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Item 7. Management’s Discussion and Analysis

2024-02-16 compared with 2023-02-16 · 98 added, 122 removed, 241 unchanged (48% of the section changed)

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For a discussion on the year ended December 31, 2022 compared to the year ended December 31, 2021, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on February 16, 2023.

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

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

Americas, International and Corporate.

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

On 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 a joint venture between R&Q Insurance Holdings Ltd.

On January 5, 2023, the Company divested Mine Safety Appliances LLC ("MSA LLC") a wholly owned subsidiary that held legacy product liability claims relating to coal dust, asbestos, silica, and other exposures, to a joint venture between R&Q Insurance Holdings Ltd.

and Obra Capital, Inc.

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 will derecognize 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.

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

On July 1, 2021, the Company acquired Bacharach, Inc.

and its affiliated companies ("Bacharach") in a transaction valued at $329.4 million, net of cash acquired.

Headquartered near Pittsburgh in New Kensington, Pa., Bacharach is a leader in gas detection technologies used in the heating, ventilation, air conditioning and refrigeration ("HVAC-R") markets.

Bacharach’s advanced instrumentation technologies help protect lives and the environment, while also increasing operational efficiency for its diversified customer base.

Bacharach's portfolio of gas detection and analysis products are used to detect, measure and analyze leaks of various gases that are commonly found in both commercial and industrial settings.

Bacharach has strong expertise in the refrigerant leak detection market with customers in the HVAC-R, food retail, automotive, commercial and industrial refrigeration, and military markets.

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

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

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

On January 25, 2021, the Company acquired 100% of the common stock of B T Q Limited, including Bristol Uniforms and Bell Apparel ("Bristol") in an all-cash transaction valued at $63.0 million, net of cash acquired.

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

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

and key European markets.

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

protecting the health and safety of firefighters.

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

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

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

BUSINESS OVERVIEW

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

Recognized for their market leading innovation, many MSA products integrate a combination of electronics, mechanical systems and advanced materials to protect users against hazardous or life-threatening situations.

The Company's comprehensive product line, which is governed by rigorous safety standards across highly regulated industries, is used by workers around the world in a broad range of markets, including fire service, oil, gas and petrochemical industry, construction, industrial manufacturing applications, utilities, mining and the military.

MSA's core products include breathing apparatus, fixed gas and flame detection systems, portable gas detection instruments, industrial head protection products, firefighter helmets and protective apparel, and fall protection devices.

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

MSA is the global leader in advanced safety products, technology and solutions.

Driven by its singular mission of safety, the Company has been at the forefront of safety innovation since 1914, protecting workers and facility infrastructure around the world across a broad range of diverse end markets while creating sustainable value for shareholders .

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:

To best serve these customer preferences, we have organized our business into four geographical operating segments that are aggregated into three reportable segments:

Americas, International and Corporate.

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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.

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, Morocco and China or are purchased from third-party vendors.

The Corporate segment primarily consists of general and administrative expenses incurred in our corporate headquarters, costs associated with corporate development initiatives, legal expense, interest expense, foreign exchange gains or losses and other centrally-managed costs.

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

During the years ended December 31, 2022, 2021 and 2020 corporate general and administrative costs were $40.3 million, $37.6 million, and $28.5 million, respectively.

These increases primarily reflect an increase in centrally managed functions.

During the years ended December 31, 2023, and 2022 corporate general and administrative costs were $52.7 million and $40.3 million, respectively.

These increases reflect an increase in centrally managed functions and is primarily the result of higher variable compensation expense related to sales growth and improved performance results from prior year.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Net Sales 2023 2022 Dollar

(Decrease) Percent

Increase Percent

(In millions)

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International 552.1 484.7 67.4 13.9%

Net sales for the year ended December 31, 2022, were $1.53 billion, an increase of $127.7 million, from $1.40 billion for the year ended December 31, 2021, driven by strategic price increases, volume growth, and acquisitions, partially offset by foreign currency translation.

We saw strong growth across most of our core products and across both reporting segments.

Net sales for the year ended December 31, 2023, were $1.8 billion, an increase of $0.3 billion, from $1.5 billion for the year ended December 31, 2022, driven by volume growth and pricing actions.

We saw healthy growth across product categories and both reporting segments.

Constant currency sales increased by 16.1% for the year ended December 31, 2023.

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Constant currency sales change 17.5% 13.2% 16.1%

Acquisitions (2.8)% (1.6)% (2.3)%

Organic constant currency change 12.3% 5.4% 9.9%

Constant currency sales change and Organic constant currency sales change are 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 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.

