MSA Safety Inc 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the historical financial statements and other financial information included elsewhere in this quarterly report on Form 10-Q. This discussion may contain forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. 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 our annual report entitled “Forward-Looking Statements” and “Risk Factors,” and those discussed in our Form 10-Q quarterly reports filed after such annual report (such as in Part II, Item 1A, “Risk Factors.”) Subsequent Events On July 1, 2021, we acquired Bacharach, Inc. and its affiliated companies (Bacharach) in an all cash transaction valued at $337 million, net of cash acquired. Headquartered near Pittsburgh in New Kensington, PA, Bacharach is a leader in gas detection technologies used in the heating, ventilation, air conditioning, and refrigeration (HVAC-R) markets. MSA is planning for Bacharach to add $30-$35 million of net sales and adjusted earnings accretion of $0.10 - $0.15 per share in the second half of 2021. During July 2021, we purchased the remaining 10% noncontrolling interest in MSA (China) Safety Equipment Co., Ltd. from our China partner for $19 million, inclusive of a $6 million dividend. China has been a key market in our International segment and is an important part of our strategic plan going forward. We have seen good growth in China and continue to make additional investments in this region. BUSINESS OVERVIEW MSA is a global leader in the development, manufacture and supply of safety products that protect people and facility infrastructures. 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 fire service, oil, gas and petrochemical industry, construction, industrial manufacturing applications, utilities, mining and the military. MSA's core products 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. 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. -28- 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, who are tasked with keeping citizens safe, and include 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 during these times, 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 workspace safety in a manner consistent with the mission and values of MSA. The Company intends to bring the majority of the U.S. workforce back during the third quarter 2021. 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 four geographical operating segments that are aggregated into three reportable geographic segments: Americas, International and Corporate. Americas . Our largest manufacturing and research and development facilities are located in the United States (U.S.). We serve our markets across the Americas with manufacturing facilities in the U.S., Mexico and Brazil. Operations in the other countries within the Americas segment focus primarily on sales and distribution in their respective home country markets. International . 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. In China, the products manufactured are sold primarily in China as well as in regional markets. Operations in other International segment countries focus primarily on sales and distribution in their respective home country markets. Although some of these companies may perform limited production, most of their sales are of products manufactured in our plants in Germany, France, the U.S., U.K., Ireland and China or are purchased from third-party vendors. Corporate . The Corporate segment primarily consists of general and administrative expenses incurred in our corporate headquarters, costs associated with corporate development initiatives, legal expense, interest expense, foreign exchange gains or losses and other centrally-managed costs. Corporate general and administrative costs comprise the majority of the expense in the Corporate segment. -29- PRINCIPAL PRODUCTS The following is a brief description of each of our principal product categories: MSA's corporate strategy includes a focus on driving sales of core products where we have leading market positions and a distinct competitive advantage. 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 89% and 85% of sales for the six months ended June 30, 2021 and 2020. MSA also maintains a portfolio of non-core products. Non-core products reinforce and extend the core offerings, drawing upon our customer relationships, distribution channels, geographical presence and technical experience. These products are complementary to the core offerings and often reflect more episodic or contract-driven growth patterns. Key non-core products include air-purifying respirators ("APR"), eye and face protection, ballistic helmets and gas masks. MSA does not produce disposable respirators of any type; however, Mine Safety Appliances Company, LLC ("MSA LLC"), one of the Company's subsidiaries, does produce advanced elastomeric APR, including half-mask respirators, full-facepiece respirators and powered air purifying respirators, each with replaceable filters providing a minimum of N-95 filtration capability. These products have historically been used in many industrial and first responder applications. APR products represented 6% and 9% of our consolidated sales for the six months ended June 30, 2021 and 2020, with over 74% and 75% of this business being in our Americas segment. 