MSA Safety Inc: Form 10-Q for the period ended Sep 30, 2024

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 Safety Incorporated is the global leader in advanced safety products, technology and solutions. Driven by its singular mission of safety, the Company has been at the forefront of safety innovation since 1914, protecting workers and facility infrastructure around the world across a broad range of diverse end markets while creating sustainable value for shareholders. The Company's comprehensive product line, which is governed by rigorous safety standards across highly regulated industries, is used to protect workers and facility infrastructures around the world in a broad range of markets, including fire service, energy, utility, construction and industrial manufacturing applications as well as heating, ventilation, air conditioning and refrigeration ("HVAC-R"). The Company's product portfolio includes fire service where core products include self-contained breathing apparatus ("SCBA"), protective apparel and helmets; detection where core products include fixed gas and flame detection ("FGFD") systems and portable gas detection instruments; and industrial personal protective equipment ("PPE") where core products include industrial head protection and fall protection devices.

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, 2023.

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 segments: Americas, International and Corporate.

Americas. Our largest manufacturing and research and development facilities are located in the United States. We serve our markets across the Americas with manufacturing facilities in the U.S., Mexico and Brazil. Operations in the other countries within the Americas segment focus primarily on sales and distribution in their respective home country markets.

International. Our International segment includes companies in Europe, the Middle East and Africa ("EMEA") and the Asia Pacific region. In our largest International subsidiaries (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, Morocco 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.

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2024, Compared to Three Months Ended September 30, 2023

Net Sales. Net sales for the three months ended September 30, 2024, were $432.7 million, a decrease of $14.0 million, or 3.1%, compared to $446.7 million in the same period last year. Please refer to the Net Sales table for a reconciliation of the quarter over quarter sales change.

(In millions, except percentage change)

Net sales for the Americas segment were $299.5 million in the third quarter of 2024, a decrease of $14.8 million, or 4.7%, compared to $314.3 million in the third quarter of 2023. Organic constant currency sales in the Americas segment decreased 3.4% during the period. This decrease was driven by a decline in fire service, primarily SCBA where delayed timing of large order delivery was a factor, partially offset by an increase in detection, primarily portables.

Net sales for the International segment were $133.2 million in the third quarter of 2024, an increase of $0.8 million, or 0.6%, compared to $132.4 million for the third quarter of 2023. Organic constant currency sales in the International segment decreased 0.8% during the period. Growth in fire service and detection was mostly offset by a decline in industrial PPE.

The operating environment remains dynamic. Looking forward, we expect to finish 2024 with mid-single-digit sales growth in the fourth quarter, resulting in low-single-digit top-line growth for the full year.

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

Gross profit. Gross profit for the third quarter of 2024 was $207.5 million, a decrease of $11.3 million or 5.2%, compared to $218.8 million for the third quarter of 2023. The ratio of gross profit to net sales was 47.9% in the third quarter of 2024 compared to 49.0% in the same quarter last year. The decrease in gross profit margin is primarily related to lower sales volume. Effective price/cost management and productivity improvements offset inflationary pressures.

Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses were $95.1 million during the third quarter of 2024, a decrease of $7.1 million or 6.9%, compared to $102.2 million for the same period a year ago. Overall, SG&A expenses were 22.0% of net sales during the third quarter of 2024, compared to 22.9% of net sales during the same period in 2023. Organic constant currency SG&A decreased by approximately $6.9 million or 6.7%. The decrease in SG&A was driven by lower variable compensation and discretionary expense management, partially offset by inflation and professional service expense related to strategic initiatives.

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Please refer to the SG&A expenses table for a reconciliation of the quarter over quarter expense change.

Note: Organic constant currency SG&A change is a non-GAAP financial measure. See the "Non-GAAP Financial Measures" section below.

Research and development expense. Research and development expense was $16.7 million during the third quarter of 2024, a decrease of $1.0 million, compared to $17.7 million during the third quarter of 2023. Research and development expense was 3.9% of net sales in the third quarter of 2024 and 4.0% in the third quarter of 2023.

