MSA Safety Inc 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the historical financial statements and other financial information included elsewhere in this quarterly report on Form 10-Q. This discussion may contain forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of our annual report entitled “Forward-Looking Statements” and “Risk Factors,” and those discussed in our Form 10-Q quarterly reports filed after such annual report (such as in Part II, Item 1A, “Risk Factors.”) BUSINESS OVERVIEW MSA is a global leader in the development, manufacture and supply of safety products that protect people and facility infrastructures. Recognized for their market leading innovation, many MSA products integrate a combination of electronics, mechanical systems and advanced materials to protect users against hazardous or life-threatening situations. The Company's comprehensive product line, which is governed by rigorous safety standards across highly regulated industries, is used by workers around the world in a broad range of markets, including fire service, oil, gas and petrochemical industry, construction, industrial manufacturing applications, utilities, mining and the military. MSA's core products include breathing apparatus, fixed gas and flame detection systems, portable gas detection instruments, industrial head protection products, firefighter helmets and protective apparel, and fall protection devices. We are committed to providing our customers with service unmatched in the safety industry and, in the process, enhancing our ability to provide a growing line of safety solutions for customers in key global markets. We tailor our product offerings and distribution strategy to satisfy distinct customer preferences that vary across geographic regions. To best serve these customer preferences, we have organized our business into four geographical operating segments that are aggregated into three reportable geographic segments: Americas, International and Corporate. Americas. Our largest manufacturing and research and development facilities are located in the U.S. We serve our markets across the Americas with manufacturing facilities in the U.S., Mexico and Brazil. Operations in the other countries within the Americas segment focus primarily on sales and distribution in their respective home country markets. International. Our International segment includes companies in Europe, the Middle East and Africa and the Asia Pacific region. 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. Operations in other International segment countries focus primarily on sales and distribution in their respective home country markets. Although some of these companies may perform limited production, most of their sales are of products manufactured in our plants in Germany, France, the U.S., U.K., Ireland and China or are purchased from third-party vendors. Within the International segment, during the first quarter of 2022, 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. Corporate. The Corporate segment primarily consists of general and administrative expenses incurred in our corporate headquarters, costs associated with corporate development initiatives, legal expense, interest expense, foreign exchange gains or losses and other centrally-managed costs. Corporate general and administrative costs comprise the majority of the expense in the Corporate segment. 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. -27- PRINCIPAL PRODUCTS The following is a brief description of each of our principal product categories: MSA's corporate strategy includes a focus on driving sales of core products where we have leading market positions and a distinct competitive advantage. Core products, as mentioned above, include breathing apparatus 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 89% and 90% of sales for both the nine months ended September 30, 2022 and 2021, respectively. MSA also maintains a portfolio of non-core products. Non-core products reinforce and extend the core offerings, drawing upon our customer relationships, distribution channels, geographical presence and technical experience. These products are complementary to the core offerings and often reflect more episodic or contract-driven growth patterns. Key non-core products include air-purifying respirators, eye and face protection, ballistic helmets and gas masks. MSA maintains a diversified portfolio of safety products that protect workers and facility infrastructure across a broad array of end markets. While the company sells its products through distribution, which can limit end-user visibility, the Company provides estimated ranges of end market exposure to facilitate understanding of its growth drivers. The Company estimates that approximately 35%-40% of its overall revenue is derived from the fire service market and 25%-30% of its revenue is derived from the energy market. The remaining 30%-40% is split among construction, utilities, general industrial applications, military and mining. A detailed listing of our significant product offerings in the aforementioned product groups above is included in MSA's Annual Report on Form 10-K for the year ended December 31, 2021. RESULTS OF OPERATIONS Three Months Ended September 30, 2022, Compared to Three Months Ended September 30, 2021 Net Sales. Net sales for the three months ended September 30, 2022, were $381.7 million, an increase of $41.5 million, or 12.2%, compared to $340.2 million in the same period last year, driven by the pricing actions to keep pace with inflation, and volume growth. We saw healthy growth across most core products. 