MSA Safety Inc 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the historical financial statements and other financial information included elsewhere in this quarterly report on Form 10-Q. This discussion may contain forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of our annual report entitled “Forward-Looking Statements” and “Risk Factors,” and those discussed in our Form 10-Q quarterly reports filed after such annual report (such as in Part II, Item 1A, “Risk Factors.”) BUSINESS OVERVIEW MSA 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 segments: Americas, International and Corporate. Americas. Our largest manufacturing and research and development facilities are located in the United States. We serve our markets across the Americas with manufacturing facilities in the U.S., Mexico and Brazil. Operations in the other countries within the Americas segment focus primarily on sales and distribution in their respective home country markets. International. Our International segment includes companies in Europe, the Middle East and Africa ("EMEA") and the Asia Pacific region. In our largest International subsidiaries (in Germany, France, U.K., Ireland and China), we develop, manufacture and sell a wide variety of products. In China, the products manufactured are sold primarily in China as well as in regional markets. Operations in other International segment countries focus primarily on sales and distribution in their respective home country markets. Although some of these companies may perform limited production, most of their sales are of products manufactured in our plants in Germany, France, the U.S., U.K., Ireland, Morocco and China or are purchased from third-party vendors. Corporate. The Corporate segment primarily consists of general and administrative expenses incurred in our corporate headquarters, costs associated with corporate development initiatives, legal expense, interest expense, foreign exchange gains or losses and other centrally-managed costs. Corporate general and administrative costs comprise the majority of the expense in the Corporate segment. RESULTS OF OPERATIONS Three Months Ended March 31, 2024, Compared to Three Months Ended March 31, 2023 Net Sales. 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. -22- Table of Contents Net Sales Three Months Ended March 31, Dollar Increase Percent Increase (In millions) 2024 2023 Consolidated $413.3 $398.3 $15.0 3.8% Americas 295.5 280.3 15.2 5.4% International 117.8 118.0 (0.2) (0.2)% Net Sales Three Months Ended March 31, 2024 versus March 31, 2023 (Percent Change) Americas International Consolidated GAAP reported sales change 5.4% (0.2)% 3.8% Currency translation effects (0.6)% (0.9)% (0.7)% Constant currency sales change 4.8% (1.1)% 3.1% Note: Constant currency sales change is a non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance. Constant currency sales change is calculated by deducting the percentage impact from currency translation effects from the overall percentage change in net sales. Net sales for the Americas segment were $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 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 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 $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 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 March 31, 2024 versus March 31, 2023 (Percent Change) Consolidated GAAP reported change 3.4% Currency translation effects (0.4)% Constant currency change 3.0% -23- Table of Contents Research and development expense . 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. 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 $19.3 million and $18.2 million during the first quarter of March 31, 2024, and 2023, respectively. Restructuring charges . 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 $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. 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 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 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. -24- Table of Contents 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 March 31, 2024 (In thousands) Americas International Corporate Consolidated 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 Amortization of acquisition-related intangible assets 2,314 Transaction costs (a) 233 Adjusted operating income (loss) 86,218 13,486 (11,695) 88,009 Adjusted operating margin % 29.2 % 11.5 % Depreciation and amortization 13,245 Adjusted EBITDA 95,693 17,045 (11,484) 101,254 Adjusted EBITDA margin % 32.4 % 14.5 % (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) Three Months Ended March 31, 2023 (In thousands) Americas International Corporate Consolidated Net sales to external customers $ 280,267 $ 117,995 $ — $ 398,262 Operating loss (60,061) Restructuring charges (Note 3) 1,747 Currency exchange losses, net 4,175 Loss on divestiture of MSA LLC (Note 17) 129,211 Product liability expense (Note 17) 3 Amortization of acquisition-related intangible assets 2,305 Adjusted operating income (loss) 71,694 15,779 (10,093) 77,380 Adjusted operating margin % 25.6 % 13.4 % Depreciation and amortization 12,267 Adjusted EBITDA 80,494 19,058 (9,905) 89,647 Adjusted EBITDA margin % 28.7 % 16.2 % Note: Adjusted operating income (loss) and adjusted EBITDA are non-GAAP financial measures. Adjusted operating income (loss) is reconciled above to the nearest GAAP financial measure, Operating income (loss), and excludes restructuring, currency exchange, product liability expense, loss on divestiture of MSA LLC, transaction costs and acquisition-related amortization. Adjusted EBITDA is reconciled above to the nearest GAAP financial measure, Operating income (loss) and excludes depreciation and amortization expense. 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. -25- Table of Contents Income taxes. 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—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. While we believe our tax positions will be sustained, the final outcome of tax audits and related litigation may differ materially from the tax amounts recorded in our unaudited condensed consolidated financial statements. Net income . Net income was $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 Our main source of liquidity is operating cash flows, supplemented by borrowings. Our principal liquidity requirements are for working capital, capital expenditures, principal and interest payments on debt, declared dividend payments and acquisitions. At 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 March 31, 2024, approximately 85% of our borrowings are denominated in U.S. dollars, which limits our exposure to currency exchange rate fluctuations. 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 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 $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 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 $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. -26- Table of Contents CUMULATIVE TRANSLATION ADJUSTMENTS The position of the U.S. 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 $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 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 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—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 We prepare our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. We evaluate these estimates and judgments on an on-going basis based on historical experience and various assumptions that we believe to be reasonable under the circumstances. However, different amounts could be reported if we had used different assumptions and in light of different facts and circumstances. Actual amounts could differ from the estimates and judgments reflected in our unaudited condensed consolidated financial statements. The more critical judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements are discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023. RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS None. -27- Table of Contents