# MSA Safety Inc: Form 10-Q for the period ended Mar 31, 2022

- Company: [MSA Safety Inc](/companies/msa.md) (CIK 66570)
- Form: 10-Q
- Filed: 2022-04-29
- Accepted by EDGAR: Apr 29, 2022, 13:27 ET
- Period: 2022-03-31
- Accession: 0000066570-22-000015
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/66570/000006657022000015/msa-20220331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/66570/000006657022000015/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-01-01 to 2022-03-31 | $330.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-01-01 to 2022-03-31 | $187.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-01-01 to 2022-03-31 | $142.8m | us-gaap:GrossProfit |
| Research and development | 3 months, 2022-01-01 to 2022-03-31 | $13.3m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2022-01-01 to 2022-03-31 | $78.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-01-01 to 2022-03-31 | $42.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-01-01 to 2022-03-31 | $3.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-01-01 to 2022-03-31 | $9.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-01-01 to 2022-03-31 | $35.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-01-01 to 2022-03-31 | $0.90 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-01-01 to 2022-03-31 | $0.90 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-01-01 to 2022-03-31 | 39,523,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2022-01-01 to 2022-03-31 | $24.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-01-01 to 2022-03-31 | $8.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2022-01-01 to 2022-03-31 | $17.3m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2022-03-31 | $147.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-03-31 | $826.2m | us-gaap:AssetsCurrent |
| Total assets | at 2022-03-31 | $2.42bn | us-gaap:Assets |
| Current liabilities | at 2022-03-31 | $333.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-03-31 | $1.55bn | us-gaap:Liabilities |
| Long-term debt | at 2022-03-31 | $591.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2022-03-31 | $8.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2022-03-31 | $860.9m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 30,878 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.

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, all pursuant to an established pandemic response plan. The Company’s return-to-work plans continue to evolve as needed, such as when the Omicron variant emerged.

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 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, 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.

Within the International segment, during the first quarter, due to military conflict in Ukraine, we suspended product shipments into Russia and Belarus. The suspension is indefinite. Customers in Russia, Belarus and Ukraine generated approximately $6 million of sales during the year ended December 31, 2021.

During the fourth quarter of 2021, the Company changed its method of accounting for certain inventory in the U.S. from the LIFO method to the FIFO method. The FIFO method of accounting for inventory is preferable because it conforms the Company's entire inventory to a single method of accounting and improves comparability with the Company's peers. The effects of the change in accounting method from LIFO to FIFO have been retrospectively applied to all periods presented in all sections of this Quarterly Report, including Management's Discussion and Analysis. Refer to Note 4—Inventory of the consolidated financial statements in Part II Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021, for further information related to the change in accounting principle.

### 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 in which SCBA is the principal product, 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 91% and 88% of sales for the three months ended March 31, 2022 and 2021, respectively. 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 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 among 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, 2021.

### RESULTS OF OPERATIONS

### Three Months Ended March 31, 2022, Compared to Three Months Ended March 31, 2021

***Net Sales.*** Net sales for the three months ended March 31, 2022, were $330.7 million, an increase of $22.3 million, or 7.2%, driven by acquisitions and growth in organic activity compared to $308.4 million for the three months ended March 31, 2021. We saw healthy growth across our core products and across both reporting segments. 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, 2022 | 2021 | Dollar Increase | Percent Increase |
| --- | ---: | ---: | ---: | ---: |
| **Consolidated** | **$330.7** | **$308.4** | **$22.3** | **7.2%** |
| Americas | 225.7 | 208.3 | 17.4 | 8.4% |
| International | 105.0 | 100.1 | 4.9 | 4.9% |

| Net Sales (Percent Change) | Three Months Ended March 31, 2022 versus March 31, 2021 Americas | International | Consolidated |
| --- | ---: | ---: | ---: |
| **GAAP reported sales change** | **8.4%** | **4.9%** | **7.2%** |
| Currency translation effects | 0.6% | 5.0% | 2.1% |
| Constant currency sales change | 9.0% | 9.9% | 9.3% |
| Less: Acquisitions(a) | (5.9)% | (4.5)% | (5.5)% |
| Organic constant currency change | 3.1% | 5.4% | 3.8% |

(a) - Includes Bacharach, Inc. and its affiliated companies ("Bacharach"), which was acquired on July 1, 2021.