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 Increase (Decrease) Percent Increase (Decrease) (In millions) 2022 2021 Consolidated $381.7 $340.2 $41.5 12.2% Americas 276.1 229.1 47.0 20.5% International 105.6 111.1 (5.5) (5.0)% Net Sales Three Months Ended September 30, 2022 versus September 30, 2021 (Percent Change) Americas International Consolidated GAAP reported sales change 20.5% (5.0)% 12.2% Currency translation effects 0.6% 11.1% 4.0% Constant currency sales change 21.1% 6.1% 16.2% Note: Constant currency sales change is a non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance. Constant currency sales change is calculated by deducting the percentage impact from currency translation effects from the overall percentage change in net sales. Net sales for the Americas segment were $276.1 million in the third quarter of 2022, an increase of $47.0 million, or 20.5%, compared to $229.1 million in the third quarter of 2021. Constant currency sales in the Americas segment increased 21.1%. This increase was driven by breathing apparatus and firefighter protective apparel associated with strong demand and throughput improvements, partially offset by weakness in portable gas detection due to ongoing supply chain constraints, which we expect to improve over the coming quarters. -28- Net sales for the International segment were $105.6 million in the third quarter of 2022, a decrease of $5.5 million, or 5.0%, compared to $111.1 million for the third quarter of 2021. The euro and British pound drove negative currency translation effects. Constant currency sales in the International segment increased 6.1% during the quarter. This growth was driven by strength across a number of core products, partially offset by supply chain constraints impacting both breathing apparatus and gas detection businesses. As we entered our fourth quarter, we continued to see strong order growth in the quarter and into October. Our backlog increased to record levels across substantially all core products as a result of an uptick in order pace and ongoing supply chain and labor constraints. We expect fourth quarter revenue to increase in the low to mid single digit range compared to the fourth quarter of 2021. Looking ahead, we continue to operate in a very dynamic environment. There are a number of other evolving factors that will continue to influence our revenue and earnings outlook. These factors include, among other things, supply chain constraints, raw material or semiconductor availability, the risk of additional COVID lockdowns, industrial employment rates, military conflict, currency exchange volatility, the pace of economic recovery, as well as geopolitical risk, particularly as it relates to energy uncertainty which could affect operations and suppliers based in Germany and broader Europe. These conditions could impact our future results and growth expectations well into 2023. 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 2022 was $169.4 million, an increase of $20.0 million or 13.4%, compared to $149.4 million for the third quarter of 2021. The ratio of gross profit to net sales was 44.4% in the third quarter of 2022 compared to 43.9% in the same quarter last year. Price increases and the absence of the 2021 $1.7 million inventory step-up amortization related to the Bacharach acquisition helped to offset inflationary pressures as well as approximately $4.5 million of period specific charges related to inventory and product warranty. We have implemented additional price increases in both segments in October in response to the inflation we are seeing in electronic components and nearly all 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 $82.8 million during the third quarter of 2022, a decrease of $4.7 million or 5.4%, compared to $87.5 million for the same period a year ago. Overall, SG&A expenses were 21.7% of net sales during the third quarter of 2022, compared to 25.7% of net sales during the same period in 2021. Constant currency SG&A decreased by approximately $2 million or 2.0%, demonstrating strong leverage on the revenue growth. This decrease was driven by the absence of the 2021 acquisition related costs, which was partially offset by increased costs to support higher business activity. We also had approximately $2 million of favorable non-recurring adjustments in the third quarter of 2022. 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, 2022 versus September 30, 2021 (Percent Change) Consolidated GAAP reported change (5.4)% Currency translation effects 3.4% Constant currency change (2.0)% Research and development expense . Research and development expense was $14.4 million during the third quarter of 2022, a decrease of $0.5 million, compared to $14.9 million during the third quarter of 2021. Research and development expense was 3.8% of net sales in the third quarter of 2022 compared to 4.4% 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 third quarter of 2022, we capitalized $2.2 million of software development costs. Restructuring charges . Restructuring charges during the third quarter of 2022 were $0.9 million primarily related to various optimization activities. This compared to restructuring charges of $3.9 million during the third quarter of 2021, primarily related to integration activities. We remain focused on executing programs to optimize our cost structure. -29- Currency exchange . Currency exchange losses were $3.0 million in the third quarter of 2022 compared to losses of $0.1 million in the third quarter of 2021. The currency exchange losses for the current period related primarily due to the recognition of non-cash cumulative translation losses as result of our plan to close a foreign subsidiary. Currency exchange losses in third quarter of 2021 related to foreign currency exposure on unsettled inter-company balances. 