# MSA Safety Inc: Form 10-Q for the period ended Mar 31, 2021

- Company: [MSA Safety Inc](/companies/msa.md) (CIK 66570)
- Form: 10-Q
- Filed: 2021-04-29
- Accepted by EDGAR: Apr 29, 2021, 16:55 ET
- Period: 2021-03-31
- Accession: 0000066570-21-000024
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/66570/000006657021000024/msa-20210331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/66570/000006657021000024/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-01-01 to 2021-03-31 | $308.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2021-01-01 to 2021-03-31 | $173.7m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2021-01-01 to 2021-03-31 | $134.7m | us-gaap:GrossProfit |
| Research and development | 3 months, 2021-01-01 to 2021-03-31 | $13.2m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2021-01-01 to 2021-03-31 | $75.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2021-01-01 to 2021-03-31 | $44.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2021-01-01 to 2021-03-31 | $1.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2021-01-01 to 2021-03-31 | $9.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-01-01 to 2021-03-31 | $36.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-01-01 to 2021-03-31 | $0.92 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-01-01 to 2021-03-31 | $0.93 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-01-01 to 2021-03-31 | 39,420,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2021-01-01 to 2021-03-31 | $45.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2021-01-01 to 2021-03-31 | $9.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2021-01-01 to 2021-03-31 | $16.8m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2021-03-31 | $184.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-03-31 | $764.6m | us-gaap:AssetsCurrent |
| Total assets | at 2021-03-31 | $1.94bn | us-gaap:Assets |
| Current liabilities | at 2021-03-31 | $306.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-03-31 | $1.12bn | us-gaap:Liabilities |
| Long-term debt | at 2021-03-31 | $340.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2021-03-31 | $20.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2021-03-31 | $814.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 35,197 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.

On January 25, 2021, we acquired 100% of the common stock of B T Q Limited, including Bristol Uniforms and Bell Apparel ("Bristol") in an all-cash transaction valued at $63.0 million, net of cash acquired. Bristol, which is headquartered in the United Kingdom (U.K.), is a leading innovator and provider of protective apparel to the fire, rescue services, and utility sectors. The acquisition strengthens MSA's position as a global market leader in fire service personal protective equipment (PPE) products, which include breathing apparatus, firefighter helmets, thermal imaging cameras, and firefighter protective apparel, while providing an avenue to expand its business in the U.K. and key European markets. The fire service equipment brands of MSA, which include Gallet Firefighter Helmets, the M1 and G1 Self-Contained Breathing Apparatus range, Cairns Helmets, Globe Manufacturing, and now Bristol Uniforms, represent more than 460 combined years of innovation in the fire service industry, with a common mission: protecting the health and safety of firefighters. Bristol is also a leading manufacturer of flame-retardant, waterproof, and other protective work wear for the utility industry. Marketed under the Bell Apparel brand, this line complements MSA's existing and broad range of offerings for the global utilities market. Refer to Note - 18 Acquisitions to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further information.

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. In January 2020, the Company established a special advisory committee to evaluate ongoing concerns, risks and challenges with respect to COVID-19 across its operations and corporate headquarters. 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.

The Company has 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 returning elements of our salesforce to in-person customer interactions on a limited basis, with additional employees scheduled to begin returning to the office, once deemed appropriate under the circumstances for each business location. 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 workspace safety in a manner consistent with the mission and values of MSA. The process and timing to reconnect our workforce will continue to evolve due to the changing nature of COVID-19. 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. To best serve these customer preferences, we have organized our business into four geographical operating segments that are aggregated into three reportable geographic segments: Americas, International and Corporate.

*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 Africa ("EMEA") 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 88% and 85% of sales for the three months ended March 31, 2021 and 2020. 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 6% and 8% of our consolidated sales for the three months ended March 31, 2021 and 2020, with over 74% and 70% of this business being in our Americas segment for the three months ended March 31, 2021 and 2020. During 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 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, 2020.

### RESULTS OF OPERATIONS

### Three Months Ended March 31, 2021, Compared to Three Months Ended March 31, 2020

***Net Sales.*** Net sales for the three months ended March 31, 2021, were $308.4 million, a decrease of $32.7 million, or 9.6%, driven by lower sales across most of the core product groups compared to $341.1 million for the three months ended March 31, 2020. Please refer to the Net Sales table for a reconciliation of the quarter over quarter sales change.

*(In millions)*

| Net Sales | Three Months Ended March 31, 2021 | 2020 | Dollar Decrease | Percent Decrease |
| --- | ---: | ---: | ---: | ---: |
| **Consolidated** | **$308.4** | **$341.1** | **$(32.7)** | **(9.6)%** |
| Americas | 208.3 | 231.2 | (22.9) | (9.9)% |
| International | 100.1 | 109.9 | (9.8) | (8.9)% |

| Net Sales (Percent Change) | Three Months Ended March 31, 2021 versus March 31, 2020 Americas | International | Consolidated |
| --- | ---: | ---: | ---: |
| **GAAP reported sales change** | **(9.9)%** | **(8.9)%** | **(9.6)%** |
| Currency translation effects | 0.6% | (6.7)% | (1.7)% |
| Constant currency sales change | (9.3)% | (15.6)% | (11.3)% |

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 $208.3 million in the first quarter of 2021, a decrease of $22.9 million, or 9.9%, compared to $231.2 million in the first quarter of 2020. During the quarter, constant currency sales in the Americas segment decreased 9.3% compared to the prior year period. After a weak January and February, order pace and invoicing strengthened in March. The quarterly revenue decline was driven by economic challenges as well as a difficult comparison from a year ago, which reflected a pre-pandemic environment for MSA. Areas that were particularly impacted include industrial PPE and FGFD. Additionally, demand levels in the APR business moderated and returned to pre-pandemic levels. Americas segment business conditions and order activity improved in March and into April and that provides a sense of optimism to start the second quarter.

Net sales for the International segment were $100.1 million in the first quarter of 2021, a decrease of $9.8 million, or 8.9%, compared to $109.9 million for the first quarter of 2020. Constant currency sales in the International segment decreased 15.6% during the quarter on weaker revenues across the segment, with more significant declines in the EMEA operating segment due to COVID-19 lockdowns in Europe and lower project business in the Middle East FGFD market. This weakness was partially offset by improving conditions in China and the acquisition of Bristol.

Our order book improved in March and into April across a number of areas in our business. Our backlog is healthy to start the second quarter. Looking ahead, we continue to operate in a very dynamic environment. There are a number of evolving factors that will continue to influence our revenue outlook. These factors include, among other things, the effectiveness of the vaccine rollout, risk of additional COVID lockdowns, industrial employment rates, the pace of economic recovery and the supply chain challenges as economies open up. While the outcome is hard to predict, our recent order pace provides a sense of optimism to start the second quarter.

Refer to Note 7—Segment Information to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q, for information regarding sales by product group.

***Gross profit.*** Gross profit for the first quarter of 2021 was $134.7 million, a decrease of $22.7 million or 14.4%, compared to $157.4 million for the first quarter of 2020. The ratio of gross profit to net sales was 43.7% in the first quarter of 2021 compared to 46.1% in the same quarter last year. The lower gross profit ratio during the current quarter is primarily attributable to a couple of primary drivers. Lower throughput in our factories drove inefficiencies and inventory charges. Inventory charges were primarily due to lower levels of demand for respiratory protection. The remaining items that impacted gross profit were a less favorable product mix and higher input costs. We have made adjustments to certain pricing actions and continue to evaluate additional pricing opportunities as we navigate the supply chain inflationary pressures. The Bristol acquisition also negatively impacted mix because gross margins for turnout gear are lower than the corporate average. We expect to improve Bristol margins as we execute our integration plans.

***Selling, general and administrative expenses.*** Selling, general and administrative ("SG&A") expenses were $75.5 million during the first quarter of 2021, a decrease of $4.7 million or 5.9%, compared to $80.2 million in the first quarter of 2020. SG&A costs declined despite $1.8 million of additional SG&A expenses related to the Bristol acquisition. Overall, selling, general and administrative expenses were 24.5% of net sales during the first quarter of 2021, compared to 23.5% of net sales during the same period in 2020. We delivered $7.0 million to $8.0 million of savings from restructuring programs and discretionary cost savings associated with reduced travel, controlled hiring, professional services and other costs. Approximately half of these savings are temporary and will return to some extent slowly as the business improves and travel resumes, while half are structural in nature. We expect the year over year SG&A comparison to become more difficult as the second quarter of 2020 reflected the initial cost reduction activities that occurred at the onset of the pandemic.

***Research and development expense.*** Research and development expense was $13.2 million during the first quarter of 2021, a decrease of $0.9 million, compared to $14.1 million during the first quarter of 2020. Research and development expense was 4.3% of net sales in the first quarter of 2021 compared to 4.1% in the same period of 2020. We continue to develop new products for global safety markets, including the recently launched connected firefighter ecosystem powered by LUNAR. During the first quarter of 2021, we capitalized $2.0 million of software development costs.

***Restructuring charges.*** Restructuring charges during the first quarter of 2021, were $1.3 million primarily related to our ongoing initiatives to drive profitable growth and right size our operations. Together with cost reduction programs executed throughout 2020, we expect these programs to collectively deliver $15 million of savings throughout the income statement in 2021, and annual savings of $20 million thereafter. This compared to restructuring charges of $2.0 million during the first quarter of 2020, 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 gains were $2.1 million in the first quarter of 2021 compared to losses of $0.3 million in the first quarter of 2020. 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 March 31, 2021 was $2.8 million compared to $2.0 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 first quarter of 2021 was $44.0 million compared to $58.8 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 partially offset by lower SG&A expenses.

***Adjusted operating income.*** Americas adjusted operating income for the first quarter of 2021 was $45.2 million, a decrease of $14.6 million, or 25%, compared to $59.8 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 lower SG&A expenses.

International adjusted operating income for the first quarter of 2021 was $8.8 million, a decrease of $3.9 million, or 31%, compared to $12.7 million in the prior year quarter. The decrease in adjusted operating income is primarily attributable to lower sales volumes.

Corporate segment adjusted operating loss for the first quarter of 2021 was $6.5 million, an improvement of $2.1 million compared to an adjusted operating loss of $8.6 million in the first quarter of 2020 due to lower professional services fees and discretionary 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 March 31, 2021 Americas | International | Corporate | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $208,340 | $100,088 | $— | $308,428 |
| GAAP operating income |  |  |  | 44,038 |
| Restructuring charges (Note 3) |  |  |  | 1,308 |
| Currency exchange gains, net (Note 5) |  |  |  | (2,099) |
| Product liability expense (Note 17) |  |  |  | 2,796 |
| Acquisition related costs (Note 18)(a) |  |  |  | 1,373 |
| Adjusted operating income (loss) | 45,152 | 8,790 | (6,526) | 47,416 |
| Adjusted operating margin % | 21.7% | 8.8% |  |  |
| Depreciation and amortization |  |  |  | 10,504 |
| Adjusted EBITDA | 52,186 | 12,163 | (6,429) | 57,920 |
| Adjusted EBITDA % | 25.0% | 12.2% |  |  |

*(In thousands)*

| Adjusted operating income | Three Months Ended March 31, 2020 Americas | International | Corporate | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $231,253 | $109,892 | $— | $341,145 |
| GAAP operating income |  |  |  | 58,782 |
| Restructuring charges (Note 3) |  |  |  | 2,007 |
| Currency exchange losses, net (Note 5) |  |  |  | 270 |
| Product liability expense (Note 17) |  |  |  | 1,951 |
| Acquisition related costs (Note 18)(a) |  |  |  | 97 |
| COVID-19 related costs |  |  |  | 757 |
| Adjusted operating income (loss) | 59,807 | 12,671 | (8,614) | 63,864 |
| Adjusted operating margin % | 25.9% | 11.5% |  |  |
| Depreciation and amortization |  |  |  | 9,640 |
| Adjusted EBITDA | 66,257 | 15,765 | (8,518) | 73,504 |
| Adjusted EBITDA % | 28.7% | 14.3% |  |  |

(a) Acquisition related costs include advisory, legal, accounting, valuation, and other professional or consulting fees incurred. These costs are included in Selling, general and administrative expense in the unaudited condensed consolidated statement of income. Acquisition-related costs also include the acquisition related amortization which is included in Cost of products sold in the Condensed Consolidated Statements of Income.

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 acquisition related costs. Adjusted EBITDA is reconciled above to the nearest GAAP financial measure, Operating income (loss) and excludes depreciation and amortization expense.

***Total other (income) expense, net.*** Total other income, net, for the first quarter of 2021 was $2.3 million, compared to other expense, net, of $1.9 million for the same period in 2020 driven primarily by lower interest expense and higher pension income driven by a one-time pension settlement and a higher expected rate of return.

***Income taxes.*** The reported effective tax rate for the first quarter of 2021 was 21.0% compared to 23.0% for the first quarter of 2020. This decrease from the prior year is attributable to higher profits in foreign jurisdictions with favorable statutory tax rates.

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 $36.4 million for the first quarter of 2021, or $0.92 per diluted share compared to income of $43.7 million, or $1.11 per diluted share, for the same period last year.

### 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 acquisition related costs, including acquisition related amortization and 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 7—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 main source of liquidity is operating cash flows, supplemented by borrowings. Our principal liquidity requirements are for working capital, capital expenditures, principal and interest payments on debt, dividend payments and acquisitions. At March 31, 2021, approximately 26% 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 March 31, 2021, approximately 56% of our borrowings are denominated in U.S. dollars, which limits our exposure to currency exchange rate fluctuations.

At March 31, 2021, the Company had cash, cash equivalents and restricted cash totaling $185.1 million, including $160.1 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 March 31, 2021, positions us well to navigate through challenging business conditions.

Cash, cash equivalents and restricted cash increased $24.0 million during the three months ended March 31, 2021, compared to decreasing $29.6 million during the same period in 2020. 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 $45.6 million during the three months ended March 31, 2021, compared to providing $13.6 million during the same period in 2020. The improved operating cash flow as compared to the same period in 2020 was primarily related to working capital improvements.

