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Item 2. Management’s Discussion and Analysis

2022-04-29 compared with 2021-10-29 · 107 added, 261 removed, 140 unchanged (72% of the section changed)

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

On 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.

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

The acquisition strengthens MSA's position as a global market leader in fire service personal protective equipment (PPE) products, which include breathing apparatus, firefighter helmets, thermal imaging cameras, and firefighter protective apparel, while providing an avenue to expand its business in the U.K.

and key European markets.

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

protecting the health and safety of firefighters.

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

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

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

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

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

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

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

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

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

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

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

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

The Company brought the majority of the U.S.

workforce back during the third quarter 2021.

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

The Company’s return-to-work plans continue to evolve as needed, such as when the Omicron variant emerged.

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

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Americas, International and Corporate.

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

Our largest manufacturing and research and development facilities are located in the U.S.

We serve our markets across the Americas with manufacturing facilities in the U.S., Mexico and Brazil.

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

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

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

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

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Corporate general and administrative costs comprise the majority of the expense in the Corporate segment.

Within the International segment, during the first quarter, due to military conflict in Ukraine, we suspended product shipments into Russia and Belarus.

The suspension is indefinite.

Customers in Russia, Belarus and Ukraine generated approximately $6 million of sales during the year ended December 31, 2021.

During the fourth quarter of 2021, the Company changed its method of accounting for certain inventory in the U.S.

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 Quarterly Report, including Management's Discussion and Analysis.

Refer to Note 4—Inventory of the

consolidated financial statements in Part II Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021, for further information related to the change in accounting principle.

PRINCIPAL PRODUCTS

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MSA's corporate strategy includes a focus on driving sales of core products where we have leading market positions and a distinct competitive advantage.

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

Core products comprised approximately 89% and 85% of sales for the nine months ended September 30, 2021 and 2020.

Core products, as mentioned above, include breathing apparatus in which 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.

Core products comprised approximately 91% and 88% of sales for the three months ended March 31, 2022 and 2021, respectively.

MSA also maintains a portfolio of non-core products.

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Key non-core products include air-purifying respirators ("APR"), eye and face protection, ballistic helmets and gas masks.

MSA does not produce disposable respirators of any type;

however, Mine Safety Appliances Company, LLC ("MSA LLC"), one of the Company's subsidiaries, does produce advanced elastomeric APR, including half-mask respirators, full-facepiece respirators and powered air purifying respirators, each with replaceable filters providing a minimum of N-95 filtration capability.

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

APR products represented 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.

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

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

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RESULTS OF OPERATIONS

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.

Three Months Ended March 31, 2022, Compared to Three Months Ended March 31, 2021

Net sales for the three months ended March 31, 2022, were $330.7 million, an increase of $22.3 million, or 7.2%, driven by acquisitions and growth in organic activity compared to $308.4 million for the three months ended March 31, 2021.

We saw healthy growth across our core products and across both reporting segments.

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

Net Sales Three Months Ended September 30, Dollar

Net Sales Three Months Ended March 31, Dollar

Increase Percent

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International 105.0 100.1 4.9 4.9%

Net Sales Three Months Ended September 30, 2021

Net Sales Three Months Ended

March 31, 2022 versus March 31, 2021

(Percent Change) Americas International Consolidated

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Constant currency sales change 9.0% 9.9% 9.3%

Acquisitions (7.2)% (8.6)% (7.8)%

Acquisitions (a)

(5.9)% (4.5)% (5.5)%

Organic constant currency change 3.1% 5.4% 3.8%

(a) - Includes Bacharach, Inc.

and its affiliated companies ("Bacharach") , which was acquired on July 1, 2021.

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 $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.

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.

Net sales for the Americas segment were $225.7 million in the first quarter of 2022, an increase of $17.4 million, or 8.4%, compared to $208.3 million in the first quarter of 2021.

Constant currency sales in the Americas segment increased 9.0% compared to the prior year period with organic constant currency growth of 3.1%.

The inclusion of Bacharach drove the acquisition related sales.

Organic growth was was driven by growth across core products, partially offset by lower demand for APR products.

Supply chain and labor constraints weighed most heavily on revenue growth in gas detection and firefighter helmets and protective apparel.

Net sales for the International segment were $105.0 million in the first quarter of 2022, an increase of $4.9 million, or 4.9%, compared to $100.1 million for the first quarter of 2021.

