MSA Safety Inc 10-Q

Item 1. Financial Statements MSA SAFETY INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited Three Months Ended March 31, (In thousands, except per share values) 2023 2022 Net sales $ 398,262 $ 330,692 Cost of products sold 216,864 187,908 Gross profit 181,398 142,784 Selling, general and administrative 91,091 78,551 Research and development 15,232 13,333 Restructuring charges (Note 3) 1,747 2,189 Currency exchange losses, net 4,175 3,271 Loss on divestiture of MSA LLC (Note 17) 129,211 — Product liability expense (Note 17) 3 2,772 Operating (loss) income ( 60,061 ) 42,668 Interest expense 11,476 3,618 Other income, net ( 3,800 ) ( 6,344 ) Total other expense (income), net 7,676 ( 2,726 ) (Loss) income before income taxes ( 67,737 ) 45,394 Provision for income taxes (Note 10) 82,436 9,852 Net (loss) income $ ( 150,173 ) $ 35,542 (Loss) earnings per share attributable to common shareholders (Note 9): Basic $ ( 3.83 ) $ 0.90 Diluted $ ( 3.83 ) $ 0.90 Dividends per common share $ 0.46 $ 0.44 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. -3- Table of Contents MSA SAFETY INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME Unaudited Three Months Ended March 31, (In thousands) 2023 2022 Net (loss) income $ ( 150,173 ) $ 35,542 Other comprehensive gains, net of tax: Foreign currency translation adjustments (Note 6) 11,194 5,892 Pension and post-retirement plan actuarial gains, net of tax (Note 6) 439 2,264 Unrealized gains (losses) on available-for-sale securities (Note 6) 2 ( 9 ) Total other comprehensive gains, net of tax 11,635 8,147 Comprehensive (loss) income $ ( 138,538 ) $ 43,689 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. -4- Table of Contents MSA SAFETY INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited (In thousands) March 31, 2023 December 31, 2022 Assets Cash and cash equivalents $ 138,906 $ 162,902 Trade receivables, less allowance for credit loss of $ 6,901 and $ 6,769 279,707 297,028 Inventories (Note 4) 349,436 338,316 Investments, short-term (Note 16) — 9,905 Prepaid income taxes 24,881 21,700 Notes receivable, insurance companies (Note 17) — 5,931 Prepaid expenses and other current assets 38,367 44,344 Total current assets 831,297 880,126 Property, plant and equipment, net (Note 5) 207,115 207,552 Operating lease right-of-use assets, net 43,541 44,142 Prepaid pension cost (Note 14) 144,876 141,643 Deferred tax assets (Note 10) 26,383 25,490 Goodwill (Note 13) 623,443 620,622 Intangible assets, net (Note 13) 278,359 281,853 Notes receivable, insurance companies (Note 17) — 38,695 Insurance receivables (Note 17) and other noncurrent assets 24,656 136,853 Total assets $ 2,179,670 $ 2,376,976 Liabilities Notes payable and current portion of long-term debt (Note 12) $ 32,534 $ 7,387 Accounts payable 106,225 112,532 Employees’ compensation 33,104 45,077 Insurance and product liability (Note 17) 9,911 73,898 Income taxes payable (Note 10) 17,692 6,149 Accrued restructuring (Note 3) and other current liabilities 93,065 100,822 Total current liabilities 292,531 345,865 Long-term debt, net (Note 12) 837,114 565,445 Pensions and other employee benefits (Note 14) 139,065 137,810 Noncurrent operating lease liabilities 34,583 35,345 Deferred tax liabilities (Note 10) 102,532 31,881 Product liability (Note 17) and other noncurrent liabilities 4,099 336,889 Total liabilities $ 1,409,924 $ 1,453,235 Equity Preferred stock, 4.5 % cumulative, $ 50 par value (Note 7) $ 3,569 $ 3,569 Common stock, no par value (Note 7) 287,009 281,980 Treasury shares, at cost (Note 7) ( 363,879 ) ( 361,438 ) Accumulated other comprehensive loss (Note 6) ( 147,082 ) ( 158,717 ) Retained earnings 990,129 1,158,347 Total shareholders’ equity 769,746 923,741 Total liabilities and shareholders’ equity $ 2,179,670 $ 2,376,976 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. -5- Table of Contents MSA SAFETY INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited Three Months Ended March 31, (In thousands) 2023 2022 Operating Activities Net (loss) income $ ( 150,173 ) $ 35,542 Depreciation and amortization 14,572 14,165 Tax-effected loss on divestiture of MSA LLC (Note 17) 199,578 — Stock-based compensation (Note 11) 6,270 3,730 Pension income (Note 14) ( 2,020 ) ( 2,652 ) Deferred income tax benefit (Note 10) ( 237 ) ( 572 ) Loss on asset dispositions, net 739 4 Pension contributions (Note 14) ( 2,046 ) ( 1,914 ) Currency exchange losses, net 4,175 3,271 Product liability expense (Note 17) 3 2,772 Collections on insurance receivables and notes receivable, insurance companies (Note 17) — 3,865 Product liability payments (Note 17) ( 5,250 ) ( 1,758 ) Contribution on divestiture of MSA LLC (Note 17) ( 341,186 ) — Changes in: Trade receivables 21,662 13,365 Inventories (Note 4) ( 7,404 ) ( 40,816 ) Accounts payable ( 7,320 ) 1,408 Other current assets and liabilities ( 18,041 ) ( 6,858 ) Other noncurrent assets and liabilities 769 971 Cash Flow (Used in) From Operating Activities ( 285,909 ) 24,523 Investing Activities Capital expenditures ( 8,402 ) ( 7,976 ) Proceeds from maturities of short-term investments (Note 16) — 29,000 Purchase of short-term investments (Note 16) — ( 19,973 ) Property disposals and other investing 35 — Cash Flow (Used in) From Investing Activities ( 8,367 ) 1,051 Financing Activities Proceeds from long-term debt (Note 12) 801,000 263,000 Payments on long-term debt (Note 12) ( 505,588 ) ( 258,000 ) Debt issuance costs ( 913 ) — Cash dividends paid ( 18,045 ) ( 17,292 ) Company stock purchases (Note 7) ( 3,687 ) ( 3,659 ) Exercise of stock options (Note 7) 4 51 Cash Flow From (Used in) Financing Activities 272,771 ( 15,900 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 2,287 ) ( 3,361 ) (Decrease) increase in cash, cash equivalents and restricted cash ( 23,792 ) 6,313 Beginning cash, cash equivalents and restricted cash 164,428 141,438 Ending cash, cash equivalents and restricted cash $ 140,636 $ 147,751 Supplemental cash flow information: Cash and cash equivalents $ 138,906 $ 147,300 Restricted cash included in prepaid expenses and other current assets 1,730 451 Total cash, cash equivalents and restricted cash $ 140,636 $ 147,751 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. -6- Table of Contents MSA SAFETY INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS AND ACCUMULATED OTHER COMPREHENSIVE LOSS Unaudited (In thousands, except per share values) Retained Earnings