Payments for subsidiary MSA LLC's product liability claims exceeded collections from insurance companies by $5.7 million in the three months ended March 31, 2021, compared to collections from insurance companies of $0.7 million, net of product liability claim payments, in the same period of 2020. MSA LLC funds its operating expenses and legal liabilities from its own operating cash flow and other investments, as well as limited amounts of insurance reimbursements, and not from borrowings under the Company’s credit facility, to which it is not a party. Now that MSA LLC is largely self-insured for its historical cumulative trauma product liability claims, associated insurance reimbursements received in any given period are limited, and generally do not offset cash outlay in that same period in full. In recent years, MSA LLC’s contingent liabilities have been funded without a material impact on the Company’s consolidated capital allocation priorities.

***Investing activities.*** Investing activities used cash of $52.5 million during the three months ended March 31, 2021, compared to using $26.1 million during the same period in 2020. The acquisition of Bristol and capital expenditures, partially offset by maturities of short-term investments, net of purchases, drove cash outflows from investing activities during the three months ended March 31, 2021, while capital expenditures and the purchase of short-term investments, net of proceeds from maturities drove cash outflows from investing activities during the same period in 2020. During the first quarter of 2021, we incurred capital expenditures of $9.6 million, including $2.0 million associated with software development and other growth programs, compared to capital expenditures of $6.6 million, including $1.8 million associated with software development and other growth programs, in the same period in 2020. We also remain active in evaluating additional acquisition opportunities that will allow us to continue to grow in key end markets and geographies.

***Financing activities.*** Financing activities provided cash of $31.6 million during the three months ended March 31, 2021, compared to using $13.3 million during the same period in 2020. During the three months ended March 31, 2021, we had net proceeds on long-term debt of $52.0 million to fund the acquisition of Bristol as compared to net proceeds of $28.0 million during the same period in 2020. We paid cash dividends of $16.8 million during the three months ended March 31, 2021, compared to $16.3 million in the same period in 2020. We also used cash of $5.3 million during the three months ended March 31, 2021 to repurchase shares, compared to using $27.7 million during the same period in 2020. In 2020, $20.1 million of our repurchase activity was related to purchases under our 2015 stock repurchase program.

### CUMULATIVE TRANSLATION ADJUSTMENTS

The position of the U.S. dollar relative to international currencies at March 31, 2021, resulted in a translation loss of $10.3 million being recorded to the cumulative translation adjustments shareholders' equity account during the three months ended March 31, 2021, compared to $22.8 million being recorded to the cumulative translation adjustments account during the same period in 2020.

### COMMITMENTS AND CONTINGENCIES

We made contributions of $1.9 million to our pension plans during the three months ended March 31, 2021. We expect to make total contributions of approximately $7.7 million to our pension plans in 2021 primarily associated with statutorily required plans in the International segment.

The Company had outstanding bank guarantees and standby letters of credit with banks as of March 31, 2021, totaling $11.4 million, of which $1.3 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 March 31, 2021, the Company has $0.3 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, 2020. During the first quarter of 2021 we made an acquisition that raised business combinations to a critical accounting policy and estimate.

#### Business Combinations

In accordance with the accounting guidance for business combinations, the Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed will be recognized as goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. In addition to using management estimates and negotiated amounts, the Company uses a variety of information sources to determine the estimated fair values of acquired assets and liabilities including: third-party appraisals for the estimated value and lives of identifiable intangible assets and property, plant and equipment; third-party actuaries for the estimated obligations of defined benefit pension plans and similar benefit obligations; and legal counsel or other experts to assess the obligations associated with legal, environmental and other contingent liabilities.

The business and technical judgment of management was used in determining which intangible assets have indefinite lives and in determining the useful lives of finite-lived intangible assets in accordance with the accounting guidance for goodwill and other intangible assets.

### RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

None

## Market risk

As filed, 2,317 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 $12.8 million or 4.1% and $0.8 million or 2.2%, respectively, for the three months ended March 31, 2021.

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 March 31, 2021, we had open foreign currency forward contracts with a U.S. dollar notional value of $94.3 million. A hypothetical 10% strengthening or weakening of the U.S. dollar would result in a $9.4 million increase or decrease in the fair value of these contracts at March 31, 2021.

***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 March 31, 2021, we had $95.7 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 $7.8 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 March 31, 2021, we had $265.7 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, 4,683 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 1,632 cumulative trauma lawsuits comprised of 3,043 claims at March 31, 2021. 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 $95.6 million and notes receivables of $52.7 million at March 31, 2021. 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.

Filed Apr 29, 2021.
Source: SEC EDGAR, the filing index for accession 0000066570-21-000024. Last ingested by Listed: Nov 3, 2026, 21:35 ET. No prices; not investment advice.