Constant currency sales in the International segment increased 9.9% during the quarter with organic constant currency growth of 5.4%.

The inclusion of Bacharach drove the acquisition related sales.

Organic growth was driven by large project business in FGFD, partially offset by weakness in portable gas detection and fall protection.

Supply chain and labor constraints weighed most heavily on revenue growth in gas detection and SCBA.

Order activity continued to show year-over-year improvements and increased 22% compared to the first quarter of 2021.

Organic growth in orders was 16% while acquisitions drove 6% growth.

We continued to see strong order growth in April.

Our backlog increased to record levels as a result of an uptick in order pace and ongoing supply chain constraints, most notably in electronic components and labor at select locations.

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

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

These factors include, among other things, the effectiveness/pace of the vaccine rollout globally, risk of additional COVID lockdowns, industrial employment rates, supply chain constraints, raw material availability and the pace of economic recovery.

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

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

These factors include, among other things, supply chain constraints, raw material availability, the risk of additional COVID lockdowns, industrial employment rates, military conflict and geopolitical risk and the pace of economic recovery.

While we expect sequential improvement in revenue and earnings in the second quarter of 2022, these conditions could impact our future results and growth expectations.

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 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 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.

Gross profit for the first quarter of 2022 was $142.8 million, an increase of $8.0 million or 5.9%, compared to $134.8 million for the first quarter of 2021.

The ratio of gross profit to net sales was 43.2% in the first quarter of 2022 compared to 43.7% in the same quarter last year.

Intangible asset amortization related to acquisitions reduced gross profit by $2.3 million or 70 basis points in 2022.

Strategic pricing and lower inventory charges associated with APR products helped to mitigate the higher material costs and a less favorable product mix.

We have implemented price increases in response to the inflation we are seeing in 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 $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.

Selling, general and administrative ("SG&A") expenses were $78.6 million during the first quarter of 2022, an increase of $3.1 million or 4.1% from a year ago.

Overall, selling, general and administrative expenses were 23.8% of net sales during the first quarter of 2022, compared to 24.5% of net sales during the same period in 2021.

Organic constant currency SG&A increased $1 million or 1.4% demonstrating strong leverage on revenue growth.

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

September 30, 2021 versus September 30, 2020

March 31, 2022 versus March 31, 2021

(Percent Change) Consolidated

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Research and development expense .

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.

Research and development expense was $13.3 million during the first quarter of 2022, an increase of $0.1 million, compared to $13.2 million during the first quarter of 2021.

Research and development expense was 4.0% of net sales in the first quarter of 2022 compared to 4.3% in the same period of 2021.

We continue to develop new products for global safety markets, including the Altair io 4 and V-Gard C1.

During the first quarter of 2022, we capitalized $2.2 million of software development costs.

Restructuring charges .

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.

Restructuring charges during the first quarter of 2022, were $2.2 million primarily related to activities to improve the efficiency of our business model.

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

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

Currency exchange .

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.

Currency exchange losses were $3.3 million in the first quarter of 2022 compared to gains of $2.1 million in the first quarter of 2021.

Currency exchange in both periods were related to foreign currency exposure on unsettled inter-company balances, relating to the euro and British pound.

Refer to Note 16—Derivative Financial Instruments to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q, for information regarding our currency exchange rate risk management strategy.

Product liability expense.

Product liability expense for the three months ended 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.

Product liability expense for both the three months ended March 31, 2022 and 2021 was $2.8 million.

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

GAAP operating income.

Consolidated operating income for the third quarter of 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.

Consolidated operating income for the first quarter of 2022 was $42.7 million compared to $44.1 million in the same period last year.

The decrease in operating income was primarily driven by higher currency exchange losses relating to the euro and British pound, partially offset by an increase in sales associated with acquisitions and organic business activity.

Adjusted operating income.

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.

Americas adjusted operating income for the first quarter of 2022 was $52.4 million, an increase of $7.2 million or 16% compared to $45.2 million from the prior year quarter.

The increase in adjusted operating income is primarily attributable to higher sales volumes driven by both acquisitions and organic business activity, partially offset by higher SG&A.

International adjusted operating income for the first quarter of 2022 was $9.0 million, an increase of $0.2 million, or 3%, compared to $8.8 million in the prior year quarter.