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 maintains a diversified portfolio of safety products that protect workers and facility infrastructure across a broad array of end markets. While the company sells its products through distribution, which can limit end-user visibility, the Company provides estimated ranges of end market exposure to facilitate understanding of its growth drivers. The Company estimates that approximately 35%-40% of its overall revenue is derived from the fire service market and 25%-30% of its revenue is derived from the energy market. The remaining 30%-40% is split between construction, utilities, general industrial applications, military and mining. A detailed listing of our significant product offerings in the aforementioned product groups above is included in MSA's Annual Report on Form 10-K for the year ended December 31, 2020. RESULTS OF OPERATIONS Three Months Ended June 30, 2021, Compared to Three Months Ended June 30, 2020 Net Sales. Net sales for the three months ended June 30, 2021, were $341.3 million, an increase of $26.9 million, or 8.6%, driven by increased sales across most of the core product groups compared to $314.4 million for the three months ended June 30, 2020. Please refer to the Net Sales table for a reconciliation of the quarter over quarter sales change. Net Sales Three Months Ended June 30, Dollar Increase Percent Increase (In millions) 2021 2020 Consolidated $341.3 $314.4 $26.9 8.6% Americas 217.7 204.2 13.5 6.6% International 123.6 110.2 13.4 12.1% Net Sales Three Months Ended June 30, 2021 (Percent Change) Americas International Consolidated GAAP reported sales change 6.6% 12.1% 8.6% Currency translation effects (0.8)% (9.2)% (3.8)% Constant currency sales change 5.8% 2.9% 4.8% Less: Acquisitions —% (6.6)% (2.4)% Organic constant currency change 5.8% (3.7)% 2.4% Note: Organic 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. Organic constant currency sales change is calculated by deducting the percentage impact from acquisitions and currency translation effects from the overall percentage change in net sales. -30- Net sales for the Americas segment were $217.7 million in the second quarter of 2021, an increase of $13.5 million, or 6.6%, compared to $204.2 million in the second quarter of 2020. During the quarter, constant currency sales in the Americas segment increased 5.8% compared to the prior year period. All core products improved versus the prior year with notable improvements in our industrial business that responded quickly to the improving business environment, partially offset by lower demand for APR products as the business returned to pre-pandemic levels. Americas segment business conditions and order activity continued to improve throughout the quarter and that provides a sense of optimism to start the second half of 2021. Our ability to deliver orders will be dependent upon the extent in which supply chain challenges persist in the second half of 2021. Net sales for the International segment were $123.6 million in the second quarter of 2021, an increase of $13.4 million, or 12.1%, compared to $110.2 million for the second quarter of 2020. Constant currency sales in the International segment increased 2.9% during the quarter due to sales of Bristol turnout gear, which was partially offset by weaker volumes in EMEA operating segment driven by slower economic recovery due to the pandemic in Europe and lower project business in the Middle East Fixed Gas & Flame Detection ("FGFD") market. However, we are seeing increased incoming orders for gas detection products. Our ability to deliver orders will be dependent upon the extent in which supply chain challenges persist in the second half of 2021. Our backlog increased significantly during the past quarter as a result of an uptick in order pace and ongoing supply chain constraints in certain product lines. Our incoming orders during the quarter were strong across our product portfolio and above 2019 levels. The recently announced acquisition of Bacharach is expected to add $30-$35 million of net sales during the second half of 2021. Looking ahead, we continue to operate in a very dynamic environment. There are a number of other evolving factors that will continue to influence our revenue outlook. These factors include, among other things, the effectiveness/pace of the vaccine rollout globally, risk of additional COVID lockdowns, industrial employment rates, supply chain constraints, raw material availability and the pace of economic recovery. These conditions could impact our future results and growth expectations. 