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Item 7. Management’s Discussion and Analysis

2022-02-18 compared with 2021-02-19 · 156 added, 153 removed, 201 unchanged (61% of the section changed)

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

This section generally discusses the results of our operations for the year ended December 31, 2021 compared to the year ended December 31, 2020.

For a discussion on the year ended December 31, 2020 compared to the year ended December 31, 2019, please refer to Part II, 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 filed with the Securities and Exchange Commission on February 19, 2021.

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

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

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

Based in Milpitas, California, in the heart of Silicon Valley, SMC is a leading provider of fixed gas and flame detection instruments and Industrial Internet of Things solutions that connect and help protect high-value infrastructure assets.

The acquisition enables MSA to accelerate its strategy to enhance worker safety and accountability through the use of cloud technology and wireless connectivity.

This acquisition enhances a key focus of the Company's Safety io subsidiary, launched in 2018 primarily to leverage the capabilities of its portable gas detection portfolio as it relates to cloud connectivity.

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

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

Subsequent Event

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

There is no contingent consideration.

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

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

and key International markets.

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

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

On July 1, 2021, the Company 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.

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 14—Acquisitions of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information.

During July 2021, the Company purchased the remaining 10% noncontrolling interest in MSA (China) Safety Equipment Co., Ltd.

from our former China partner for $19.0 million, inclusive of a $5.6 million distribution.

On January 25, 2021, the Company 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, 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 United Kingdom ("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, 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 14—Acquisitions of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information.

During the fourth quarter of 2021, the Company changed its method of accounting for certain inventory in the United States from the LIFO method to the FIFO method.

The FIFO method of accounting for inventory is preferable because it conforms the Company's entire inventory to a single method of accounting and improves comparability with the Company's peers.

The effects of the change in accounting method from LIFO to FIFO have been retrospectively applied to all periods presented in all sections of this Annual Report, including Management's Discussion and Analysis .

Refer to Note 4—Inventory of the consolidated financial statements in Part II Item 8 of this Form 10-K for further information related to the change in accounting principle.

BUSINESS OVERVIEW

We are a global leader in the development, manufacture and supply of safety products that protect people and facility infrastructures.

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, the oil, gas and petrochemical industry, construction, industrial manufacturing applications, utilities, mining and the military.

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

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.

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

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

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

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

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

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

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

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

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

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

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

MSA provides safety equipment to a broad range of customers who must continue to work in times of global pandemic as is 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, all pursuant to an established pandemic response plan.

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

Through this process in 2021, we returned elements of our salesforce to in-person customer interactions on a limited basis and instituted a modified hybrid return-to-office protocol for the majority of our U.S.

workforce in the third quarter, with our International segment employees planning to return to the office once deemed appropriate under the circumstances for each business location.

We continue to deploy a phased approach to reconnect employees while adjusting the characteristics of their physical working environments, providing training and executing enhanced safety and cleaning protocols, which promotes workspace safety in a manner consistent with the mission and values of MSA.

The Company’s return-to-work plans continue to evolve as needed, such as was the case due to the Omicron variant.

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

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International .

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

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

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

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, 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.

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International 492.1 473.9 18.2 3.8%

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

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

Net sales for the year ended December 31, 2021, were $1.40 billion, an increase of $52.0 million, from $1.35 billion for the year ended December 31, 2020.

Constant currency sales increased by 3% for the year ended December 31, 2021.

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

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Constant currency sales change 3.9% (0.2)% 2.5%

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

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

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

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

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

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

Acquisitions (3.2)% (7.7)% (4.8)%

Organic constant currency change 0.7% (7.9)% (2.3)%

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 $908.1 million for the year ended December 31, 2021, an increase of $33.8 million, or 4%, compared to $874.3 million for the year ended December 31, 2020.

During 2021, constant currency sales in the Americas segment increased 4% compared to the prior year period, driven by $28 million of Bacharach sales and a general improvement in business conditions driving a higher level of sales of head protection, portable gas detection and fall protection;

partially offset by APR sales moderating to pre-pandemic levels.

Net sales for the International segment were $492.1 million for the year ended December 31, 2021, an increase of $18.2 million, or 4%, compared to $473.9 million for the year ended December 31, 2020.

Constant currency sales in the International segment was consistent with 2020, due to 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 $39 million of acquisition related sales, primarily related to Bristol.