The increase in adjusted operating income is primarily attributable to higher revenue driven by both acquisitions and organic business activity as well as various initiatives to deliver cost savings, partially offset by less favorable product mix.

Corporate segment adjusted operating loss for the first quarter of 2022 was $7.6 million, an increase of $1.1 million compared to an adjusted operating loss of $6.5 million in the first quarter of 2021 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 September 30, 2021

(In thousands) Americas International Corporate Consolidated

Net sales $ 229,076 $ 111,121 $ — $ 340,197

GAAP operating income 28,961

Restructuring charges (Note 4) 3,853

Currency exchange losses, net (Note 6) 100

Product liability expense (Note 18) 10,688

Acquisition related costs (Note 19) (a)

Adjusted operating income (loss) 44,364 12,599 (6,010) 50,953

Adjusted operating margin % 19.4 % 11.3 %

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 September 30, 2020

Adjusted operating income Three Months Ended March 31, 2022

(In thousands) Americas International Corporate Consolidated

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Adjusted EBITDA % 26.9 % 11.8 %

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

These costs are included in Selling, general and administrative expense in the unaudited Condensed Consolidated Statements of Income.

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

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

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

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

Total other (income) expense, net.

Total other 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 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.

While we believe our tax positions will be sustained, the final outcome of tax audits and related litigation may differ materially from the tax amounts recorded in our consolidated financial statements.

Net income attributable to MSA Safety Incorporated .

Net income was $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 Nine Months Ended September 30, Dollar

Increase Percent

(In millions) 2021 2020

Consolidated $989.9 $960.0 $29.9 3.1%

Americas 655.1 629.8 25.3 4.0%

International 334.8 330.2 4.6 1.4%

Net Sales Nine Months Ended September 30, 2021

(Percent Change) Americas International Consolidated

GAAP reported sales change 4.0% 1.4% 3.1%

Currency translation effects (0.1)% (6.2)% (2.2)%

Constant currency sales change 3.9% (4.8)% 0.9%

Acquisitions (2.3)% (6.2)% (3.6)%

Organic constant currency change 1.6% (11.0)% (2.7)%

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 $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 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 $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 Nine Months Ended

September 30, 2021 versus September 30, 2020

(Percent Change) Consolidated

GAAP reported change 15.1%

Currency translation effects (1.8)%

Constant currency change 13.3%

Acquisitions and related strategic transaction costs (6.9)%

Organic constant currency change 6.4%

Research and development expense .

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 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 remain focused on executing programs to optimize our cost structure.

Currency exchange .

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.

Product liability expense.

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 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 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 Nine Months Ended September 30, 2021

Adjusted operating income Three Months Ended March 31, 2021

(In thousands) Americas International Corporate Consolidated

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Adjusted EBITDA % 25.1 % 12.2 %

Adjusted operating income Nine Months Ended September 30, 2020

(In thousands) Americas International Corporate Consolidated

Net sales $ 629,787 $ 330,188 $ — $ 959,975

GAAP operating income 148,213

Restructuring charges (Note 4) 18,475

Currency exchange losses, net (Note 6) 3,821

Product liability expense (Note 18) 4,878

Acquisition related costs (Note 19) (a)

COVID-19 related costs 757

Adjusted operating income (loss) 149,708 45,719 (19,081) 176,346

Adjusted operating margin % 23.8 % 13.8 %

Depreciation and amortization (a)

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

Adjusted EBITDA % 26.9 % 16.7 %

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

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

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

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.

These costs are included in Selling, general and administrative expense in the unaudited Condensed Consolidated Statements of Income.

Acquisition-related costs also include the acquisition related amortization, which is included in Cost of products sold in the unaudited Condensed 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 (income) expense, net.

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.

Total other income, net.

Total other income, net, for the first quarter of 2022 was $2.7 million, compared to $2.3 million for the same period in 2021 driven primarily by higher pension income driven by a higher expected rate of return, partially offset by higher interest expense related to the Bacharach acquisition.

Income taxes.

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.

The reported effective tax rate for the first quarter of 2022 was 21.7% compared to 21.0% for the first quarter of 2021.

This increase from the prior year is attributable to a decrease in benefits related to certain share based payments.

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

While we believe our tax positions will be sustained, the final outcome of tax audits and related litigation may differ materially from the tax amounts recorded in our unaudited condensed consolidated financial statements.

