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 and solutions 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 ("FGFD"), 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. On January 5, 2023, the Company divested Mine Safety Appliances, LLC ("MSA LLC"), a wholly owned subsidiary that holds legacy product liability claims relating to coal dust, asbestos, silica, and other exposures, to Sag Main Holdings, LLC, a joint venture between R&Q Insurance Holdings Ltd. (“R&Q”) and Obra Capital, Inc. (“Obra”). In connection with the closing, MSA contributed $341.2 million in cash and cash equivalents, while R&Q and Obra contributed an additional $35.0 million. As a result of the transaction, MSA derecognized all legacy cumulative trauma product liability reserves, related insurance assets, and associated deferred tax assets of the divested subsidiary from its balance sheet in the first quarter of 2023. R&Q and Obra have assumed management of the divested subsidiary, including the management of its claims. 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. 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 United States. 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 ("EMEA") 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. 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. -25- Table of Contents 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 where self-contained breathing apparatus is the principal product, FGFD systems, portable gas detection instruments, industrial head protection products, firefighter helmets and protective apparel, and fall protection devices. Core products comprised approximately 92% and 89% of sales, respectively, for the three months ended September 30, 2023 and 2022. 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 sometimes reflect more episodic or contract-driven growth patterns. Non-core products include air-purifying respirators, eye and face protection, ballistic helmets and gas masks. MSA's diversified portfolio of safety products protects workers and facility infrastructure across a broad array of end markets including fire service, the oil, gas and petrochemical industry, construction, industrial manufacturing applications, heating, ventilation, air conditioning and refrigeration, utilities, mining and the military. 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, 2022. RESULTS OF OPERATIONS Three Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022 Net Sales. Net sales for the three months ended September 30, 2023, were $446.7 million, an increase of $65.0 million, or 17.0%, compared to $381.7 million in the same period last year, driven by volume growth and pricing actions. We saw healthy growth across product categories and both reporting segments. Please refer to the Net Sales table for a reconciliation of the quarter over quarter sales change. Net Sales Three Months Ended September 30, Dollar Increase Percent Increase (In millions) 2023 2022 Consolidated $446.7 $381.7 $65.0 17.0% Americas 314.3 276.1 38.2 13.8% International 132.4 105.6 26.8 25.4% Net Sales Three Months Ended September 30, 2023 versus September 30, 2022 (Percent Change) Americas International Consolidated GAAP reported sales change 13.8% 25.4% 17.0% Currency translation effects (1.5)% (4.7)% (2.3)% Constant currency sales change 12.3% 20.7% 14.7% 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 $314.3 million in the third quarter of 2023, an increase of $38.2 million, or 13.8%, compared to $276.1 million in the third quarter of 2022. Constant currency sales in the Americas segment increased 12.3%. This growth was driven by increases in all products, particularly firefighter protective apparel, FGFD, fall protection, portable instruments and breathing apparatus associated with healthy demand and backlog conversion as a result of supply chain improvements. -26- Table of Contents Net sales for the International segment were $132.4 million in the third quarter of 2023, an increase of $26.8 million, or 25.4%, compared to $105.6 million for the third quarter of 2022. Constant currency sales in the International segment increased 20.7% during the quarter. This growth was driven by increases in most products, particularly FGFD and breathing apparatus, associated with backlog conversion as a result of supply chain improvements. Looking ahead, we continue to operate in a dynamic environment. There are a number of other evolving factors that will continue to influence our revenue and earnings outlook. These factors include, among other things, supply chain constraints, raw material availability, industrial employment rates, interest rate changes, military conflict, currency exchange volatility, the pace of economic recovery, and geopolitical risk. These or other conditions could impact our future results and growth expectations through the balance of 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 2023 was $218.8 million, an increase of $49.4 million or 29.1%, compared to $169.4 million for the third quarter of 2022. The ratio of gross profit to net sales was 49.0% in the third quarter of 2023 compared to 44.4% in the same quarter last year. Volume leverage, price/cost management, and productivity efforts contributed to the gross profit improvement. Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses were $102.2 million during the third quarter of 2023, an increase of $19.4 million or 23.5%, compared to $82.8 million for the same period a year ago. Overall, SG&A expenses were 22.9% of net sales during the third quarter of 2023, compared to 21.7% of net sales during the same period in 2022. Constant currency SG&A increased by approximately $17.7 million or 21.2%. The increase in SG&A was driven by the higher level of sales, increased variable compensation, targeted investments and inflation. Please refer to the SG&A expenses table for a reconciliation of the quarter over quarter expense change. Selling, general, and administrative expenses Three Months Ended September 30, 2023 versus September 30, 2022 (Percent Change) Consolidated GAAP reported change 23.5% Currency translation effects (2.3)% Constant currency change 21.2% Research and development expense . Research and development expense was $17.7 million during the third quarter of 2023, an increase of $3.3 million, compared to $14.4 million during the third quarter of 2022. Research and development expense was 4.0% of net sales in the third quarter of 2023 compared to 3.8% in the same period of 2022. During the third quarter of 2023 and 2022, we capitalized $3.3 million and $2.2 million of software development costs, respectively. Depreciation expense for capitalized software development cost of $2.7 million and $2.1 million during the third quarter of 2023 and 2022, respectively, was recorded in costs of products sold on the unaudited Condensed Consolidated Statements of Operations. MSA remains committed to dedicating significant resources to research and development activities, including the development of technology-based safety solutions. As we continue to invest a significant portion of our new product development into technology-based safety solutions, we anticipate that the historical relationship of research and development expense to net sales will continue to evolve; however, we do not anticipate reductions in the relative level of total spend on research and development activities on an annual basis. Total spend on both software development and research and development activities was $21.0 million and $16.6 million during the third quarter of September 30, 2023, and 2022, respectively. Restructuring charges . Restructuring charges of $3.3 million during the third quarter of 2023 were primarily related to manufacturing footprint optimization activities and ongoing initiatives to drive profitable growth. Restructuring charges of $0.9 million during the third quarter of 2022 were related to various optimization activities including the implementation of our European Shared Service Center in Warsaw, Poland and other optimization activities. We remain focused on executing programs to further optimize our cost structure. -27- Table of Contents Currency exchange . Currency exchange losses were $1.5 million in the third quarter of 2023 compared to $3.0 million in the third quarter of 2022. Currency exchange activity for both periods related primarily to foreign currency exposure on unsettled inter-company balances. Refer to Note 15—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. There was no product liability expense for the third quarter of 2023 due to our divestiture of MSA LLC, as discussed further in Note 17—Contingencies to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q. This compared to $4.0 million in the third quarter of 2022 which related primarily to defense costs incurred for cumulative trauma product liability claims. GAAP operating income. Consolidated operating income for the third quarter of 2023 was $94.1 million compared to $64.3 million in the same period last year. The increase in operating income was primarily driven by higher sales and gross margin partially offset by increased SG&A. Adjusted operating income. Americas adjusted operating income for the third quarter of 2023 was $93.9 million, an increase of $18.8 million or 25.1% compared to $75.1 million in the prior year third quarter. The increase in adjusted operating income is attributable to higher sales and gross margin. International adjusted operating income for the third quarter of 2023 was $22.6 million, an increase of $14.1 million, or 167.2%, compared to $8.4 million in the prior year third quarter. The increase in adjusted operating income is primarily attributable to higher sales and gross margin. Corporate segment adjusted operating loss for the third quarter of 2023 was $15.2 million, an increase of $6.8 million in comparison to an adjusted operating loss of $8.4 million in the third quarter of 2022, driven by higher performance based compensation expense related to sales growth and improved results from prior year. 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, 2023 (In thousands) Americas International Corporate Consolidated Net sales $ 314,273 $ 132,455 $ — $ 446,728 GAAP operating income 94,123 Restructuring charges (Note 3) 3,285 Currency exchange losses, net 1,496 Amortization of acquisition-related intangible assets 2,315 Transaction costs (a) 78 Adjusted operating income (loss) 93,918 22,577 (15,198) 101,297 Adjusted operating margin % 29.9 % 17.0 % Depreciation and amortization 13,189 Adjusted EBITDA 103,157 26,289 (14,960) 114,486 Adjusted EBITDA margin % 32.8 % 19.8 % -28- Table of Contents 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 17) 4,035 Amortization of acquisition-related intangible assets 2,279 Transaction costs (a) 620 Adjusted operating income (loss) 75,088 8,448 (8,411) 75,125 Adjusted operating margin % 27.2 % 8.0 % Depreciation and amortization 11,518 Adjusted EBITDA 83,945 10,980 (8,282) 86,643 Adjusted EBITDA margin % 30.4 % 10.4 % (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. 