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 three months ended September 30, 2022 was $4.0 million compared to $10.7 million in the same period last year. Product liability expense for the current period related primarily to defense costs incurred for cumulative trauma product liability claims. The expense during the third quarter 2021 related to 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 to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q. GAAP operating income. Consolidated operating income for the third quarter of 2022 was $64.3 million compared to $32.4 million in the same period last year. The increase in operating income was primarily driven by an increase in sales associated with volume growth, price realization, lower SG&A expenses, lower product liability expense and restructuring expense, partially offset by higher currency exchange losses. Adjusted operating income. Americas adjusted operating income for the third quarter of 2022 was $75.1 million, an increase of $27.5 million or 57.7% compared to $47.6 million from the prior year quarter. The increase in adjusted operating income is primarily attributable to higher sales volumes. International adjusted operating income for the third quarter of 2022 was $8.4 million, a decrease of $4.4 million, or 33.9%, compared to $12.8 million in the prior year quarter. The decrease in adjusted operating income is primarily attributable to lower revenue and gross margins, as a result of unfavorable currency translation, inflationary pressures, and supply chain constraints primarily associated with gas detection, partially offset by lower SG&A expenses. Corporate segment adjusted operating loss for the third quarter of 2022 was $8.4 million, an increase of $2.4 million compared to an adjusted operating loss of $6.0 million in the third quarter of 2021, due to higher compensation 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 (loss) Three Months Ended September 30, 2022 (In thousands) Americas International Corporate Consolidated Net sales $ 276,082 $ 105,612 $ — $ 381,694 GAAP operating income 64,313 Restructuring charges (Note 3) 899 Currency exchange losses, net 2,979 Product liability expense (Note 18) 4,035 Acquisition related costs (a) 2,899 Adjusted operating income (loss) 75,088 8,448 (8,411) 75,125 Adjusted operating margin % 27.2 % 8.0 % Depreciation and amortization (a) 11,518 Adjusted EBITDA 83,945 10,980 (8,282) 86,643 Adjusted EBITDA margin % 30.4 % 10.4 % -30- Adjusted operating income (loss) Three Months Ended September 30, 2021 (In thousands) Americas International Corporate Consolidated Net sales $ 229,076 $ 111,121 $ — $ 340,197 GAAP operating income 32,402 Restructuring charges (Note 3) 3,853 Currency exchange losses, net 100 Product liability expense (Note 18) 10,688 Acquisition related costs (a) 7,351 Adjusted operating income (loss) 47,624 12,780 (6,010) 54,394 Adjusted operating margin % 20.8 % 11.5 % Depreciation and amortization (a) 11,823 Adjusted EBITDA 55,774 16,323 (5,880) 66,217 Adjusted EBITDA margin % 24.3 % 14.7 % (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 SG&A 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. Note: Adjusted operating income (loss) and adjusted EBITDA are non-GAAP financial measures. 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 expense, net. Total other expense, net, for the third quarter of 2022 was $3.6 million, compared to other expense, net, $1.5 million for the same period in 2021 driven primarily by higher interest expense related to a higher interest rate environment and a write-down of an equity investment, 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 2022 was 26.0% compared to 31.5% for the third quarter of 2021. This decrease from the prior year is attributable to expense recorded in the third quarter of 2021 related to U.S. tax on foreign dividends, nondeductible transaction costs, and a decrease in nondeductible executive compensation, partially offset by nondeductible foreign exchange on entity closures and a decrease in foreign tax credit. We are subject to regular review and audit by both foreign and domestic tax authorities. While we believe our tax positions will be sustained, the final outcome of tax audits and related litigation may differ materially from the tax amounts recorded in our unaudited condensed consolidated financial statements. Net income attributable to MSA Safety Incorporated . Net income was $44.9 million for the third quarter of 2022, or $1.14 per diluted share compared to net income of $21.2 million, or $0.54 per diluted share, for the same period last year. -31- Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021 Net Sales. Net sales for the nine months ended September 30, 2022, were $1,084.7 million, an increase of $94.8 million, or 9.6%, compared to $989.9 million in the same period last year, driven by acquisitions and the combination of price realization and volume growth. We saw healthy growth across most of our core products and across both reporting segments. 