Accumulated Other Comprehensive (Loss) Balances December 31, 2021 $ 1,050,214 $ ( 149,140 ) Net income 35,542 — Foreign currency translation adjustments — 5,892 Pension and post-retirement plan adjustments, net of tax of $ 1,016 — 2,264 Unrecognized net losses on available-for-sale securities (Note 16) — ( 9 ) Common dividends ($ 0.44 per share) ( 17,282 ) — Preferred dividends ($ 0.5625 per share) ( 10 ) — Balances March 31, 2022 $ 1,068,464 $ ( 140,993 ) Balances December 31, 2022 $ 1,158,347 $ ( 158,717 ) Net loss ( 150,173 ) — Foreign currency translation adjustments — 11,194 Pension and post-retirement plan adjustments, net of tax of $ 278 — 439 Unrecognized net gains on available-for-sale securities (Note 16) — 2 Common dividends ($ 0.46 per share) ( 18,035 ) — Preferred dividends ($ 0.5625 per share) ( 10 ) — Balances March 31, 2023 $ 990,129 $ ( 147,082 ) The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. -7- Table of Contents MSA SAFETY INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Unaudited Note 1— Basis of Presentation The condensed consolidated financial statements of MSA Safety Incorporated and its subsidiaries ("MSA" or "the Company") are unaudited. These unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary by management to fairly state the Company's results. Intercompany accounts and transactions have been eliminated. The results reported in these unaudited condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. The December 31, 2022, Balance Sheet data was derived from the audited Consolidated Balance Sheet, but does not include all disclosures required by accounting principles generally accepted in the United States of America ("U.S. GAAP"). This Form 10-Q report should be read in conjunction with MSA's Form 10-K for the year ended December 31, 2022, which includes all disclosures required by U.S. GAAP. Note 2— Cash and Cash Equivalents Several of the Company's subsidiaries participate in a notional cash pooling arrangement to manage global liquidity requirements. As part of a master netting arrangement, the participants combine their cash balances in pooling accounts at the same financial institution with the ability to offset bank overdrafts of one participant against positive cash account balances held by another participant. Under the terms of the master netting arrangement, the financial institution has the right, ability and intent to offset a positive balance in one account against an overdrawn amount in another account. Amounts in each of the accounts are unencumbered and unrestricted with respect to use. As such, the net cash balance related to this pooling arrangement is included in Cash and cash equivalents in the unaudited Condensed Consolidated Balance Sheets. The Company's net cash pool position consisted of the following: (In thousands) March 31, 2023 Gross cash pool position $ 71,897 Less: cash pool borrowings ( 68,198 ) Net cash pool position $ 3,699 Note 3— Restructuring Charges During the three months ended March 31, 2023, we recorded restructuring charges of $ 1.7 million. Americas segment restructuring charges of $ 1.4 million during the three months ended March 31, 2023, were related to manufacturing footprint optimization activities. Corporate segment restructuring charges of $ 0.6 million during the three months ended March 31, 2023 were primarily related to various optimization activities. During the three months ended March 31, 2022, we recorded restructuring charges of $ 2.2 million. International segment restructuring charges of $ 2.0 million during the three months ended March 31, 2022, were primarily related to the expansion of our European Shared Service Center in Warsaw, Poland. Americas segment restructuring charges of $ 0.4 million during the three months ended March 31, 2022, were primarily related to programs to adjust our operations in response to current business conditions. -8- Table of Contents Restructuring reserves are included in Accrued restructuring and other current liabilities in the accompanying unaudited Condensed Consolidated Balance Sheets. Activity and reserve balances for restructuring by segment were as follows: (In millions) Americas International Corporate Total Reserve balances at December 31, 2021 $ 3.3 $ 17.4 $ 0.3 $ 21.0 Restructuring charges 2.3 5.1 0.6 8.0 Currency translation 0.1 ( 1.3 ) — ( 1.2 ) Cash payments / utilization ( 4.0 ) ( 8.4 ) ( 0.4 ) ( 12.8 ) Reserve balances at December 31, 2022 $ 1.7 $ 12.8 $ 0.5 $ 15.0 Restructuring charges (adjustments) 1.4 ( 0.3 ) 0.6 1.7 Currency translation — 0.2 — 0.2 Cash payments ( 2.0 ) ( 2.7 ) ( 0.7 ) ( 5.4 ) Reserve balances at March 31, 2023 $ 1.1 $ 10.0 $ 0.4 $ 11.5 Note 4— Inventories The following table sets forth the components of inventory: (In thousands) March 31, 2023 December 31, 2022 Finished products $ 97,360 $ 97,142 Work in process 22,141 16,360 Raw materials and supplies 229,935 224,814 Total inventories $ 349,436 $ 338,316 Note 5— Property, Plant and Equipment The following table sets forth the components of property, plant and equipment, net: (In thousands) March 31, 2023 December 31, 2022 Land $ 4,932 $ 4,884 Buildings 140,155 138,618 Machinery and equipment 475,707 466,394 Construction in progress 21,107 22,097 Total 641,901 631,993 Less: accumulated depreciation ( 434,786 ) ( 424,441 ) Property, plant and equipment, net $ 207,115 $ 207,552 -9- Table of Contents Note 6— Reclassifications Out of Accumulated Other Comprehensive Loss Changes in accumulated other comprehensive loss were as follows: Three Months Ended March 31, (In thousands) 2023 2022 Pension and other post-retirement benefits (a) Balance at beginning of period $ ( 50,335 ) $ ( 57,296 ) Amounts reclassified from accumulated other comprehensive loss into net (loss) income: Amortization of prior service credit (Note 14) ( 24 ) ( 48 ) Recognized net actuarial losses (Note 14) 185 3,328 Tax expense (benefit) 278 ( 1,016 ) Total amount reclassified from accumulated other comprehensive loss, net of tax, into net (loss) income 439 2,264 Balance at end of period $ ( 49,896 ) $ ( 55,032 ) Available-for-sale securities Balance at beginning of period $ ( 2 ) $ ( 5 ) Unrealized net gains (losses) on available-for-sale securities (Note 16) 2 ( 9 ) Balance at end of period $ — $ ( 14 ) Foreign currency translation Balance at beginning of period $ ( 108,380 ) $ ( 91,839 ) Foreign currency translation adjustments 11,194 5,892 Balance