Net income attributable to MSA Safety Incorporated .

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.

Net income was $35.5 million for the first quarter of 2022, or $0.90 per diluted share compared to net income of $36.5 million, or $0.92 per diluted share, for the same period last year.

Non-GAAP Financial Information

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

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), 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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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.

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

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

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

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

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

At March 31, 2022, approximately 45% 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 September 30, 2021, approximately 80% of our borrowings are denominated in U.S.

At March 31, 2022, approximately 81% of our borrowings are denominated in U.S.

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

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.

At March 31, 2022, the Company had cash and cash equivalents totaling $147.3 million and access to sufficient capital, providing ample liquidity and flexibility to continue to maintain our balanced capital allocation strategy that prioritizes growth investments, funding our dividends and servicing debt obligations.

Cash, cash equivalents and restricted cash increased $6.3 million during the three months ended March 31, 2022, compared to increasing $24.0 million during the same period in 2021.

We believe MSA's healthy balance sheet and access to significant capital at March 31, 2022, positions us well to navigate through challenging business conditions.

Operating activities.

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.

Operating activities provided cash of $24.5 million during the three months ended March 31, 2022, compared to providing $45.6 million during the same period in 2021.

The decreased operating cash flow as compared to the same period in 2021 was primarily related to working capital requirements, notably increased inventory related to increased backlog.

Collections from insurance companies exceeded payments for subsidiary MSA LLC's product liability claims by $2.1 million in the three months ended March 31, 2022, compared to product liability claim payments of $5.7 million, net of collections from insurance companies, in the same period of 2021.

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 intercompany notes.

MSA LLC 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.

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Investing activities.

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.

Investing activities provided cash of $1.1 million during the three months ended March 31, 2022, compared to using $52.5 million during the same period in 2021.

Maturities of short-term investments, net of purchases, partially offset by capital expenditures, drove cash inflows from investing activities during the three months ended March 31, 2022, while 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 same period in 2021.

During the three months ended March 31, 2022, we incurred capital expenditures of $8.0 million, including $2.2 million associated with software development, compared to capital expenditures of $9.6 million, including $2.0 million associated with software development and other growth programs, in the same period in 2021.

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 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.

Financing activities used cash of $15.9 million during the three months ended March 31, 2022, compared to providing cash of $31.6 million during the same period in 2021.

During the three months ended March 31, 2022, we had net proceeds from long-term debt of $5.0 million as compared to net proceeds from long-term debt of $52.0 million to fund the acquisition of Bristol during the same period in 2021.

We paid cash dividends of $17.3 million during the three months ended March 31, 2022, compared to $16.8 million in the same period in 2021.

We also used cash of $3.7 million during the three months ended March 31, 2022 to repurchase shares, compared to using $5.3 million during the same period in 2021.

CUMULATIVE TRANSLATION ADJUSTMENTS

The position of the U.S.

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.

dollar relative to international currencies at March 31, 2022, resulted in a translation gain of $5.9 million being recorded to the cumulative translation adjustments shareholders' equity account during the three months ended March 31, 2022, compared to a $10.3 million translation loss being recorded to the cumulative translation adjustments account during the same period in 2021.

COMMITMENTS AND CONTINGENCIES

We made contributions of $5.8 million to our pension plans during the nine months ended September 30, 2021.

We made contributions of $1.9 million to our pension plans during the three months ended March 31, 2022.

We expect to make total contributions of approximately $7.7 million to our pension plans in 2022 primarily associated with statutorily required plans in the International segment.

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

The Company had outstanding bank guarantees and standby letters of credit with banks as of March 31, 2022, totaling $8.9 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 September 30, 2021, the Company has $0.5 million of restricted cash in support of these arrangements.

At March 31, 2022, 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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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S.

The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures.

We prepare our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S.

The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures.

We evaluate these estimates and judgments on an on-going basis based on historical experience and various assumptions that we believe to be reasonable under the circumstances.

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Actual amounts could differ from the estimates and judgments reflected in our unaudited condensed consolidated financial statements.

The more critical judgments and estimates used in the preparation of our consolidated financial statements are discussed in Item 7.

The more critical judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements are discussed in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021.

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

Business Combinations

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

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

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

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

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

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

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

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

RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

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