During the third quarter of 2024 and 2023, we capitalized $3.2 million and $3.3 million of software development costs, respectively. Depreciation expense for capitalized software development costs of $2.7 million for both the third quarter of 2024 and 2023, was recorded in costs of products sold on the unaudited Condensed Consolidated Statements of Operations.

MSA remains committed to dedicating significant resources to research and development activities, including the development of technology-based safety solutions. As we continue to invest a significant portion of our new product development into technology-based safety solutions, we anticipate that the historical relationship of research and development expense to net sales will continue to evolve; however, we do not anticipate reductions in the relative level of total spend on research and development activities on an annual basis. Total spend on both software development and research and development activities was $19.9 million and $21.0 million during the third quarter of September 30, 2024, and 2023, respectively.

Restructuring charges. Restructuring charges of $1.2 million during the third quarter of 2024 were primarily related to initiatives to optimize our manufacturing footprint and improve productivity. Restructuring charges of $3.3 million during the third quarter of 2023 were primarily related to initiatives to optimize our manufacturing footprint and drive profitable growth.

Currency exchange. Currency exchange losses were $3.0 million in the third quarter of 2024 compared to $1.5 million in the third quarter of 2023. The currency exchange activity for both periods related primarily to foreign currency exposure on unsettled inter-company balances and recognized exchange loss for our Argentina affiliate operating in a hyper-inflationary environment. 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.

GAAP operating income. Consolidated operating income for the third quarter of 2024 was $91.5 million compared to $94.1 million in the same period last year. The decrease in operating income was primarily driven by lower sales and gross profit partially offset by productivity improvements and lower SG&A as discussed further above.

Adjusted operating income. Americas adjusted operating income for the third quarter of 2024 was $91.8 million, a decrease of $2.1 million or 2.2% compared to $93.9 million in the prior year third quarter. The decrease in adjusted operating income is attributable to lower sales volumes partially offset by a decline in SG&A expenses. Effective price/cost management and productivity improvements offset inflationary pressures.

International adjusted operating income for the third quarter of 2024 was $18.2 million, a decrease of $4.4 million, or 19.5%, compared to $22.6 million in the prior year third quarter. The decrease in adjusted operating income is attributable to lower sales volumes partially offset by productivity improvements and pricing.

Corporate segment adjusted operating loss for the third quarter of 2024 was $12.1 million, a decrease of $3.1 million, compared to an adjusted operating loss of $15.2 million in the third quarter of 2023, driven by lower variable compensation partially offset by inflation and increased professional service fees associated with various strategic initiatives.

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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)

(In thousands)

Total other expense, net. Total other expense, net, for the third quarter of 2024 was $3.3 million, compared to $6.5 million for the same period in 2023, driven primarily by decreased interest expense related to reduced debt balances related to prior year borrowings associated with the MSA LLC divestiture as well as increased pension income driven by a higher expected rate of return.

Income taxes. The reported effective tax rate for the third quarter of 2024 was 24.4% compared to 25.6% for the third quarter of 2023. The decrease from the prior year was primarily driven by discrete benefits booked in the third quarter of 2024 related to the filing of prior period tax returns and a decrease in nondeductible compensation.

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

Net income. Net income was $66.6 million for the third quarter of 2024, or $1.69 per diluted share compared to $65.3 million, or $1.65 per diluted share, for the same period last year.

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Nine Months Ended September 30, 2024, Compared to Nine Months Ended September 30, 2023

Net Sales. Net sales for the nine months ended September 30, 2024, were $1.31 billion, an increase of $16.1 million, or 1.2%, compared to $1.29 billion in the same period last year. Please refer to the Net Sales table for a reconciliation of the period over period sales change.

(In millions, except percentage change)

Note: Organic constant currency sales change is a non-GAAP financial measure. See the "Non-GAAP Financial Measures" section below.

Net sales for the Americas segment were $909.7 million in the nine months ended September 30, 2024, an increase of $6.8 million, or 0.8%, compared to $902.9 million in the same period last year. Organic constant currency sales in the Americas segment increased 1.1% during the period. This growth was driven by an increase in detection.