at end of period $ ( 97,186 ) $ ( 85,947 ) (a) Reclassifications out of accumulated other comprehensive loss and into net (loss) income are included in the computation of net periodic pension and other post-retirement benefit costs (refer to Note 14—Pensions and Other Post-retirement Benefits). Note 7— Capital Stock Preferred Stock - The Company has authorized 100,000 shares of $ 50 par value 4.5 % cumulative preferred nonvoting stock which is callable at $ 52.50 . There are 71,340 shares issued and 52,998 shares held in treasury at both March 31, 2023 and December 31, 2022. The Treasury shares at cost line in the unaudited Condensed Consolidated Balance Sheets includes $ 1.8 million related to preferred stock. There were no shares of preferred stock purchased and subsequently held in treasury during the three months ended March 31, 2023, or 2022. The Company has also authorized 1,000,000 shares of $ 10 par value second cumulative preferred voting stock. No shares have been issued as of March 31, 2023, or December 31, 2022. Common Stock - The Company has authorized 180,000,000 shares of no par value common stock. There were 62,081,391 shares issued as of March 31, 2023, and December 31, 2022. No new shares were issued during the three months ended March 31, 2023, or 2022. There were 39,264,779 and 39,213,064 shares outstanding at March 31, 2023, and December 31, 2022, respectively. Treasury Shares - The Company's stock repurchase program authorizes up to $ 100.0 million to repurchase MSA common stock in the open market and in private transactions. The stock repurchase program has no expiration date. The maximum number of shares that may be repurchased is calculated based on the dollars remaining under the program and the respective month-end closing share price. During the three months ended March 31, 2023, and 2022, no shares were repurchased under this program. There were 22,816,612 and 22,868,327 Treasury shares at March 31, 2023, and December 31, 2022, respectively. The Company issues Treasury shares for all stock-based benefit plans. Shares are issued from Treasury at the average Treasury share cost on the date of the transaction. There were 26,774 and 28,366 Treasury shares issued for these purposes during the three months ended March 31, 2023, and 2022, respectively. -10- Table of Contents Common stock activity is summarized as follows: Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 (In thousands) Common Stock Treasury Cost Common Stock Treasury Cost Balance at beginning of period $ 281,980 $ ( 359,838 ) $ 260,121 $ ( 328,776 ) Stock compensation expense 6,270 — 3,730 — Restricted and performance stock awards ( 1,244 ) 1,244 ( 1,260 ) 1,260 Stock options exercised 3 1 36 15 Treasury shares purchased for stock compensation programs — ( 3,687 ) — ( 3,659 ) Balance at end of period $ 287,009 $ ( 362,280 ) $ 262,627 $ ( 331,160 ) Note 8— Segment Information We are organized into four geographical operating segments that are based on management responsibilities: Northern North America, Latin America, Europe, Middle East & Africa, and Asia Pacific. The operating segments have been aggregated (based on economic similarities, the nature of their products, end-user markets and methods of distribution) into three reportable segments: Americas, International, and Corporate. The Americas segment is comprised of our operations in Northern North American and Latin American geographies. The International segment is comprised of our operations in all geographies outside of the Americas. Certain global expenses are allocated to each segment in a manner consistent with where the benefits from the expenses are derived. The Company's sales are allocated to each segment based primarily on the country destination of the end-customer. Adjusted operating income (loss), adjusted operating margin, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and adjusted EBITDA margin are the measures used by the chief operating decision maker to evaluate segment performance and allocate resources. Adjusted operating income (loss) is defined as operating income (loss) excluding restructuring charges, currency exchange (gains) losses, product liability expense, loss on divestiture of MSA LLC, transaction costs and acquisition-related amortization. Adjusted operating margin is defined as adjusted operating income (loss) divided by segment net sales to external customers. Adjusted EBITDA is defined as adjusted operating income (loss) plus depreciation and amortization. Adjusted EBITDA margin is defined as adjusted EBITDA divided by segment net sales to external customers. The accounting principles applied at the operating segment level in determining operating income (loss) are generally the same as those applied at the unaudited condensed consolidated financial statement level. Sales and transfers between operating segments are accounted for at market-based transaction prices and are eliminated in consolidation. -11- Table of Contents Reportable segment information is presented in the following table: (In thousands, except percentages) Americas International Corporate Consolidated Totals Three Months Ended March 31, 2023 Net sales to external customers $ 280,267 $ 117,995 $ — $ 398,262 Operating loss ( 60,061 ) Restructuring charges (Note 3) 1,747 Currency exchange losses, net 4,175 Loss on divestiture of MSA LLC (Note 17) 129,211 Product liability expense (Note 17) 3 Amortization of acquisition-related intangible assets 2,305 Adjusted operating income (loss) 71,694 15,779 ( 10,093 ) 77,380 Adjusted operating margin % 25.6 % 13.4 % Depreciation and amortization 12,267 Adjusted EBITDA 80,494 19,058 ( 9,905 ) 89,647 Adjusted EBITDA margin % 28.7 % 16.2 % Three Months Ended March 31, 2022 Net sales to external customers $ 225,648 $ 105,044 $ — $ 330,692 Operating income 42,668 Restructuring charges (Note 3) 2,189 Currency exchange losses, net 3,271 Product liability expense (Note 17) 2,772 Amortization of acquisition-related intangible assets 2,336 Transaction costs (a) 607 Adjusted operating income (loss) 52,435 9,024 ( 7,616 ) 53,843 Adjusted operating margin % 23.2 % 8.6 % Depreciation and amortization 11,829 Adjusted EBITDA 60,796 12,362 ( 7,486 ) 65,672 Adjusted EBITDA margin % 26.9 % 11.8 % (a) Transaction costs include advisory, legal, accounting, valuation, and other professional or consulting fees incurred during acquisitions and divestitures. These costs are included