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 second quarter of 2021 was $152.9 million, an increase of $11.3 million or 8.0%, compared to $141.6 million for the second quarter of 2020. The ratio of gross profit to net sales was 44.8% in the second quarter of 2021 compared to 45.0% in the same quarter last year. Strategic pricing and stronger throughput in our factories offset higher material costs. Despite a number of headwinds in margin associated with input costs, a less favorable product mix, and inventory charges associated with lower demand for APR products, gross margins were roughly in line with prior year levels. We have implemented an off-cycle price increase to respond to the inflation we are seeing in the U.S. across electronic components, resins and other inputs. While there could be a number of scenarios on how long these challenges may persist, we could see these impact our business for the foreseeable future with more meaningful impact in the second half of 2021. We will continue to evaluate additional pricing opportunities as we continue to navigate inflationary pressures. -31- Selling, general and administrative expenses . Selling, general and administrative ("SG&A") expenses were $83.4 million during the second quarter of 2021, an increase of $14.4 million or 20.8%, $12.1 million on a constant currency basis, compared to $69.0 million in the second quarter of 2020. Overall, selling, general and administrative expenses were 24.4% of net sales during the second quarter of 2021, compared to 22.0% of net sales during the same period in 2020. We expect SG&A to approximate 23.5% of net sales in the second half of 2021. Improved business conditions drove $3 million of additional variable compensation during the quarter. Acquisition costs related to the acquisitions of Bacharach and Bristol totaling $8 million also increased SG&A costs during the quarter. These costs include $4.3 million of incremental stock compensation expense driven by the acquisition of Bacharach and its expected revenue and profitability contributions in the coming years, $2 million of transaction costs related to the acquisition of Bacharach, and $1.8 million of Bristol base SG&A which was not in the comparable period. Costs savings from restructuring programs offset discretionary cost increases during the quarter. Please refer to the Selling, general and administrative expenses table for a reconciliation of the quarter over quarter expense change. Selling, general, and administrative expenses Three Months Ended June 30, 2021 versus June 30, 2020 (Percent Change) Consolidated GAAP reported change 20.8% Currency translation effects (3.3)% Constant currency change 17.5% Less: Acquisitions and related strategic transaction costs (5.3)% Organic constant currency change 12.2% Research and development expense . Research and development expense was $14.0 million during the second quarter of 2021, an increase of $0.2 million, compared to $13.8 million during the second quarter of 2020. Research and development expense was 4.1% of net sales in the second quarter of 2021 compared to 4.4% in the same period of 2020. We continue to develop new products for global safety markets. During the second quarter of 2021, we capitalized $2.1 million of software development costs. Restructuring charges . Restructuring charges during the second quarter of 2021, were $7.1 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 $25 million thereafter. This compared to restructuring charges of $8.9 million during the second quarter of 2020, primarily related to footprint rationalization and the Company's FGFD manufacturing footprint optimization and the acceleration of cost reduction programs associated with our ongoing initiatives to drive profitable growth in our International segment. We continue to evaluate additional programs to execute in the second half of 2021 in response to changing business conditions. Currency exchange . Currency exchange losses were $1.6 million in the second quarter of 2021 compared to losses of $0.8 million in the second quarter of 2020. Currency exchange in both periods were related to foreign currency exposure on unsettled inter-company balances. 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 three months ended June 30, 2021 was $11.8 million compared to $0.9 million in the same period last year. Product liability expense increased during the quarter to reflect an increase in the number of asserted claims pending against MSA LLC and a corresponding adjustment to the reserve, as discussed further in Note 17. The expense in the second quarter of 2020 related primarily to defense costs incurred for cumulative trauma product liability claims. GAAP operating income. Consolidated operating income for the second quarter of 2021 was $35.1 million compared to $48.3 million in the same period last year. The decrease in operating results was driven by higher product liability expense and SG&A expenses, and acquisition related costs as described above, partially offset by sales volume. -32- Adjusted operating income. Americas adjusted operating income for the second quarter of 2021 was $49.2 million, and comparable to $49.0 million from the prior year quarter. International adjusted operating income for the second quarter of 2021 was $20.4 million, an increase of $3.0 million, or 17%, compared to $17.4 million in the prior year quarter. The increase in adjusted operating income is primarily attributable to higher sales volumes and gross profit expansion, partially offset by higher SG&A, which was driven by the Bristol acquisition. Corporate segment adjusted operating loss for the second quarter of 2021 was $11.0 million, an increase of $3.5 million compared to an adjusted operating loss of $7.5 million in the second quarter of 2020 due to variable compensation resets, including $4.3 million of incremental stock compensation expense related to the July 1, 2021 acquisition of Bacharach. 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 June 30, 2021 (In thousands) Americas International Corporate Consolidated Net sales $ 217,707 $ 123,582 $ — $ 341,289 GAAP operating income 35,050 Restructuring charges (Note 3) 7,078 Currency exchange losses, net (Note 5) 1,640 Product liability expense (Note 17) 11,751 Acquisition related costs (Note 18) (a) 3,168 Adjusted operating income (loss) 49,238 20,440 (10,991) 58,687 Adjusted operating margin % 22.6 % 16.5 % Depreciation and amortization 11,584 Adjusted EBITDA 57,137 24,020 (10,886) 70,271 Adjusted EBITDA % 26.2 % 19.4 % Adjusted operating income Three Months Ended June 30, 2020 (In thousands) Americas International Corporate Consolidated Net sales $ 204,231 $ 110,207 $ — $ 314,438 GAAP operating income 48,294 Restructuring charges (Note 3) 8,865 Currency exchange losses, net (Note 5) 793 Product liability expense (Note 17) 851 Acquisition related costs (Note 18) 64 Adjusted operating income (loss) 49,003 17,402 (7,538) 58,867 Adjusted operating margin % 24.0 % 15.8 % Depreciation and amortization 9,786 Adjusted EBITDA 55,620 20,474 (7,441) 68,653 Adjusted EBITDA % 27.2 % 18.6 % (a) Acquisition related costs include advisory, legal, accounting, valuation, and other professional or consulting fees incurred during due diligence and integration. These costs are included in Selling, general and administrative expense in the unaudited Condensed Consolidated Statements 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. Note: 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 acquisition related costs. Adjusted EBITDA is reconciled above to the nearest GAAP financial measure, Operating income (loss) and excludes depreciation and amortization expense. -33- Total other (income) expense, net. Total other income, net, for the second quarter of 2021 was $0.1 million, compared to other expense, net, of $0.5 million for the same period in 2020 driven primarily by lower interest expense and higher pension income driven by a higher expected rate of return. Income taxes. The reported effective tax rate for the second quarter of 2021 was 27.8% compared to 23.9% for the second quarter of 2020. This increase from the prior year is attributable to statutory rate increases in the U.K., which required a quarter specific reevaluation of our deferred taxes in the U.K., which will not recur in future periods; and nondeductible executive compensation. 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 $25.1 million for the second quarter of 2021, or $0.64 per diluted share compared to income of $36.1 million, or $0.92 per diluted share, for the same period last year. Six Months Ended June 30, 2021, Compared to Six Months Ended June 30, 2020 Net Sales. Net sales for the six months ended June 30, 2021, were $649.7 million, a decrease of $5.9 million, or 0.9%, driven by decreased first quarter sales across most of the core product groups compared to $655.6 million for the six months ended June 30, 2021. Please refer to the Net Sales table for a reconciliation of the period over period sales change. Net Sales Six Months Ended June 30, Dollar Decrease Percent Decrease (In millions) 2021 2020 Consolidated $649.7 $655.6 $(5.9) (0.9)% Americas 426.0 435.5 (9.5) (2.2)% International 223.7 220.1 3.6 1.6% Net Sales Six Months Ended June 30, 2021 (Percent Change) Americas International Consolidated GAAP reported sales change (2.2)% 1.6% (0.9)% Currency translation effects —% (7.9)% (2.7)% Constant currency sales change (2.2)% (6.3)% (3.6)% Less: Acquisitions —% (5.0)% (1.7)% Organic constant currency change (2.2)% (11.3)% (5.3)% Note: Organic 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. Organic constant currency sales change is calculated by deducting the percentage impact from acquisitions and currency translation effects from the overall percentage change in net sales. Net sales for the Americas segment were $426.0 million in the six months ended June 30, 2021, a decrease of $9.5 million, or 2.2%, compared to $435.5 million in the same period last year. During the six months ended June 30, 2021, constant currency sales in the Americas segment decreased 2.2% compared to the prior year period, driven by APR sales moderating to pre-pandemic levels, which was partially offset by a general improvement in business conditions during the second quarter of 2021. Our ability to deliver orders will be dependent upon the extent in which supply chain challenges persist in the second half of 2021. Net sales for the International segment were $223.7 million in the six months ended June 30, 2021, an increase of $3.6 million, or 1.6%, compared to $220.1 million for the same period last year. Constant currency sales in the International segment decreased 6.3% during the period 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 sales of Bristol turnout gear. Our ability to deliver orders will be dependent upon the extent in which supply chain challenges persist in the second half of 2021. 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. -34- Gross profit . Gross profit for the six months ended June 30, 2021, was $287.7 million, a decrease of $11.3 million or 3.8%, compared to $299.0 million during the same period last year. The ratio of gross profit to net sales was 44.3% during the six months ended June 30, 2021 compared to 45.6% during the same period last year. Strategic pricing and stronger throughput in our factories helped to offset higher material costs, despite a number of headwinds in margin associated with input costs, a less favorable product mix, and inventory charges associated with lower demand for APR products. We have implemented an off-cycle price increase to respond to the inflation we are seeing in the U.S. across electronic components, resins and other inputs. While there could be a number of scenarios on how long these challenges may persist, we could see these impact our business for the foreseeable future with more meaningful impact in the second half of 2021. We will continue to evaluate additional pricing opportunities as we continue to navigate inflationary pressures. Selling, general and administrative expenses . Selling, general and administrative ("SG&A") expenses were $158.9 million during the six months ended June 30, 2021, an increase of $9.6 million or 6.4%, compared to $149.3 million during the same period last year. Overall, selling, general and administrative expenses were 24.5% of net sales during the six months ended June 30, 2021, compared to 22.8% of net sales during the same period in 2020. We expect SG&A to approximate 23.5% of second half 2021 net sales. Improved business conditions drove $3 million of additional variable compensation during the period. Acquisition costs related to the acquisitions of Bacharach and Bristol totaling $11 million also increased SG&A costs during the period. These costs include $4.3 million of incremental stock compensation expense driven by the acquisition of Bacharach and its expected revenue and profitability contributions in the coming years, $3 million of transaction costs related to the acquisition of Bacharach and Bristol, and $3.7 million of Bristol base SG&A which was not in the comparable period. Costs savings from restructuring programs offset discretionary cost increases during the year and we expect to bring costs back into the business at a slower pace than the revenue improvements. 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 Six Months Ended June 30, 2021 versus June 30, 2020 (Percent Change) Consolidated GAAP reported change 6.4% Currency translation effects (2.4)% Constant currency change 4.0% Less: Acquisitions and related strategic transaction costs (3.7)% Organic constant currency change 0.3% Research and development expense . Research and development expense was $27.2 million during the six months ended June 30, 2021, a decrease of $0.7 million, compared to $27.9 million during the same period last year. Research and development expense was 4.2% of net sales in the six months ended June 30, 2021, compared to 4.3% in the same period of 2020. We continue to develop new products for global safety markets. During the six months ended June 30, 2021, we capitalized $4.1 million of software development costs. Restructuring charges . Restructuring charges during the six months ended June 30, 2021, were $8.4 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 $25 million thereafter. This compared to restructuring charges of $10.9 million during the same period in 2020, primarily related to footprint rationalization projects including the Company's FGFD manufacturing footprint optimization and the acceleration of cost reduction programs associated with our ongoing initiatives to drive profitable growth in our International segment. We continue to evaluate additional programs to execute in the second half of 2021 in response to changing business conditions. -35- Currency exchange . Currency exchange gains were $0.5 million during the six months ended June 30, 2021, compared to losses of $1.1 million in the same period of 2020. Currency exchange in both periods were related to foreign currency exposure on unsettled inter-company balances. 