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 industrial safety technology products 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. MSA Safety operates through its Accelerate strategy, leveraging the MSA Business System (MBS) to drive continuous improvement, profitable above-market growth, and balanced capital allocation within a high-performance culture. The Company's comprehensive products and solutions, governed by rigorous safety standards across highly regulated industries, are used across a broad range of markets, including fire service, energy, utilities, construction, and industrial manufacturing, as well as heating, ventilation, air conditioning, and refrigeration (“HVAC-R”). The Company's principal product categories are detection, fire service, and industrial personal protective equipment (“PPE”). Detection includes fixed gas and flame detection (“FGFD”) systems and portable gas detection instruments; fire service includes self-contained breathing apparatus (“SCBA”), protective apparel and helmets; and industrial PPE includes industrial head protection and fall protection devices. In addition to its principal product categories, MSA continues to deploy and expand its MSA+™ ecosystem, a sophisticated Hardware-enabled Software-as-a-Service ("HeSaaS") model that provides a turnkey approach by integrating MSA’s hardware with cloud-based software and support services, while delivering 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, 2025. 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 two reportable segments: Americas and International. 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, Mexico, Morocco and China or are purchased from third-party vendors. Corporate. Corporate expenses not allocated to the reportable segments consist 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. General and administrative costs and overhead comprise the majority of the corporate related expenses. -24- Table of Contents Three Months Ended March 31, 2026, Compared to Three Months Ended March 31, 2025 Net Sales. Net sales for the three months ended March 31, 2026, were $463.6 million, an increase of $42.3 million, or 10.0%, compared to $421.3 million in the same period of 2025. Please refer to the Net Sales table for a reconciliation of the period over period sales change. Net Sales Three Months Ended March 31, Dollar Increase Percent Increase (In millions, except percentage change) 2026 2025 Consolidated $463.6 $421.3 $42.3 10.0% Americas 325.2 293.1 32.1 11.0% International 138.4 128.2 10.2 8.0% Net Sales Three Months Ended March 31, 2026, versus March 31, 2025 (Percent Change) Americas International Consolidated GAAP reported sales change 11.0% 8.0% 10.0% Currency translation effects (1.9)% (7.3)% (3.7)% Acquisitions (1.9)% (7.5)% (3.5)% Organic change 7.2% (6.8)% 2.8% 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 $325.2 million in the three months ended March 31, 2026, an increase of $32.1 million, or 11.0%, compared to $293.1 million in the same period of 2025. Organic sales in the Americas segment increased 7.2% during the period, driven by growth in all three product groups with high single digit expansion in both detection and fire service. M&C added $5.3 million of sales to the Americas segment during the period. Net sales for the International segment were $138.4 million in the three months ended March 31, 2026, an increase of $10.2 million, or 8.0%, compared to $128.2 million in the same period of 2025. Organic sales in the International segment decreased 6.8% during the period, resulting from double-digit decline in fire service and detection largely driven by order timing, economic conditions in Europe, and the conflict in the Middle East partially offset by growth in industrial PPE. M&C added $9.6 million of sales to the International segment during the period. The operating environment continues to be dynamic with continued macroeconomic, tariff and geopolitical uncertainty, particularly surrounding the conflict in the Middle East. We expect to generate full-year mid-single digit organic sales growth in 2026. We anticipate ongoing momentum in portable gas detection and fall protection as key growth drivers, as well as SCBA, which should benefit, in part, from the timing delays in 2025 that shifted some business to 2026. Furthermore, pricing actions in 2025 and 2026, along with moderate volume growth, should also support our outlook. Overall backlog remains healthy, and we have a solid commercial pipeline. MSA has applied for International Emergency Economic Powers Act ("IEEPA") tariff refunds through US Customs and Border Protection’s (“CBP”) newly developed Consolidated Administration and Processing of Entries (“CAPE”) functionality within its Automated Commercial Environment (“ACE”) Portal. CBP has indicated refunds would be issued within 60-90 days of IEEPA tariff claim acceptance, but it is possible that our submission may not be accepted or that delays could occur for a variety of reasons. As of March 31, 2026, the Company has not recorded any amount related to potential tariff refunds in our unaudited condensed consolidated financial statements. 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 three months ended March 31, 2026, was $219.6 million, an increase of $26.2 million or 13.5%, compared to $193.4 million in the same period of 2025. The ratio of gross profit to net sales was 47.4% during the three months ended March 31, 2026, compared to 45.9% in the same period of 2025. The increase in gross profit margin is primarily related to price realization, productivity, product mix, and favorable transactional foreign currency partially offset by inflation, tariffs and additional amortization related to the M&C acquisition. -25- Table of Contents Selling, general and administrative expenses. Selling, general and administrative (“SG&A”) expenses were $107.7 million during the three months ended March 31, 2026, an increase of $13.7 million or 14.6%, compared to $94.0 million in the same period of 2025. Overall, SG&A expenses were 23.2% of net sales during the three months ended March 31, 2026, compared to 22.3% of net sales in the same period of 2025. SG&A includes $5.5 million of expenses associated with M&C operations and $2.2 million of strategic transaction costs. Organic SG&A increased $4.3 million or 4.6%, driven primarily by higher variable compensation largely due to the cancellation of unvested equity awards in the prior period in accordance with plan terms, higher professional service costs 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 Three Months Ended March 31, 2026, versus March 31, 2025 (Percent Change) Consolidated GAAP reported change 14.6% Currency translation effects (3.5)% Acquisitions and related strategic transaction costs (6.5)% Organic change 4.6% 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 $16.4 million during the three months ended March 31, 2026, an increase of $0.7 million, compared to $15.7 million in the same period of 2025. Research and development expense was 3.5% of net sales in the three months ended March 31, 2026, and 3.7% of net sales in the same period of 2025. During the three months ended March 31, 2026, and 2025, we capitalized $4.2 million and $3.3 million of software development costs, respectively. Amortization expense for capitalized software development costs of $3.3 million and $2.9 million during the three months ended March 31, 2026, and 2025, respectively, was recorded in costs of products sold on the unaudited Condensed Consolidated Statements of Income. The Company's commitment to innovation is supported by a research and development pipeline focused on integrating advanced technology into core safety equipment. Approximately half of MSA’s R&D engineers are now focused on software development to support the expansion of its connected ecosystems and HeSaaS models. 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 $20.6 million and $19.0 million during the three months ended March 31, 2026, and 2025, respectively. Restructuring charges . Restructuring charges of $2.3 million during the three months ended March 31, 2026, were primarily related to management restructuring, footprint optimization and other ongoing initiatives to right-size the organization in response to macroeconomic conditions. Restructuring charges of $1.9 million in the same period of 2025 were primarily related to initiatives to right-size the organization in response to macroeconomic conditions, optimize our manufacturing footprint and improve productivity. Currency exchange losses, net . Currency exchange losses were $0.2 million during the three months ended March 31, 2026, compared to $4.1 million in the same period of 2025. The currency exchange activity for both periods related primarily to foreign currency exposure on unsettled inter-company balances. Refer to Note 17—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 three months ended March 31, 2026, was $93.0 million compared to $77.8 million in the same period of 2025. The increase in operating results was primarily driven by higher gross profit and lower currency exchange losses partially offset by higher SG&A and restructuring charges as discussed further above. Adjusted operating income. Americas adjusted operating income for the three months ended March 31, 2026, was $98.1 million, an increase of $19.4 million, or 24.7%, compared to $78.7 million in the same period of 2025. The increase in adjusted operating income is attributable to higher gross profit partially offset by higher SG&A expenses. -26- Table of Contents International adjusted operating income was $14.5 million, a decrease of $4.2 million, or 22.3%, compared to $18.7 million in the same period of 2025. Lower gross profit and higher SG&A expense were partially offset by the contribution from M&C. Corporate expenses for the three months ended March 31, 2026, was $11.5 million, an increase of $1.6 million compared to $9.9 million in the same period of 2025, driven by increased variable compensation, increased professional service fees and inflation. The following tables present a summary of adjusted operating income (loss), adjusted operating margin %, adjusted EBITDA 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. (In thousands) Americas International Total Reportable Segments Corporate Consolidated Three Months Ended March 31, 2026 Net sales $ 325,238 $ 138,394 $ 463,632 $ 463,632 GAAP operating income 93,014 Adjusted operating income (loss) 98,126 14,531 112,657 (11,536) 101,121 Adjusted operating margin % 30.2 % 10.5 % 24.3 % Adjusted EBITDA 108,319 19,080 127,399 (11,536) 115,863 Adjusted EBITDA % 33.3 % 13.8 % 27.5 % Three Months Ended March 31, 2025 Net sales $ 293,160 $ 128,180 $ 421,340 $ 421,340 GAAP operating income 77,761 Adjusted operating income (loss) 78,693 18,708 97,401 (9,899) 87,502 Adjusted operating margin % 26.8 % 14.6 % 23.1 % Adjusted EBITDA 88,412 22,725 111,137 (9,670) 101,467 Adjusted EBITDA % 30.2 % 17.7 % 26.4 % 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. -27- Table of Contents 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) 2026 2025 Adjusted EBITDA from reportable segments $ 127,399 $ 111,137 Less: Depreciation and amortization 14,742 13,736 Adjusted operating income from reportable segments $ 112,657 $ 97,401 Less: Corporate expenses 11,536 9,899 Currency exchange losses, net 199 4,076 Restructuring charges (Note 4) 2,329 1,924 Acquisition-related amortization 3,392 2,286 Transaction costs (a) 2,187 1,455 GAAP operating income $ 93,014 $ 77,761 Less: Interest expense 7,703 6,835 Other income, net (7,681) (7,023) Income before income taxes 92,992 77,949 Provision for income taxes 21,723 18,344 Net income $ 71,269 $ 59,605 (a) Transaction costs include advisory, legal, accounting, valuation, and other professional or consulting fees incurred during our evaluation of or in connection with acquisitions and divestitures. These costs are included in Selling, general and administrative expense in the unaudited Condensed Consolidated Statements of Income. Total other expense (income), net. Total other expense for the three months ended March 31, 2026, was nominal, compared to other income of $0.2 million in the same period of 2025. Higher interest expense was mostly offset by increased pension income driven by a higher expected rate of return. Income taxes. The reported effective tax rate for the three months ended March 31, 2026, was 23.4% compared to 23.5% in the same period of 2025. The slight decrease from the prior year was primarily driven by additional benefit related to export sales. 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 $71.3 million for the three months ended March 31, 2026, or $1.83 per diluted share compared to net income of $59.6 million, or $1.51 per diluted share, in the same period of 2025. -28- Table of Contents 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, 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, 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 make 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. 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, 2026, approximately 47% 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 due in 2030. At March 31, 2026, approximately 71% of our borrowings are denominated in U.S. dollars, which limits our exposure to currency exchange rate fluctuations. We believe MSA's healthy balance sheet and access to significant capital at March 31, 2026, 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, returning cash to shareholders in the form of dividends, and share buybacks. At March 31, 2026, the Company had cash and cash equivalents totaling $180.2 million. Cash and cash equivalents increased $15.1 million during the three months ended March 31, 2026, compared to increasing $6.1 million during the same period in 2025. At March 31, 2026, $972.3 million of the existing $1.3 billion revolving credit facility was unused, including letters of credit issued under the facility. The facility also provides an accordion feature that allows the Company to access an additional $500.0 million of capacity pending approval by MSA’s board of directors and from the bank group. The Company also has access under the Prudential Note Agreement and NYL Note Facility, subject to the issuers' acceptance, to $195.0 million and $50.0 million aggregate principal amount, respectively, of senior unsecured notes. Operating activities. Operating activities provided cash of $75.7 million during the three months ended March 31, 2026, compared to $61.8 million during the same period in 2025. The increased cash flow from operating activities was primarily related to higher operating results and lower cash used for variable compensation and other accruals as compared to the prior year, partially offset by higher cash usage for working capital needs. -29- Table of Contents Investing activities. Investing activities used cash of $10.6 million during the three months ended March 31, 2026, compared to using $10.8 million during the same period in 2025. Capital expenditures drove the decrease in cash outflows from investing activities during the three months ended March 31, 2026. 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 $47.2 million during the three months ended March 31, 2026, compared to using cash of $45.6 million during the same period in 2025. During the three months ended March 31, 2026, we had net proceeds on long-term debt of $33.8 million as compared to net payments of $7.5 million during the same period in 2025. We paid cash dividends of $20.6 million during the three months ended March 31, 2026, compared to $20.0 million in the same period in 2025. We used cash of $60.4 million during the three months ended March 31, 2026, to repurchase shares, including $50.4 million related to our share repurchase program, compared to $18.3 million in the same period in 2025, including $10.0 million related to our share repurchase program. The remainder in both periods related to our employee stock compensation programs. CUMULATIVE TRANSLATION ADJUSTMENTS The position of the U.S. dollar relative to international currencies, primarily the euro and British pound, at March 31, 2026, resulted in a translation loss of $6.1 million being recorded to the cumulative translation adjustments shareholders' equity account during the three months ended March 31, 2026, compared to a $22.5 million translation gain being recorded to the cumulative translation adjustments shareholders' equity account during the same period in 2025. COMMITMENTS AND CONTINGENCIES We made contributions of $2.2 million to our pension plans during the three months ended March 31, 2026. We expect to make net contributions between $8.0 million and $10.0 million to our pension plans in 2026, 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, 2026, totaling $7.7 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, 2026, the Company has $1.2 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 19—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, 2025. 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. -30- Table of Contents