in Selling, general and administrative expense in the unaudited Condensed Consolidated Statements of Operations. -12- Table of Contents Total sales by product group was as follows: Three Months Ended March 31, 2023 Consolidated Americas International (In thousands, except percentages) Dollars Percent Dollars Percent Dollars Percent Fixed Gas & Flame Detection $ 93,635 24 % $ 61,143 22 % $ 32,492 28 % Breathing Apparatus 76,721 19 % 52,769 19 % 23,952 20 % Firefighter Helmets & Protective Apparel 62,667 16 % 49,287 18 % 13,380 11 % Portable Gas Detection 52,966 13 % 38,168 14 % 14,798 13 % Industrial Head Protection 42,907 11 % 33,625 12 % 9,282 8 % Fall Protection 31,157 8 % 20,458 7 % 10,699 9 % Other 38,209 9 % 24,817 8 % 13,392 11 % Total $ 398,262 100 % $ 280,267 100 % $ 117,995 100 % Three Months Ended March 31, 2022 Consolidated Americas International (In thousands, except percentages) Dollars Percent Dollars Percent Dollars Percent Fixed Gas & Flame Detection $ 83,077 25 % $ 54,621 24 % $ 28,456 27 % Breathing Apparatus 70,951 22 % 50,398 22 % 20,553 20 % Firefighter Helmets & Protective Apparel 48,461 15 % 33,476 15 % 14,985 14 % Portable Gas Detection 36,744 11 % 25,791 11 % 10,953 10 % Industrial Head Protection 36,157 11 % 28,165 13 % 7,992 8 % Fall Protection 24,662 7 % 16,277 7 % 8,385 8 % Other 30,640 9 % 16,920 8 % 13,720 13 % Total $ 330,692 100 % $ 225,648 100 % $ 105,044 100 % Note 9—(Loss) E arnings per Share Basic (loss) earnings per share is computed by dividing net income, after the deduction of preferred stock dividends and undistributed earnings allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted (loss) earnings per share assumes the issuance of common stock for all potentially dilutive share equivalents outstanding not classified as participating securities. Participating securities are defined as unvested stock-based compensation awards that contain nonforfeitable rights to dividends. Three Months Ended March 31, (In thousands, except per share values) 2023 2022 Net (loss) income $ ( 150,173 ) $ 35,542 Preferred stock dividends ( 10 ) ( 10 ) Net (loss) income available to common equity ( 150,183 ) 35,532 Dividends and undistributed earnings allocated to participating securities — ( 4 ) Net (loss) income available to common shareholders ( 150,183 ) 35,528 Basic weighted-average shares outstanding 39,224 39,291 Stock-based compensation awards (a) — 232 Diluted weighted-average shares outstanding 39,224 39,523 Antidilutive shares 180 — (Loss) earnings per share: Basic $ ( 3.83 ) $ 0.90 Diluted $ ( 3.83 ) $ 0.90 (a) During periods in which the Company incurs a net loss, stock-based compensation awards are excluded from the computation of diluted earnings per share because their effect would be anti-dilutive. As such, during periods in which the Company incurs a net loss, diluted weighted average shares outstanding are equivalent to basic weighted average shares outstanding. -13- Table of Contents Note 10— Income Taxes The Company's effective tax rate for the three months ended March 31, 2023, was ( 121.7 )%, which differs from the United States of America ("U.S.") federal statutory rate of 21% primarily due to the divestiture of MSA LLC and the non-deductible loss recorded on the derecognition of the product liability reserves and related assets. Refer to Note 17—Contingencies to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further information on this transaction. The Company's effective tax rate for the three months ended March 31, 2022, was 21.7 %, which differs from the U.S. federal statutory rate of 21% primarily due to state income taxes partially offset by tax benefits on certain share-based payments. At March 31, 2023, the Company had a gross liability for unrecognized tax benefits of $ 3.4 million. The Company has recognized tax benefits associated with these liabilities of $ 1.8 million at March 31, 2023. The gross liability includes amounts associated with foreign tax exposure in prior periods. The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense and operating expenses, respectively. The Company's liability for accrued interest related to uncertain tax positions was $ 0.3 million at March 31, 2023. 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. Note 11— Stock Plans The 2016 Management Equity Incentive Plan provides for various forms of stock-based compensation for eligible employees through May 2026 including stock options, restricted stock awards, restricted stock units and performance stock units. The 2017 Non-Employee Directors’ Equity Incentive Plan provides for grants of stock options and restricted stock to non-employee directors through May 2027. Stock compensation expense, included in Selling, general and administrative expense in the unaudited Condensed Consolidated Statements of Operations, is as follows: Three Months Ended March 31, (In thousands) 2023 2022 Stock compensation expense $ 6,270 $ 3,730 Income tax benefit 1,536 914 Stock compensation expense, net of tax $ 4,734 $ 2,816 We have not capitalized any stock-based compensation expense. A summary of stock option activity for the three months ended March 31, 2023, is as follows: Shares Weighted Average Exercise Price Outstanding at January 1, 2023 58,156 $ 46.48 Exercised ( 76 ) 48.41 Outstanding and exercisable at March 31, 2023 58,080 $ 46.47 -14- Table of Contents Restricted stock awards and restricted stock units are valued at the market value of the stock on the grant date. A summary of restricted stock activity for the three months ended March 31, 2023, is as follows: Shares Weighted Average Grant Date Fair Value Unvested at January 1, 2023 145,886 $ 137.36 Granted 52,883 133.72 Vested ( 26,763 ) 126.16 Forfeited ( 1,744 ) 136.41 Unvested at March 31, 2023 170,262 $ 138.20 Performance stock units that have a market condition modifier are valued at an estimated fair value using a Monte Carlo model. The final number of shares to be issued for performance stock units granted in the first quarter of 2023 may range from 0 % to 200 % of the target award based on achieving the specified performance targets over the performance period plus an additional modifier based on total shareholder return ("TSR") over the performance period. The following weighted average assumptions were used in estimating the fair value of the performance stock units granted for the three months ended March 31, 2023. Fair value per unit $ 