Net sales for the International segment were $398.7 million in the nine months ended September 30, 2024, an increase of $9.3 million, or 2.4%, compared to $389.4 million in the same period last year. Organic constant currency sales in the International segment increased 1.9% during the period. This growth was driven by strength across fire service and detection, partially offset by a decline in industrial PPE.

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, 2024, was $626.0 million, an increase of $12.0 million or 2.0%, compared to $614.0 million during the same period last year. The ratio of gross profit to net sales was 47.8% during the nine months ended September 30, 2024 compared to 47.5% during the same period last year. Volume leverage, price/cost management and productivity efforts offset inflationary pressures and contributed to the gross profit margin improvement.

Selling, general and administrative expenses. SG&A expenses were $294.3 million during the nine months ended September 30, 2024, an increase of $4.7 million or 1.6%, compared to $289.6 million during the same period last year. Overall, SG&A expenses were 22.5% of net sales during the nine months ended September 30, 2024, compared to 22.4% of net sales during the same period in 2023. Organic constant currency SG&A increased $5.1 million or 1.8%. The increase in SG&A was driven by higher commercial costs associated with volume growth, inflation, net cost for product related legal matter and higher professional service expense partially offset by lower variable compensation and discretionary cost management.

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

Note: Organic constant currency SG&A change is a non-GAAP financial measure. See the "Non-GAAP Financial Measures" section below.

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Research and development expense. Research and development expense was $49.7 million during the nine months ended September 30, 2024, an increase of $0.8 million, compared to $48.9 million during the same period last year. Research and development expense was 3.8% of net sales in both the nine months ended September 30, 2024 and 2023.

During the nine months ended September 30, 2024 and 2023, we capitalized $10.0 million and $9.4 million of software development costs, respectively. Depreciation expense for capitalized software development costs of $8.2 million and $7.5 million during the nine months ended September 30, 2024 and 2023, respectively, was recorded in costs of products sold on the unaudited Condensed Consolidated Statements of Operations.

MSA remains committed to dedicating significant resources to research and development activities, including the development of technology-based safety solutions. As we continue to invest a significant portion of our new product development into technology-based safety solutions, we anticipate that the historical relationship of research and development expense to net sales will continue to evolve; however, we do not anticipate reductions in the relative level of total spend on research and development activities on an annual basis. Total spend on both software development and research and development activities was $59.7 million and $58.3 million during the nine months ended September 30, 2024, and 2023, respectively.

Restructuring charges. Restructuring charges of $5.7 million during the nine months ended September 30, 2024 were primarily related to ongoing initiatives to optimize our manufacturing footprint and improve productivity as well as management restructuring. Restructuring charges of $8.4 million during nine months ended September 30, 2023 related to our ongoing initiatives to adjust our cost structure and improve productivity. We remain focused on executing programs to optimize our cost structure.

Currency exchange. Currency exchange losses were $4.7 million during the nine months ended September 30, 2024, compared to $8.8 million in the same period of 2023. During 2024, we recognized non-cash net cumulative translation gains of $1.2 million associated with certain foreign subsidiaries. The remaining currency exchange activity for both periods related primarily due to foreign currency exposure on unsettled inter-company balances and recognized exchange loss for our Argentina affiliate operating in a hyper-inflationary environment.

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, 2024, and 2023, was minimal due to our divestiture of MSA LLC in January 2023, as discussed further in Note 17—Commitments and Contingencies to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q.

Loss on divestiture of MSA LLC. The $129.2 million pre-tax loss on divestiture of MSA LLC for the nine months ended September 30, 2023, relates to the derecognition of all legacy cumulative trauma product liability reserves and related insurance assets of the divested subsidiary during the first quarter of 2023. The loss also includes a $341.2 million contribution of cash and cash equivalents, as well as transaction related costs of $5.6 million. Refer to Note 17—Commitments and Contingencies to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further information.