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 six months ended June 30, 2021 was $14.5 million compared to $2.8 million in the same period last year. Product liability expense increased during the period to reflect an increase in the number of asserted claims pending against MSA LLC and a corresponding adjustment to the reserve, as discussed further in Note 17. Product liability expense for 2020 related primarily to defense costs incurred for cumulative trauma product liability claims. GAAP operating income. Consolidated operating income for the six months ended June 30, 2021, was $79.1 million compared to $107.1 million in the same period last year. The decrease in operating results was driven by lower sales volumes, lower gross profit and higher product liability expense and SG&A expenses for the reasons noted above. Costs savings from restructuring programs offset discretionary cost increases during the quarter. Adjusted operating income. Americas adjusted operating income for the six months ended June 30, 2021 was $94.4 million, a decrease of $14.4 million, or 13.3%, compared to $108.8 million in the prior year. The decrease was related to the lower level of sales, variable compensation resets and lower gross profit, for reasons noted above. International adjusted operating income for the six months ended June 30, 2021, was $29.2 million, a decrease of $0.9 million, or 2.9%, compared to $30.1 million in the prior year. The decrease in adjusted operating income is primarily attributable to SG&A expenses due to the Bristol acquisition and increased post-pandemic activities. Costs savings from restructuring programs offset discretionary cost increases during the first half of 2021. Corporate segment adjusted operating loss for the six months ended June 30, 2021, was $17.5 million, an increase of $1.3 million compared to an adjusted operating loss of $16.2 million in the same period of 2020 as higher variable compensation expenses, including Bacharach acquisition-related costs, were mostly offset by lower discretionary costs. -36- 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 Six Months Ended June 30, 2021 (In thousands) Americas International Corporate Consolidated Net sales $ 426,046 $ 223,671 $ — $ 649,717 GAAP operating income 79,088 Restructuring charges (Note 3) 8,385 Currency exchange gains, net (Note 5) (459) Product liability expense (Note 17) 14,547 Acquisition related costs (Note 18) (a) 4,541 Adjusted operating income (loss) 94,390 29,194 (17,482) 106,102 Adjusted operating margin % 22.2 % 13.1 % Depreciation and amortization $ 22,088 Adjusted EBITDA $ 109,322 $ 36,147 $ (17,279) $ 128,190 Adjusted EBITDA % 25.7 % 16.2 % Adjusted operating income Six Months Ended June 30, 2020 (In thousands) Americas International Corporate Consolidated Net sales $ 435,484 $ 220,099 $ — $ 655,583 GAAP operating income 107,076 Restructuring charges (Note 3) 10,872 Currency exchange losses, net (Note 5) 1,063 Product liability expense (Note 17) 2,802 Acquisition related costs (Note 18) (a) 161 COVID-19 related costs 757 Adjusted operating income (loss) 108,811 30,073 (16,153) 122,731 Adjusted operating margin % 25.0 % 13.7 % Depreciation and amortization 19,428 Adjusted EBITDA 121,878 36,239 (15,958) 142,159 Adjusted EBITDA % 28.0 % 16.5 % (a) Acquisition related costs include advisory, legal, accounting, valuation, and other professional or consulting fees incurred during due diligence and integration. 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. Note: 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 acquisition related costs. Adjusted EBITDA is reconciled above to the nearest GAAP financial measure, Operating income (loss) and excludes depreciation and amortization expense. Total other (income) expense, net. Total other income, net, for the six months ended June 30, 2021 was $2.4 million, compared to other expense, net, of $2.3 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. -37- Income taxes. The reported effective tax rate for the six months ended June 30, 2021, was 24.0% compared to 23.4% for the same period in 2020. This increase from the prior year is attributable to statutory rate increases in foreign jurisdictions and nondeductible executive compensation, partially offset by tax benefits related to certain share-based payments. 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 $61.5 million for the six months ended June 30, 2021, or $1.56 per diluted share compared to income of $79.7 million, or $2.03 per diluted share, for the same period last year. 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 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. We believe that the use of these non-GAAP financial measures provide investors with additional useful information and provide a more complete understanding of the underlying results. Because not all companies use identical calculations, these presentations may not be comparable to similarly titled measures from other companies. For more information about these non-GAAP measures and a reconciliation to the nearest U.S. GAAP measure, please refer to the reconciliations referenced above in Management's Discussion & Analysis section and in Note 7—Segment Information to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q. We may also provide financial information on a constant currency basis, which is a non-GAAP financial measure. These references to a constant currency basis do not include operational impacts that could result from fluctuations in foreign currency rates, which are outside of management's control. To provide information on a constant currency basis, the applicable financial results are adjusted by translating current and prior period results in local currency to a