131.46 Risk-free interest rate 4.4 % Expected dividend yield 1.43 % Expected volatility 36.7 % MSA stock beta 0.739 The risk-free interest rate is based on the U.S. Treasury Constant Maturity rates as of the grant date converted into an implied spot rate yield curve. Expected dividend yield is based on the most recent annualized dividend divided by the one year average closing share price. Expected volatility is based on the three year historical volatility preceding the grant date using daily stock prices. Expected life is based on historical stock option exercise data. A summary of performance stock unit activity for the three months ended March 31, 2023, is as follows: Shares Weighted Average Grant Date Fair Value Unvested at January 1, 2023 178,760 $ 146.28 Granted 75,425 131.46 Performance adjustments (a) ( 3,009 ) 127.40 Vested ( 53,407 ) 127.36 Forfeited ( 796 ) 139.27 Unvested at March 31, 2023 196,973 $ 146.05 (a) Performance adjustments relate primarily to the final number of shares issued for the 2020 performance unit awards which vested in the first quarter of 2023 at 94.9 % of the target award based on both cumulative performance against EBITDA margin and revenue growth targets and MSA's TSR during the three -year performance period. -15- Table of Contents Note 12— Long-Term Debt (In thousands) March 31, 2023 December 31, 2022 2016 Senior Notes payable through 2031, 3.40 %, net of debt issuance costs $ 60,167 $ 66,379 2021 Senior Notes payable through 2036, 2.69 %, net of debt issuance costs 99,717 99,711 2021 Senior Notes payable through 2036, 2.69 %, net of debt issuance costs 99,717 99,711 2023 Term Loan credit agreement maturing in 2026, net of debt issuance costs 249,145 — Senior revolving credit facility maturing in 2026, net of debt issuance costs 360,902 307,031 Total 869,648 572,832 Amounts due within one year 32,534 7,387 Long-term debt, net of debt issuance costs $ 837,114 $ 565,445 On May 24, 2021, the Company entered into a Fourth Amended and Restated Credit Agreement (the “Revolving Credit Facility" or "Facility”) that extended its term through May 24, 2026 and increased the capacity to $ 900.0 million. Under the amended agreement, the Company may elect either a Base rate of interest (“BASE”) or an interest rate based on the London Interbank Offered Rate (“LIBOR”). The BASE is a daily fluctuating per annum rate equal to the highest of (i) 0.00 %, (ii) the Prime Rate, (iii) the Federal Funds Open Rate plus one half of one percent ( 0.5 %), (iv) the Overnight Bank Funding Rate, plus one half of one percent ( 0.5 %), or (v) the Daily LIBOR Rate plus one percent ( 1.00 %). The Company pays a credit spread of 0 to 175 basis points based on the Company’s net EBITDA leverage ratio and elected rate (BASE or LIBOR). The Company has a weighted average revolver interest rate of 5.74 % as of March 31, 2023. At March 31, 2023, $ 536.1 million of the existing $ 900.0 million Revolving Credit Facility was unused, including letters of credit issued under the Facility. The Facility also provides an accordion feature that allows the Company to access an additional $ 400.0 million of capacity pending approval by MSA’s board of directors and from the bank group. On July 1, 2021, the Company entered into a Third Amended and Restated Multi-Currency Note Purchase and Private Shelf Agreement (the “Prudential Note Agreement”) with PGIM, Inc. (“Prudential”). The Prudential Note Agreement provided for (i) the issuance of $ 100.0 million of 2.69 % Series C Senior Notes due July 1, 2036 and (ii) the establishment of an uncommitted note issuance facility whereby the Company may request, subject to Prudential’s acceptance in its sole discretion, the issuance of up to $ 335.0 million aggregate principal amount of senior unsecured notes. As of March 31, 2023, the Company has outstanding £ 48.8 million (approximately $ 60.3 million at March 31, 2023) of 3.4 % Series B Senior Notes due January 22, 2031. Remaining maturities of this note are £ 6.1 million (approximately $ 7.5 million at March 31, 2023) due January 22, 2024, with annual maturities of £ 6.1 million through January 2031. On July 1, 2021, the Company entered into a Second Amended and Restated Master Note Facility (the “NYL Note Facility”) with NYL Investors. The NYL Note Facility provided for (i) the issuance of $ 100.0 million of 2.69 % Series A Senior Notes due July 1, 2036, and (ii) the establishment of an uncommitted note issuance facility whereby the Company may request, subject to NYL Investors’ acceptance in its sole discretion, the issuance of up to $ 200.0 million aggregate principal amount of senior unsecured notes. The Revolving Credit Facility, Prudential Note Agreement and NYL Note Facility require the Company to comply with specified financial covenants, including a requirement to maintain a minimum fixed charges coverage ratio of not less than 1.50 to 1.00 and a consolidated leverage ratio not to exceed 3.50 to 1.00; except during an acquisition period, defined as four consecutive fiscal quarters beginning with the quarter of acquisition, in which case the consolidated net leverage ratio shall not exceed 4.00 to 1.00; in each case calculated on the basis of the trailing four fiscal quarters. In addition, the agreements contain negative covenants limiting the ability of the Company and its subsidiaries to incur additional indebtedness or issue guarantees, create or incur liens, make loans and investments, make acquisitions, transfer or sell assets, enter into transactions with affiliated parties, make changes in its organizational documents that are materially adverse to lenders or modify the nature of the Company's or its subsidiaries' business. All credit facilities exclude Mine Safety Appliances Company, LLC prior to the divestiture of this subsidiary on January 5, 2023, as discussed further in Note 17. During August 2021, the Company amended its Revolving Credit Facility to transition from Sterling LIBOR reference rates to Sterling Overnight Interbank Average Rate ("SONIA") reference rates. The Company will apply the optional expedients in ASC 848, Reference Rate Reform , to this modification and potential future modifications driven by reference rate reform, accounting for the modifications as a continuation of the existing contracts. Therefore, these modifications will not require remeasurement at the modification date or a reassessment of previous accounting determinations. As