GAAP operating income. Consolidated operating income for the nine months ended September 30, 2024, was $271.5 million compared to $129.1 million in the same period last year. The increase in operating results was driven by the higher sales and gross profit margin as well as the absence of loss on divestiture of MSA LLC that was recognized in 2023, partially offset by increased SG&A expense.

Adjusted operating income. Americas adjusted operating income for the nine months ended September 30, 2024 was $276.5 million, an increase of $16.1 million, or 6.2%, compared to $260.4 million in the prior year. The increase in adjusted operating income is primarily attributable to higher sales and gross profit margin due to effective price/cost management partially offset by higher SG&A expense to support business growth.

International adjusted operating income for the nine months ended September 30, 2024, was $55.9 million, a decrease of $4.2 million, or 6.9%, compared to $60.1 million in the prior year. The decrease in adjusted operating income is primarily attributable to lower sales volumes and unfavorable mix.

Corporate segment adjusted operating loss for the nine months ended September 30, 2024, was $38.4 million, an increase of $0.3 million compared to an adjusted operating loss of $38.1 million in the same period of 2023 driven by inflation and increased professional service fees associated with various strategic initiatives partially offset by lower variable compensation.

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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)

(In thousands)

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Total other expense, net. Total other expense, net, for the nine months ended September 30, 2024 was $13.3 million, compared to $21.7 million for the same period in 2023. The decrease in total other expense, net is primarily due to decreased interest expense related to reduced debt balances related to prior year borrowings associated with the MSA LLC divestiture as well as increased pension income driven by a higher expected rate of return partially offset by pension settlement expense recognized in the current year.

Income taxes. The reported effective tax rate for the nine months ended September 30, 2024 was 23.7% compared to 116.6% for the same period in 2023. This significant variance is primarily due to the divestiture of MSA LLC and the non-deductible loss recorded on the derecognition of the product liability reserves and related assets in the prior year. Refer to Note 17—Commitments and Contingencies to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further information on this transaction.

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 (loss) attributable to MSA Safety Incorporated. Net income was $197.0 million for the nine months ended September 30, 2024, or $4.98 per diluted share compared to net loss of $17.8 million, or $(0.46) per diluted share, for the same period last year.

Non-GAAP Financial Measures

This report includes certain non-GAAP financial measures and operating ratios derived from non-GAAP financial measures. These financial measures and ratios include organic constant currency revenue growth, organic constant currency SG&A change, adjusted operating income (loss), adjusted operating margin %, adjusted EBITDA and adjusted EBITDA margin %.

Organic constant currency sales and SG&A change are non-GAAP financial measures provided by the Company to give a better understanding of the Company's underlying business performance. Organic constant currency sales and SG&A change are calculated by deducting the percentage impact from currency translation effects from the overall percentage change in net sales and SG&A. The Company believes that organic constant currency revenue growth and SG&A change are useful metrics for investors, as foreign currency translation can have a material impact on revenue and SG&A trends. Organic constant currency revenue growth and SG&A change highlight ongoing business performance excluding the impact of fluctuating foreign currencies, which is outside of the Company's control.

Adjusted operating income (loss), adjusted operating margin %, adjusted EBITDA and adjusted EBITDA margin % are non-GAAP financial measures and operating ratios derived from non-GAAP measures. Adjusted operating income (loss) is reconciled above to the nearest GAAP financial measure, Operating income (loss), and excludes restructuring, currency exchange, product liability expense, loss on divestiture of MSA LLC, net cost for product related legal matter, transaction costs and acquisition-related amortization. Adjusted EBITDA is reconciled above to the nearest GAAP financial measure, Operating income (loss) and excludes depreciation and amortization expense. Adjusted operating margin % is defined as adjusted operating income (loss) divided by segment net sales to external customers and adjusted EBITDA margin % is defined as adjusted EBITDA divided by segment net sales to external customers. These metrics are consistent with how the Company's chief operating decision maker ("CODM") evaluates segment results and makes strategic decisions about the business. Additionally, these non-gaap financial measures provide information useful to investors in understanding our operating performance and trends, and to facilitate comparisons with the performance of our peers.