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 Increase (In millions) 2022 2021 Consolidated $1,084.7 $989.9 $94.8 9.6% Americas 754.1 655.1 99.0 15.1% International 330.6 334.8 (4.2) (1.3)% Net Sales Nine Months Ended September 30, 2022 versus September 30, 2021 (Percent Change) Americas International Consolidated GAAP reported sales change 15.1% (1.3)% 9.6% Currency translation effects 0.4% 8.3% 3.1% Constant currency sales change 15.5% 7.0% 12.7% Less: Acquisitions (a) (3.8)% (2.4)% (3.4)% Organic constant currency change 11.7% 4.6% 9.3% (a) Includes Bacharach, Inc. and its affiliated companies ("Bacharach"), which was acquired on July 1, 2021. Note: Organic constant currency sales change is a non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance. Organic constant currency sales change is calculated by deducting the percentage impact from acquisitions and currency translation effects from the overall percentage change in net sales. Net sales for the Americas segment were $754.1 million in the nine months ended September 30, 2022, an increase of $99.0 million, or 15.1%, compared to $655.1 million in the same period last year. Constant currency sales in the Americas segment increased 15.5% compared to the prior year period with organic constant currency growth of 11.7%. The inclusion of Bacharach drove the acquisition related sales. Organic growth was driven by growth across most core products. Net sales for the International segment were $330.6 million in the nine months ended September 30, 2022, a decrease of $4.2 million, or 1.3%, compared to $334.8 million in the same period last year. Constant currency sales in the International segment increased 7.0% during the period with organic constant currency growth of 4.6%. The inclusion of Bacharach drove acquisition related sales. Organic growth was driven across a number of core products, partially offset by weakness in fall protection and ongoing supply chain constraints with the gas detection business. 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, 2022, was $476.6 million, an increase of $39.4 million or 9.0%, compared to $437.2 million during the same period last year. The ratio of gross profit to net sales was 43.9% during the nine months ended September 30, 2022 compared to 44.2% during the same period last year. Intangible asset amortization related to acquisitions reduced gross profit by $4.6 million or 45 basis points in 2022 while the absence of inventory step-up amortization related to the Bacharach acquisition increased gross profit by $1.7 million or 15 basis points. Pricing kept pace with inflationary pressures as well as offset inventory charges and product warranty charges. Selling, general and administrative expenses. SG&A expenses were $247.4 million during the nine months ended September 30, 2022, an increase of $1.1 million or 0.4%, compared to $246.3 million during the same period last year. Overall, SG&A expenses were 22.8% of net sales during the nine months ended September 30, 2022, compared to 24.9% of net sales during the same period in 2021. Organic constant currency SG&A increased $6 million or 2.5%, demonstrating strong leverage on revenue growth. This increase was driven by annual merit increases and increased costs to support higher business activity, which was partially offset by the absence of the 2021 acquisition related costs and savings from our restructuring programs in our International segment. -32- 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, 2022 versus September 30, 2021 (Percent Change) Consolidated GAAP reported change 0.4% Currency translation effects 2.6% Constant currency change 3.0% Less: Acquisitions and related strategic transaction costs (0.5)% Organic constant currency change 2.5% Research and development expense . Research and development expense was $43.0 million during the nine months ended September 30, 2022, an increase of $0.9 million, compared to $42.1 million during the same period last year. Research and development expense was 4.0% of net sales in the first nine months ended September 30, 2022 and 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 nine months ended September 30, 2022, we capitalized $6.5 million of software development costs. Restructuring charges . Restructuring charges during the nine months ended September 30, 2022, were $3.1 million primarily related to our ongoing initiatives to drive profitable growth and right size operations. This compared to restructuring charges of $12.2 million during the same period in 2021, primarily related to our ongoing initiatives to drive profitable growth and right size our operations and integration activities. We remain focused on executing programs to optimize our cost structure. Currency exchange . Currency exchange losses were $4.8 million during the nine months ended September 30, 2022, compared to gains of $0.4 million in the same period of 2021. The currency exchange losses for the current period related primarily due to the recognition of non-cash cumulative translation losses as result of our plan to close a foreign subsidiary and foreign currency exposure on unsettled inter-company balances. Currency exchange gains in 2021 related to foreign currency exposure on unsettled inter-company balances. 