Note: Organic 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. Organic constant currency sales change is calculated by deducting the percentage impact from acquisitions and currency translation effects from the overall percentage change in net sales.

Net sales for the Americas segment were $225.7 million in the first quarter of 2022, an increase of $17.4 million, or 8.4%, compared to $208.3 million in the first quarter of 2021. Constant currency sales in the Americas segment increased 9.0% compared to the prior year period with organic constant currency growth of 3.1%. The inclusion of Bacharach drove the acquisition related sales. Organic growth was was driven by growth across core products, partially offset by lower demand for APR products. Supply chain and labor constraints weighed most heavily on revenue growth in gas detection and firefighter helmets and protective apparel.

Net sales for the International segment were $105.0 million in the first quarter of 2022, an increase of $4.9 million, or 4.9%, compared to $100.1 million for the first quarter of 2021. Constant currency sales in the International segment increased 9.9% during the quarter with organic constant currency growth of 5.4%. The inclusion of Bacharach drove the acquisition related sales. Organic growth was driven by large project business in FGFD, partially offset by weakness in portable gas detection and fall protection. Supply chain and labor constraints weighed most heavily on revenue growth in gas detection and SCBA.

Order activity continued to show year-over-year improvements and increased 22% compared to the first quarter of 2021. Organic growth in orders was 16% while acquisitions drove 6% growth. We continued to see strong order growth in April. Our backlog increased to record levels as a result of an uptick in order pace and ongoing supply chain constraints, most notably in electronic components and labor at select locations.

Looking ahead, we continue to operate in a very dynamic environment. There are a number of other evolving factors that will continue to influence our revenue and earnings outlook. These factors include, among other things, supply chain constraints, raw material availability, the risk of additional COVID lockdowns, industrial employment rates, military conflict and geopolitical risk and the pace of economic recovery. While we expect sequential improvement in revenue and earnings in the second quarter of 2022, these conditions could impact our future results and growth expectations.

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 first quarter of 2022 was $142.8 million, an increase of $8.0 million or 5.9%, compared to $134.8 million for the first quarter of 2021. The ratio of gross profit to net sales was 43.2% in the first quarter of 2022 compared to 43.7% in the same quarter last year. Intangible asset amortization related to acquisitions reduced gross profit by $2.3 million or 70 basis points in 2022. Strategic pricing and lower inventory charges associated with APR products helped to mitigate the higher material costs and a less favorable product mix.

We have implemented price increases in response to the inflation we are seeing in electronic components, resins and other inputs. While there could be a number of scenarios on the length of time that these challenges may persist, we could see these impact our business for the foreseeable future with more meaningful impact over the coming quarters. We will continue to evaluate additional pricing opportunities as we continue to navigate inflationary pressures.

***Selling, general and administrative expenses.*** Selling, general and administrative ("SG&A") expenses were $78.6 million during the first quarter of 2022, an increase of $3.1 million or 4.1% from a year ago. Overall, selling, general and administrative expenses were 23.8% of net sales during the first quarter of 2022, compared to 24.5% of net sales during the same period in 2021. Organic constant currency SG&A increased $1 million or 1.4% demonstrating strong leverage on revenue growth.

Please refer to the Selling, general and administrative expenses table for a reconciliation of the quarter over quarter expense change.

| Selling, general, and administrative expenses (Percent Change) | Three Months Ended March 31, 2022 versus March 31, 2021 Consolidated |
| --- | ---: |
| **GAAP reported change** | **4.1%** |
| Currency translation effects | 1.6% |
| Constant currency change | 5.7% |
| Less: Acquisitions and related strategic transaction costs | (4.3)% |
| Organic constant currency change | 1.4% |

***Research and development expense.*** Research and development expense was $13.3 million during the first quarter of 2022, an increase of $0.1 million, compared to $13.2 million during the first quarter of 2021. Research and development expense was 4.0% of net sales in the first quarter of 2022 compared to 4.3% in the same period of 2021. We continue to develop new products for global safety markets, including the Altair io 4 and V-Gard C1. During the first quarter of 2022, we capitalized $2.2 million of software development costs.

***Restructuring charges.*** Restructuring charges during the first quarter of 2022, were $2.2 million primarily related to activities to improve the efficiency of our business model. This compared to restructuring charges of $1.3 million during the first quarter of 2021, primarily related to our ongoing initiatives to drive profitable growth and right size our operations. We remain focused on executing programs to optimize our cost structure.

***Currency exchange.*** Currency exchange losses were $3.3 million in the first quarter of 2022 compared to gains of $2.1 million in the first quarter of 2021. Currency exchange in both periods were related to foreign currency exposure on unsettled inter-company balances, relating to the euro and British pound.

Refer to Note 16—Derivative Financial Instruments to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q, for information regarding our currency exchange rate risk management strategy.

***Product liability expense.*** Product liability expense for both the three months ended March 31, 2022 and 2021 was $2.8 million. 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 2022 was $42.7 million compared to $44.1 million in the same period last year. The decrease in operating income was primarily driven by higher currency exchange losses relating to the euro and British pound, partially offset by an increase in sales associated with acquisitions and organic business activity.

***Adjusted operating income.*** Americas adjusted operating income for the first quarter of 2022 was $52.4 million, an increase of $7.2 million or 16% compared to $45.2 million from the prior year quarter. The increase in adjusted operating income is primarily attributable to higher sales volumes driven by both acquisitions and organic business activity, partially offset by higher SG&A.

International adjusted operating income for the first quarter of 2022 was $9.0 million, an increase of $0.2 million, or 3%, compared to $8.8 million in the prior year quarter. The increase in adjusted operating income is primarily attributable to higher revenue driven by both acquisitions and organic business activity as well as various initiatives to deliver cost savings, partially offset by less favorable product mix.

Corporate segment adjusted operating loss for the first quarter of 2022 was $7.6 million, an increase of $1.1 million compared to an adjusted operating loss of $6.5 million in the first quarter of 2021 due to higher SG&A expense.

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, 2022 Americas | International | Corporate | Consolidated |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $225,648 | $105,044 | $— | $330,692 |
| GAAP operating income |  |  |  | 42,668 |
| Restructuring charges (Note 3) |  |  |  | 2,189 |
| Currency exchange losses, net (Note 6) |  |  |  | 3,271 |
| Product liability expense (Note 18) |  |  |  | 2,772 |
| Acquisition related costs (Note 14)(a) |  |  |  | 2,943 |
| Adjusted operating income (loss) | 52,435 | 9,024 | (7,616) | 53,843 |
| Adjusted operating margin % | 23.2% | 8.6% |  |  |
| Depreciation and amortization(a) |  |  |  | 11,829 |
| Adjusted EBITDA | 60,796 | 12,362 | (7,486) | 65,672 |
| Adjusted EBITDA % | 26.9% | 11.8% |  |  |

*(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 |  |  |  | 44,083 |
| Restructuring charges (Note 3) |  |  |  | 1,308 |
| Currency exchange gains, net (Note 6) |  |  |  | (2,099) |
| Product liability expense (Note 18) |  |  |  | 2,796 |
| Acquisition related costs (Note 14)(a) |  |  |  | 1,373 |
| Adjusted operating income (loss) | 45,195 | 8,792 | (6,526) | 47,461 |
| Adjusted operating margin % | 21.7% | 8.8% |  |  |
| Depreciation and amortization(a) |  |  |  | 10,504 |
| Adjusted EBITDA | 52,229 | 12,165 | (6,429) | 57,965 |
| Adjusted EBITDA % | 25.1% | 12.2% |  |  |

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

Note: Adjusted operating income (loss) and adjusted EBITDA are 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, net.*** Total other income, net, for the first quarter of 2022 was $2.7 million, compared to $2.3 million for the same period in 2021 driven primarily by higher pension income driven by a higher expected rate of return, partially offset by higher interest expense related to the Bacharach acquisition.

***Income taxes.*** The reported effective tax rate for the first quarter of 2022 was 21.7% compared to 21.0% for the first quarter of 2021. This increase from the prior year is attributable to a decrease in benefits related to certain share based payments.

We are subject to regular review and audit by both foreign and domestic tax authorities. While we believe our tax positions will be sustained, the final outcome of tax audits and related litigation may differ materially from the tax amounts recorded in our unaudited condensed consolidated financial statements.

***Net income attributable to MSA Safety Incorporated.*** Net income was $35.5 million for the first quarter of 2022, or $0.90 per diluted share compared to net income of $36.5 million, or $0.92 per diluted share, for the same period last year.

### Non-GAAP Financial Information

We may provide information regarding financial measures such as organic constant currency changes, financial measures excluding the impact of acquisitions and related acquisition related costs (including acquisition related amortization), 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 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, declared dividend payments and acquisitions. At March 31, 2022, approximately 45% of our long-term debt is at fixed interest rates with repayment schedules through 2036. The remainder of our long-term debt is at variable rates on an unsecured revolving credit facility that is due in 2026. At March 31, 2022, approximately 81% of our borrowings are denominated in U.S. dollars, which limits our exposure to currency exchange rate fluctuations.

At March 31, 2022, the Company had cash and cash equivalents totaling $147.3 million and access to sufficient capital, providing ample liquidity and flexibility to continue to maintain our balanced capital allocation strategy that prioritizes growth investments, funding our dividends and servicing debt obligations. Cash, cash equivalents and restricted cash increased $6.3 million during the three months ended March 31, 2022, compared to increasing $24.0 million during the same period in 2021. We believe MSA's healthy balance sheet and access to significant capital at March 31, 2022, positions us well to navigate through challenging business conditions.

***Operating activities.*** Operating activities provided cash of $24.5 million during the three months ended March 31, 2022, compared to providing $45.6 million during the same period in 2021. The decreased operating cash flow as compared to the same period in 2021 was primarily related to working capital requirements, notably increased inventory related to increased backlog.

Collections from insurance companies exceeded payments for subsidiary MSA LLC's product liability claims by $2.1 million in the three months ended March 31, 2022, compared to product liability claim payments of $5.7 million, net of collections from insurance companies, in the same period of 2021. 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 intercompany notes. MSA LLC is not party to the Company's credit facility. 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 fully offset cash outlay in that same period. 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 provided cash of $1.1 million during the three months ended March 31, 2022, compared to using $52.5 million during the same period in 2021. Maturities of short-term investments, net of purchases, partially offset by capital expenditures, drove cash inflows from investing activities during the three months ended March 31, 2022, while 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 same period in 2021. During the three months ended March 31, 2022, we incurred capital expenditures of $8.0 million, including $2.2 million associated with software development, compared to capital expenditures of $9.6 million, including $2.0 million associated with software development and other growth programs, in the same period in 2021. 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 used cash of $15.9 million during the three months ended March 31, 2022, compared to providing cash of $31.6 million during the same period in 2021. During the three months ended March 31, 2022, we had net proceeds from long-term debt of $5.0 million as compared to net proceeds from long-term debt of $52.0 million to fund the acquisition of Bristol during the same period in 2021. We paid cash dividends of $17.3 million during the three months ended March 31, 2022, compared to $16.8 million in the same period in 2021. We also used cash of $3.7 million during the three months ended March 31, 2022 to repurchase shares, compared to using $5.3 million during the same period in 2021.

### CUMULATIVE TRANSLATION ADJUSTMENTS

The position of the U.S. dollar relative to international currencies at March 31, 2022, resulted in a translation gain of $5.9 million being recorded to the cumulative translation adjustments shareholders' equity account during the three months ended March 31, 2022, compared to a $10.3 million translation loss being recorded to the cumulative translation adjustments account during the same period in 2021.

### COMMITMENTS AND CONTINGENCIES

We made contributions of $1.9 million to our pension plans during the three months ended March 31, 2022. We expect to make total contributions of approximately $7.7 million to our pension plans in 2022 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, 2022, totaling $8.9 million, of which $1.5 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, 2022, the Company has $0.5 million of restricted cash in support of these arrangements.