fixed foreign exchange rate. This approach is used for countries where the functional currency is the local country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance. Constant currency information is not recognized under U.S. GAAP and it is not intended as an alternative to U.S. GAAP measures. -38- LIQUIDITY AND CAPITAL RESOURCES 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 June 30, 2021, approximately 28% 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 June 30, 2021, approximately 62% of our borrowings are denominated in U.S. dollars, which limits our exposure to currency exchange rate fluctuations. At June 30, 2021, the Company had cash, cash equivalents and restricted cash totaling $174.4 million, including $156.0 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 June 30, 2021, positions us well to navigate through challenging business conditions. Cash, cash equivalents and restricted cash increased $13.4 million during the six months ended June 30, 2021, compared to decreasing $16.0 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 $83.9 million during the six months ended June 30, 2021, compared to providing $83.0 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 in receivables. Payments for subsidiary MSA LLC's product liability claims exceeded collections from insurance companies by $16.5 million in the six months ended June 30, 2021, compared to collections from insurance companies of $1.1 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 fully offset cash outlay in that same period. 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 $58.2 million during the six months ended June 30, 2021, compared to using $29.2 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 six months ended June 30, 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 six months ended June 30, 2021, we incurred capital expenditures of $20.3 million, including $4.1 million associated with software development and other growth programs, compared to capital expenditures of $19.8 million, including $4 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 $11.5 million during the six months ended June 30, 2021, compared to using $66.2 million during the same period in 2020. During the six months ended June 30, 2021, we had net proceeds on long-term debt of $27.0 million to fund the acquisition of Bristol as compared to net payments on long-term debt of $9.0 million during the same period in 2020. We paid cash dividends of $34.1 million during the six months ended June 30, 2021, compared to $33.1 million in the same period in 2020. We also used cash of $5.5 million during the six months ended June 30, 2021 to repurchase shares, compared to using $28.3 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. On July 1, 2021, the Company acquired Bacharach, Inc. for $337.0 million. The acquisition was partially financed by $200.0 million of 2.69% Senior Notes from the Prudential Note Agreement and NYL Note Facility. The remaining purchase price was financed under the Revolving Credit Facility. During July we completed a buy-out of our minority partner in our China business for about $19 million, inclusive of a $6 million dividend. We funded the investment with local cash balances; and as part of this deal, we expect to repatriate between $10-15 million of cash back to the U.S. in the third quarter 2021. The transaction provides enhanced capital allocation flexibility and helps us optimize foreign cash balances. -39- CUMULATIVE TRANSLATION ADJUSTMENTS The position of the U.S. dollar relative to international currencies at June 30, 2021, resulted in a translation loss of $4.1 million being recorded to the cumulative translation adjustments shareholders' equity account during the six months ended June 30, 2021, compared to an $18.2 million translation loss being recorded to the cumulative translation adjustments account during the same period in 2020. COMMITMENTS AND CONTINGENCIES We made contributions of $3.8 million to our pension plans during the six months ended June 30, 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 June 30, 2021, totaling $11.3 million, of which $1.7 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 June 30, 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. Please refer to Note 17—Contingencies to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further discussion on the Company's single incident and cumulative trauma product liabilities. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. We evaluate these estimates and judgments on an on-going basis based on historical experience and various assumptions that we believe to be reasonable under the circumstances. However, different amounts could be reported if we had used different assumptions and in light of different facts and circumstances. Actual amounts could differ from the estimates and judgments reflected in our unaudited condensed consolidated financial statements. The more critical judgments and estimates used in the preparation of our consolidated financial statements are discussed in Item 7. 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 None -40-