such, the Company does not anticipate the change in reference rates will have an impact on the Company’s unaudited condensed consolidated financial statements. Management continues to evaluate the Company’s other outstanding U.S. LIBOR based contracts to determine whether reference rate modifications are necessary. -16- Table of Contents On January 5, 2023, the Company entered into a new $ 250 million term loan facility to fund the divestiture of MSA LLC, a wholly owned subsidiary. Under the agreement, the Company may elect either BASE or an interest rate based on the Secured Overnight Financing Rate. The Company pays a credit spread of 0 to 200 basis points based on the Company's net EBITDA leverage ratio and elected rate. The Company had a Term Loan interest rate of 6.22 % as of March 31, 2023. As of March 31, 2023, the Company was in full compliance with the restrictive covenants under its various credit agreements. The Company had outstanding bank guarantees and standby letters of credit with banks as of March 31, 2023, totaling $ 9.7 million, of which $ 1.5 million relate to the Revolving Credit Facility. The 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 March 31, 2023, the Company has $ 1.7 million of restricted cash in support of these arrangements. Note 13— Goodwill and Intangible Assets, Net Changes in goodwill during the three months ended March 31, 2023, were as follows: (In thousands) Goodwill Balance at January 1, 2023 $ 620,622 Currency translation 2,821 Balance at March 31, 2023 $ 623,443 At March 31, 2023, goodwill of $ 447.6 million and $ 175.8 million related to the Americas and International reportable segments, respectively. Changes in intangible assets, net, during the three months ended March 31, 2023, were as follows: (In thousands) Intangible Assets Net balance at January 1, 2023 $ 281,853 Amortization expense ( 4,490 ) Currency translation 996 Net balance at March 31, 2023 $ 278,359 At March 31, 2023, intangible assets, net, includes a trade name related to Globe Manufacturing Company, LLC ("Globe") with an indefinite life totaling $ 60.0 million. -17- Table of Contents Note 14— Pensions and Other Post-retirement Benefits Components of net periodic benefit (income) cost consisted of the following: Pension Benefits Other Benefits (In thousands) 2023 2022 2023 2022 Three Months Ended March 31, Service cost $ 1,884 $ 3,099 $ 53 $ 82 Interest cost 5,918 3,613 273 148 Expected return on plan assets ( 9,906 ) ( 12,418 ) — — Amortization of prior service cost (credit) 37 36 ( 61 ) ( 84 ) Recognized net actuarial losses 47 3,018 138 310 Net periodic benefit (income) cost (a) $ ( 2,020 ) $ ( 2,652 ) $ 403 $ 456 (a) Components of net periodic benefit (income) cost other than service cost are included in the line item Other income, net, and service costs are included in the line items Cost of products sold and Selling, general and administrative in the unaudited Condensed Consolidated Statements of Operations. We made contributions of $ 2.0 million and $ 1.9 million to our pension plans during the three months ended March 31, 2023, and 2022, respectively. We expect to make total contributions of $ 8.2 million to our pension plans in 2023, which are primarily associated with statutorily required plans in the International reporting segment. Note 15— Derivative Financial Instruments As part of our currency exchange rate risk management strategy, we enter into certain derivative foreign currency forward contracts that do not meet the U.S. GAAP criteria for hedge accounting but have the impact of partially offsetting certain of our foreign currency exposures. We account for these forward contracts at fair value and report the related gains or losses in currency exchange losses, net, in the unaudited Condensed Consolidated Statements of Operations. The notional amount of open forward contracts was $ 104.1 million and $ 103.0 million at March 31, 2023, and December 31, 2022, respectively. The following table presents the unaudited Condensed Consolidated Balance Sheets location and fair value of assets and liabilities associated with derivative financial instruments: (In thousands) March 31, 2023 December 31, 2022 Derivatives not designated as hedging instruments: Foreign exchange contracts: prepaid expenses and other current assets $ 1,900 $ 724 Foreign exchange contracts: accrued restructuring and other current liabilities 206 85 The following table presents the unaudited Condensed Consolidated Statements of Operations and unaudited Condensed Consolidated Statements of Cash Flows location and the (gain) loss impact of derivative financial instruments: Three Months Ended March 31, (In thousands) 2023 2022 Derivatives not designated as hedging instruments: Foreign exchange contracts: currency exchange losses, net $ ( 502 ) $ 2,765 -18- Table of Contents Note 16— Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are: • Level 1—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets. • Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. • Level 3—Unobservable inputs for the asset or liability. The valuation methodologies we used to measure financial assets and liabilities include the derivative financial instruments described in Note 15—Derivative Financial Instruments. We estimate the fair value of the derivative financial instruments, consisting of foreign currency forward contracts, based upon valuation models with inputs that generally can be verified by observable market conditions and do not involve significant management judgment. Accordingly, the fair values of the derivative financial instruments are classified within Level 2 of the fair value hierarchy. With the exception of our investments in marketable securities and fixed rate long-term debt, we believe that the reported carrying amounts of our financial assets and liabilities approximate their fair values. Our investments in available-for-sale marketable securities, primarily fixed income, were transferred to Sag Main Holdings, LLC, as part of our MSA LLC divestiture as described in Note 17—Contingencies. Prior to the divestiture, these investments were valued at fair value using quoted market prices for similar securities or pricing models. Accordingly, the fair values of the investments were classified within Level 2 of the fair value hierarchy. The amortized cost basis of our investments was $ 9.9 million as of December 31, 2022. The fair value was $ 9.9 