# MSA Safety Inc: Form 10-Q for the period ended Jun 30, 2020

- Company: [MSA Safety Inc](/companies/msa.md) (CIK 66570)
- Form: 10-Q
- Filed: 2020-07-31
- Accepted by EDGAR: Jul 30, 2020, 19:31 ET
- Period: 2020-06-30
- Accession: 0000066570-20-000034
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/66570/000006657020000034/msa-20200630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/66570/000006657020000034/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-04-01 to 2020-06-30 | $314.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2020-01-01 to 2020-06-30 | $655.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-04-01 to 2020-06-30 | $172.8m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2020-01-01 to 2020-06-30 | $356.6m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-04-01 to 2020-06-30 | $141.6m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2020-01-01 to 2020-06-30 | $299.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2020-04-01 to 2020-06-30 | $13.8m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2020-01-01 to 2020-06-30 | $27.9m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2020-04-01 to 2020-06-30 | $69.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2020-01-01 to 2020-06-30 | $149.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-04-01 to 2020-06-30 | $48.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2020-01-01 to 2020-06-30 | $107.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-04-01 to 2020-06-30 | $2.5m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2020-01-01 to 2020-06-30 | $5.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-04-01 to 2020-06-30 | $11.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2020-01-01 to 2020-06-30 | $24.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-04-01 to 2020-06-30 | $36.1m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-01-01 to 2020-06-30 | $79.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.92 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-01-01 to 2020-06-30 | $2.03 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.93 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-01-01 to 2020-06-30 | $2.05 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-04-01 to 2020-06-30 | 39,195,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-01-01 to 2020-06-30 | 39,273,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-01-01 to 2020-06-30 | $83.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2020-01-01 to 2020-06-30 | $19.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2020-01-01 to 2020-06-30 | $33.1m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2020-06-30 | $136.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-06-30 | $721.5m | us-gaap:AssetsCurrent |
| Total assets | at 2020-06-30 | $1.75bn | us-gaap:Assets |
| Current liabilities | at 2020-06-30 | $293.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-06-30 | $1.00bn | us-gaap:Liabilities |
| Long-term debt | at 2020-06-30 | $314.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-06-30 | $20.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-06-30 | $741.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 50,020 characters.

*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 is a global leader in the development, manufacture and supply of safety products that protect people and facility infrastructures. Recognized for their market leading innovation, many MSA products integrate a combination of electronics, mechanical systems and advanced materials to protect users against hazardous or life-threatening situations. The Company's comprehensive product line, which is governed by rigorous safety standards across highly regulated industries, is used by workers around the world in a broad range of markets, including fire service, oil, gas and petrochemical industry, construction, industrial manufacturing applications, utilities, mining and the military. MSA's core products include breathing apparatus, fixed gas and flame detection systems, portable gas detection instruments, industrial head protection products, firefighter helmets and protective apparel, and fall protection devices. We are committed to providing our customers with service unmatched in the safety industry and, in the process, enhancing our ability to provide a growing line of safety solutions for customers in key global markets.

MSA provides safety equipment to a broad range of customers who must continue to work in times of global pandemic as is now the case with COVID-19. Our customers include first responders, who are tasked with keeping citizens safe, and include industrial and utility workers tasked with maintaining critical infrastructure. For this reason, in order to successfully fulfill our mission as The Safety Company, MSA is an essential business and has continued operating its manufacturing facilities during these times, to the extent practicable, while protecting the health and safety of our workforce, and complying with all applicable laws. The Company has established a special advisory committee to evaluate ongoing concerns, risks and challenges with respect to COVID-19 across its operations and corporate headquarters in January 2020. The Company‘s pandemic response plan includes four key priorities: protecting the health and safety of MSA associates, enabling business continuity, expanding manufacturing capacity of MSA’s existing air-purifying respirator portfolio, and managing its operating expenses and capital structure.

During the second quarter the Company developed a thoughtful, phased approach to begin reconnecting segments of our workforce that had converted to remote working conditions due to COVID-19. This process includes reengaging elements of our salesforce in in-person customer interactions on a limited basis, with additional functions scheduled to begin returning to the office, once deemed appropriate under the circumstances for each geography. A phased approach to reconnect employees while adjusting the characteristics of their physical working environments, providing training and executing enhanced safety and cleaning protocols, will promote workplace safety. The process and timing to reconnect our workforce will continue to evolve due to the changing nature of COVID-19, and the Company expects to modify plans as necessary to respond to such changes.

We tailor our product offerings and distribution strategy to satisfy distinct customer preferences that vary across geographic regions. On January 1, 2020, to best serve these customer preferences, we restructured our business from six geographical operating segments into four: Northern North America, Latin America, Europe, Middle East & Africa ("EMEA"), and Asia Pacific ("APAC"). These four operating segments are further aggregated into three reportable geographic segments: Americas, International and Corporate. This change did not impact reportable segments as all changes were within the International segment. In 2019, 65% and 35% of our net sales were made by our Americas and International segments, respectively.

*Americas*. Our largest manufacturing and research and development facilities are located in the United States (U.S.). 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 the Asia Pacific region. In our largest International subsidiaries (in Germany, France, United Kingdom (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 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.

### 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, fixed gas and flame detection systems, portable gas detection instruments, industrial head protection products, firefighter helmets and protective apparel, and fall protection devices. Core products comprised approximately 85% and 88% of sales for the six months ended June 30, 2020 and 2019. 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 often reflect more episodic or contract-driven growth patterns. Key non-core products include air-purifying respirators ("APR"), eye and face protection, ballistic helmets and gas masks.

MSA does not produce disposable respirators of any type; however, Mine Safety Appliances Company, LLC ("MSA LLC"), one of the Company's subsidiaries, does produce advanced elastomeric APR, including half-mask respirators, full-facepiece respirators and powered air purifying respirators, each with replaceable filters providing a minimum of N-95 filtration capability. These products have historically been used in many industrial and first responder applications. APR products represented 9% of our consolidated sales in the first half of 2020 with approximately 75% of this business being in our Americas segment. In the first quarter, Emergency Use Authorizations ("EUA") were issued by the FDA to expand the types of respiratory protection available to the medical community in response to COVID-19. Those include an EUA that temporarily permits the use of NIOSH-approved respirators in healthcare settings, including elastomeric APR that are part of MSA's existing portfolio. MSA LLC is committed to increasing production of masks within the existing portfolio to support our customer base and other response efforts.

MSA maintains a diversified portfolio of safety products that protect workers and facility infrastructure across a broad array of end markets. While the company sells its products through distribution, which can limit end-user visibility, the company provides estimated ranges of end market exposure to facilitate understanding of its growth drivers. The company estimates that approximately 35%-40% of its overall revenue is derived from the fire service market and 25%-30% of its revenue is derived from the energy market. The remaining 30%-40% is split between construction, utilities, general industrial applications, military and mining.

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, 2019.

### RESULTS OF OPERATIONS

### Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019

***Net Sales.*** Net sales for the three months ended June 30, 2020, were $314.4 million, a decrease of $35.3 million, or 10.1%, driven by lower sales across most of the core product groups compared to $349.7 million for the three months ended June 30, 2019. Please refer to the Net Sales table for a reconciliation of the quarter over quarter sales change.

*(In millions)*

| Net Sales | Three Months Ended June 30, 2020 | 2019 | Dollar Decrease | Percent Decrease |
| --- | ---: | ---: | ---: | ---: |
| **Consolidated** | **$314.4** | **$349.7** | **$(35.3)** | **(10.1)%** |
| Americas | 204.2 | 231.4 | (27.2) | (11.8)% |
| International | 110.2 | 118.3 | (8.1) | (6.8)% |

-28-

| Net Sales (Percent Change) | Three Months Ended June 30, 2020 versus June 30, 2019 Americas | International | Consolidated |
| --- | ---: | ---: | ---: |
| **GAAP reported sales change** | **(11.8)%** | **(6.8)%** | **(10.1)%** |
| Currency translation effects | 2.3% | 2.5% | 2.3% |
| Constant currency sales change | (9.5)% | (4.3)% | (7.8)% |

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 $204.2 million in the second quarter of 2020, a decrease of $27.2 million, or 11.8%, compared to $231.4 million in the second quarter of 2019. During the quarter, constant currency sales in the Americas segment decreased 9.5% compared to the prior year period, driven by weakness across most of our portfolio due to the fallout from the COVID-19 pandemic. Employment based industrial PPE products such as head protection, fall protection and portable gas detection experienced challenges based on high unemployment rates and closed worksites, down 33%. The decline was partially offset by increased sales of air purifying respirators ("APR"). The Company's subsidiary, MSA LLC, continues to ramp up production of APR in its Jacksonville, NC plant and expects to work down its backlog in this area over the next several quarters.

Net sales for the International segment were $110.2 million in the second quarter of 2020, a decrease of $8.1 million, or 6.8%, compared to $118.3 million for the second quarter of 2019. Constant currency sales in the International segment decreased 4.3% during the quarter as sales in the EMEA region were down 6.6% driven by general business weakness due to the disruption to the business stemming from the COVID-19 pandemic. This decrease was partially offset by an increase in sales of head protection and breathing apparatus products across a number of geographies, including China, where sales increased by 9.5%. Incoming orders in China were up 16% in the quarter reflecting improved business conditions.

Our incoming orders have been choppy throughout the second quarter and remain that way into the third quarter. We started the quarter strongly in April, followed by a weak May. We then saw a rebound in the order book in June with a slow down again in July with the virus resurgence and related economic challenges. There is a great deal of uncertainty in the economy and the Company’s key end markets which makes it difficult to provide an outlook for the second half of the year. These conditions could impact our future results and growth expectations.

Our backlog continues to be healthy, and is consistent with the first quarter, but we remain disciplined in managing our cost structure and executing on long term margin improvement projects. We have been proactive managing through a challenging environment, and we are committed to continuing that approach. We are well positioned to manage through and emerge from this downturn as a stronger organization.

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 second quarter of 2020 was $141.6 million, a decrease of $19.5 million or 12.1%, compared to $161.1 million for the second quarter of 2019. The ratio of gross profit to net sales was 45.0% in the second quarter of 2020 compared to 46.1% in the same quarter last year. The lower gross profit ratio during the current quarter is primarily attributable to higher costs related to COVID-19, driven by lower throughput in our factories, higher freight costs and implementing COVID-19 safety protocols across our worksites, coupled with a less favorable mix, partially offset by strategic pricing improvements particularly in our International segment.

***Selling, general and administrative expenses.*** Selling, general and administrative ("SG&A") expenses were $69.0 million during the second quarter of 2020, a decrease of 15.0 million or 17.8%, compared to $84.0 million in the second quarter of 2019. Overall, selling, general and administrative expenses were 22.0% of net sales during the second quarter of 2020, compared to 24.0% of net sales during the same period in 2019. The decrease was the result of returns from previously executed restructuring programs and discretionary cost controls implemented in March 2020, in response to the COVID-19 pandemic and slowdown in certain end markets. These actions provided approximately $6 million of cost savings in the quarter. Additionally, a decrease in variable compensation expense related to bonus and performance-based stock awards provided approximately $5 million of cost savings.

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 (Percent Change) | Three Months Ended June 30, 2020 versus June 30, 2019 Consolidated |
| --- | ---: |
| GAAP reported change | (17.8)% |
| Currency translation effects | 1.9% |
| Constant currency change | (15.9)% |
| Less: Acquisitions and related strategic transaction costs | 1.9% |
| Organic constant currency change | (14.0)% |

Note: Organic constant currency change is a non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance. Organic constant currency change in selling, general, and administrative expenses is calculated by deducting the percentage impact from acquisitions and related strategic transaction costs as well as the currency translation effects from the overall percentage change in selling, general, and administrative expense. Management believes excluding acquisitions and currency translation effects provides investors with a greater level of clarity into spending levels on a year-over-year basis.

***Research and development expense.*** Research and development expense was $13.8 million during the second quarter of 2020, a decrease of $0.5 million, compared to $14.3 million during the second quarter of 2019. Research and development expense was 4.4% of net sales in the second quarter of 2020 compared to 4.1% in the same period of 2019. During the second quarter of 2020, we capitalized $2 million of software development costs.

***Restructuring charges.*** Restructuring charges during the second quarter of 2020, were $8.9 million primarily related to footprint rationalization projects including the Company's Fixed Gas & Flame Detection ("FGFD") manufacturing footprint optimization and the acceleration of cost reduction programs associated with our ongoing initiatives to drive profitable growth in our International segment. This compared to restructuring charges of $3.5 million during the second quarter of 2019, primarily related to a non-cash settlement charge associated with the closure of our pension plan in the U.K. as well as footprint rationalization and other restructuring programs associated with our ongoing initiatives to drive profitable growth in our International segment. We remain focused on executing programs that will optimize our cost structure.

***Currency exchange.*** Currency exchange losses were $0.8 million in the second quarter of 2020 compared to $1.3 million in the second quarter of 2019. Currency exchange losses in both periods were related to foreign currency exposure on unsettled inter-company balances.

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 three months ended June 30, 2020 was $0.9 million compared to $3.5 million in the same period last year. Product liability expense for both periods related primarily to defense costs incurred for cumulative trauma product liability claims.

***GAAP operating income.*** Consolidated operating income for the second quarter of 2020 was $48.3 million compared to $54.5 million in the same period last year. The decrease in operating results was driven by lower sales volumes and lower gross profit for the reasons noted above and increased restructuring charges partially offset by improved SG&A expense leverage.

***Adjusted operating income.*** Americas adjusted operating income for the second quarter of 2020 was $49.0 million, a decrease of $8.7 million, or 15%, compared to $57.7 million in the prior year quarter. The decrease was related to the lower level of sales and lower gross profit for reasons noted above, which were partially offset by improved SG&A leverage. Sales for the quarter declined 12% as compared to the prior year while SG&A expenses declined 18%.

International adjusted operating income for the second quarter of 2020 was $17.4 million, an increase of $2.3 million, or 15%, compared to $15.1 million in the prior year quarter. The increase in adjusted operating income is primarily attributable to selling, general and administrative costs being down over 10% as we realize returns from restructuring programs executed over the past 12 to 18 months and strategic pricing improvements which more than offset the decrease in sales volumes.

Corporate segment adjusted operating loss for the second quarter of 2020 was $7.5 million, a decrease of $0.9 million, or 10%, compared to an adjusted operating loss of $8.4 million in the second quarter of 2019 due to lower professional service and other expenses due to cost control 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.

*(In thousands)*

| Adjusted operating income | Three Months Ended June 30, 2020 Americas | International | Corporate | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $204,231 | $110,207 | $— | $314,438 |
| GAAP operating income |  |  |  | 48,294 |
| Restructuring charges (Note 4) |  |  |  | 8,865 |
| Currency exchange losses, net (Note 6) |  |  |  | 793 |
| Product liability expense (Note 17) |  |  |  | 851 |
| Strategic transaction costs (Note 18) |  |  |  | 64 |
| Adjusted operating income (loss) | 49,003 | 17,402 | (7,538) | 58,867 |
| Adjusted operating margin % | 24.0% | 15.8% |  |  |
| Depreciation and amortization |  |  |  | 9,786 |
| Adjusted EBITDA | 55,620 | 20,474 | (7,441) | 68,653 |
| Adjusted EBITDA % | 27.2% | 18.6% |  |  |

*(In thousands)*

| Adjusted operating income | Three Months Ended June 30, 2019 Americas | International | Corporate | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $231,389 | $118,286 | $— | $349,675 |
| GAAP operating income |  |  |  | 54,478 |
| Restructuring charges (Note 4) |  |  |  | 3,522 |
| Currency exchange losses, net (Note 6) |  |  |  | 1,290 |
| Product liability expense (Note 17) |  |  |  | 3,529 |
| Strategic transaction costs (Note 18) |  |  |  | 1,529 |
| Adjusted operating income (loss) | 57,689 | 15,072 | (8,413) | 64,348 |
| Adjusted operating margin % | 24.9% | 12.7% |  |  |
| Depreciation and amortization |  |  |  | 9,466 |
| Adjusted EBITDA | 63,842 | 18,288 | (8,316) | 73,814 |
| Adjusted EBITDA % | 27.6% | 15.5% |  |  |

Note: Adjusted operating income (loss) and adjusted EBITDA are a non-GAAP financial measures used by the chief operating decision maker to evaluate segment performance and allocate resources. Adjusted operating income (loss) is reconciled above to the nearest GAAP financial measure, Operating income (loss), and excludes restructuring, currency exchange, product liability expense, and strategic transaction costs. Adjusted EBITDA is reconciled above to the nearest GAAP financial measure, Operating income (loss) and excludes depreciation and amortization expense.

***Total other expense, net.*** Total other expense, net, for the second quarter of 2020 was $0.5 million, compared to $1.1 million for the same period in 2019, primarily due to lower interest expense, partially offset by lower pension income driven by lower discount rates and lower expected rate of return.

***Income taxes.*** The reported effective tax rate for the second quarter of 2020 was 23.9% compared to 24.8% for the second quarter of 2019. This decrease from the prior year is attributable to lower US tax on foreign operations and tax benefits on certain share-based payments, partially offset 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 consolidated financial statements.

***Net income attributable to MSA Safety Incorporated.*** Net income was $36.1 million for the second quarter of 2020, or $0.92 per diluted share compared to income of $39.8 million, or $1.01 per diluted share, for the same period last year.

### Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

***Net Sales.*** Net sales for the six months ended June 30, 2020, were $655.6 million, a decrease of $20.1 million, or 3.0%, compared to $675.7 million for the six months ended June 30, 2019. Please refer to the Net Sales table for a reconciliation of the period over period sales change.

*(In millions)*

| Net Sales | Six Months Ended June 30, 2020 | 2019 | Dollar Decrease | Percent Decrease |
| --- | ---: | ---: | ---: | ---: |
| **Consolidated** | **$655.6** | **$675.7** | **$(20.1)** | **(3.0)%** |
| Americas | 435.5 | 445.1 | (9.6) | (2.2)% |
| International | 220.1 | 230.6 | (10.5) | (4.6)% |

| Net Sales (Percent Change) | Six Months Ended June 30, 2020 versus June 30, 2019 Americas | International | Consolidated |
| --- | ---: | ---: | ---: |
| **GAAP reported sales change** | **(2.2)%** | **(4.6)%** | **(3.0)%** |
| Currency translation effects | 1.9% | 2.8% | 2.2% |
| Constant currency sales change | (0.3)% | (1.8)% | (0.8)% |

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 $435.5 million during the six months ended June 30, 2020, a decrease of $9.6 million, or 2.2%, compared to $445.1 million during the same period last year. During the six months ended June 30, 2020, constant currency sales in the Americas segment decreased 0.3% compared to the prior year period, driven by weakness in most of our end markets due to the second quarter shutdowns tied to the COVID-19 pandemic, which was partially offset by notable increases in APR.

Net sales for the International segment were $220.1 million during the six months ended June 30, 2020, a decrease of $10.5 million, or 4.6%, compared to $230.6 million during the same period last year. Constant currency sales in the International segment decreased 1.8% during the period. Weaker fall protection and portable gas detection product sales in the EMEA region were only partially offset by higher breathing apparatus and industrial head protection sales. APAC sales declined across our core product groups driven by the shutdowns tied to the COVID-19 pandemic earlier in the year.

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 six months ended June 30, 2020, was $299.0 million, a decrease of $12.1 million or 3.9%, compared to $311.1 million during the same period last year. The ratio of gross profit to net sales was 45.6% in the six months ended June 30, 2020, compared to 46.0% during the same period last year. The lower gross profit ratio during the six month period is primarily attributable to higher costs related to COVID-19, driven by lower throughput in our factories, higher freight costs and implementing COVID-19 safety protocols across our worksites, coupled with a less favorable mix, partially offset by strategic pricing improvements, particularly in our International segment.

***Selling, general and administrative expenses.*** SG&A expenses were $149.3 million during the six months ended June 30, 2020, a decrease of $13.1 million or 8.1%, compared to $162.4 million during the same period last year. Overall, selling, general and administrative expenses were 22.8% of net sales during the six months ended June 30, 2020, compared to 24.0% of net sales during the same period in 2019. The decrease was the result of returns from previously executed restructuring programs and discretionary cost controls implemented in March 2020, in response to the COVID-19 pandemic and slowdown in certain end markets. These actions provided approximately $7 million of cost savings in the six month period. Additionally, a decrease in variable compensation expense related to bonus and performance-based stock awards provided approximately $5 million of cost savings.

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 (Percent Change) | Six Months Ended June 30, 2020 versus June 30, 2019 Consolidated |
| --- | ---: |
| GAAP reported change | (8.1)% |
| Currency translation effects | 1.9% |
| Constant currency change | (6.2)% |
| Less: Acquisitions and related strategic transaction costs | 0.1% |
| Organic constant currency change | (6.1)% |

Note: Organic constant currency change is a non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance. Organic constant currency change in selling, general, and administrative expenses is calculated by deducting the percentage impact from acquisitions and related strategic transaction costs as well as the currency translation effects from the overall percentage change in selling, general, and administrative expense. Management believes excluding acquisitions and currency translation effects provides investors with a greater level of clarity into spending levels on a year-over-year basis.

***Research and development expense.*** Research and development expense was $27.9 million during the six months ended June 30, 2020 compared to $28.0 million during the same period last year. Research and development expense was 4.3% of net sales in the six months ended June 30, 2020, compared to 4.1% in the same period of 2019. We launched the Altair io 360 Gas Detector, an area monitor that operates with the simplicity of a smart-home device during the first quarter. During the six months ended June 30, 2020, we capitalized $4.0 million of software development costs.

***Restructuring charges.*** Restructuring charges during the six months ended June 30, 2020, were $10.9 million, primarily related to footprint rationalization projects including the Company's FGFD manufacturing footprint optimization and the acceleration of cost reduction programs associated with our ongoing initiatives to drive profitable growth in our International segment. This compared to restructuring charges of $9.4 million during the same period in 2019, primarily related to a non-cash settlement charge associated with the closure of our pension plan in the U.K. as well as footprint rationalization and other restructuring programs associated with our ongoing initiatives to drive profitable growth in our International segment. We remain focused on executing programs that will optimize our cost structure.

***Currency exchange.*** Currency exchange losses were $1.1 million in the six months ended June 30, 2020, compared to $18.3 million in the same period of 2019. The decrease in currency exchange losses from prior year was primarily due to the recognition of non-cash cumulative translation losses of approximately $15.4 million during the first quarter of 2019 as a result of the approval of our plan to close our South Africa subsidiaries. This charge is related to the historical translation of the elements of the financial statements for the business from the functional currency to the U.S. Dollar. The translation impact has been historically recorded as currency translation adjustment (“CTA”), a separate component of accumulated other comprehensive loss within the equity section of the unaudited Condensed Consolidated Balance Sheet.

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 six months ended June 30, 2020, was $2.8 million compared to $6.4 million in the same period last year. Product liability expense for both periods related primarily to defense costs incurred for cumulative trauma product liability claims.

***GAAP operating income.*** Consolidated operating income for the six months ended June 30, 2020, was $107.1 million compared to $86.6 million in the same period last year. The increase in operating results was primarily driven by lower currency exchange losses and improved SG&A leverage. On a consolidated basis, SG&A expenses declined by 8% while sales only declined 3%.

***Adjusted operating income.*** Americas adjusted operating income for the six months ended June 30, 2020, was $108.8 million, a decrease of $3.7 million, or 3.3%, compared to $112.5 million in the prior year. The decrease was related to the lower level of sales partially offset by improved SG&A leverage. Sales for the six month period declined by 2% as compared to prior year while SG&A expenses declined 5%.

International adjusted operating income for the six months ended June 30, 2020, was $30.1 million, an increase of $4.0 million, or 15.2%, compared to $26.1 million in the prior year. The increase in adjusted operating income is primarily attributable to selling, general and administrative costs being down 10%, as we realize returns from restructuring programs executed over the past 12 to 18 months, and strategic pricing improvements which more than offset the 5% decrease in sales.

Corporate segment adjusted operating loss for the six months ended June 30, 2020, was $16.2 million, an increase of $0.2 million, or 1.3%, compared to an adjusted operating loss of $16.0 million in the same period of 2019 due primarily to increased costs associated with the implementing COVID-19 safety protocols.

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.

*(In thousands)*

| Adjusted operating income | Six Months Ended June 30, 2020 Americas | International | Corporate | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $435,484 | $220,099 | $— | $655,583 |
| GAAP operating income |  |  |  | 107,076 |
| Restructuring charges (Note 4) |  |  |  | 10,872 |
| Currency exchange losses, net (Note 6) |  |  |  | 1,063 |
| Product liability expense (Note 17) |  |  |  | 2,802 |
| Strategic transaction costs (Note 18) |  |  |  | 161 |
| COVID-19 related costs |  |  |  | 757 |
| Adjusted operating income (loss) | 108,811 | 30,073 | (16,153) | 122,731 |
| Adjusted operating margin % | 25.0% | 13.7% |  |  |
| Depreciation and amortization |  |  |  | 19,428 |
| Adjusted EBITDA | 121,878 | 36,239 | (15,958) | 142,159 |
| Adjusted EBITDA % | 28.0% | 16.5% |  |  |

*(In thousands)*

| Adjusted operating income | Six Months Ended June 30, 2019 Americas | International | Corporate | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $445,076 | $230,637 | $— | $675,713 |
| GAAP operating income |  |  |  | 86,638 |
| Restructuring charges (Note 4) |  |  |  | 9,353 |
| Currency exchange losses, net (Note 6) |  |  |  | 18,251 |
| Product liability expense (Note 17) |  |  |  | 6,425 |
| Strategic transaction costs (Note 18) |  |  |  | 1,985 |
| Adjusted operating income (loss) | 112,492 | 26,112 | (15,952) | 122,652 |
| Adjusted operating margin % | 25.3% | 11.3% |  |  |
| Depreciation and amortization |  |  |  | 18,792 |
| Adjusted EBITDA | 124,742 | 32,459 | (15,757) | 141,444 |
| Adjusted EBITDA % | 28.0% | 14.1% |  |  |

Note: Adjusted operating income (loss) and adjusted EBITDA are a non-GAAP financial measures used by the chief operating decision maker to evaluate segment performance and allocate resources. Adjusted operating income (loss) is reconciled above to the nearest GAAP financial measure, Operating income (loss), and excludes restructuring, currency exchange, product liability expense, strategic transaction costs and COVID-19 related costs, consisting of a one-time bonus for essential manufacturing employees. Adjusted EBITDA is reconciled above to the nearest GAAP financial measure, Operating income (loss) and excludes depreciation and amortization expense.

***Total other expense, net.*** Total other expense, net, for the six months ended June 30, 2020, was $2.3 million, compared to $0.9 million for the same period in 2019, primarily due to lower pension income driven by lower discount rates and lower expected rate of return partially offset by lower interest expense.

***Income taxes.*** The reported effective tax rate for the six months ended June 30, 2020, was 23.4% compared to 25.9% for the same period in 2019. This decrease from the prior year is attributable to a large non-deductible loss in 2019 related to foreign exchange on entity closures and a decrease in benefits related to certain share-based payments, partially offset by an increase in state income taxes. The adjusted effective tax rate, which excludes the tax benefit associated with ASU 2016-09, *Improvements to Employee Share-Based Payment Accounting*, is expected to be in the range of 24% – 25% for the full year ending December 31, 2020.

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 consolidated financial statements.

***Net income attributable to MSA Safety Incorporated.*** Net income was $79.7 million for the six months ended June 30, 2020, or $2.03 per diluted share compared to income of $63.0 million, or $1.61 per diluted share, for the same period in 2019.

### Non-GAAP Financial Information

We may provide information regarding financial measures such as organic constant currency changes, financial measures excluding the impact of acquisitions and related strategic transaction costs, COVID-19 related costs, consisting of a one-time bonus for essential manufacturing employees and adjusted operating income, adjusted operating margin percentage, adjusted EBITDA and adjusted EBITDA margin percentage, which are not recognized terms under U.S. GAAP and do not purport to be alternatives to net sales, selling, general and administrative expense, operating income or net income as a measure of operating performance. We believe that the use of these non-GAAP financial measures provide investors with additional useful information and provide a more complete understanding of the underlying results. Because not all companies use identical calculations, these presentations may not be comparable to similarly titled measures from other companies. For more information about these non-GAAP measures and a reconciliation to the nearest U.S. GAAP measure, please refer to the reconciliations referenced above in Management's Discussion & Analysis section and in Note 8—Segment Information to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q.

We may also provide financial information on a constant currency basis, which is a non-GAAP financial measure. These references to a constant currency basis do not include operational impacts that could result from fluctuations in foreign currency rates, which are outside of management's control. To provide information on a constant currency basis, the applicable financial results are adjusted by translating current and prior period results in local currency to a fixed foreign exchange rate. This approach is used for countries where the functional currency is the local country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance. Constant currency information is not recognized under U.S. GAAP and it is not intended as an alternative to U.S. GAAP measures.

### LIQUIDITY AND CAPITAL RESOURCES

Our primary 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 acquisitions. At June 30, 2020, approximately 32% of our long-term debt is at fixed interest rates with repayment schedules through 2031. The remainder of our long-term debt is at variable rates on an unsecured revolving credit facility that is due in 2023. At June 30, 2020, approximately 78% of our borrowings are denominated in U.S. dollars, which limits our exposure to currency exchange rate fluctuations.

At June 30, 2020, the Company had cash, cash equivalents and restricted cash totaling $136.6 million, including $109.2 million held by our foreign subsidiaries, and access to sufficient capital, providing ample liquidity and flexibility to continue to maintain our balanced capital allocation strategy. We believe MSA's healthy balance sheet and access to significant capital at June 30, 2020, positions us well to navigate through the COVID-19 pandemic and challenging business conditions.

Cash, cash equivalents and restricted cash decreased $16.0 million during the six months ended June 30, 2020, compared to decreasing $28.6 million during the same period in 2019. We continue to employ a balanced capital allocation strategy that prioritizes growth investments, funding our dividend and servicing debt obligations.

***Operating activities.*** Operating activities provided cash of $83.0 million during the six months ended June 30, 2020, compared to providing $37.5 million during the same period in 2019. The improved operating cash flow during the period was related to a lower use of cash for working capital as improvements related to accounts receivable and accounts payable were only partially offset by increased inventory levels to support our backlog levels. Also contributing to the increase in operating cash flows during the period were lower product liability payments. Our collections from insurance companies exceeded payments for product liability claims by $1.1 million, in the six months ended June 30, 2020, compared to product liability payments of $22.9 million, net of collections on insurance receivables, in the same period of 2019. Historically, cumulative trauma liability payments were funded with the Company's operating cash flow, pending resolution of disputed insurance coverage. For more than a decade, we have funded product liability settlements from operating cash flow. The vast majority of the insurance receivable and notes receivable - insurance companies balances at June 30, 2020, is attributable to reimbursement believed to be due under the terms of signed agreements with insurers and are not currently subject to litigation. While the timing of cash flows for product liability and insurance receivable can and do vary from quarter to quarter, we have been successful in establishing cash flow streams that have allowed us to fund these liabilities without a material impact on our capital allocation priorities.

On March 25, 2020, the U.S. Senate passed the Coronavirus Aid, Relief, and Economic Security Act, (the “CARES Act”). The CARES Act includes a number of tax provisions relevant to business. As permitted under the CARES Act, MSA deferred estimated payments of U.S. income taxes of approximately $14 million to July 15, 2020. As is also permitted under the CARES Act, MSA will defer the remittance of the employer portion of the social security tax. The social security tax provision requires that the deferred employment tax be paid over the following two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. We expect to defer approximately $6 million of payments related to the employer’s portion of social security tax in 2020.

***Investing activities.*** Investing activities used cash of $29.2 million during the six months ended June 30, 2020, compared to using $63.9 million during the same period in 2019. Capital expenditures and the purchase of short-term investments, net of proceeds from maturities drove cash outflows from investing activities during the six months ended June 30, 2020, while the acquisition of Sierra Monitor Corporation, purchase of short-term investments, net of proceeds from maturities and capital expenditures drove cash outflows from investing activities during the same period in 2019. During 2020, we incurred capital expenditures of $19.8 million, including $4.0 million associated with software development and other growth programs, compared to capital expenditures of $13.5 million, including $1.9 million associated with software development and other growth programs, in the same period in 2019. MSA LLC, one of the Company's subsidiaries, is continuing to ramp up the capacity for its APR production in the U.S. in response to demand created by the global pandemic. MSA LLC has increased its available workforce for APR production and expects to invest between $11 million to $13 million of capital expenditures to modernize and improve our APR production capacity in the U.S. Approximately $5 million has been spent on this project through June 30, 2020. The Company expects to invest between $45 million to $50 million in total capital expenditures for the full year ending December 31, 2020.

***Financing activities.*** Financing activities used cash of $66.2 million during the six months ended June 30, 2020, compared to using $1.3 million during the same period in 2019. During the six months ended June 30, 2020, we had net payments on long-term debt of $9.0 million as compared to net proceeds of $37.0 million during the same period in 2019. We paid cash dividends of $33.1 million during the six months ended June 30, 2020, compared to $30.9 million in the same period in 2019. We also used cash of $28.3 million during the six months ended June 30, 2020 to repurchase shares, including $20.1 million related to purchases under our 2015 stock repurchase program, compared to using $11.0 million during the same period in 2019.

### CUMULATIVE TRANSLATION ADJUSTMENTS

The position of the U.S. dollar relative to international currencies at June 30, 2020, resulted in a translation loss of $18.2 million being recorded to the cumulative translation adjustments shareholders' equity account during the six months ended June 30, 2020, compared to no net translation adjustments during the same period in 2019.

Brexit has caused, and may continue to create, volatility in global stock markets and regional and global economic uncertainty particularly in the U.K. financial and banking markets. Weakening of economic conditions or economic uncertainties tend to harm our business, and if such conditions worsen in the U.K. or in the rest of Europe, it may have an adverse effect on our consolidated operations and sales. The Company continues to monitor the economic situation related to Brexit and current analysis indicates that exposure in our supply chain related to additional duties and sourcing costs is not material. We have approximately $45 million of annual sales denominated in the British pound which are subject to exchange rate risk associated with any volatility in the British pound. We have long-term debt of $73.3 million at June 30, 2020, that is denominated in British pounds. Because the debt is denominated in local currency, the value of the debt and local cash flows are aligned with respect to movements in the exchange rate between the British pound and U.S. dollar.

### COMMITMENTS AND CONTINGENCIES

We made contributions of $3.8 million to our pension plans during the six months ended June 30, 2020. We expect to make total contributions of approximately $7.6 million to our pension plans in 2020 which are primarily associated with our International segment.

The Company had outstanding bank guarantees and standby letters of credit with banks as of June 30, 2020, totaling $9.6 million, of which $1.9 million related 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 June 30, 2020, the Company has $0.4 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.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these 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 condensed consolidated financial statements.

The more critical judgments and estimates used in the preparation of our consolidated financial statements are discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019.

### RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

Please refer to Note 2— Recently Adopted and Recently Issued Accounting Standards to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q.

## Market risk

As filed, 2,309 characters.

Market risk represents the risk of adverse changes in the value of a financial instrument caused by changes in currency exchange rates, interest rates and equity prices. We are exposed to market risks related to currency exchange rates and interest rates.

***Currency exchange rate sensitivity.*** We are subject to the effects of fluctuations in currency exchange rates on various transactions and on the translation of the reported financial position and operating results of our non-U.S. companies from local currencies to U.S. dollars. A hypothetical 10% strengthening or weakening of the U.S. dollar would decrease or increase our reported sales and net income by approximately $13.4 million or 4% and $1.1 million or 3%, respectively, for the three months ended June 30, 2020.

When appropriate, we may attempt to limit our transactional exposure to changes in currency exchange rates through forward contracts or other actions intended to reduce existing exposures by creating offsetting currency exposures. At June 30, 2020, we had open foreign currency forward contracts with a U.S. dollar notional value of $77.8 million. A hypothetical 10% strengthening or weakening of the U.S. dollar would result in a $7.8 million increase or decrease in the fair value of these contracts at June 30, 2020.

***Interest rates.*** We are exposed to changes in interest rates primarily as a result of borrowing and investing activities used to maintain liquidity and fund business operations.

At June 30, 2020, we had $108.1 million of fixed rate debt which matures at various dates through 2031. The incremental increase in the fair value of fixed rate long-term debt resulting from a hypothetical 10% decrease in interest rates would be approximately $8.3 million. However, our sensitivity to interest rate declines and the corresponding increase in the fair value of our debt portfolio would unfavorably affect earnings and cash flows only to the extent that we elected to repurchase or retire all or a portion of our fixed rate debt portfolio at prices above carrying values.

At June 30, 2020, we had $227.7 million of variable rate borrowings under our revolving credit facility. A 100 basis point increase or decrease in interest rates could impact our future earnings under our current capital structure.

## Controls and procedures

As filed, 1,176 characters.

(a) *Evaluation of disclosure controls and procedures.* Based on their evaluation as of the end of the period covered by this Form 10-Q, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) *Changes in internal control*. There were no changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 5,985 characters.

**Claims of injuries from our products, product defects or recalls of our products could have a material adverse effect on our business, operating results, financial condition and liquidity.**

MSA and its subsidiaries face an inherent business risk of exposure to product liability claims arising from the alleged failure of our products to prevent the types of personal injury or death against which they are designed to protect. In the event the parties using our products are injured or any of our products prove to be defective, we could be subject to claims with respect to such injuries. In addition, we may be required to or may voluntarily recall or redesign certain products that could potentially be harmful to end users. Any claim or product recall that results in significant expense or negative publicity against us could have a material adverse effect on our business, operating results, financial condition and liquidity, including any successful claim brought against us in excess or outside of available insurance coverage.

**Our subsidiary, Mine Safety Appliances Company, LLC, may experience losses from cumulative trauma product liability claims. The inability to collect insurance receivables and the transition to becoming largely self-insured for cumulative trauma product liability claims could have a material adverse effect on our business, operating results, financial condition and liquidity.**

Our subsidiary, Mine Safety Appliances Company, LLC (“MSA LLC”) was named as a defendant in 1,705 cumulative trauma lawsuits comprised of 2,655 claims at June 30, 2020. Cumulative trauma product liability claims involve exposures to harmful substances (e.g., silica, asbestos and coal dust) that occurred years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, mesothelioma or coal worker’s pneumoconiosis. The products at issue were manufactured many years ago and are not currently offered by MSA LLC. A reserve has been established with respect to estimated amounts for cumulative trauma product liability claims currently asserted but not yet resolved and incurred but not reported (“IBNR”) cumulative trauma product liability claims. Because our cumulative trauma product liability risk is subject to inherent uncertainties, including unfavorable trial rulings or developments, an increase in newly filed claims, or more aggressive settlement demands, and since MSA LLC is largely self-insured, there can be no certainty that MSA LLC may not ultimately incur losses in excess of presently recorded liabilities. These losses could have a material adverse effect on our business, operating results, financial condition and liquidity.

We will adjust the reserve from time to time based on whether the actual numbers, types and settlement values of claims asserted differ from current projections and estimates or there are significant changes in the facts underlying the assumptions used in establishing the reserve. Each of these factors may increase or decrease significantly within an individual period depending on, among other things, the timing of claims filings or settlements, or litigation outcomes during a particular period that are especially favorable or unfavorable to MSA LLC. We accordingly consider MSA LLC’s claims experience over multiple periods and/or whether there are changes in MSA LLC’s claims experience and trends that are likely to continue for a significant time into the future in determining whether to make an adjustment to the reserve, rather than evaluating such factors solely in the short term. Any future adjustments to the reserve may be material and could materially impact future periods in which the reserve is adjusted.

In the normal course of business, MSA LLC makes payments to settle these types of cumulative trauma product liability claims and for related defense costs, and records receivables for the amounts believed to be recoverable under insurance. MSA LLC has recorded insurance receivables totaling $58.7 million and notes receivables of $56.7 million at June 30, 2020. Since MSA LLC is now largely self-insured for cumulative trauma claims, additional amounts recorded as insurance receivables will be limited and based on calculating the amounts to be reimbursed pursuant to negotiated Coverage-in-Place Agreements. Various factors could affect the timing and amount of recovery of the insurance receivables, including assumptions regarding claims composition (which are relevant to calculating reimbursement under the terms of certain Coverage-In-Place Agreements) and the extent to which the issuing insurers may become insolvent in the future.

**Pandemics or disease outbreaks, such as COVID-19, may cause unfavorable economic or market conditions which could impact demand patterns and/or disrupt global supply chains and manufacturing operations. Collectively, these outcomes could materially and adversely affect our business, results of operations and financial condition.**

Pandemics or disease outbreaks such as the novel coronavirus (COVID-19) could result in a widespread health crisis that could adversely affect the economies of developed and emerging markets, potentially resulting in an economic downturn that could affect customers’ demand for our products in certain industrial-based end-markets. The spread of pandemics or disease outbreaks may also disrupt the company’s manufacturing operations, supply chain, or logistics necessary to import, export and deliver products to our customers. During a pandemic or crisis, applicable laws and response directives could, in some circumstances, adversely affect our ability to operate our plants, or to deliver our products in a timely manner. Some laws and directives may also hinder our ability to move certain products across borders. Economic conditions can also influence order patterns. These factors could negatively impact our consolidated results of operations and cash flow.

Filed Jul 31, 2020.
Source: SEC EDGAR, the filing index for accession 0000066570-20-000034. Last ingested by Listed: Nov 3, 2026, 21:35 ET. No prices; not investment advice.