Organic constant currency sales change is calculated by deducting the percentage impact from acquisitions and currency translation effects from the overall percentage change in net sales.

Net sales for the Americas segment were $1,043.2 million for the year ended December 31, 2022, an increase of $135.1 million, or 14.9%, compared to $908.1 million for the year ended December 31, 2021.

During 2022, constant currency sales in the Americas segment increased 15.1% or on an organic constant currency basis increased 12.3%, excluding acquisitions.

Growth was driven by favorable unit growth, new products, pricing and this volume growth was across most product categories.

The inclusion of Bacharach drove the acquisition related sales.

Net sales for the International segment were $484.7 million for the year ended December 31, 2022, a decrease of $7.4 million, or 1.5%, compared to $492.1 million for the year ended December 31, 2021.

Constant currency sales in the International segment increased 7.0% compared to the prior year period with organic constant currency growth of 5.4%.

Growth was driven by favorable unit growth, new products, pricing and this volume growth was across most product categories;

however, the unfavorable impact of foreign currency translation offset this growth on a reported basis.

The inclusion of Bacharach drove acquisition related sales.

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

Net sales for the Americas segment were $1.2 billion for the year ended December 31, 2023, an increase of $0.2 billion, or 18.4%, compared to $1.0 billion for the year ended December 31, 2022.

During 2023, constant currency sales in the Americas segment increased 17.5% compared to the prior year driven by volume growth and pricing actions.

This growth was driven by increases in all products, particularly firefighter protective apparel and detection associated with healthy demand and improved output as well as backlog conversion as a result of continued progress with the supply chain and by applying the MSA Business System mindset.

Net sales for the International segment were $552.1 million for the year ended December 31, 2023, an increase of $67.4 million, or 13.9%, compared to $484.7 million for the year ended December 31, 2022.

Constant currency sales in the International segment increased 13.2% compared to the prior year period.

This growth was driven by strength across most core products, particularly detection and breathing apparatus.

We expect to generate mid-single digit sales growth in 2024 with incremental margin and cash flow conversion aligned with our long-term targets.

We expect to have greater visibility in the first half of the year and we will continue to be agile in the event the operating environment differs meaningfully from our expectations.

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

These factors include, among other things, supply chain constraints, raw material or semiconductor availability, the risk of additional COVID lockdowns, industrial employment rates, interest rate changes, military conflict, currency exchange volatility, the pace of economic recovery, as well as geopolitical risk, particularly as it relates to energy uncertainty which could affect operations and suppliers based in Germany and broader Europe.

These or other conditions could impact our future results and growth expectations well into 2023.

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 into 2024.

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

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The ratio of gross profit to net sales was 47.7% in 2023 compared to 44.1% in 2022.

Pricing and productivity efforts were partially offset by inflation, inventory and product warranty charges.

Volume leverage, price/cost management, favorable product mix and productivity efforts contributed to the gross profit improvement.

Selling, general and administrative expenses.

Selling, general and administrative ("SG&A") expenses were $396.6 million for the year ended December 31, 2023, an increase of $57.7 million, or 17.0%, compared to $338.9 million for the year ended December 31, 2022.

Overall, selling, general and administrative expenses were 22.2% of net sales in 2022 compared to 23.8% of net sales in 2021.

Organic constant currency SG&A increased $13 million or 4.0%, demonstrating leverage on revenue growth.

This increase was driven by wage inflation and strategic investments to support revenue growth.

Areas of savings included lower acquisition related costs and savings from our restructuring programs in our International segment.

Overall, selling, general and administrative expenses were 22.2% of net sales in both periods.

Constant currency SG&A increased $55 million or 16.4%, to support our revenue growth.

The increase in SG&A was driven by the higher level of sales, increased variable compensation and inflation.

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

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Constant currency change 16.4%

Acquisitions and strategic transaction costs (0.7)%

Organic constant currency change 4.0%

Constant currency SG&A change and Organic constant currency SG&A change are non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance.

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

Constant currency SG&A change is calculated by deducting the percentage impact from currency translation effects from the overall percentage change in SG&A.

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

Research and development expense.

Research and development expense was $57.0 million for the year ended December 31, 2022, a decrease of $0.8 million, or 1.4%, compared to $57.8 million for the year ended December 31, 2021.