million as of December 31, 2022, which was reported in Investments, short-term in the accompanying unaudited Condensed Consolidated Balance Sheets. Prior to the divestiture, changes in fair value were recorded in Other comprehensive (loss) income, net of tax. No impairment losses relating to these securities occurred during the three months ended March 31, 2023. All investments in marketable securities had maturities of one year or less and were in an unrealized loss position as of December 31, 2022. The reported carrying amount of our fixed rate long-term debt was $ 260.3 million and $ 266.5 million at March 31, 2023, and December 31, 2022, respectively. The fair value of this debt was $ 217.1 million and $ 218.3 million at March 31, 2023, and December 31, 2022, respectively. The fair value of this debt was determined using Level 2 inputs by evaluating similarly rated companies with publicly traded bonds where available or current borrowing rates available for financings with similar terms and maturities. Note 17— Contingencies Product liability The Company and its subsidiaries face an inherent business risk of exposure to legal claims arising from the alleged failure of our products to prevent the types of personal injury or death against which they are designed to protect. Product liability claims are categorized as either single incident or cumulative trauma. Single incident product liability claims. Single incident product liability claims involve incidents of short duration that are typically known when they occur and involve observable injuries, which provide an objective basis for quantifying damages. Management has established reserves for the single incident product liability claims of its various subsidiaries, including asserted single incident product liability claims and incurred but not reported ("IBNR") single incident claims. To determine the reserves, Management makes reasonable estimates of losses for single incident claims based on the number and characteristics of asserted claims, historical experience, sales volumes, expected settlement costs, and other relevant information. The reserve for single incident product liability claims was $ 1.5 million at March 31, 2023, and $ 1.4 million December 31, 2022. Single incident product liability expense was $ 0.1 million during both the three months ended March 31, 2023 and the three months ended March 31, 2022. Single incident product liability exposures are evaluated on an annual basis, or more frequently if changing circumstances warrant. Adjustments are made to the reserve as appropriate. The reserve has not been discounted to present value and does not include future amounts which will be spent to defend the claims. -19- Table of Contents Cumulative trauma product liability claims. Cumulative trauma product liability claims involve alleged exposures to harmful substances (e.g., silica, asbestos and coal dust) that occurred years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, mesothelioma, or coal worker’s pneumoconiosis. Prior to the divestiture described below, one of the Company's former subsidiaries, Mine Safety Appliances Company, LLC ("MSA LLC"), was named as a defendant in various lawsuits related to such claims. These lawsuits mainly involve respiratory protection products allegedly manufactured and sold by MSA LLC or its predecessors. Management previously established a reserve for MSA LLC's potential exposure to cumulative trauma product liability claims. Prior to its divestiture, MSA LLC's total cumulative trauma product liability reserve was $ 395.1 million, including $ 13.4 million for claims settled but not yet paid and related defense costs, as of December 31, 2022. The reserve includes estimated amounts related to asserted and IBNR asbestos, silica, and coal dust claims expected to be resolved through the year 2075. The reserve was not discounted to present value and did not include future amounts which will be spent to defend the claims. Defense costs were recognized in the unaudited Condensed Consolidated Statements of Operations as incurred. At December 31, 2022, $ 65.1 million of the total reserve for cumulative trauma product liability claims was recorded in the Insurance and product liability line within other current liabilities in the Consolidated Balance Sheet and the remainder, $ 330.0 million, is recorded in the Product liability and other noncurrent liabilities line. Prior to the divestiture, MSA LLC's cumulative trauma product liability reserve was based upon an estimate of MSA LLC’s current and potential future liability for cumulative trauma product liability claims, in accordance with applicable accounting principles. See further discussion on the process and assumptions used to derive this estimate in Note 20—Contingencies of the consolidated financial statements in Part II Item 8 of MSA's Form 10-K for the year ended December 31, 2022. On January 5, 2023, the Company entered into a membership interest purchase agreement (the “Purchase Agreement”) with Sag Main Holdings, LLC (the “Buyer”). The Buyer is a joint venture between R&Q Insurance Holdings Ltd. (“R&Q”) and Obra Capital, Inc. (“Obra”). Under the Purchase Agreement, on January 5, 2023, the Company transferred to the Buyer all of the issued and outstanding limited liability company interests of MSAC LLC (the “Sale”). In connection with the closing, the Company contributed $ 341.2 million in cash and cash equivalents, while R&Q and Obra contributed an additional $ 35.0 million. As MSA LLC was the obligor for the Company's legacy cumulative trauma product liability reserves and policyholder of the related insurance assets, the rights and obligations related to these items transferred upon the sale to the Buyer. In addition, pursuant to the Purchase Agreement, the Buyer and MSA LLC have agreed to indemnify the Company and its affiliates for legacy cumulative trauma product liabilities and other product liabilities, and the Company has agreed to indemnify MSA LLC for all other historical liabilities of MSA LLC. This indemnification is not subject to any cap or time limitation. In connection with the sale, the Company and its Board of Directors received a solvency opinion from an independent advisory firm that MSA LLC was solvent and adequately capitalized after giving effect to the transaction. Following the completion of the sale and thus transfer, the Company no longer has any obligation