Order activity was healthy as we finished the fourth quarter, and continued to show year-over-year improvements to start 2022.

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

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

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

These factors include, among other things, supply chain constraints, including electronic components impacting our fixed and portable gas detection product groups, which have intensified to start 2022;

availability of labor, especially at Globe;

the effectiveness/pace of the vaccine rollout globally;

risk of additional COVID outbreaks and/or lockdowns;

industrial employment rates;

and the pace of economic recovery.

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

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

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

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

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

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

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

Gross profit.

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

Gross profit for the year ended December 31, 2021 was $615.3 million, an increase of $19.8 million, or 3.3%, compared to $595.5 million for the year ended December 31, 2020.

The ratio of gross profit to net sales was 43.9% in 2021 compared to 44.2% in 2020.

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

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

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

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

Strategic pricing, stronger throughput in our factories and lower inventory charges associated with APR products offset the impacts of $3.8 million of inventory step-up amortization and $5.0 million of intangible asset amortization related to our 2021 acquisitions, and higher material costs.

We have continued to take pricing actions across our business and will continue to take additional actions to respond to the inflation we are seeing, especially in the U.S.

across electronic components, resins and other inputs.

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.

Selling, general and administrative expenses.

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

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

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

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

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

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

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

Selling, general and administrative ("SG&A") expenses were $332.9 million for the year ended December 31, 2021, an increase of $42.6 million, or 14.7%, compared to $290.3 million for the year ended December 31, 2020.

Overall, selling, general and administrative expenses were 23.8% of net sales in 2021 compared to 21.5% of net sales in 2020.

Improved business conditions drove $17.7 million of additional variable compensation and $2.6 million of higher discretionary expense during the period as the business exited the peak pandemic state.

SG&A includes $22.3 million of expenses associated with Bacharach and Bristol operations, which includes $7.1 million of non-recurring deal costs related to these acquisitions.

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

Selling, general, and administrative expenses Year Ended

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Constant currency change 13.7%

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

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

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

Acquisitions and related strategic transaction costs (7.3)%

Organic constant currency change 6.4%

Organic constant currency SG&A 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 SG&A change is calculated by deducting the percentage impact from acquisitions and related strategic transaction costs and currency translation effects from the overall percentage change in SG&A.

Research and development expense.

Research and development ("R&D") expense was $58.3 million for the year ended December 31, 2020, an increase of $0.5 million, or 0.7%, compared to $57.8 million for the year ended December 31, 2019.

Research and development expense was $57.8 million for the year ended December 31, 2021, a decrease of $0.5 million, or 0.8%, compared to $58.3 million for the year ended December 31, 2020.

Research and development expense was 4.1% of net sales in 2021, compared to 4.3% of net sales in 2020.

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

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

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

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

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

We capitalized approximately $8.1 million and $8.2 million of software development costs during the years ended December 31, 2021 and 2020, respectively.

Restructuring charges.

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

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

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

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

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

During the year ended December 31, 2021, the Company recorded restructuring charges of $16.4 million primarily related to our ongoing initiatives to drive profitable growth and acquisition integration activities.

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

This compared to restructuring charges of $27.4 million during the year ended December 31, 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 remain focused on executing programs to optimize our cost structure and to drive improvements in productivity.

Currency exchange .

Currency exchange losses were $0.2 million during the year ended December 31, 2021, compared to $8.6 million during the year ended December 31, 2020.

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

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

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

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

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

Refer to Note 18—Derivative Financial Instruments of the consolidated financial statements in Part II Item 8 of this Form 10-K for information regarding our currency exchange rate risk management strategy.

Product liability and other operating expense.

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

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

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

Please refer to Note 19—Contingencies of the

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

Product liability expense.

Product liability expense during the year ended December 31, 2021 was $185.3 million compared to $39.0 million for the year ended December 31, 2020.

The expense in both periods primarily relates to increases in MSA LLC's reserve for cumulative trauma product liability claims, and to a far lesser extent, incurred defense costs.

Adjustments to the reserve for the year ended December 31, 2021 totaled $219.0 million net of insurance receivable of $42.9 million.

These adjustments were largely a result of incorporating the increased number of newly filed claims during the year into long term trends used in the estimate, particularly, the number of newly filed coal claims, which were well in excess of historical experience.