Research and development expense was $68.0 million for the year ended December 31, 2023, an increase of $11.0 million, or 19.3%, compared to $57.0 million for the year ended December 31, 2022.

Research and development expense was 3.8% of net sales in 2023, compared to 3.7% of net sales in 2022.

We capitalized approximately $12.1 million and $8.7 million of software development costs during the years ended December 31, 2023 and 2022, respectively.

Depreciation expense for capitalized software development cost of $7.9 million and $4.9 million during the years ended December 31, 2022 and 2021, was recorded in costs of products sold on the Consolidated Statements of Income.

Amortization expense for capitalized software development cost of $10.4 million and $7.9 million during the years ended December 31, 2023 and 2022, was recorded in costs of products sold on the Consolidated Statements of Income.

Refer to Note 1—Significant Accounting Policies of the consolidated financial statements in Part II Item 8 of this Form 10-K for further details regarding our software development costs.

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Restructuring charges.

During the year ended December 31, 2022, the Company recorded restructuring charges of $8.0 million primarily related to our ongoing international initiatives to drive profitable growth and right size operations.

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

During the year ended December 31, 2023, the Company recorded restructuring charges of $9.9 million primarily related to our ongoing manufacturing footprint optimization activities and other initiatives to adjust our cost structure and improve productivity.

This compared to restructuring charges of $8.0 million during the year ended December 31, 2022, primarily related to our ongoing international initiatives to drive profitable growth and right size operations.

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

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Currency exchange losses were $17.1 million during the year ended December 31, 2023, compared to $10.3 million during the year ended December 31, 2022.

The currency exchange losses for the current period related primarily due to foreign currency exposure on unsettled inter-company balances and the recognition of non-cash cumulative translation losses as result of our plan to close a foreign subsidiary.

Currency exchange in 2021 related to foreign currency exposure on unsettled inter-company balances.

Currency exchange activity for both periods related primarily due to foreign currency exposure on unsettled inter-company balances and recognized exchange loss for our Argentina affiliate operating in a hyper-inflationary environment.

During 2022, we also recognized non-cash cumulative translation losses as a result of our plan to close a foreign subsidiary.

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

Product liability expense.

Product liability expense during the year ended December 31, 2022 was $20.6 million compared to $185.3 million for the year ended December 31, 2021.

Product liability expense for both periods primarily relates to increases in MSA LLC's reserve for cumulative trauma product liability claims and defense costs incurred for these claims.

Adjustments to the reserve for the year ended December 31, 2022 totaled $8.4 million net of insurance receivable of $1.6 million.

The reserve includes estimated amounts for claims expected to be resolved through the year 2075.

On January 5, 2023, the Company divested MSA LLC, a wholly owned subsidiary that holds legacy product liability claims relating to coal dust, asbestos, silica, and other exposures.

As a result of the transaction, we will derecognize in the first quarter of 2023 all legacy cumulative trauma product liability reserves, related insurance assets, and associated deferred tax assets of the divested subsidiary from our balance sheet and recognize a loss of approximately $200 million.

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

Product liability expense during the year ended December 31, 2023 was minimal due to our divestiture of MSA LLC.

This compared to $20.6 million for the year ended December 31, 2022, which related primarily to defense costs incurred for cumulative trauma product liability claims as well as an increase in MSA LLC's reserve for cumulative trauma product liability claims resulting from the annual valuation.

Loss on divestiture of MSA LLC .

The $129.2 million pre-tax loss on divestiture of MSA LLC for the year ended December 31, 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 20—Contingencies to the consolidated financial statements in Part II Item 8 of this Form 10-K for further information.

GAAP operating income.

Consolidated operating income for the year ended December 31, 2023 was $231.3 million compared to $239.1 million for the year ended December 31, 2022.

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

The decrease in operating income was primarily driven by the loss on divestiture of MSA LLC, partially offset by strong operating results driven by higher sales and gross profit.

Adjusted operating income.

Americas adjusted operating income for the year ended December 31, 2023 was $359.6 million, an increase of $92.2 million or 34%, compared to $267.4 million for the year ended December 31, 2022.

The increase in adjusted operating income is primarily attributable to higher sales volumes driven by the full year impact of the Bacharach acquisition and organic business activity, partially offset by higher SG&A expenses to support business growth.

International adjusted operating income for the year ended December 31, 2022 was $60.9 million, a decrease of $12.4 million, or 17%, compared to adjusted operating income of $73.3 million for the year ended December 31, 2021.

The decrease in adjusted operating income is primarily attributable to lower revenue and gross margins as a result of unfavorable currency translation and transactional impact, inflationary pressures, partially offset by lower SG&A expenses.

Corporate segment adjusted operating loss for the year ended December 31, 2022 was $37.9 million, an increase of $2.7 million, or 8%, compared to an adjusted operating loss of $35.2 million for the year ended December 31, 2021 due primarily to increased costs to support higher business activity.

The increase in adjusted operating income is primarily attributable to higher sales and gross profit, partially offset by higher SG&A expenses to support business growth.

International adjusted operating income for the year ended December 31, 2023 was $89.7 million, an increase of $28.8 million, or 47%, compared to adjusted operating income of $60.9 million for the year ended December 31, 2022.

The increase in adjusted operating income is primarily attributable to higher sales and gross profit.

Corporate segment adjusted operating loss for the year ended December 31, 2023 was $51.6 million, an increase of $13.7 million, or 36%, compared to an adjusted operating loss of $37.9 million for the year ended December 31, 2022 due primarily to 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.

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Currency exchange losses, net 17,079

Loss on divestiture of MSA LLC (Note 20) 129,211

Product liability expense (Note 20) 3

Acquisition related costs (Note 14) (a)

Amortization of acquisition-related intangible assets 9,246

Transaction costs (a)

Adjusted operating income (loss) 359,617 89,699 (51,600) 397,716

Adjusted operating margin % 29.1 % 16.2 %

Depreciation and amortization (a)

34,334 12,256 520 47,110

Depreciation and amortization 36,979 13,705 843 51,527

Adjusted EBITDA 396,596 103,404 (50,757) 449,243

Adjusted EBITDA % 32.1 % 18.7 %

(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 Consolidated Statements of Income.

Adjusted operating income Year Ended December 31, 2022

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Product liability expense (Note 20) 20,590

Acquisition related costs (Note 14) (a)

Amortization of acquisition-related intangible assets 9,207

Transaction costs (a)

Adjusted operating income (loss) 267,392 60,923 (37,928) 290,387

Adjusted operating margin % 25.6 % 12.6 %

Depreciation and amortization (a)

31,236 13,718 463 45,417

Depreciation and amortization 34,334 12,256 520 47,110

Adjusted EBITDA 301,726 73,179 (37,408) 337,497

Adjusted EBITDA % 28.9 % 15.1 %

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

These costs are included in SG&A expense in the unaudited Condensed Consolidated Statements of Income.

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

(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 Consolidated Statements of Income.

Adjusted operating income (loss) and adjusted EBITDA are non-GAAP financial measures.

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

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

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Total other expense (income), net.

Total other expense, net, for the year ended December 31, 2022, was $0.6 million, a decrease of $1.4 million compared to other income, net, of $0.8 million for the year ended December 31, 2021, driven primarily by higher interest expense, related to rising interest rate environment, and a write-down of an equity investment, partially offset by higher pension income, resulting from higher expected rate of return on plan assets.

We expect total interest expense for 2023 to be between $48 million and $50 million, this increase is primarily related to the additional long-term debt to divest MSA LLC as of January 5, 2023.

We expect non-cash pension income to decline by $8 million compared to 2022.

Total other expense, net, for the year ended December 31, 2023, was $24.6 million, an increase of $24.0 million compared to $0.6 million for the year ended December 31, 2022, due primarily to increased interest expense related to higher interest rates and increased debt balances associated with the MSA LLC divestiture as well as decreased pension income driven by a lower expected rate of return.

We expect total interest expense for 2024 to be approximately $40 million, this decrease is primarily related to significant long-term debt payments made during 2023.

We expect non-cash pension income to increase by $2 million compared to 2023.

Income taxes.

The reported effective tax rate for the year ended December 31, 2022 was 24.7%, which includes a benefit of 0.8% for share-based payments, expense of 0.1% related to higher profits in foreign jurisdictions, and an expense of 1.2% due to nondeductible compensation.

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

The reported effective tax rate for the year ended December 31, 2023 was 71.6% compared to 24.7% for the year ended December 31, 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 partially offset by a $5.3 million tax adjustment for Switzerland tax reform.

Refer to Note 20— Contingencies to consolidated financial statements in Part II Item 8 of this Form 10-K for further information on the MSA LLC divestiture.

The Organization for Economic Co-operation and Development (OECD) has a framework to implement a global minimum corporate tax of 15% for companies with global revenues above €750.0 million (referred to as Pillar 2), with effective dates beginning in January 2024.

While it is uncertain whether the U.S.

will enact legislation to adopt Pillar 2, we meet the overall revenue threshold and therefore fall within the scope of Pillar 2.

At this time, we do not expect Pillar 2 to have a material impact on our effective tax rate or our consolidated results of operation, financial position, and cash flows.

We continue to monitor the potential financial impacts and compliance requirements of Pillar 2.

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

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To supplement our Consolidated Financial Statements presented in accordance with generally accepted accounting principles (“GAAP”), we use, and this report includes, certain non-GAAP financial measures.

These financial measures include organic constant currency changes, financial measures excluding the impact of acquisitions and related acquisition related costs (including acquisition related amortization), adjusted operating income, adjusted operating margin percentage, adjusted EBITDA and adjusted EBITDA margin percentage.

These financial measures include constant currency changes, financial measures excluding the impact of acquisitions and related acquisition related costs (including acquisition related amortization), adjusted operating income, adjusted operating margin percentage, adjusted EBITDA and adjusted EBITDA margin percentage.

We believe that the use of these non-GAAP financial measures provide investors with additional useful information and provide a more complete understanding of our operating performance and trends, and facilitate comparisons with the performance of our peers.

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At December 31, 2023, approximately 83% of our borrowings are denominated in US dollars, which limits our exposure to currency exchange rate fluctuations.

At December 31, 2022, the Company had cash and cash equivalents, including restricted cash, totaling $164.4 million, and access to sufficient capital, providing ample liquidity and flexibility to continue to maintain our balanced capital allocation strategy.

At December 31, 2023, the Company had cash and cash equivalents, including restricted cash, totaling $148.4 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 decreased $16.0 million during the year ended December 31, 2023.

The cash flow activity reflects strong operating results and working capital performance being offset by the MSA LLC divestiture as discussed below.

This compared to cash increasing $23.0 million during the same period in 2022.

At December 31, 2023, $838.1 million of the existing $900.0 million senior revolving credit facility was unused, including letters of credit issued under the facility.

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

The Company believes our healthy balance sheet and access to significant capital at the year ended December 31, 2022, positions us well to navigate through challenging business conditions.

We believe MSA's healthy balance sheet and access to significant capital at the year ended December 31, 2023, positions us well to navigate through challenging business conditions and supply chain constraints or other unexpected events.

Operating activities.

Operating activities provided cash of $92.9 million in 2023, compared to providing cash of $157.5 million in 2022.

The reduced operating cash flow as compared to the same period in 2021 was primarily related to increased working capital requirements, notably increased inventory balances at year-end 2022 to support the higher backlog and accounts receivable related to stronger fourth quarter 2022 revenue.

Payments for subsidiary MSA LLC's product liability claims exceeded collections from insurance companies by $27.2 million in the year ended December 31, 2022, compared to $24.1 million in 2021.

On January 5, 2023, the Company divested MSA LLC and as a result, will derecognize all legacy cumulative trauma product liability reserves, related insurance assets, and associated deferred tax assets of the divested subsidiary from our balance sheet and will recognize a loss of approximately $200 million in the first quarter of 2023 and expect related cash outflows to be recognized within operating activities in the consolidated statements of cash flows.

R&Q and Obra have assumed management of the divested subsidiary, including the management of its claims.

The divestiture enhances operating cash flow predictability by eliminating costs associated with defending and settling the transferred claims.

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

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

This decrease was mostly offset by working capital improvement, notably for inventories, which was the result of a more normal supply chain environment and focus for the business and improved operating results.

Sustainable progress across all elements of net working capital are being delivered through the principles of the MSA Business System.

Investing activities.

Investing activities used cash of $40.0 million for the year ended December 31, 2023, compared to using $4.5 million in 2022.

The decrease in cash used in investing activities as compared to the same period in 2021 was primarily related to the absence of acquisitions.

We remain active in evaluating additional acquisition opportunities that will allow us to continue to grow in key end markets and geographies.

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 20—Contingencies to the consolidated financial statements in Part II Item 8 of this Form 10-K.

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 used cash of $113.4 million for the year ended December 31, 2022, compared to providing cash of $203.9 million in 2021.

During 2022, we had net payments on long-term debt of $13.0 million as compared to net proceeds on long-term debt of $293.2 million during the same period in 2021 to fund the acquisitions of Bacharach and Bristol and buy-out our minority partner in our China business.

We paid cash dividends of $71.5 million during 2022, compared to $68.6 million, exclusive of a $5.6 million dividend to our former noncontrolling interest partner in China as part of the buy-out, during 2021.

We also used cash of $34.4 million during 2022 to repurchase shares, compared to using $6.2 million during the same period in 2021.

In 2022, $30.4 million of our repurchase activity was related to purchases under our 2015 stock repurchase program.

In January 2023, we entered into a new $250 million term loan and $65 million was drawn down from our revolving credit facility to fund the divestiture of MSA LLC, a wholly owned subsidiary that, at the time of divestiture held legacy product liability claims relating to coal dust, asbestos, silica, and other exposures.

Subsequent to this transaction, we have more than $500 million of availability remaining on our revolving credit facility.

Financing activities used cash of $52.3 million for the year ended December 31, 2023, compared to using cash of $113.4 million in 2022.

During 2023, we had net proceeds on long-term debt of $23.9 million to fund the MSA LLC divestiture as compared to net payments on long-term debt of $13.0 million during the same period in 2022.

Since the MSA LLC divestiture in January 2023, we have paid down $289.0 million of our outstanding borrowings.

We paid cash dividends of $73.5 million during 2023, compared to $71.5 million during 2022.

We used cash of $4.0 million during 2023 to repurchase shares related to our employee stock compensation transactions.

We used cash of $34.4 million during 2022, including $30.4 million related to our share repurchase program with the remainder related to employee stock compensation transactions.

CUMULATIVE TRANSLATION ADJUSTMENTS

The year-end position of the U.S.

dollar relative to international currencies at December 31, 2022, resulted in a translation loss of $19.5 million being recorded to cumulative translation adjustments shareholders' equity account for the year ended December 31, 2022, compared to a translation loss of $25.4 million being recorded to the cumulative translation adjustments account during 2021.

dollar relative to international currencies at December 31, 2023, resulted in a translation gain of $21.7 million being recorded to cumulative translation adjustments shareholders' equity account for the year ended December 31, 2023, compared to a translation loss of $19.5 million being recorded to the cumulative translation adjustments account during 2022.

COMMITMENTS AND CONTINGENCIES

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

It also does not include $315 million of variable rate debt related to the January 5, 2023, divestiture of MSA LLC.

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

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To the extent that a balance remains when the facility matures in 2026, we expect to refinance the remaining balance through new borrowing facilities.

Interest expense on fixed rate debt over the next five years is expected to be approximately $7.5 million in 2023, $7.3 million in 2024, $7.0 million in 2025, $6.8 million in 2026 and $6.6 million in 2027.

We expect total interest expense for 2023 to be between $48 million and $50 million.

Interest payments on fixed rate debt over the next five years are excluded from the table above and are expected to be approximately $9.8 million in 2024, $9.6 million in 2025, $9.3 million in 2026, $8.5 million in 2027 and $7.0 million in 2028.

We expect total interest expense for 2024 to be approximately $40 million.

The Company had outstanding bank guarantees and standby letters of credit with banks as of December 31, 2023 totaling $9.1 million, of which $1.1 million relate to the senior revolving credit facility.

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for the year ended December 31, 2022.

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

During 2021, the Company made acquisitions that raised business combinations to a critical accounting policy and estimate.

There were no business combinations during 2022.

There were no business combinations during 2023 or 2022.

Business combinations.

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Adjustments are made to the reserve as appropriate.

Cumulative trauma product liability claims involve exposures to harmful substances that occurred over many years and may have developed over long periods of time into diseases.

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

In addition, in connection with finalizing and reporting the Company's results of operations, management works annually (unless significant changes in trends or new developments warrant an earlier review) with an outside valuation consultant and outside legal counsel to review MSA LLC's potential exposure to all cumulative trauma product liability claims.

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

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

Please refer to Note 20—Contingencies to the consolidated financial statements in Part II Item 8 of this Form 10-K for further discussion on the Company's product liabilities and divestiture of MSA LLC on January 5, 2023.

Cumulative trauma product liability claims relate to the Company's now-divested subsidiary, MSA LLC and involve exposures to harmful substances that occurred over many years and may have developed over long periods of time into diseases.

Refer to Note 20—Contingencies to the consolidated financial statements in Part II Item 8 of this Form 10-K for further discussion on the Company's product liability claims and divestiture of MSA LLC on January 5, 2023.

Prior to the divestiture, MSA LLC's cumulative trauma product liability reserve was based upon an estimate of MSA LLC’s then 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.

Income taxes.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis