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 but not limited to the effects of changes in U.S. trade policy and trade agreements, along with increased tariffs as well as 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 principal product categories are fire service, detection and industrial personal protective equipment ("PPE"). Core products for fire service include self-contained breathing apparatus ("SCBA"), protective apparel and helmets; core products for detection include fixed gas and flame detection ("FGFD") systems and portable gas detection instruments; and core products for industrial PPE include industrial head protection and fall protection devices. In addition to its principal product categories, MSA continues to deploy and grow its MSA+™ solution, a business approach that combines MSA hardware, software, and services to simplify safety operations for customers and deliver recurring revenue. 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, 2024. We tailor our product and solution 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 (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. -22- Table of Contents RESULTS OF OPERATIONS Three Months Ended March 31, 2025, Compared to Three Months Ended March 31, 2024 Net Sales Three Months Ended March 31, Dollar Increase (Decrease) Percent Increase (Decrease) (In millions, except percentage change) 2025 2024 Consolidated $421.3 $413.3 $8.0 1.9% Americas 293.1 295.5 (2.4) (0.8)% International 128.2 117.8 10.4 8.8% Net Sales. Net sales for the three months ended March 31, 2025, were $421.3 million, an increase of $8.0 million, or 1.9%, compared to $413.3 million in the same period last year and included approximately $10.0 million of sales pulled forward into the quarter in consideration of tariffs. Please refer to the Net Sales table below for a reconciliation of the quarter over quarter sales change. Net Sales Three Months Ended March 31, 2025 versus March 31, 2024 (Percent Change) Americas International Consolidated GAAP reported sales change (0.8)% 8.8% 1.9% Currency translation effects 1.8% 2.1% 1.9% Organic sales change 1.0% 10.9% 3.8% Note: Organic sales change is a non-GAAP financial measure. See the "Non-GAAP Financial Measures" section below. Net sales for the Americas segment were $293.1 million in the first quarter of 2025, a decrease of $2.4 million, or 0.8%, compared to $295.5 million in the first quarter of 2024. Organic sales in the Americas segment increased 1.0% during the period, driven by growth in detection and industrial PPE partially offset by a decrease in fire service. Net sales for the International segment were $128.2 million in the first quarter of 2025, an increase of $10.4 million, or 8.8%, compared to $117.8 million for the first quarter of 2024. Organic sales in the International segment increased 10.9% during the period, driven by growth in detection and fire service partially offset by a modest decline in industrial PPE. We maintain our low single-digit full-year organic sales growth outlook. The business remains healthy, supported by stable order trends into April. Our broad diversification across products, geographies, and markets, along with favorable underlying market trends in the safety industry, and a strong commercial pipeline, provides confidence as we move forward. There has been increased macroeconomic uncertainty driven by global tariff policies which could present risk to our growth outlook. Refer to Note 9—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 2025 was $193.4 million, a decrease of $2.1 million or 1.1%, compared to $195.5 million for the first quarter of 2024. The ratio of gross profit to net sales was 45.9% in the first quarter of 2025 compared to 47.3% in the same quarter last year. The decrease in gross profit margin is related to transactional foreign currency headwinds and inflation partially offset by higher sales volume, price realization and favorable product mix. While we are taking actions to mitigate tariffs and foreign exchange pressures, we may not be able to offset all the headwinds in the near term. We will remain agile in this dynamic environment if the operating landscape significantly diverges from our expectations. Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses were $94.0 million during the first quarter of 2025, a decrease of $0.2 million or 0.2%, compared to $94.2 million for the first quarter of 2024. SG&A expenses were 22.3% of net sales during the first quarter of 2025, compared to 22.8% of net sales during the same period in 2024. Organic SG&A increased by approximately $1.2 million or 1.3%. The increase in SG&A was driven by inflation, higher commission expense on double-digit detection growth and corporate development-related costs, partially offset by discretionary expense management and $3 million of favorable discrete adjustments in the current quarter primarily related to variable compensation. -23- Table of Contents Please refer to the SG&A expenses table below for a reconciliation of the quarter over quarter expense change. Selling, general, and administrative expenses Three Months Ended March 31, 2025 versus March 31, 2024 (Percent Change) Consolidated GAAP reported change (0.2)% Currency translation effects 1.5% Organic change 1.3% Note: Organic SG&A change is a non-GAAP financial measure. See the "Non-GAAP Financial Measures" section below. Research and development expense . Research and development expense was $15.7 million during the first quarter of 2025, a decrease of $0.2 million, compared to $15.9 million during the first quarter of 2024. Research and development expense was 3.7% of net sales in the first quarter of 2025 and 3.9% in the first quarter of 2024. During the first quarter of 2025 and 2024, we capitalized $3.3 million and $3.4 million of software development costs, respectively. Depreciation expense for capitalized software development costs of $2.9 million and $2.7 million for the first quarter of 2025 and 2024, respectively, was recorded in Costs of products sold on the unaudited Condensed Consolidated Statements of Income. MSA remains committed to dedicating significant resources to research and development activities, including the recently announced MSA ® G1 ™ SCBA XR Edition and all-new Globe ® G-XTREME ® PRO Jacket. 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 and capitalized software development costs 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 $19.0 million and $19.3 million during the first quarter of March 31, 2025, and 2024, respectively. Restructuring charges . Restructuring charges of $1.9 million during the first quarter of 2025 were primarily related to initiatives to right-size the organization in response to macroeconomic conditions and ongoing initiatives to optimize our manufacturing footprint and improve productivity. 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. Currency exchange . Currency exchange losses were $4.1 million in the first quarter of 2025 compared to $2.3 million in the first quarter of 2024. The 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 16—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. GAAP operating income. Consolidated operating income for the first quarter of 2025 was $77.8 million compared to $80.1 million in the same period last year. The decrease in operating income was primarily driven by lower gross profit and increased currency exchange losses, partially offset by lower restructuring charges as discussed further above. Adjusted operating income. Americas adjusted operating income for the first quarter of 2025 was $78.7 million, a decrease of $7.5 million or 8.7% compared to $86.2 million in the prior year first quarter. The decrease in adjusted operating income is attributable to lower sales and gross profit partially offset by a decline in SG&A expenses. International adjusted operating income for the first quarter of 2025 was $18.7 million, an increase of $5.2 million, or 38.7%, compared to $13.5 million in the prior year first quarter. The increase in adjusted operating income is attributable to higher sales volumes and higher gross profit driven by productivity improvements and pricing partially offset by higher SG&A expense. Corporate segment adjusted operating loss for the first quarter of 2025 was $9.9 million, a decrease of $1.8 million, compared to an adjusted operating loss of $11.7 million in the first quarter of 2024, driven by lower variable compensation partially offset by inflation. -24- Table of Contents The following tables present a summary of adjusted operating income (loss), adjusted operating margin %, adjusted EBITDA and adjusted EBITDA % by reportable segment. 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. (In thousands) Americas International Corporate Consolidated Three months ended March 31, 2025 Net sales $ 293,160 $ 128,180 $ — $ 421,340 GAAP operating income 77,761 Adjusted operating income (loss) 78,693 18,708 (9,899) 87,502 Adjusted operating margin % 26.8 % 14.6 % Adjusted EBITDA 88,412 22,725 (9,670) 101,467 Adjusted EBITDA % 30.2 % 17.7 % Three months ended March 31, 2024 Net sales $ 295,539 $ 117,763 $ — $ 413,302 GAAP operating income 80,112 Adjusted operating income (loss) 86,218 13,486 (11,695) 88,009 Adjusted operating margin % 29.2 % 11.5 % Adjusted EBITDA 95,693 17,045 (11,484) 101,254 Adjusted EBITDA % 32.4 % 14.5 % Note: Adjusted operating income (loss), adjusted operating margin %, adjusted EBITDA and Adjusted EBITDA margin % are non-GAAP financial measures and operating ratios derived from non-GAAP financial measures. Refer to Note 9—Segment Information to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for reconciliation of total adjusted operating income from reportable segments to income before income taxes and table below for reconciliation of adjusted EBITDA to net income. See also the "Non-GAAP Financial Information" section below. A reconciliation of total adjusted EBITDA and total adjusted operating income from reportable segments to net income is presented in the following table: Three Months Ended March 31, (In thousands) 2025 2024 Adjusted EBITDA $ 101,467 $ 101,254 Less: Depreciation and amortization 13,965 13,245 Adjusted operating income 87,502 $ 88,009 Less: Restructuring charges (Note 4) 1,924 3,017 Currency exchange losses, net 4,076 2,333 Amortization of acquisition-related intangible assets 2,286 2,314 Transaction costs (a) 1,455 233 GAAP operating income $ 77,761 $ 80,112 Less: Interest expense 6,835 10,740 Other income, net (7,023) (6,235) Income before income taxes 77,949 75,607 Provision for income taxes 18,344 17,468 Net income $ 59,605 $ 58,139 (a) Transaction costs include advisory, legal, accounting, valuation, and other professional or consulting fees incurred in connection with acquisitions and divestitures. These costs are included in Selling, general and administrative expense in the unaudited Condensed Consolidated Statements of Income. -25- Table of Contents Total other (income) expense, net. Total other income, net, for the first quarter of 2025 was $0.2 million, compared to other expense, net, of $4.5 million for the same period in 2024, driven primarily by decreased interest expense related to lower debt balances and interest rates as well as increased pension income driven by a higher expected rate of return. Income taxes. The reported effective tax rate for the first quarter of 2025 was 23.5% compared to 23.1% for the first quarter of 2024. The increase from the prior year was primarily driven by an increase in state income taxes. 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 $59.6 million for the first quarter of 2025, or $1.51 per diluted share, compared to $58.1 million, or $1.47 per diluted share, for the same period last year. Non-GAAP Financial Measures This report includes certain non-GAAP financial measures and operating ratios derived from non-GAAP financial measures. These financial measures and ratios include organic (referred to in our historical filings as constant currency) sales change, organic SG&A change, adjusted operating income (loss), adjusted operating margin %, adjusted EBITDA and adjusted EBITDA margin %. Organic sales and SG&A change are non-GAAP financial measures provided by the Company to give a better understanding of the Company's underlying business performance. Organic sales and SG&A change are calculated by deducting the percentage impact from currency translation effects as well as the impact from acquisitions and divestitures completed in the preceding 12 months from the overall percentage change in net sales and SG&A. The Company believes that organic sales and SG&A change are useful metrics for investors, as foreign currency translation can have a material impact on revenue and SG&A trends. Organic sales and SG&A change highlight ongoing business performance excluding the impact of fluctuating foreign currencies, acquisitions and divestitures. Adjusted operating income (loss), adjusted operating margin %, adjusted EBITDA and adjusted EBITDA margin % are non-GAAP financial measures and operating ratios derived from non-GAAP measures. Total reportable segment adjusted operating income is reconciled above to the nearest GAAP financial measure, operating income, and excludes restructuring, currency exchange, transaction costs and acquisition-related amortization. Total reportable segment adjusted EBITDA is reconciled above to the nearest GAAP financial measure, net income and, in addition to the items summarized above that are excluded from adjusted operating income (loss), excludes depreciation and amortization expense; interest expense; other income, net; and provision for income taxes. Adjusted operating margin % is defined as adjusted operating income (loss) divided by net sales to external customers and adjusted EBITDA margin % is defined as adjusted EBITDA divided by net sales to external customers. Management uses these measures internally to assess and better understand our underlying business performance and trends related to core business activities as well as to makes strategic decisions about the business and allocate resources. Additionally, these non-GAAP financial measures provide information useful to investors in understanding our operating performance and trends, and to facilitate comparisons with the performance of our peers. The non-GAAP financial measures and key performance indicators we use, and computational methods with respect thereto, may differ from the non-GAAP financial measures and key performance indicators, and computational methods, that our peers use to assess their performance and trends. The presentation of these non-GAAP financial measures does not comply with U.S. GAAP. These non-GAAP financial measures should be viewed as supplemental in nature, and not as a substitute for, or superior to, our reported results prepared in accordance with GAAP. -26- Table of Contents LIQUIDITY AND CAPITAL RESOURCES Our main source of liquidity is operating cash flows, supplemented by borrowings. Our principal liquidity requirements are for working capital, capital expenditures, principal and interest payments on debt, dividend payments and share repurchases. At March 31, 2025, approximately 60% 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, 2025, approximately 90% of our borrowings are denominated in U.S. dollars, which limits our exposure to currency exchange rate fluctuations. At March 31, 2025, the Company had cash and cash equivalents totaling $170.6 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 $6.2 million during the three months ended March 31, 2025, compared to increasing $1.9 million during the same period in 2024. At March 31, 2025, we had no borrowings outstanding under our $900.0 million senior revolving credit 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. We believe MSA's healthy balance sheet and access to significant capital at March 31, 2025, positions us well to navigate through a dynamic operating environment and other unexpected events. We maintain a balanced capital deployment strategy that focuses on investing for organic growth and pursuing inorganic growth opportunities, as well as, returning cash to shareholders in the form of dividends and share buybacks. Additionally, as disclosed in Note 13—Long-Term Debt to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q, on April 1, 2025, we entered into a Fifth Amended and Restated Credit Agreement that extended its term through April 1, 2030, and increased the capacity to $1.3 billion. Operating activities. Operating activities provided cash of $61.8 million during the three months ended March 31, 2025, compared to $50.9 million during the same period in 2024. The increased cash flow from operating activities was primarily related to lower cash used for variable compensation as compared to the prior year, partially offset by higher cash usage for working capital needs. The working capital cash usage increase related primarily to accounts receivable, partially offset by lower cash usage for inventory and accounts payable. Investing activities. Investing activities used cash of $10.8 million during the three months ended March 31, 2025, compared to using $11.2 million during the same period in 2024. We remain committed to evaluating acquisition opportunities that will allow us to continue to grow in key end markets and geographies. Financing activities. Financing activities used cash of $45.6 million during the three months ended March 31, 2025, compared to $29.1 million during the same period in 2024. During the three months ended March 31, 2025, we had net payments on long-term debt of $7.5 million as compared to $5.0 million during the same period in 2024. We paid cash dividends of $20.0 million during the three months ended March 31, 2025, compared to $18.5 million in the same period in 2024. We used cash of $18.3 million during the three months ended March 31, 2025, to repurchase shares, including $10.0 million related to our share repurchase program and the remainder related to our employee stock compensation transactions compared to $5.8 million in the same period in 2024, all of which related to our employee stock compensation programs. -27- Table of Contents CUMULATIVE TRANSLATION ADJUSTMENTS The position of the U.S. dollar relative to international currencies, primarily the euro and British pound, at March 31, 2025, resulted in a translation gain of $22.5 million being recorded to the cumulative translation adjustments shareholders' equity account during the three months ended March 31, 2025, compared to a $10.7 million translation loss being recorded to the cumulative translation adjustments shareholders' equity account during the same period in 2024. COMMITMENTS AND CONTINGENCIES We made contributions of $1.8 million to our pension plans during the three months ended March 31, 2025. We expect to make net contributions between $6 million and $8 million to our pension plans in 2025, which are primarily associated with statutorily required plans in the International reporting segment. The Company had outstanding bank guarantees and standby letters of credit with banks as of March 31, 2025, totaling $9.5 million, of which $1.5 million relate to the senior revolving credit facility. These letters of credit serve to cover customer requirements in connection with certain sales orders and insurance companies. The Company is also required to provide cash collateral in connection with certain arrangements. At March 31, 2025, the Company has $0.7 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 18—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, 2024. RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS Refer to Note 1—Basis of Presentation to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further information regarding recently adopted and recently issued accounting standards. -28- Table of Contents