with respect to pending and future cumulative trauma product liability claims relating to these matters. As such, all legacy cumulative trauma product liability reserves, related insurance assets, and associated deferred tax assets of the divested subsidiary were derecognized from our balance sheet and the Company incurred a tax-effected loss on the divestiture of MSA LLC of $ 199.6 million, including transaction related costs of $ 5.6 million. R&Q and Obra's joint venture has assumed management of the divested subsidiary, including the management of its claims and associated assets. -20- Table of Contents Below is a summary of the impact of the divestiture of MSA LLC on our unaudited Condensed Consolidated Statements of Operations for the quarter ended March 31, 2023: (In millions) Three Months Ended March 31, 2023 Cash and cash equivalents $ ( 341.2 ) Current insurance receivables ( 17.3 ) Notes receivable, insurance companies ( 5.9 ) Noncurrent insurance receivables ( 110.3 ) Notes receivable, insurance companies, noncurrent ( 38.7 ) Current product liability 65.1 Noncurrent product liability 324.7 Loss on divestiture of MSA LLC before transaction costs ( 123.6 ) Transaction costs ( 5.6 ) Loss on divestiture of MSA LLC ( 129.2 ) Income tax expense (a) ( 70.4 ) Tax-effected loss on divestiture of MSA LLC $ ( 199.6 ) (a) Related to the write-off of deferred tax asset related to product liability reserve Insurance Receivable and Notes Receivable, Insurance Companies Many years ago, MSA LLC purchased insurance policies from various insurance carriers that, subject to common contract exclusions, provided coverage for cumulative trauma product liability losses (the "Occurrence-Based Policies"). Prior to the divestiture of MSA LLC, when adjustments were made to amounts recorded in the cumulative trauma product liability reserve, we calculated amounts due to be reimbursed pursuant to the terms of the negotiated Coverage-In-Place Agreements, including cumulative trauma product liability losses and related defense costs, and we recorded the amounts probable of reimbursement as insurance receivables. Insurance receivables at December 31, 2022 totaled $ 127.6 million, of which $ 17.3 million was reported in Prepaid expenses and other current assets in the unaudited Condensed Consolidated Balance Sheets and $ 110.3 million was reported in Insurance receivables and other noncurrent assets. A summary of insurance receivables balance and activity related to cumulative trauma product liability losses and divestiture of MSA LLC is as follows: (In millions) Three Months Ended March 31, 2023 Year Ended December 31, 2022 Balance beginning of period $ 127.6 $ 130.2 Divestiture of MSA LLC ( 127.6 ) — Additions — 1.8 Collections and other adjustments — ( 4.4 ) Balance end of period $ — $ 127.6 Prior to the divestiture of MSA LLC, notes receivable from insurance companies at December 31, 2022 totaled $ 44.6 million of which $ 5.9 million was reported in Notes receivable, insurance companies, current in the unaudited Condensed Consolidated Balance Sheets and $ 38.7 million was reported in Notes receivable, insurance companies, noncurrent. -21- Table of Contents A summary of notes receivables from insurance companies balance is as follows: (In millions) Three Months Ended March 31, 2023 Year Ended December 31, 2022 Balance beginning of period $ 44.6 $ 48.5 Divestiture of MSA LLC ( 44.6 ) — Additions — 1.2 Collections — ( 5.1 ) Balance end of period $ — $ 44.6 Other Litigation Globe, a subsidiary of the Company, is defending claims in which plaintiffs assert that certain products allegedly containing per- and polyfluoroalkyl substances (“PFAS”) have caused harm, including injury or health issues. PFAS are a large class of substances that are widely used in everyday products. Specifically, Globe builds turnout gear from technical fabrics sourced from a small pool of specialty textile manufacturers. These protective fabrics have been tested and certified to meet industry standards, and some of them contain PFAS to achieve water, oil, or chemical resistance. At this time, no manufacturer of firefighter protective clothing is able to meet current National Fire Protection Association safety standards while offering coats or pants that are completely PFAS free. Globe believes it has valid defenses to these claims. These matters are at a very early stage with numerous factual and legal issues to be resolved. Defense costs relating to these lawsuits are recognized in the unaudited Condensed Consolidated Statements of Operations as incurred. Globe is also pursuing insurance coverage and indemnification related to the lawsuits. As of May 2, 2023, Globe was named as a defendant in 75 lawsuits comprised of approximately 4,870 claims, plus one action filed on behalf of a putative class of Florida firefighters and certain of their dependents. MSA LLC is also a defendant in a number of PFAS lawsuits and the Buyer assumed responsibility for these and any similar future claims specific to MSA LLC in connection with the divestiture on January 5, 2023. Product Warranty The Company provides warranties on certain product sales. Product warranty reserves are established in the same period that revenue from the sale of the related products is recognized, or in the period that a specific issue arises as to the functionality of the Company's product. The determination of such reserves requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under warranty. The amounts of the reserves are based on established terms and the Company's best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. If actual return rates and/or repair and replacement costs differ significantly from estimates, adjustments to recognize additional cost of sales may be required in future periods. The following table reconciles changes in the Company's accrued warranty reserve: (In thousands) Three Months Ended March 31, 2023 Year Ended December 31, 2022 Beginning warranty reserve $ 15,230 $ 12,423 Warranty payments ( 2,479 ) ( 10,631 ) Warranty claims 2,554 14,544 Provision for product warranties and other adjustments ( 163 ) ( 1,106 ) Ending warranty reserve $ 15,142 $ 15,230 Warranty expense was $ 2.4 million and $ 1.9 million for the three months ended March 31, 2023, and 2022, respectively, and is included in Costs of products sold on the unaudited Condensed Consolidated Statements of Operations. -22- Table of Contents