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Item 2. Management’s Discussion and Analysis

2024-04-30 compared with 2023-10-25 · 85 added, 219 removed, 111 unchanged (73% of the section changed)

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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.

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.

MSA Safety Incorporated 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.

The Company's comprehensive product line, which is governed by rigorous safety standards across highly regulated industries, is used to protect workers and facility infrastructures around the world in a broad range of markets, including fire service, energy, utility, construction and industrial manufacturing applications as well as heating, ventilation, air conditioning and refrigeration ("HVAC-R").

The Company's product portfolio includes firefighter safety gear where core products include self-contained breathing apparatus ("SCBA"), protective apparel and helmets;

detection where core products include fixed gas and flame detection ("FGFD") systems and portable gas detection instruments;

and industrial personal protective equipment ("PPE") where core products include industrial head protection and fall protection devices.

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, 2023.

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.

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 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.

Three Months Ended March 31, 2024, Compared to Three Months Ended March 31, 2023

Net sales for the three months ended March 31, 2024, were $413.3 million, an increase of $15.0 million, or 3.8%, compared to $398.3 million in the same period last year.

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

Net Sales Three Months Ended September 30, Dollar

Net Sales Three Months Ended March 31, Dollar

Increase Percent

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Net Sales Three Months Ended

September 30, 2023 versus September 30, 2022

March 31, 2024 versus March 31, 2023

(Percent Change) Americas International Consolidated

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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.

Net sales for the Americas segment were $295.5 million in the first quarter of 2024, an increase of $15.2 million, or 5.4%, compared to $280.3 million in the first quarter of 2023.

Constant currency sales in the Americas segment increased 4.8%.

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.

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.

This growth was driven by an increase in firefighter safety products, partially offset by declines in detection and industrial PPE.

Net sales for the International segment were $117.8 million in the first quarter of 2024, a decrease of $0.2 million, or 0.2%, compared to $118.0 million for the first quarter of 2023.

Constant currency sales in the International segment decreased 1.1% during the quarter.

Growth in our EMEA region was offset by a decline in our APAC region, particularly in Industrial PPE.

The operating environment remains dynamic, and we continue to navigate these challenges to continue delivering solutions to our customers.

Backlog continued to be slightly elevated, specifically in Detection and Industrial PPE, due to certain supply chain challenges.

While the supply chain continues to be volatile, we’re working closely with our suppliers and now expect backlog to normalize by the end of the year.

Orders were healthy in the quarter and through April.

Looking forward, we continue to expect to generate mid-single digit sales growth in 2024.

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.

Gross profit for the first quarter of 2024 was $195.5 million, an increase of $14.1 million or 7.8%, compared to $181.4 million for the first quarter of 2023.

The ratio of gross profit to net sales was 47.3% in the first quarter of 2024 compared to 45.5% in the same quarter last year.

Improved productivity and price/cost management are the leading drivers of the increase year over year.

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.

Selling, general and administrative ("SG&A") expenses were $94.2 million during the first quarter of 2024, an increase of $3.1 million or 3.4%, compared to $91.1 million for the same period a year ago.

Overall, SG&A expenses were 22.8% of net sales during the first quarter of 2024, compared to 22.9% of net sales during the same period in 2023.

Constant currency SG&A increased by approximately $2.7 million or 3.0%.

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

The increase in SG&A was driven by the higher level of sales and inflation partially offset by lower variable compensation.

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

March 31, 2024 versus March 31, 2023

(Percent Change) Consolidated

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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.

Research and development expense was $15.9 million during the first quarter of 2024, an increase of $0.7 million, compared to $15.2 million during the first quarter of 2023.

Research and development expense was 3.9% of net sales in the first quarter of 2024 and 3.8% in the first quarter of 2023.

During the first quarter of 2024 and 2023, we capitalized $3.4 million and $3.0 million of software development costs, respectively.

Depreciation expense for capitalized software development cost of $2.7 million and $2.3 million during the first quarter of 2024 and 2023, 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.

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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.

Total spend on both software development and research and development activities was $19.3 million and $18.2 million during the first quarter of March 31, 2024, and 2023, 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.

Restructuring charges of $3.0 million during the first quarter of 2024 were primarily related to management restructuring and initiatives to adjust our cost structure and optimize our manufacturing footprint.

Restructuring charges of $1.7 million during the first quarter of 2023 were related to manufacturing footprint optimization activities.

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

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.

Currency exchange losses were $2.3 million in the first quarter of 2024 compared to $4.2 million in the first quarter of 2023.

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

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.

Product liability expense for the first quarter of both 2024 and 2023 was minimal due to our divestiture of MSA LLC in January 2023, as discussed further in Note 17—Commitments and Contingencies to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q.

Loss on divestiture of MSA LLC.

The $129.2 million pre-tax loss on divestiture of MSA LLC for the first quarter of 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—Commitments and 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 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.

Consolidated operating income for the first quarter of 2024 was $80.1 million compared to loss of $60.1 million in the same period last year.

The increase in operating income was primarily driven by the loss on divestiture of MSA LLC in the prior year as well as higher sales and gross margin in the Americas segment 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.

Americas adjusted operating income for the first quarter of 2024 was $86.2 million, an increase of $14.5 million or 20.3% compared to $71.7 million in the prior year first quarter.

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

International adjusted operating income for the first quarter of 2024 was $13.5 million, a decrease of $2.3 million, or 14.5%, compared to $15.8 million in the prior year first quarter.

The decrease in adjusted operating income is primarily attributable to lower gross profit due to unfavorable geographical mix and higher inflationary pressures.

Corporate segment adjusted operating loss for the first quarter of 2024 was $11.7 million, an increase of $1.6 million in comparison to an adjusted operating loss of $10.1 million in the first quarter of 2023, driven by inflation and increased professional service fees associated with various strategic initiatives.

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)

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 %

Adjusted operating income (loss) Three Months Ended September 30, 2022

Adjusted operating income (loss) Three Months Ended March 31, 2024

(In thousands) Americas International Corporate Consolidated

Net sales $ 276,082 $ 105,612 $ — $ 381,694

GAAP operating income 64,313

Net sales to external customers $ 295,539 $ 117,763 $ — $ 413,302

Operating income 80,112

Restructuring charges (Note 3) 3,017

Currency exchange losses, net 2,333

Product liability expense (Note 17) 4,035

Amortization of acquisition-related intangible assets 2,314

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

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 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.

Nine Months Ended September 30, 2023, Compared to Nine Months Ended September 30, 2022

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

(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%

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.

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.

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.

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

Adjusted operating income (loss) Three Months Ended March 31, 2023

(In thousands) Americas International Corporate Consolidated

Net sales $ 902,918 $ 389,372 $ — $ 1,292,290

GAAP operating income 129,070

Net sales to external customers $ 280,267 $ 117,995 $ — $ 398,262

Operating loss (60,061)

Restructuring charges (Note 3) 1,747

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Amortization of acquisition-related intangible assets 2,305

Transaction costs (a)

Adjusted operating income (loss) 71,694 15,779 (10,093) 77,380

Adjusted operating margin % 25.6 % 13.4 %

Depreciation and amortization (a)

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)

Adjusted operating income (loss) 184,664 34,674 (24,756) 194,582

Adjusted operating margin % 24.5 % 10.5 %

Depreciation and amortization (a)

Depreciation and amortization 12,267

Adjusted EBITDA 80,494 19,058 (9,905) 89,647

Adjusted EBITDA margin % 28.7 % 16.2 %

(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.

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

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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 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.

Adjusted operating margin % and Adjusted EBITDA % are operating ratios derived from non-GAAP financial measures.

Total other expense, net.

Total other expense, net, for the first quarter of 2024 was $4.5 million, compared to $7.7 million for the same period in 2023, driven primarily by decreased interest expense related to reduced debt balances related to prior year borrowings associated with the MSA LLC divestiture as well as increased pension income driven by a higher 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.

The reported effective tax rate for the first quarter of 2024 was 23.1% compared to (121.7)% for the first quarter of 2023.

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.

Refer to Note 17—Commitments and Contingencies to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further information on the MSA LLC divestiture.

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

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.

Net income was $58.1 million for the first quarter of 2024, or $1.47 per diluted share compared to net loss of $150.2 million, or $(3.83) per diluted share, for the same period last year.

LIQUIDITY AND CAPITAL RESOURCES

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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.

At March 31, 2024, approximately 51% 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.

At March 31, 2024, approximately 85% 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.

At March 31, 2024, the Company had cash and cash equivalents totaling $148.3 million and access to sufficient capital, providing ample liquidity and flexibility to continue to maintain our balanced capital allocation strategy that prioritizes growth investments, funding our dividends and servicing debt obligations.

Cash, cash equivalents and restricted cash increased $1.9 million during the three months ended March 31, 2024 compared to cash decreasing $23.8 million during the same period in 2023.

We believe MSA's healthy balance sheet and access to significant capital at March 31, 2024, positions us well to navigate through challenging business conditions, 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.

Operating activities provided cash of $50.9 million during the three months ended March 31, 2024, compared to using cash of $285.9 million during the same period in 2023.

The improved cash flow from operating activities as compared to the same period in 2023 was primarily related to the prior year contribution of $341.2 in the divestiture of MSA LLC.

Refer to Note 17—Commitments and Contingencies to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further information.

Cash flow provided by operating activities decreased slightly excluding the cash flow impact of the MSA LLC divestiture as higher cash usage for bonus and incentive payouts related to prior year performance was mostly offset by 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.

Investing activities used cash of $11.2 million during the three months ended March 31, 2024, compared to using $8.4 million during the same period in 2023.

The increase in cash used in investing activities as compared to the same period in 2023 was related to increased capital expenditures to support our manufacturing footprint optimization activities.

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.

Financing activities used cash of $29.1 million during the three months ended March 31, 2024, compared to providing cash of $272.8 million during the same period in 2023.

During the three months ended March 31, 2024, we had net payments on long-term debt of $5.0 million as compared to net proceeds from long-term debt of $295.4 million during the same period in 2023 to fund the MSA LLC divestiture.

Since the MSA LLC divestiture in January 2023, we have paid down $294.1 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.

We paid cash dividends of $18.5 million during the three months ended March 31, 2024, compared to $18.0 million in the same period in 2023.

We used cash of $5.8 million during the three months ended March 31, 2024 to repurchase shares related to our employee stock compensation transactions compared to $3.7 million in the same period in 2023.

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.

dollar relative to international currencies, primarily the euro, at March 31, 2024, resulted in a translation loss of $10.7 million being recorded to the cumulative translation adjustments shareholders' equity account during the three months ended March 31, 2024, compared to a $11.2 million translation gain being recorded to the cumulative translation adjustments shareholders' equity account during the same period in 2023.

COMMITMENTS AND CONTINGENCIES

We made contributions of $4.3 million to our pension plans during the nine months ended September 30, 2023.

We made contributions of $1.3 million to our pension plans during the three months ended March 31, 2024.

We expect to make total contributions of approximately $5.3 million to our pension plans in 2024 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.

The Company had outstanding bank guarantees and standby letters of credit with banks as of March 31, 2024, totaling $9.3 million, of which $1.1 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.

At March 31, 2024, the Company has $2.0 million of restricted cash in support of these arrangements.

We have purchase commitments for materials, supplies, services, and property, plant and equipment as part of our ordinary conduct of business.

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.

Please refer to Note 17—Commitments and 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

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What changed 10-Q

Item 2. Management’s Discussion and Analysis