The reserve includes estimated amounts for claims expected to be resolved through the year 2074.

Please refer to Note 20—Contingencies of the consolidated financial statements in Part II Item 8 of this Form 10-K for additional information.

GAAP operating income.

Consolidated operating income for the year ended December 31, 2021 was $22.8 million compared to $171.9 million for the year ended December 31, 2020.

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

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

The decrease in operating results was driven by the factors described in the preceding sections.

Adjusted operating income.

Americas adjusted operating income for the year ended December 31, 2021 was $202.5 million, a decrease of $2.8 million or 1%, compared to $205.3 million for the year ended December 31, 2020.

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

The decrease was related to variable compensation resets and higher SG&A due to the Bacharach acquisition, as well as higher input costs, which was mostly offset by higher revenue.

International adjusted operating income for the year ended December 31, 2021 was $73.3 million, an increase of $2.2 million, or 3%, compared to adjusted operating income of $71.1 million for the year ended December 31, 2020.

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

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

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

The increase in adjusted operating income is primarily attributable to higher revenue.

Corporate segment adjusted operating loss for the year ended December 31, 2021 was $35.2 million, an increase of $7.1 million, or 25%, compared to an adjusted operating loss of $28.1 million for the year ended December 31, 2020, due primarily 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.

Year Ended December 31, 2020

Adjusted operating income Year Ended December 31, 2021

(In thousands) Americas International Corporate Consolidated

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Restructuring charges (Note 3) 16,433

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

Currency exchange losses, net 216

Product liability expense (Note 20) 185,264

Strategic transaction costs (Note 13) 717

COVID-19 related costs 757

Acquisition related costs (Note 14) (a)

Adjusted operating income (loss) 202,496 73,279 (35,198) 240,577

Adjusted operating margin % 22.3 % 14.9 %

Depreciation and amortization 26,762 12,521 391 39,674

Depreciation and amortization (a)

31,236 13,718 463 45,417

Adjusted EBITDA 233,732 86,997 (34,735) 285,994

Adjusted EBITDA % 25.7 % 17.7 %

Year Ended December 31, 2019

Adjusted operating income Year Ended December 31, 2020

(In thousands) Americas International Corporate Consolidated

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Restructuring charges (Note 3) 27,381

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

Currency exchange losses, net 8,578

Product liability expense (Note 20) 39,036

Strategic transaction costs (Note 13) 4,400

Acquisition related costs (Note 14) (a)

COVID-19 related costs 757

Adjusted operating income (loss) 205,304 71,140 (28,080) 248,364

Adjusted operating margin % 23.5 % 15.0 %

Depreciation and amortization 24,691 12,938 391 38,020

Depreciation and amortization (a)

26,762 12,521 391 39,674

Adjusted EBITDA 232,066 83,661 (27,689) 288,038

Adjusted EBITDA % 26.5 % 17.7 %

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

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

* The year ended December 31, 2020 amounts were adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 4 to the consolidated financial statements.

(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 Consolidated Statements of Income.

Acquisition-related costs during 2021 also include $8.8 million of amortization which is included in Cost of products sold in the Consolidated Statements of Income.

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

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

Total other expense, net.

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

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

Total other (income) expense, net.

Total other income, net, for the year ended December 31, 2021, was $0.8 million, an increase of $4.5 million compared to other expense, net, of $3.7 million for the year ended December 31, 2020, due primarily to higher pension income driven by a one-time pension settlement and a higher expected rate of return on plan assets.

Income taxes.

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

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

The reported effective tax rate for the year ended December 31, 2021 was 7.7%, which includes a benefit of 18.3% for share-based payments, a benefit of 10.9% related to higher profits in foreign jurisdictions and settlement of a foreign audit, and an expense of 15.3% due to nondeductible compensation.

This compared to a reported effective tax rate for the year ended December 31, 2020 of 25.6%, which included a benefit of 3.9% for share-based payments, an expense of 3.4% due to nondeductible compensation, and expense of 1.5% related to a foreign audit.

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 $120.1 million for the year ended December 31, 2020, or $3.05 per diluted share, compared to $136.4 million, or $3.48 per diluted share, for the year ended December 31, 2019, as a result of the factors described above.

Net income was $21.3 million for the year ended December 31, 2021, or $0.54 per diluted share, compared to $124.1 million, or $3.15 per diluted share, for the year ended December 31, 2020, as positive momentum in the business was offset by the product liability reserve adjustment.

Non-GAAP Financial Information

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

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), adjusted operating income, adjusted operating margin percentage, adjusted EBITDA and adjusted EBITDA margin percentage, which are not recognized terms under U.S.

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

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

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

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

At December 31, 2021, approximately 46% of our long-term debt is at fixed interest rates with repayment schedules through 2036.

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At December 31, 2021, approximately 81% of our borrowings are denominated in US dollars, which limits our exposure to currency exchange rate fluctuations.

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

credit facility in connection with the Bristol acquisition.

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

Cash, cash equivalents and restricted cash increased $8.5 million during the year ended December 31, 2020 compared to an increase of $11.9 million during 2019.

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

Our unsecured senior revolving credit facility provides for borrowings up to $600.0 million through 2023 and is subject to certain commitment fees.

This credit facility has sub-limits for the issuance of letters of credit, swingline borrowings and foreign currency denominated borrowings;

and may be used for general corporate purposes, including working capital, permitted acquisitions, capital expenditures and repayment of existing indebtedness.

Loans under the revolving facility will bear interest at a variable rate based on LIBOR or the federal funds rate at the Company's option.

Our weighted average interest rate was 1.15% in 2020.

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

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

At December 31, 2021, the Company had cash and cash equivalents totaling $141.4 million, and access to sufficient capital, providing ample liquidity and flexibility to continue to maintain our balanced capital allocation strategy.

At December 31, 2021, $572.4 million of the existing $900.0 million senior revolving credit facility was unused, including letters of credit issued under the facility.

The facility also provides an accordion feature that allows the Company to access an additional $400.0 million of capacity pending approval by MSA’s board of directors and from the bank group.

The Company believes our healthy balance sheet and access to significant capital at the year ended December 31, 2021, positions us well to navigate through challenging business conditions.

Operating activities.

Operating activities provided cash of $199.1 million in 2021, compared to providing cash of $206.6 million in 2020.

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

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

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

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

The reduced operating cash flow as compared to the same period in 2020 was primarily related to increased working capital and payments for subsidiary MSA LLC's product liability claims exceeding collections from insurance companies by $24.1 million in the year ended December 31, 2021, compared to $12.9 million in 2020.

MSA LLC presently 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 intercompany notes.

The subsidiary is not party to the Company's credit facility.

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.

Please refer to Note 20—Contingencies of the consolidated financial statements in Part II Item 8 of this Form 10-K for additional information.

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Investing activities used cash of $415.5 million for the year ended December 31, 2021, compared to using $72.8 million in 2020.

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

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

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

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

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 year ended December 31, 2021, while capital expenditures and the purchase of short-term investments, net of proceeds from maturities, drove cash outflows from investing activities during the same period in 2020.

During 2021 we incurred capital expenditures of $43.8 million, including approximately $8.1 million associated with software development and other growth programs, compared to capital expenditures of $48.9 million, including $8.2 million associated with software development and other growth programs, in the same period in 2020.

The reduced capital expenditures in 2021 was a result of MSA's ramping up APR production in our Jacksonville, NC facility in 2020.

We 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 $126.5 million for the year ended December 31, 2020, compared to using cash of $84.6 million in 2019.

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

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

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

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

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

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

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

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

Financing activities provided cash of $203.9 million for the year ended December 31, 2021, compared to using cash of $126.5 million in 2020.

During 2021, we had net proceeds on long-term debt of $293.2 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 $44.0 million during the same period in 2020.

We paid cash dividends, exclusive of a $5.6 million dividend to our former noncontrolling interest partner in China as part of the buy-out, of $68.6 million during 2021, compared to $66.6 million during 2020.

We also used cash of $6.2 million during 2021 to repurchase shares, compared to using $29.1 million during the same period in 2020.

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

CUMULATIVE TRANSLATION ADJUSTMENTS

The year-end position of the U.S.

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

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

dollar relative to the euro.

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

dollar relative to the euro.

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

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

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

dollar relative to international currencies at December 31, 2021, resulted in a translation loss of $25.4 million being recorded to cumulative translation adjustments shareholders' equity account for the year ended December 31, 2021, compared to a $22.3 million translation gain being recorded to the cumulative translation adjustments account during 2020.

COMMITMENTS AND CONTINGENCIES

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Operating leases 59.2 10.6 8.5 6.4 4.2 3.7 25.8

Inventory costing method change tax 10.7 2.7 2.7 2.7 2.6 — —

Transition tax 2.0 — 0.7 1.3 — — —

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

We expect to meet our 2021 and 2022 debt service obligations through cash provided by operations.

We expect to meet our future debt service obligations through cash provided by operations.

Approximately $334.4 million of debt payable in 2026 relates to our unsecured senior revolving credit facility.

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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 19 to the consolidated financial statements in Part II Item 8 of this Form 10-K for further discussion on the Company's product liabilities.

Please refer to Note 20—Contingencies to the consolidated financial statements in Part II Item 8 of this Form 10-K for further discussion on the Company's product liabilities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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A summary of the Company's significant accounting policies is included in Note 1—Significant Accounting Policies to the consolidated financial statements in Part II, Item 8 of this Form 10-K.

We believe that the following are the more critical judgments and estimates used in the preparation of our 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 this Form 10-K for the year ended December 31, 2021.

During 2021, the Company made acquisitions 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.

Cumulative trauma product liability.

We face an inherent business risk of exposure to product liability claims arising from the alleged failure of our products to prevent the types of personal injury or death against which they are designed to protect.

The Company and its subsidiaries face an inherent business risk of exposure to product liability claims arising from the alleged failure of our products to prevent the types of personal injury or death against which they are designed to protect.

Product liability claims are categorized as either single incident or cumulative trauma.

Single incident product liability claims involve incidents of short duration that are typically known when they occur and involve observable injuries, which provide an objective basis for quantifying damages.

The Company estimates its liability for single incident product liability claims based on expected settlement costs for asserted single incident product liability claims and an estimate of costs for single incident product liability claims incurred but not reported ("IBNR").

The Company estimates its subsidiaries' liability for single incident product liability claims based on expected settlement costs for asserted single incident product liability claims and an estimate of costs for single incident product liability claims incurred but not reported ("IBNR").

Single incident product liability exposures are evaluated on an annual basis, or more frequently if changing circumstances warrant.

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Cumulative trauma product liability claims involve exposures to harmful substances (e.g., silica, asbestos and coal dust) that occurred years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, mesothelioma, or coal worker’s pneumoconiosis.

MSA LLC's combined cumulative trauma product liability reserve is based upon estimates of its liability for asserted cumulative trauma product liability claims not yet resolved and for IBNR cumulative trauma product liability claims.

In addition, in connection with finalizing and reporting the Company's results of operations, management works annually (unless significant changes in trends or new developments warrant an earlier review) with an outside valuation consultant and outside legal counsel to review MSA LLC's potential exposure to all cumulative trauma product liability claims, including asserted cumulative trauma product liability claims not yet resolved and IBNR cumulative trauma product liability claims.

The process for estimating asserted cumulative trauma product liability claims not yet resolved takes into account available facts for those claims including the number and composition of such claims, outcomes of matters resolved during current and prior periods, and variances associated with different groups of claims, plaintiffs' counsel, and venues, as well as any other relevant information.

The process for estimating IBNR claims involves a number of key judgments and assumptions, including as to the number and types of claims that may be asserted, the period in which claims may be asserted and resolved, the percentage of claims that may be dismissed without payment, the average cost to resolve claims on which a payment is made, the manner in which MSA LLC will defend claims, and the medical and legal environments that will be applicable to the assertion, evaluation, and resolution of claims in the future.

MSA LLC's combined cumulative trauma product liability reserve is based upon estimates of its liability for asserted and IBNR cumulative trauma product liability claims.

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

We accordingly consider MSA LLC’s claims experience over multiple periods and/or whether there are changes in MSA LLC’s claims experience and trends that are likely to continue for a significant time into the future in determining whether to make an adjustment to the reserve, rather than evaluating such factors solely in the short term.

Please refer to Note 20—Contingencies to the consolidated financial statements in Part II Item 8 of this Form 10-K for further discussion on the Company's product liabilities.

Income taxes.

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

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

In 2021, we performed a quantitative test at October 1, 2021.

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

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RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 1—Significant Accounting Policies of the consolidated financial statements in Part II Item 8 of this Form 10-K.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis