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

- Company: [MSA Safety Inc](/companies/msa.md) (CIK 66570)
- Form: 10-Q
- Filed: 2020-10-30
- Accepted by EDGAR: Oct 29, 2020, 19:12 ET
- Period: 2020-09-30
- Accession: 0000066570-20-000040
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/66570/000006657020000040/msa-20200930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/66570/000006657020000040/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-07-01 to 2020-09-30 | $304.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2020-01-01 to 2020-09-30 | $960.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-07-01 to 2020-09-30 | $172.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2020-01-01 to 2020-09-30 | $528.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-07-01 to 2020-09-30 | $132.2m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2020-01-01 to 2020-09-30 | $431.2m | us-gaap:GrossProfit |
| Research and development | 3 months, 2020-07-01 to 2020-09-30 | $13.9m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2020-01-01 to 2020-09-30 | $41.7m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2020-07-01 to 2020-09-30 | $64.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2020-01-01 to 2020-09-30 | $214.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-07-01 to 2020-09-30 | $41.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2020-01-01 to 2020-09-30 | $148.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-07-01 to 2020-09-30 | $2.3m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2020-01-01 to 2020-09-30 | $7.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-07-01 to 2020-09-30 | $11.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2020-01-01 to 2020-09-30 | $36.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-07-01 to 2020-09-30 | $28.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2020-01-01 to 2020-09-30 | $107.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.71 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2020-01-01 to 2020-09-30 | $2.74 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-07-01 to 2020-09-30 | $0.72 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2020-01-01 to 2020-09-30 | $2.77 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-07-01 to 2020-09-30 | 39,260,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2020-01-01 to 2020-09-30 | 39,269,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2020-01-01 to 2020-09-30 | $110.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2020-01-01 to 2020-09-30 | $32.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2020-01-01 to 2020-09-30 | $49.8m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2020-09-30 | $132.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-09-30 | $744.1m | us-gaap:AssetsCurrent |
| Total assets | at 2020-09-30 | $1.79bn | us-gaap:Assets |
| Current liabilities | at 2020-09-30 | $284.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-09-30 | $1.01bn | us-gaap:Liabilities |
| Long-term debt | at 2020-09-30 | $321.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-09-30 | $20.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-09-30 | $772.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 51,343 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 in a way consistent with the mission of MSA. 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 87% of sales for the nine months ended September 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 for the nine months ended September 30, 2020 with over 75% of this business being in our Americas segment. In the first quarter of 2020, 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 continues to temporarily permit 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 September 30, 2020, Compared to Three Months Ended September 30, 2019

***Net Sales.*** Net sales for the three months ended September 30, 2020, were $304.4 million, a decrease of $46.6 million, or 13.3%, driven by lower sales across most of the core product groups compared to $351.0 million for the three months ended September 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 September, 2020 | 2019 | Dollar Decrease | Percent Decrease |
| --- | ---: | ---: | ---: | ---: |
| **Consolidated** | **$304.4** | **$351.0** | **$(46.6)** | **(13.3)%** |
| Americas | 194.3 | 234.6 | (40.3) | (17.2)% |
| International | 110.1 | 116.4 | (6.3) | (5.4)% |

-27-

| Net Sales (Percent Change) | Three Months Ended September 30, 2020 versus September 30, 2019 Americas | International | Consolidated |
| --- | ---: | ---: | ---: |
| **GAAP reported sales change** | **(17.2)%** | **(5.4)%** | **(13.3)%** |
| Currency translation effects | 1.9% | (3.2)% | 0.2% |
| Constant currency sales change | (15.3)% | (8.6)% | (13.1)% |

Note: Constant currency sales change is a non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance. Constant currency sales change is calculated by deducting the percentage impact from currency translation effects from the overall percentage change in net sales.

Net sales for the Americas segment were $194.3 million in the third quarter of 2020, a decrease of $40.3 million, or 17.2%, compared to $234.6 million in the third quarter of 2019. During the quarter, constant currency sales in the Americas segment decreased 15.3% compared to the prior year period, with significant weakness during July and August. This weakness was driven predominately by weaker business conditions in the U.S., our largest and most profitable geographical area, with sales down 25% in July and August as the COVID-19 pandemic continued to have an impact on demand for our products in key markets, most notably oil and gas and commercial construction. Employment based industrial PPE products such as head protection, fall protection and portable gas detection experienced challenges based on continuing high unemployment rates and closed worksites. The decline was partially offset by increased sales of APR. Business conditions started to improve in September. Sales were up 1% in the Americas segment in September on improving conditions in the U.S. after seeing significant declines in July and August.

Net sales for the International segment were $110.1 million in the third quarter of 2020, a decrease of $6.3 million, or 5.4%, compared to $116.4 million for the third quarter of 2019. Constant currency sales in the International segment decreased 8.6% during the quarter on weaker revenues across the segment, with more significant declines in the Middle East.

Following weak demand in key markets in July and August due to the ongoing impact of COVID-19 and global economic challenges, order pace improved in September with orders up 11% as compared the same month a year ago. October orders also remained relatively healthy compared to July and August. While a great deal of uncertainty remains with the upcoming U.S. Presidential election, the global economy and our Company’s key end markets, we expect sequential quarterly invoicing to improve in the fourth quarter.

Our backlog is relatively consistent compared to the end of the second quarter of 2020. Backlog is trending considerably higher than a year ago on increases in SCBA, Turnout Gear, and APR. While backlog continues to be healthy, 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 third quarter of 2020 was $132.2 million, a decrease of $26.5 million or 16.7%, compared to $158.7 million for the third quarter of 2019. The ratio of gross profit to net sales was 43.4% in the third quarter of 2020 compared to 45.2% in the same quarter last year. The lower gross profit ratio during the current quarter is primarily attributable to inefficiencies associated with lower throughput in our factories associated with a lower level of demand and to a lesser extent, additional cost of implementing COVID-19 safety protocols across our worksites, partially offset by strategic pricing improvements.

***Selling, general and administrative expenses.*** Selling, general and administrative ("SG&A") expenses were $64.8 million during the third quarter of 2020, a decrease of $18.1 million or 21.8%, compared to $82.9 million in the third quarter of 2019. Overall, selling, general and administrative expenses were 21.3% of net sales during the third quarter of 2020, compared to 23.6% 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 earlier in the year, in response to the COVID-19 pandemic and slowdown in certain end markets. These actions provided approximately $8 million to $10 million of cost savings in the quarter. A decrease in variable compensation expense related to bonus and performance-based stock awards provided approximately $6 million of cost savings due to weaker business conditions and the impact on revenue. Additionally, we saw favorable adjustments to medical costs and other accruals that reduced SG&A expenses for the quarter by approximately $3 million as compared to the same period a year ago. While we expect certain costs like variable compensation expense to reset and increase in 2021 as compared to 2020, we are focused on mitigating the amount of costs that might come back into the business as we see an improvement in our end markets and recover from the pandemic.

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 September 30, 2020 versus September 30, 2019 Consolidated |
| --- | ---: |
| GAAP reported change | (21.8)% |
| Currency translation effects | (0.1)% |
| Constant currency change | (21.9)% |

Note: 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. Constant currency change in selling, general, and administrative expenses is calculated by deducting the percentage impact of currency translation effects from the overall percentage change in selling, general, and administrative expense. Management believes excluding 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 $13.9 million during the third quarter of 2020, an increase of $0.4 million, compared to $13.5 million during the third quarter of 2019. Research and development expense was 4.6% of net sales in the third quarter of 2020 compared to 3.9% in the same period of 2019. We continue to invest in research and development in order to bring to market the most advanced safety solutions for our customers. During the third quarter of 2020, we capitalized $2 million of software development costs.

***Restructuring charges.*** Restructuring charges during the third quarter of 2020, were $7.6 million primarily due to severance costs related to a plan to reduce our global cost structure. The plan addresses weakened global economic conditions and is designed to improve our business model during the downturn. Together with cost reduction programs executed throughout 2020, we expect these programs to collectively deliver $10 million to $15 million of savings in 2021, and annual savings of $15 million to $20 million thereafter. This compared to restructuring charges of $1.9 million during the third quarter of 2019, primarily related to 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 $2.8 million in the third quarter of 2020 compared to gains of $0.9 million in the third quarter of 2019. Currency exchange 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 September 30, 2020 was $2.1 million compared to $1.7 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 third quarter of 2020 was $41.1 million compared to $59.6 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 third quarter of 2020 was $40.9 million, a decrease of $18.1 million, or 31%, compared to $59.0 million in the prior year quarter. The decrease was related to the lower level of sales and lower gross profit for reasons noted above partially offset by improved SG&A leverage. Sales for the quarter declined 13% as compared to the prior year while SG&A expenses declined 22%.

International adjusted operating income for the third quarter of 2020 was $15.7 million, an increase of $1.9 million, or 14%, compared to $13.8 million in the prior year quarter. The increase in adjusted operating income is primarily attributable to improved gross profit associated with strategic pricing improvements and benefits we continue to realize from restructuring programs executed over the past 12 to 18 months which more than offset the decrease in sales volumes.

Corporate segment adjusted operating loss for the third quarter of 2020 was $2.9 million, an improvement of $6.6 million compared to an adjusted operating loss of $9.5 million in the third quarter of 2019 due to lower variable compensation expense, as well as lower professional service and other expenses related to cost control initiatives. We expect corporate adjusted operating loss to moderate back up to a more normalized range of $6 million to $8 million in future quarters.

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 September 30, 2020 Americas | International | Corporate | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $194,303 | $110,089 | $— | $304,392 |
| GAAP operating income |  |  |  | 41,149 |
| Restructuring charges (Note 4) |  |  |  | 7,603 |
| Currency exchange losses, net (Note 6) |  |  |  | 2,759 |
| Product liability expense (Note 17) |  |  |  | 2,077 |
| Strategic transaction costs |  |  |  | 41 |
| Adjusted operating income (loss) | 40,898 | 15,658 | (2,927) | 53,629 |
| Adjusted operating margin % | 21.0% | 14.2% |  |  |
| Depreciation and amortization |  |  |  | 9,856 |
| Adjusted EBITDA | 47,465 | 18,848 | (2,828) | 63,485 |
| Adjusted EBITDA % | 24.4% | 17.1% |  |  |

*(In thousands)*

| Adjusted operating income | Three Months Ended September 30, 2019 Americas | International | Corporate | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $234,624 | $116,390 | $— | $351,014 |
| GAAP operating income |  |  |  | 59,614 |
| Restructuring charges (Note 4) |  |  |  | 1,850 |
| Currency exchange gains, net (Note 6) |  |  |  | (913) |
| Product liability expense (Note 17) |  |  |  | 1,730 |
| Strategic transaction costs |  |  |  | 952 |
| Adjusted operating income (loss) | 58,971 | 13,776 | (9,514) | 63,233 |
| Adjusted operating margin % | 25.1% | 11.8% |  |  |
| Depreciation and amortization |  |  |  | 9,547 |
| Adjusted EBITDA | 65,342 | 16,854 | (9,416) | 72,780 |
| Adjusted EBITDA % | 27.8% | 14.5% |  |  |

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 third quarter of 2020 was $1.2 million, compared to $1.3 million for the same period in 2019. Lower interest expense was mostly 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 third quarter of 2020 was 29.3% compared to 26.9% for the third quarter of 2019. This increase from the prior year is attributable to state income taxes, increased statutory rates in foreign jurisdictions, nondeductible executive compensation, and a reduction in the benefit related to domestic goods sold into foreign markets, partially offset by benefits associated with the research and development tax credit.

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 $28.0 million for the third quarter of 2020, or $0.71 per diluted share compared to income of $42.2 million, or $1.08 per diluted share, for the same period last year.

### Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

***Net Sales.*** Net sales for the nine months ended September 30, 2020, were $960.0 million, a decrease of $66.7 million, or 6.5%, compared to $1,026.7 million for the nine months ended September 30, 2019. Please refer to the Net Sales table for a reconciliation of the period over period sales change.

*(In millions)*

| Net Sales | Nine Months Ended September 30, 2020 | 2019 | Dollar Decrease | Percent Decrease |
| --- | ---: | ---: | ---: | ---: |
| **Consolidated** | **$960.0** | **$1,026.7** | **$(66.7)** | **(6.5)%** |
| Americas | 629.8 | 679.7 | (49.9) | (7.3)% |
| International | 330.2 | 347.0 | (16.8) | (4.8)% |

| Net Sales (Percent Change) | Nine Months Ended September 30, 2020 versus September 30, 2019 Americas | International | Consolidated |
| --- | ---: | ---: | ---: |
| **GAAP reported sales change** | **(7.3)%** | **(4.8)%** | **(6.5)%** |
| Currency translation effects | 1.8% | 0.7% | 1.5% |
| Constant currency sales change | (5.5)% | (4.1)% | (5.0)% |

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 $629.8 million during the nine months ended September 30, 2020, a decrease of $49.9 million, or 7.3%, compared to $679.7 million during the same period last year. During the nine months ended September 30, 2020, constant currency sales in the Americas segment decreased 5.5% compared to the prior year period, driven by weakness in oil and gas and commercial construction markets due to the ongoing impact of the COVID-19 pandemic, which was partially offset by increases in APR.

Net sales for the International segment were $330.2 million during the nine months ended September 30, 2020, a decrease of $16.8 million, or 4.8%, compared to $347.0 million during the same period last year. Constant currency sales in the International segment decreased 4.1% during the period. Weaker fall protection and portable gas detection product sales in the EMEA region were only partially offset by higher industrial head protection sales. APAC sales declined across our core product groups driven by the shutdowns tied to the COVID-19 pandemic.

Refer to Note 8—Segment Information to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q, for information regarding sales by product group.

***Gross profit.*** Gross profit for the nine months ended September 30, 2020, was $431.2 million, a decrease of $38.6 million or 8.2%, compared to $469.8 million during the same period last year. The ratio of gross profit to net sales was 44.9% in the nine months ended September 30, 2020, compared to 45.8% during the same period last year. The lower gross profit ratio during the nine month period is primarily attributable inefficiencies associated with lower throughput in our factories associated with a lower level of demand and to a lesser extent, additional cost of implementing COVID-19 safety protocols across our worksites, partially offset by strategic pricing improvements.

***Selling, general and administrative expenses.*** SG&A expenses were $214.1 million during the nine months ended September 30, 2020, a decrease of $31.3 million or 12.7%, compared to $245.3 million during the same period last year. Overall, selling, general and administrative expenses were 22.3% of net sales during the nine months ended September 30, 2020, compared to 23.9% 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 earlier in the year, in response to the COVID-19 pandemic and slowdown in certain end markets. These actions provided approximately $15 million to $17 million of cost savings in the nine month period. Additionally, a decrease in variable compensation expense related to bonus and performance-based stock awards provided approximately $11 million of cost savings. While we expect certain costs like variable compensation expense to reset and increase in 2021 as compared to 2020, we are focused on mitigating the amount of costs that might come back into the business as we see an improvement in our end markets and recover from the pandemic.

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) | Nine Months Ended September 30, 2020 versus September 30, 2019 Consolidated |
| --- | ---: |
| GAAP reported change | (12.7)% |
| Currency translation effects | 1.1% |
| Constant currency change | (11.6)% |

Note: 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. Constant currency change in selling, general, and administrative expenses is calculated by deducting the percentage impact of currency translation effects from the overall percentage change in selling, general, and administrative expense. Management believes excluding 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 $41.7 million during the nine months ended September 30, 2020 compared to $41.5 million during the same period last year. Research and development expense was 4.3% of net sales in the nine months ended September 30, 2020, compared to 4.0% 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 nine months ended September 30, 2020, we capitalized $6 million of software development costs.

***Restructuring charges.*** Restructuring charges during the nine months ended September 30, 2020, were $18.5 million, primarily due to severance costs related to a plan which addresses weakened global economic conditions and is designed to improve our business model during the downturn. Together with cost reduction programs executed throughout 2020, we expect these programs to collectively deliver $10 million to $15 million of savings in 2021, and annual savings of $15 million to $20 million thereafter. This compared to restructuring charges of $11.2 million during the same period in 2019, primarily related to 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 $3.8 million in the nine months ended September 30, 2020, compared to $17.3 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 nine months ended September 30, 2020, was $4.9 million compared to $8.2 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 nine months ended September 30, 2020, was $148.2 million compared to $146.3 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 13% while sales declined 7%.

***Adjusted operating income.*** Americas adjusted operating income for the nine months ended September 30, 2020, was $149.7 million, a decrease of $21.8 million, or 12.7%, compared to $171.5 million in the prior year. The decrease was related to the lower level of sales partially offset by improved SG&A leverage.

International adjusted operating income for the nine months ended September 30, 2020, was $45.7 million, an increase of $5.8 million, or 14.6%, compared to $39.9 million in the prior year. The increase in adjusted operating income is primarily attributable to improved gross profit associated with strategic pricing improvements and benefits we continue to realize s from restructuring programs executed over the past 12 to 18 months, which more than offset the 5% decrease in sales.

Corporate segment adjusted operating loss for the nine months ended September 30, 2020, was $19.1 million, an improvement of $6.4 million, or 25.1%, compared to an adjusted operating loss of $25.5 million in the same period of 2019 due primarily to lower variable compensation expense as well as lower professional service and other expenses related 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 | Nine Months Ended September 30, 2020 Americas | International | Corporate | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $629,787 | $330,188 | $— | $959,975 |
| GAAP operating income |  |  |  | 148,213 |
| Restructuring charges (Note 4) |  |  |  | 18,475 |
| Currency exchange losses, net (Note 6) |  |  |  | 3,821 |
| Product liability expense (Note 17) |  |  |  | 4,878 |
| Strategic transaction costs |  |  |  | 202 |
| COVID-19 related costs |  |  |  | 757 |
| Adjusted operating income (loss) | 149,708 | 45,719 | (19,081) | 176,346 |
| Adjusted operating margin % | 23.8% | 13.8% |  |  |
| Depreciation and amortization |  |  |  | 29,284 |
| Adjusted EBITDA | 169,343 | 55,075 | (18,788) | 205,630 |
| Adjusted EBITDA % | 26.9% | 16.7% |  |  |

*(In thousands)*

| Adjusted operating income | Nine Months Ended September 30, 2019 Americas | International | Corporate | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $679,699 | $347,027 | $— | $1,026,726 |
| GAAP operating income |  |  |  | 146,252 |
| Restructuring charges (Note 4) |  |  |  | 11,203 |
| Currency exchange losses, net (Note 6) |  |  |  | 17,338 |
| Product liability expense (Note 17) |  |  |  | 8,155 |
| Strategic transaction costs |  |  |  | 2,937 |
| Adjusted operating income (loss) | 171,463 | 39,888 | (25,466) | 185,885 |
| Adjusted operating margin % | 25.2% | 11.5% |  |  |
| Depreciation and amortization |  |  |  | 28,339 |
| Adjusted EBITDA | 190,084 | 49,313 | (25,173) | 214,224 |
| Adjusted EBITDA % | 28.0% | 14.2% |  |  |

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 nine months ended September 30, 2020, was $3.5 million, compared to $2.2 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 nine months ended September 30, 2020, was 25.1% compared to 26.3% 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, partially offset by an increase in state income taxes and increased statutory rates in foreign jurisdictions. 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 25% – 26% 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 $107.8 million for the nine months ended September 30, 2020, or $2.74 per diluted share compared to income of $105.3 million, or $2.69 per diluted share, for the same period in 2019.

### Non-GAAP Financial Information

We may provide information regarding financial measures such as 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 September 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 September 30, 2020, approximately 78% of our borrowings are denominated in U.S. dollars, which limits our exposure to currency exchange rate fluctuations.

At September 30, 2020, the Company had cash, cash equivalents and restricted cash totaling $133.2 million, including $111.7 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 September 30, 2020, positions us well to navigate through the COVID-19 pandemic and challenging business conditions.

Cash, cash equivalents and restricted cash decreased $19.4 million during the nine months ended September 30, 2020, compared to decreasing $31.7 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 $110.2 million during the nine months ended September 30, 2020, compared to providing $88.3 million during the same period in 2019. The improved operating cash flow during the period was primarily related to lower net product liability payments. Working capital improvement related to accounts receivable were offset by increased inventory levels to support our backlog levels heading into the fourth quarter. Our collections from insurance companies exceeded payments for product liability claims by $4.2 million, in the nine months ended September 30, 2020, compared to product liability payments of $25.1 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 September 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 $13.5 million from the first and second quarters of 2020 to July 15, 2020. This income tax payment was reflected as a use of operating cash in the third quarter. As is also permitted under the CARES Act, MSA will defer the remittance of the employer portion of the social security tax. The 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 and have deferred $4 million year to date through September 30, 2020.

***Investing activities.*** Investing activities used cash of $51.7 million during the nine months ended September 30, 2020, compared to using $73.8 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 nine months ended September 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 $32.7 million, including $6 million associated with software development and other growth programs, compared to capital expenditures of $23.5 million, including $3.5 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 $8 million has been spent on this project through September 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 $76.1 million during the nine months ended September 30, 2020, compared to using $40.8 million during the same period in 2019. During the nine months ended September 30, 2020, we had net payments on long-term debt of $5.0 million as compared to net proceeds of $13.0 million during the same period in 2019. We paid cash dividends of $49.8 million during the nine months ended September 30, 2020, compared to $47.2 million in the same period in 2019. We also used cash of $28.7 million during the nine months ended September 30, 2020 to repurchase shares, including $20.1 million related to purchases under our 2015 stock repurchase program, compared to using $11.1 million during the same period in 2019, including $3.3 million related to purchases under our 2015 stock repurchase program.

### CUMULATIVE TRANSLATION ADJUSTMENTS

The position of the U.S. dollar relative to international currencies at September 30, 2020, resulted in a translation loss of $3.0 million being recorded to the cumulative translation adjustments shareholders' equity account during the nine months ended September 30, 2020, compared to $15.9 million being recorded to the cumulative translation adjustments account 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 $76 million at September 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 $5.7 million to our pension plans during the nine months ended September 30, 2020. We expect to make total contributions of approximately $7.6 million to our pension plans in 2020 primarily associated with statutorily required plans in the International segment.

The Company had outstanding bank guarantees and standby letters of credit with banks as of September 30, 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 September 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 unaudited 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, 2,334 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 $13.6 million or 4% and $0.8 million or 3%, respectively, for the three months ended September 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 September 30, 2020, we had open foreign currency forward contracts with a U.S. dollar notional value of $86.9 million. A hypothetical 10% strengthening or weakening of the U.S. dollar would result in a $8.7 million increase or decrease in the fair value of these contracts at September 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 September 30, 2020, we had $111.0 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 $8.2 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 September 30, 2020, we had $231.9 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, 5,995 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 1,743 cumulative trauma lawsuits comprised of 2,840 claims at September 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 $59.1 million and notes receivables of $52.0 million at September 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 Oct 30, 2020.
Source: SEC EDGAR, the filing index for accession 0000066570-20-000040. Last ingested by Listed: Nov 3, 2026, 21:35 ET. No prices; not investment advice.