What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-29 compared with 2021-07-29 · 138 added, 152 removed, 263 unchanged (52% of the section changed)

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Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of 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

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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 July 1, 2021, we acquired Bacharach, Inc.

and its affiliated companies (Bacharach) in a transaction valued at $329.4 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.

Founded in 1909, Bacharach’s advanced instrumentation technologies help protect lives and the environment, while also increasing operational efficiency for its diversified customer base.

Bacharach's portfolio of gas detection and analysis products are used to detect, measure and analyze leaks of various gases that are commonly found in both commercial and industrial settings.

Bacharach has strong expertise in the refrigerant leak detection market with customers in the HVAC-R, food retail, automotive, commercial and industrial refrigeration, and military markets.

Refer to Note 19—Acquisitions to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further information.

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.

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 million, net of cash acquired.

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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.

The Company brought the majority of the U.S.

workforce back during the third quarter 2021.

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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 89% and 85% of sales for the six months ended June 30, 2021 and 2020.

Core products comprised approximately 89% and 85% of sales for the nine months ended September 30, 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 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.

APR products represented 5% and 9% of our consolidated sales for the nine months ended September 30, 2021 and 2020, with over 73% 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.

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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.

The remaining 30%-40% is split among 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 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.

Three Months Ended September 30, 2021, Compared to Three Months Ended September 30, 2020

Net sales for the three months ended September 30, 2021, were $340.2 million, an increase of $35.8 million, or 11.8%, driven by acquisitions and increased sales across all core product groups compared to $304.4 million for the three months ended September 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

Net Sales Three Months Ended September 30, Dollar

Increase Percent

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International 111.1 110.1 1.0 0.9%

Net Sales Three Months Ended June 30, 2021

Net Sales Three Months Ended September 30, 2021

(Percent Change) Americas International Consolidated

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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 $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.

Net sales for the Americas segment were $229.1 million in the third quarter of 2021, an increase of $34.8 million, or 17.9%, compared to $194.3 million in the third quarter of 2020.

During the quarter, constant currency sales in the Americas segment increased 17.3% 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.

Most 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 respirator business returned to pre-pandemic levels.

The Americas segment Fixed Gas & Flame Detection ("FGFD") sales were driven in part by $14.1 million of Bacharach sales.

Americas segment business conditions and order activity continue to be healthy.

Our ability to timely deliver orders will be dependent upon the extent to which supply chain challenges and to a lessor extent labor shortages persist.

Net sales for the International segment were $111.1 million in the third quarter of 2021, an increase of $1.0 million, or 0.9%, compared to $110.1 million for the third quarter of 2020.

Constant currency sales in the International segment decreased 1.6% during the quarter due to weaker organic sales volumes across the segment with more significant weakness in emerging markets due to an uneven economic recovery due to the ongoing prevalence of COVID-19 throughout the region and supply chain challenges, which were partially offset by $9.0 million of sales from Bristol and $1.1 million of Bacharach sales.

Recovery in this segment is dependent on the stabilization of the pandemic.

Our backlog remains at an elevated level, as a result of an uptick in order pace and ongoing supply chain constraints in certain product lines.

Order activity was healthy as we finished the third quarter.

We saw improvements as we went through the quarter with September being our strongest incoming order month of the quarter.

Historically, we see a strengthening in the fourth quarter compared with the the third quarter and at this point we expect to experience a 10% increase in sales from the third quarter to the fourth quarter due to seasonality in 2021.

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

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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.

These conditions could impact our future results and growth expectations well into 2022.

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 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.

Gross profit for the third quarter of 2021 was $146.0 million, an increase of $13.8 million or 10.4%, compared to $132.2 million for the third quarter of 2020.

The ratio of gross profit to net sales was 42.9% in the third quarter of 2021 compared to 43.4% in the same quarter last year.

Strategic pricing and stronger throughput in our factories helped to mitigate the $2.4 million of intangible asset amortization related to our 2021 acquisitions, $1.7 million of inventory step-up amortization related to the Bacharach acquisition and higher material costs.

These acquisition related costs negatively impacted gross profit by 120 basis points.

We have implemented an off-cycle price increase in response 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.

While there could be a number of scenarios on the length of time that these challenges may persist, we could see these impact our business for the foreseeable future with more meaningful impact well into 2022.

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 $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.

Selling, general and administrative ("SG&A") expenses were $87.5 million during the third quarter of 2021, an increase of $22.7 million or 35.0%, compared to $64.8 million in the third quarter of 2020.

Overall, selling, general and administrative expenses were 25.7% of net sales during the third quarter of 2021, compared to 21.3% of net sales during the same period in 2020.

Improved business conditions drove $6.7 million of additional variable compensation and $3.3 million of higher discretionary expense during the quarter.

SG&A includes $9.1 million of expenses associated with Bacharach and Bristol operations and deal costs related to these acquisitions.

We continue to expect SG&A to be 23.5% of sales for the second half of 2021.

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

September 30, 2021 versus September 30, 2020

(Percent Change) Consolidated

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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.

Research and development expense was $14.9 million during the third quarter of 2021, an increase of $1.0 million, compared to $13.9 million during the third quarter of 2020.

Research and development expense was 4.4% of net sales in the third quarter of 2021 compared to 4.6% in the same period of 2020.

We continue to develop new products for global safety markets, including the recently announced launch of the Altair io4, the future of connected work.

During the third quarter of 2021, we capitalized $2.0 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.

Restructuring charges during the third quarter of 2021, were $3.9 million primarily related to integration activities.

Together with cost reduction programs executed throughout 2020, we expect these programs to collectively deliver approximately $15 million of savings throughout the income statement in 2021, and annual savings of $25-$30 million thereafter.

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

We remain focused on executing programs to optimize our cost structure.

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 losses were $0.1 million in the third quarter of 2021 compared to losses of $2.8 million in the third 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 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.

Product liability expense for the three months ended September 30, 2021 was $10.7 million compared to $2.1 million in the same period last year.

Product liability expense increased during the period to reflect an increase in the number of asserted Coal claims pending against MSA LLC and a corresponding adjustment to the reserve, as discussed further in Note 18—Contingencies.

Product liability expense for 2020 related primarily to defense costs incurred for cumulative trauma product liability claims.

Management performs an annual review during the fourth quarter of MSA LLC’s cumulative trauma product liability claims in consultation with an outside valuation consultant and outside legal counsel.

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.

Consolidated operating income for the third quarter of 2021 was $29.0 million compared to $41.1 million in the same period last year.

The decrease in operating income was primarily driven by higher product liability expense and higher SG&A expenses, as described above, partially offset by increased sales volume.

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.

Americas adjusted operating income for the third quarter of 2021 was $44.4 million, an increase of $3.5 million or 8% compared to $40.9 million from the prior year quarter.

The increase in adjusted operating income is primarily attributable to higher sales volumes, partially offset by higher SG&A, which was driven by compensation resets, and an increase in discretionary costs as described above.

International adjusted operating income for the third quarter of 2021 was $12.6 million, a decrease of $3.1 million, or 20%, compared to $15.7 million in the prior year quarter.

The decrease in adjusted operating income is primarily attributable to lower organic revenue and higher SG&A, as described above.

Corporate segment adjusted operating loss for the third quarter of 2021 was $6.0 million, an increase of $3.1 million compared to an adjusted operating loss of $2.9 million in the third quarter of 2020 due to higher SG&A expense.

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

Adjusted operating income Three Months Ended September 30, 2021

(In thousands) Americas International Corporate Consolidated

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Adjusted operating margin % 19.4 % 11.3 %

Depreciation and amortization 11,584

Depreciation and amortization (a)

Adjusted EBITDA 52,514 16,142 (5,880) 62,776

Adjusted EBITDA % 22.9 % 14.5 %

Adjusted operating income Three Months Ended June 30, 2020

Adjusted operating income Three Months Ended September 30, 2020

(In thousands) Americas International Corporate Consolidated

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Product liability expense (Note 18) 2,077

Acquisition related costs (Note 18) 64

Acquisition related costs (Note 19) (a)

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

Adjusted operating margin % 21.0 % 14.2 %

Depreciation and amortization 9,786

Depreciation and amortization (a)

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

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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.

Total other expense, net, for the third quarter of 2021 was $1.5 million, compared to other expense, net, of $1.2 million for the same period in 2020 driven primarily by higher interest expense related to the Bacharach acquisition, partially offset by 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.

The reported effective tax rate for the third quarter of 2021 was 31.5% compared to 29.3% for the third quarter of 2020.

This increase from the prior year is attributable to state income taxes and nondeductible transaction costs, partially offset by the impact of statutory rate increases in foreign jurisdictions recorded in the third quarter of 2020.

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 $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 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.

Net income was $18.8 million for the third quarter of 2021, or $0.48 per diluted share compared to income of $28.0 million, or $0.71 per diluted share, for the same period last year.

Nine Months Ended September 30, 2021, Compared to Nine Months Ended September 30, 2020

Net sales for the nine months ended September 30, 2021, were $989.9 million, an increase of $29.9 million, or 3.1%, driven by acquisitions and increased sales across most of the core product groups compared to $960.0 million for the nine months ended September 30, 2020.

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

Net Sales Nine Months Ended September 30, Dollar

Increase Percent

(In millions) 2021 2020

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International 334.8 330.2 4.6 1.4%

Net Sales Six Months Ended June 30, 2021

Net Sales Nine Months Ended September 30, 2021

(Percent Change) Americas International Consolidated

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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.

Net sales for the Americas segment were $655.1 million in the nine months ended September 30, 2021, an increase of $25.3 million, or 4.0%, compared to $629.8 million in the same period last year.

During the nine months ended September 30, 2021, constant currency sales in the Americas segment increased 3.9% compared to the prior year period, driven by a general improvement in business conditions that began during the second quarter of 2021 and $14.1 million of Bacharach sales, partially offset by APR sales moderating to pre-pandemic levels.

Our ability to timely deliver orders will be dependent upon the extent to which supply chain challenges and to a lesser extent labor shortages persist.

Net sales for the International segment were $334.8 million in the nine months ended September 30, 2021, an increase of $4.6 million, or 1.4%, compared to $330.2 million for the same period last year.

Constant currency sales in the International segment decreased 4.8% during the period on weaker organic sales volumes across the segment, with more significant weakness in emerging markets due to an uneven economic recovery due to COVID-19 and lower project business in the Middle East FGFD market.

This weakness was partially offset by $21.5 million of Bristol turnout gear sales and $1.1 million of Bacharach sales.

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 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.

Gross profit for the nine months ended September 30, 2021, was $433.7 million, an increase of $2.5 million or 0.6%, compared to $431.2 million during the same period last year.

The ratio of gross profit to net sales was 43.8% during the nine months ended September 30, 2021 compared to 44.9% during the same period last year.

Strategic pricing and stronger throughput in our factories partially mitigated $3.3 million of inventory step-up amortization related to acquisitions and $2.6 million of intangible asset amortization related to our 2021 acquisitions, higher material costs, 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.

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.

Selling, general and administrative ("SG&A") expenses were $246.3 million during the nine months ended September 30, 2021, an increase of $32.2 million or 15.1%, compared to $214.1 million during the same period last year.

Overall, selling, general and administrative expenses were 24.9% of net sales during the nine months ended September 30, 2021, compared to 22.3% of net sales during the same period in 2020.

Improved business conditions drove $14.7 million of additional variable compensation and $1.6 million of higher discretionary expense during the period as the business exited the peak pandemic state.

SG&A includes $15.3 million of expenses associated with Bacharach and Bristol operations as well as deal costs related to these acquisitions.

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

Selling, general, and administrative expenses Nine Months Ended

September 30, 2021 versus September 30, 2020

(Percent Change) Consolidated

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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.

Research and development expense was $42.1 million during the nine months ended September 30, 2021, an increase of $0.4 million, compared to $41.7 million during the same period last year.

Research and development expense was 4.3% of net sales in both periods.

We continue to develop new products for global safety markets, including the recently announced launch of the Altair io4, the future of connected work.

During the nine months ended September 30, 2021, we capitalized $6.1 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.

Restructuring charges during the nine months ended September 30, 2021, were $12.2 million primarily related to our ongoing initiatives to drive profitable growth and right size our operations and integration activities.

This compared to restructuring charges of $18.5 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.

We remain focused on executing programs to optimize our cost structure.

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 gains were $0.4 million during the nine months ended September 30, 2021, compared to losses of $3.8 million in the same period 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 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 the nine months ended September 30, 2021 was $25.2 million compared to $4.9 million in the same period last year.

Product liability expense increased during the period to reflect an increase in the number of asserted coal claims pending against MSA LLC and a corresponding adjustment to the reserve, as discussed further in Note 18—Contingencies.

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.

Consolidated operating income for the nine months ended September 30, 2021, was $108.0 million compared to $148.2 million in the same period last year.

The decrease in operating results was driven by gross profit headwinds, including acquisition amortization, higher product liability expense and SG&A expenses for the reasons noted above.

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.

Americas adjusted operating income for the nine months ended September 30, 2021 was $138.8 million, a decrease of $10.9 million, or 7.3%, compared to $149.7 million in the prior year.

The decrease was related to variable compensation resets and higher SG&A due to the Bacharach acquisition.