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 nine months ended September 30, 2022 was $9.7 million compared to $25.2 million in the same period last year. Product liability expense for the current period related primarily to defense costs incurred for cumulative trauma product liability claims. The expense during 2021 related to an increase in the number of asserted claims pending against MSA LLC and a corresponding adjustment to the reserve. GAAP operating income. Consolidated operating income for the nine months ended September 30, 2022, was $168.5 million compared to $111.6 million in the same period last year. The increase in operating income was primarily driven by an increase in sales associated with acquisitions and organic business activity, lower product liability expense, and lower restructuring expense. Adjusted operating income. Americas adjusted operating income for the nine months ended September 30, 2022 was $184.7 million, an increase of $42.5 million, or 29.9%, compared to $142.2 million in the prior year. 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 expenses to support business growth. International adjusted operating income for the nine months ended September 30, 2022, was $34.7 million, a decrease of $7.3 million, or 17.4%, compared to $42.0 million in the prior year. The decrease in adjusted operating income is primarily attributable to lower revenue and gross margins as a result of unfavorable currency translation and inflationary pressures, partially offset by lower SG&A expenses. Corporate segment adjusted operating loss for the nine months ended September 30, 2022, was $24.8 million, an increase of $1.3 million compared to an adjusted operating loss of $23.5 million in the same period of 2021 due to higher SG&A expense. -33- 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 (loss) Nine Months Ended September 30, 2022 (In thousands) Americas International Corporate Consolidated Net sales $ 754,116 $ 330,583 $ — $ 1,084,699 GAAP operating income 168,517 Restructuring charges (Note 3) 3,146 Currency exchange losses, net 4,788 Product liability expense (Note 18) 9,733 Acquisition related costs (a) 8,398 Adjusted operating income (loss) 184,664 34,674 (24,756) 194,582 Adjusted operating margin % 24.5 % 10.5 % Depreciation and amortization (a) 34,961 Adjusted EBITDA 210,201 43,708 (24,366) 229,543 Adjusted EBITDA margin % 27.9 % 13.2 % Adjusted operating income (loss) Nine Months Ended September 30, 2021 (In thousands) Americas International Corporate Consolidated Net sales $ 655,123 $ 334,792 $ — $ 989,915 GAAP operating income 111,619 Restructuring charges (Note 3) 12,239 Currency exchange gains, net (359) Product liability expense (Note 18) 25,235 Acquisition related costs (a) 11,891 Adjusted operating income (loss) 142,160 41,982 (23,517) 160,625 Adjusted operating margin % 21.7 % 12.5 % Depreciation and amortization (a) 33,716 Adjusted EBITDA 165,243 52,283 (23,185) 194,341 Adjusted EBITDA margin % 25.2 % 15.6 % (a) Acquisition related costs include advisory, legal, accounting, valuation, and other professional or consulting fees incurred during due diligence and integration. These costs are included in SG&A 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. Note: Adjusted operating income (loss) and adjusted EBITDA are non-GAAP financial measures. 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, net. Total other income, net, for the nine months ended September 30, 2022 was $1.0 million, compared to $0.9 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 a higher interest rate environment and a write-down of an equity investment. -34- Income taxes. The reported effective tax rate for the nine months ended September 30, 2022 was 24.4% compared to 26.0% for the same period in 2021. This decrease from the prior year is attributable to the impact of statutory rate increases recorded in the second quarter of 2021, decreases in nondeductible executive compensation, U.S. tax on foreign dividends, tax benefits on certain share-based payments, and nondeductible transaction costs, partially offset by nondeductible foreign exchange on entity closures. 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 $128.1 million for the nine months ended September 30, 2022, or $3.25 per diluted share compared to income of $82.8 million, or $2.10 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), adjusted operating income, adjusted operating margin percentage, adjusted EBITDA and adjusted EBITDA margin percentage, which are not recognized terms under U.S. GAAP and do not purport to be alternatives to net sales, selling, general and administrative expense, operating income or net income as a measure of operating performance. We believe that the use of these non-GAAP financial measures provide investors with additional useful information and provide a more complete understanding of the underlying results. Because not all companies use identical calculations, these presentations may not be comparable to similarly titled measures from other companies. For more information about these non-GAAP measures and a reconciliation to the nearest U.S. GAAP measure, please refer to the reconciliations referenced above in Management's Discussion & Analysis. We may also provide financial information on a constant currency basis, which is a non-GAAP financial measure. These references to a constant currency basis do not include operational impacts that could result from fluctuations in foreign currency rates, which are outside of management's control. To provide information on a constant currency basis, the applicable financial results are adjusted by translating current and prior period results in local currency to a fixed foreign exchange rate. This approach is used for countries where the functional currency is the local country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance. Constant currency information is not recognized under U.S. GAAP and it is not intended as an alternative to U.S. GAAP measures. -35- LIQUIDITY AND CAPITAL RESOURCES Our main source of liquidity is operating cash flows, supplemented by borrowings. Our principal liquidity requirements are for working capital, capital expenditures, principal and interest payments on debt, declared dividend payments and acquisitions. At September 30, 2022, approximately 43% 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, 2022, approximately 84% of our borrowings are denominated in U.S. dollars, which limits our exposure to currency exchange rate fluctuations. At September 30, 2022, the Company had cash and cash equivalents totaling $159.6 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 $19.8 million during the nine months ended September 30, 2022, compared to decreasing $43.2 million during the same period in 2021. We believe MSA's healthy balance sheet and access to significant capital at September 30, 2022, positions us well to navigate through challenging business conditions and supply chain constraints or other unexpected events. Operating activities. Operating activities provided cash of $103.9 million during the nine months ended September 30, 2022, compared to providing $130.1 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 $0.4 million in the nine months ended September 30, 2022, compared to product liability claim payments of $17.1 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. In recent years, MSA LLC’s contingent liabilities have been funded without a material impact on the Company’s consolidated capital allocation priorities. Investing activities. Investing activities used cash of $4.4 million during the nine months ended September 30, 2022, compared to using $402.6 million during the same period in 2021. The decrease in cash used in investing activities as compared to the same period in 2021 was primarily related to the absence of acquisitions. 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 $56.2 million during the nine months ended September 30, 2022, compared to providing cash of $233.4 million during the same period in 2021. During the nine months ended September 30, 2022, we had net proceeds from long-term debt of $27.0 million as compared to net proceeds from long-term debt of $308.9 million to fund the acquisition of Bristol and Bacharach during the same period in 2021. We paid cash dividends of $53.4 million during the nine months ended September 30, 2022, compared to $51.3 million in the same period in 2021. We also used cash of $34.4 million during the nine months ended September 30, 2022 to repurchase shares, of which $30.4 million related to our share repurchase program, compared to using $6.1 million during the same period in 2021. CUMULATIVE TRANSLATION ADJUSTMENTS The position of the U.S. dollar relative to international currencies at September 30, 2022, resulted in a translation loss of $58.1 million being recorded to the cumulative translation adjustments shareholders' equity account during the nine months ended September 30, 2022, compared to a $18.0 million translation loss being recorded to the cumulative translation adjustments shareholders' equity account during the same period in 2021. COMMITMENTS AND CONTINGENCIES We made contributions of $5.7 million to our pension plans during the nine months ended September 30, 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, 2022, totaling $9.2 million, of which $1.5 million relate 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, 2022, the Company has $1.7 million of restricted cash in support of these arrangements. -36- 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 18—Contingencies to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further discussion on the Company's single incident and cumulative trauma product liabilities. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We prepare our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). 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. However, different amounts could be reported if we had used different assumptions and in light of different facts and circumstances. Actual amounts could differ from the estimates and judgments reflected in our unaudited condensed consolidated financial statements. The more critical judgments and estimates used in the preparation of our 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. RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS None -37-