We have purchase commitments for materials, supplies, services, and property, plant and equipment as part of our ordinary conduct of business.

Please refer to Note 18—Contingencies to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further discussion on the Company's single incident and cumulative trauma product liabilities.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. We evaluate these estimates and judgments on an on-going basis based on historical experience and various assumptions that we believe to be reasonable under the circumstances. However, different amounts could be reported if we had used different assumptions and in light of different facts and circumstances. Actual amounts could differ from the estimates and judgments reflected in our unaudited condensed consolidated financial statements.

The more critical judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements are discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2021.

### RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

None

## Market risk

As filed, 2,345 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 $14.3 million or 4.3% and $1.1 million or 3.0%, respectively, for the three months ended March 31, 2022.

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, 2022, we had open foreign currency forward contracts with a U.S. dollar notional value of $99.9 million. A hypothetical 10% strengthening or weakening of the U.S. dollar would result in a $10.0 million increase or decrease in the fair value of these contracts at March 31, 2022.

***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, 2022, we had $272.2 million of fixed rate debt which matures at various dates through 2036. 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 $9.8 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, 2022, we had $329.9 million of variable rate borrowings under our revolving credit facility. A 100 basis point increase or decrease in interest rates would have a $3.6 million impact on future annual 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, 5,311 characters.

**Claims of injuries or potential safety issues related to alleged product defects, or quality concerns against our various subsidiaries could have a material adverse effect on our business, operating results, financial condition and liquidity.**

Our mission, reputation and business success rely on our ability to design and provide safe, high quality and reliable products that earn and maintain customer trust. Our products are often used in high-risk and unpredictable environments, and MSA and its subsidiaries face an inherent business risk of exposure to product liability claims. 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. In addition, we may be required to or may voluntarily recall or redesign certain products or components due to concern about product safety, quality, or reliability. Any significant claims, recalls or field actions that result 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 subsidiaries, including Mine Safety Appliances Company, LLC, may experience losses from product liability claims. Losses from product liability claims could have a material adverse effect on our business, operating results, financial condition and liquidity, which could introduce volatility from period-to-period in our financial results.**

From time to time, product liability claims are made against our various subsidiaries. In most instances the products at issue were manufactured many years ago and are not currently offered for sale, but in some instances, product liability claims may relate to current products.

Our subsidiary, Mine Safety Appliances Company, LLC (“MSA LLC”) was named as a defendant in 1,691 cumulative trauma lawsuits comprised of 4,595 claims at March 31, 2022. 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. A reserve has been established with respect to estimated amounts for cumulative trauma product liability claims currently asserted, as well as, incurred but not reported (“IBNR”) cumulative trauma product liability claims. Because our cumulative trauma product liability risk is subject to inherent uncertainties, 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. Many factors affecting cumulative trauma product liability claims may change over time or as a result of sudden unfavorable events within a single reporting period. Associated losses could have a material adverse effect on our business, operating results, financial condition and liquidity, or could result in volatility from period to period.

We will adjust the reserve from time to time based on developments in MSA LLC's actual claims experience, the claims environment or other significant changes in the factors 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, 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 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 $126.4 million and notes receivables of $48.8 million at March 31, 2022. Since MSA LLC is now largely self-insured for cumulative trauma claims, additional amounts recorded as insurance receivables will be limited. Amounts recorded as insurance receivables are based on the amount of future losses presently recorded in the cumulative trauma product liability reserve. These projected future losses are used to calculate contingent reimbursements deemed probably of collection under negotiated Coverage-in-Place Agreements. Reimbursements are calculated based on modeled assumptions, including claims composition, claims characteristics, and timing (each of which are relevant to calculating reimbursement under the terms of Coverage-In-Place Agreements). These factors, and the potential for future insurer insolvencies, could affect the timing and amount of receivables actually collected in any given period or in total.

Filed Apr 29, 2022.
Source: SEC EDGAR, the filing index for accession 0000066570-22-000015. Last ingested by Listed: Nov 3, 2026, 21:35 ET. No prices; not investment advice.