International adjusted operating income for the nine months ended September 30, 2021, was $41.8 million, a decrease of $3.9 million, or 8.6%, compared to $45.7 million in the prior year.

The decrease in adjusted operating income is primarily attributable to lower organic revenue, higher SG&A expense as described above.

Corporate segment adjusted operating loss for the nine months ended September 30, 2021, was $23.5 million, an increase of $4.4 million compared to an adjusted operating loss of $19.1 million in the same period of 2020 due to higher variable compensation expenses related to improved business conditions and the impact of the Bacharach acquisition.

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

Adjusted operating income Nine Months Ended September 30, 2021

(In thousands) Americas International Corporate Consolidated

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Adjusted operating margin % 21.2 % 12.5 %

Depreciation and amortization $ 22,088

Depreciation and amortization (a)

Adjusted EBITDA $ 161,861 $ 52,095 $ (23,185) $ 190,771

Adjusted EBITDA % 24.7 % 15.6 %

Adjusted operating income Six Months Ended June 30, 2020

Adjusted operating income Nine Months Ended September 30, 2020

(In thousands) Americas International Corporate Consolidated

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Adjusted operating margin % 23.8 % 13.8 %

Depreciation and amortization 19,428

Depreciation and amortization (a)

Adjusted EBITDA 169,343 55,075 (18,788) 205,630

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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.

Total other income, net, for the nine months ended September 30, 2021 was $0.9 million, compared to other expense, net, of $3.5 million for the same period in 2020 due primarily to 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 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.

The reported effective tax rate for the nine months ended September 30, 2021, was 25.8% compared to 25.1% for the same period in 2020.

This increase from the prior year is attributable to nondeductible executive compensation and transaction costs.

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 $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.

Net income was $80.4 million for the nine months ended September 30, 2021, or $2.04 per diluted share compared to income of $107.8 million, or $2.74 per diluted share, for the same period last year.

Non-GAAP Financial Information

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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.

Organic constant currency information is not recognized under U.S.

GAAP and it is not intended as an alternative to U.S.

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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.

At September 30, 2021, approximately 48% of our long-term debt is at fixed interest rates with repayment schedules through 2036.

The remainder of our long-term debt is at variable rates on an unsecured revolving credit facility that is due in 2026.

At June 30, 2021, approximately 62% of our borrowings are denominated in U.S.

At September 30, 2021, approximately 80% 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.

At September 30, 2021, the Company had cash and cash equivalents totaling $117.3 million 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, 2021, positions us well to navigate through challenging business conditions.

Cash, cash equivalents and restricted cash decreased $43.2 million during the nine months ended September 30, 2021, compared to decreasing $19.4 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.

Operating activities provided cash of $130.1 million during the nine months ended September 30, 2021, compared to providing $110.2 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 $17.1 million in the nine months ended September 30, 2021, compared to collections from insurance companies of $4.2 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.

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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.

Investing activities used cash of $402.6 million during the nine months ended September 30, 2021, compared to using $51.7 million during the same period in 2020.

The acquisitions of Bacharach and Bristol and capital expenditures, partially offset by maturities of short-term investments, net of purchases, drove cash outflows from investing activities during the nine months ended September 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 nine months ended September 30, 2021, we incurred capital expenditures of $31.0 million, including $6.1 million associated with software development and other growth programs, compared to capital expenditures of $32.7 million, including $6 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.

Financing activities provided cash of $233.4 million during the nine months ended September 30, 2021, compared to using cash of $76.1 million during the same period in 2020.

During the nine months ended September 30, 2021, we had net proceeds on long-term debt of $308.9 million to fund the acquisitions of Bacharach and Bristol and buy-out our minority partner in our China business as compared to net payments on long-term debt of $5.0 million during the same period in 2020.

We paid cash dividends of $51.3 million during the nine months ended September 30, 2021, compared to $49.8 million in the same period in 2020.

We also used cash of $6.1 million during the nine months ended September 30, 2021 to repurchase shares, compared to using $28.7 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.

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.

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.

dollar relative to international currencies at September 30, 2021, resulted in a translation loss of $18.0 million being recorded to the cumulative translation adjustments shareholders' equity account during the nine months ended September 30, 2021, compared to a $3.0 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 made contributions of $5.8 million to our pension plans during the nine months ended September 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.

The Company had outstanding bank guarantees and standby letters of credit with banks as of September 30, 2021, totaling $10.5 million, of which $1.5 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.

At September 30, 2021, the Company has $0.5 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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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