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, loss on divestiture of MSA LLC, transaction costs and acquisition-related amortization. Adjusted EBITDA is reconciled above to the nearest GAAP financial measure, Operating income (loss) and excludes depreciation and amortization expense. Total other expense (income), net. Total other expense, net, for the third quarter of 2023 was $6.5 million, compared to $3.6 million for the same period in 2022 driven primarily by higher interest expense related to higher interest rates, increased debt balances and decreased pension income driven by a lower expected rate of return. Income taxes. The reported effective tax rate for the third quarter of 2023 was 25.6% compared to 26.0% for the third quarter of 2022. This decrease from the prior year is primarily due to a one time expense recorded in the third quarter of 2022 related to state income tax audits and an increase in the research and development credit, partially offset by higher profits in higher tax jurisdictions and an increase in nondeductible compensation. 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 . Net income was $65.3 million for the third quarter of 2023, or $1.65 per diluted share compared to net income of $44.9 million, or $1.14 per diluted share, for the same period last year. -29- Table of Contents Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022 Net Sales. Net sales for the nine months ended September 30, 2023, were $1.3 billion, an increase of $207.6 million, or 19.1%, compared to $1.1 billion in the same period last year, driven by volume growth and price realization. We saw healthy growth across most of our core products and 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) 2023 2022 Consolidated $1,292.3 $1,084.7 $207.6 19.1% Americas 902.9 754.1 148.8 19.7% International 389.4 330.6 58.8 17.8% Net Sales Nine Months Ended September 30, 2023 versus September 30, 2022 (Percent Change) Americas International Consolidated GAAP reported sales change 19.7% 17.8% 19.1% Currency translation effects (0.9)% 0.5% (0.5)% Constant currency sales change 18.8% 18.3% 18.6% 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 $902.9 million in the nine months ended September 30, 2023, an increase of $148.8 million, or 19.7%, compared to $754.1 million in the same period last year. Constant currency sales in the Americas segment increased 18.8% compared to the prior year period. This growth was driven by increases in all products, particularly firefighter protective apparel, portable instruments and FGFD associated with healthy demand and improved output as well as backlog conversion as a result of continued progress with the supply chain. Net sales for the International segment were $389.4 million in the nine months ended September 30, 2023, an increase of $58.8 million, or 17.8%, compared to $330.6 million in the same period last year. Constant currency sales in the International segment increased 18.3% during the period. This growth was driven by strength across most core products, partially offset by a decrease in firefighter helmets and protective apparel. 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, 2023, was $614.0 million, an increase of $137.4 million or 28.8%, compared to $476.6 million during the same period last year. The ratio of gross profit to net sales was 47.5% during the nine months ended September 30, 2023 compared to 43.9% during the same period last year. Volume leverage, price/cost management, favorable product mix and productivity efforts contributed to the gross profit improvement. Selling, general and administrative expenses. SG&A expenses were $289.6 million during the nine months ended September 30, 2023, an increase of $42.2 million or 17.1%, compared to $247.4 million during the same period last year. Overall, SG&A expenses were 22.4% of net sales during the nine months ended September 30, 2023, compared to 22.8% of net sales during the same period in 2022. Constant currency SG&A increased $41.3 million or 16.8%, demonstrating strong leverage on revenue growth. The increase in SG&A was driven by the higher level of sales, increased variable compensation and inflation. -30- Table of Contents 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, 2023 versus September 30, 2022 (Percent Change) Consolidated GAAP reported change 17.1% Currency translation effects (0.3)% Constant currency change 16.8% Research and development expense . Research and development expense was $48.9 million during the nine months ended September 30, 2023, an increase of $5.9 million, compared to $43.0 million during the same period last year. Research and development expense was 3.8% of net sales in the first nine months ended September 30, 2023 and 4.0% in the same period of 2022. During the nine months ended September 30, 2023 and 2022, we