs, in the same period in 2020.

We also remain active in evaluating additional acquisition opportunities that will allow us to continue to grow in key end markets and geographies.

Financing activities.

Financing activities used cash of $76.1 million during the nine months ended September 30, 2020, compared to using $40.8 million during the same period in 2019.

During the nine months ended September 30, 2020, we had net payments on long-term debt of $5.0 million as compared to net proceeds of $13.0 million during the same period in 2019.

We paid cash dividends of $49.8 million during the nine months ended September 30, 2020, compared to $47.2 million in the same period in 2019.

We also used cash of $28.7 million during the nine months ended September 30, 2020 to repurchase shares, including $20.1 million related to purchases under our 2015 stock repurchase program, compared to using $11.1 million during the same period in 2019, including $3.3 million related to purchases under our 2015 stock repurchase program.

Financing activities provided cash of $31.6 million during the three months ended March 31, 2021, compared to using $13.3 million during the same period in 2020.

During the three months ended March 31, 2021, we had net proceeds on long-term debt of $52.0 million to fund the acquisition of Bristol as compared to net proceeds of $28.0 million during the same period in 2020.

We paid cash dividends of $16.8 million during the three months ended March 31, 2021, compared to $16.3 million in the same period in 2020.

We also used cash of $5.3 million during the three months ended March 31, 2021 to repurchase shares, compared to using $27.7 million during the same period in 2020.

In 2020, $20.1 million of our repurchase activity was related to purchases under our 2015 stock repurchase program.

CUMULATIVE TRANSLATION ADJUSTMENTS

The position of the U.S.

dollar relative to international currencies at September 30, 2020, resulted in a translation loss of $3.0 million being recorded to the cumulative translation adjustments shareholders' equity account during the nine months ended September 30, 2020, compared to $15.9 million being recorded to the cumulative translation adjustments account during the same period in 2019.

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 $76 million at September 30, 2020, 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.

dollar relative to international currencies at March 31, 2021, resulted in a translation loss of $10.3 million being recorded to the cumulative translation adjustments shareholders' equity account during the three months ended March 31, 2021, compared to $22.8 million being recorded to the cumulative translation adjustments account during the same period in 2020.

COMMITMENTS AND CONTINGENCIES

We made contributions of $5.7 million to our pension plans during the nine months ended September 30, 2020.

We made contributions of $1.9 million to our pension plans during the three months ended March 31, 2021.

We expect to make total contributions of approximately $7.7 million to our pension plans in 2021 primarily associated with statutorily required plans in the International segment.

The Company had outstanding bank guarantees and standby letters of credit with banks as of September 30, 2020, totaling $9.6 million, of which $1.9 million related to the senior revolving credit facility.

The Company had outstanding bank guarantees and standby letters of credit with banks as of March 31, 2021, totaling $11.4 million, of which $1.3 million related to the senior revolving credit facility.

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

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

At September 30, 2020, the Company has $0.4 million of restricted cash in support of these arrangements.

At March 31, 2021, the Company has $0.3 million of restricted cash in support of these arrangements.

We have purchase commitments for materials, supplies, services, and property, plant and equipment as part of our ordinary conduct of business.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020.

During the first quarter of 2021 we made an acquisition that raised business combinations to a critical accounting policy and estimate.

Business Combinations

In accordance with the accounting guidance for business combinations, the Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition.

The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed will be recognized as goodwill.

The valuations of the acquired assets and liabilities will impact the determination of future operating results.

In addition to using management estimates and negotiated amounts, the Company uses a variety of information sources to determine the estimated fair values of acquired assets and liabilities including:

third-party appraisals for the estimated value and lives of identifiable intangible assets and property, plant and equipment;

third-party actuaries for the estimated obligations of defined benefit pension plans and similar benefit obligations;

and legal counsel or other experts to assess the obligations associated with legal, environmental and other contingent liabilities.

The business and technical judgment of management was used in determining which intangible assets have indefinite lives and in determining the useful lives of finite-lived intangible assets in accordance with the accounting guidance for goodwill and other intangible assets.

RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

Please refer to Note 2— Recently Adopted and Recently Issued Accounting Standards to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q.

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-Q

Item 2. Management’s Discussion and Analysis