capitalized $9.4 million and $6.5 million of software development costs, respectively. Depreciation expense for capitalized software development cost of $7.5 million and $5.7 million during the nine months ended September 30, 2023 and 2022, respectively, was recorded in costs of products sold on the unaudited Condensed Consolidated Statements of Operations. MSA remains committed to dedicating significant resources to research and development activities, including the development of technology-based safety solutions. As we continue to invest a significant portion of our new product development into technology-based safety solutions, we anticipate that the historical relationship of research and development expense to net sales will continue to evolve; however, we do not anticipate reductions in the relative level of total spend on research and development activities on an annual basis. Total spend on both software development and research and development activities was $58.3 million and $49.5 million during the nine months ended September 30, 2023, and 2022, respectively. Restructuring charges . Restructuring charges of $8.4 million during the nine months ended September 30, 2023 related to our ongoing initiatives to adjust our cost structure and improve productivity. Restructuring charges of $3.1 million during nine months ended September 30, 2022 related to our ongoing initiatives to drive profitable growth and rightsize our operations. We remain focused on executing programs to optimize our cost structure. Currency exchange . Currency exchange losses were $8.8 million during the nine months ended September 30, 2023, compared to $4.8 million in the same period of 2022. Currency exchange activity for both periods related primarily due to foreign currency exposure on unsettled inter-company balances. During 2022, we also recognized non-cash cumulative translation losses as a result of our plan to close a foreign subsidiary. Refer to Note 15—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, 2023 was minimal due to our divestiture of MSA LLC. This compared to $9.7 million in the same period of 2022 which related primarily to defense costs incurred for cumulative trauma product liability claims. Loss on divestiture of MSA LLC. The $129.2 million pre-tax loss on divestiture of MSA LLC for the nine months ended September 30, 2023 relates to the derecognition of all legacy cumulative trauma product liability reserves and related insurance assets of the divested subsidiary during the first quarter of 2023. The loss also includes a $341.2 million contribution of cash and cash equivalents, as well as transaction related costs of $5.6 million. 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. GAAP operating income. Consolidated operating income for the nine months ended September 30, 2023, was $129.1 million compared to $168.5 million in the same period last year. The decrease in operating results was primarily driven by the loss on divestiture of MSA LLC, partially offset by higher sales and gross margin. Adjusted operating income. Americas adjusted operating income for the nine months ended September 30, 2023 was $260.4 million, an increase of $75.7 million, or 41.0%, compared to $184.7 million in the prior year. The increase in adjusted operating income is primarily attributable to higher sales and gross margin, partially offset by higher SG&A expenses to support business growth. -31- Table of Contents International adjusted operating income for the nine months ended September 30, 2023, was $60.1 million, an increase of $25.4 million, or 73.3%, compared to $34.7 million in the prior year. The increase in adjusted operating income is primarily attributable to higher sales and gross margin. Corporate segment adjusted operating loss for the nine months ended September 30, 2023, was $38.1 million, an increase of $13.3 million compared to an adjusted operating loss of $24.8 million in the same period of 2022 driven by higher performance based compensation expense related to sales growth and improved results from prior year. 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, 2023 (In thousands) Americas International Corporate Consolidated Net sales $ 902,918 $ 389,372 $ — $ 1,292,290 GAAP operating income 129,070 Restructuring charges (Note 3) 8,382 Currency exchange losses, net 8,781 Loss on divestiture of MSA LLC (Note 17) 129,211 Product liability expense (Note 17) 3 Amortization of acquisition-related intangible assets 6,936 Transaction costs (a) 78 Adjusted operating income (loss) 260,428 60,099 (38,066) 282,461 Adjusted operating margin % 28.8 % 15.4 % Depreciation and amortization (a) 38,029 Adjusted EBITDA 287,628 70,296 (37,434) 320,490 Adjusted EBITDA margin % 31.9 % 18.1 % 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 17) 9,733 Amortization of acquisition-related intangible assets 6,922 Transaction costs (a) 1,476 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 % (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. 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, loss on divestiture of MSA LLC, transaction costs and acquisition-related amortization. Adjusted EBITDA is reconciled above to the nearest GAAP financial measure, Operating income (loss) and excludes depreciation and amortization expense. -32- Table of Contents Total other (expense) income, net. Total other expense, net, for the nine months ended September 30, 2023 was $21.7 million, compared to total other income, net, of $1.0 million for the same period in 2022 driven primarily by higher interest expense related to higher interest rates, increased debt balances and decreased pension income driven by a lower expected rate of return. Income taxes. The reported effective tax rate for the nine months ended September 30, 2023 was 116.6% compared to 24.4% for the same period in 2022. This significant variance from the prior year is 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. 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 (loss) income attributable to MSA Safety Incorporated . Net loss was $17.8 million for the nine months ended September 30, 2023, or $(0.46) per diluted share compared to net income of $128.1 million, or $3.25 per diluted share, for the same period last year. -33- Table of Contents 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, 2023, approximately 42% 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 and a term loan, both due in 2026. At September 30, 2023, approximately 87% of our borrowings are denominated in U.S. dollars, which limits our exposure to currency exchange rate fluctuations. At September 30, 2023, the Company had cash and cash equivalents totaling $164.5 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 $2.0 million during the nine months ended September 30, 2023. The cash flow activity reflects strong operating results and working capital performance being mostly offset by the MSA LLC divestiture as discussed below. This compared to cash increasing $19.8 million during the same period in 2022. We believe MSA's healthy balance sheet and access to significant capital at September 30, 2023, positions us well to navigate through challenging business conditions and supply chain constraints or other unexpected events. Operating activities. Operating activities used cash of $66.1 million during the nine months ended September 30, 2023, compared to providing $103.9 million during the same period in 2022. The decreased operating cash flow as compared to the same period in 2022 was primarily related to the contribution of $341.2 million in the divestiture of MSA LLC. 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. This decrease was partially offset by working capital improvements, notably for inventories, and improved operating results. Investing activities. Investing activities used cash of $28.3 million during the nine months ended September 30, 2023, compared to using $4.4 million during the same period in 2022. The increase in cash used in investing activities as compared to the same period in 2022 was primarily related to the absence of short-term investment activity. 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 to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q. We remain committed to evaluating additional acquisition opportunities that will allow us to continue to grow in key end markets and geographies. Financing activities. Financing activities provided cash of $110.5 million during the nine months ended September 30, 2023, compared to using cash of $56.2 million during the same period in 2022. During the nine months ended September 30, 2023, we had net proceeds from long-term debt of $168.6 million to fund the MSA LLC divestiture as compared to net proceeds from long-term debt of $27.0 million during the same period in 2022. Since the MSA LLC divestiture in January 2023, we have paid down $146 million of our outstanding borrowings. We paid cash dividends of $55.0 million during the nine months ended September 30, 2023, compared to $53.4 million in the same period in 2022. We used cash of $3.9 million during the nine months ended September 30, 2023 to repurchase shares related to our employee stock compensation transactions. We used cash of $34.4 million during the nine months ended September 30, 2022, including $30.4 million related to our share repurchase program with the remainder related to employee stock compensation transactions. CUMULATIVE TRANSLATION ADJUSTMENTS The position of the U.S. dollar relative to international currencies, primarily the euro, British pound and Mexican peso, at September 30, 2023, resulted in a translation loss of $2.5 million being recorded to the cumulative translation adjustments shareholders' equity account during the nine months ended September 30, 2023, compared to a $58.1 million translation loss being recorded to the cumulative translation adjustments shareholders' equity account during the same period in 2022. COMMITMENTS AND CONTINGENCIES We made contributions of $4.3 million to our pension plans during the nine months ended September 30, 2023. We expect to make total contributions of approximately $5.7 million to our pension plans in 2023 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, 2023, 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, 2023, the Company has $1.9 million of restricted cash in support of these arrangements. -34- Table of Contents 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 17—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, 2022. RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS None. -35- Table of Contents