Management uses these measures internally to assess and better understand our underlying business performance and trends related to core business activities as well as to allocate resources. The non-GAAP financial measures and key performance indicators we use, and computational methods with respect thereto, may differ from the non-GAAP financial measures and key performance indicators, and computational methods, that our peers use to assess their performance and trends. The presentation of these non-GAAP financial measures does not comply with U.S. GAAP. These non-GAAP financial measures should be viewed as supplemental in nature, and not as a substitute for, or superior to, our reported results prepared in accordance with GAAP.

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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 September 30, 2024, approximately 55% 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 and a term loan, both due in 2026. At September 30, 2024, approximately 90% of our borrowings are denominated in U.S. dollars, which limits our exposure to currency exchange rate fluctuations.

At September 30, 2024, the Company had cash and cash equivalents totaling $154.4 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 $6.6 million during the nine months ended September 30, 2024 compared to increasing $2.0 million during the same period in 2023. We believe MSA's healthy balance sheet and access to significant capital at September 30, 2024, positions us well to navigate through challenging business conditions, supply chain constraints and other unexpected events.

Operating activities. Operating activities provided cash of $188.5 million during the nine months ended September 30, 2024, compared to using cash of $66.1 million during the same period in 2023. The improved cash flow from operating activities as compared to the same period in 2023 was primarily related to the prior year contribution of $341.2 million in the divestiture of MSA LLC. Refer to Note 17—Commitments and Contingencies to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further information. Excluding the cash flow impact of the MSA LLC divestiture for 2023, cash flow provided by operating activities decreased by $91.9 million, as improved operating results were completely offset by higher cash usage for working capital needs as well as increased cash usage for variable compensation payouts and tax prepayments both driven by prior year performance. The working capital cash usage increase related primarily to inventory purchases to support customer demand which were partially offset by improved accounts payable and accounts receivable management.

Investing activities. Investing activities used cash of $39.7 million during the nine months ended September 30, 2024, compared to using $28.3 million during the same period in 2023. The increase in cash used in investing activities as compared to the same period in 2023 was related to increased capital expenditures to support our manufacturing footprint optimization activities and IT systems implementation. We remain committed to 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 $136.2 million during the nine months ended September 30, 2024, compared to providing cash of $110.5 million during the same period in 2023. During the nine months ended September 30, 2024, we had net payments on long-term debt of $51.0 million as compared to net proceeds from long-term debt of $168.6 million during the same period in 2023 to fund the MSA LLC divestiture. We paid cash dividends of $58.7 million during the nine months ended September 30, 2024, compared to $55.0 million in the same period in 2023. We used cash of $27.4 million during the nine months ended September 30, 2024, to repurchase shares, including $20.0 million related to our share repurchase program and the remainder related to our employee stock compensation transactions compared to $3.9 million in the same period in 2023, all of which related to our employee stock compensation transactions.

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CUMULATIVE TRANSLATION ADJUSTMENTS

The position of the U.S. dollar relative to international currencies, primarily the euro, at September 30, 2024, resulted in a translation gain of $1.8 million being recorded to the cumulative translation adjustments shareholders' equity account during the nine months ended September 30, 2024, compared to a $2.5 million translation loss being recorded to the cumulative translation adjustments shareholders' equity account during the same period in 2023.

COMMITMENTS AND CONTINGENCIES

We made contributions of $3.9 million to our pension plans during the nine months ended September 30, 2024. We expect to make total contributions of approximately $5.3 million to our pension plans in 2024 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, 2024, totaling $10 million, of which $1.5 million relate to the senior revolving credit facility. These letters of credit serve to cover customer requirements in connection with certain sales orders and insurance companies. The Company is also required to provide cash collateral in connection with certain arrangements. At September 30, 2024, the Company has $0.6 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—Commitments and Contingencies to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further discussion on the Company's single incident and cumulative trauma product liabilities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

The more critical judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements are discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023.

RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

None.

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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 $17.5 million or 4.0% and $1.9 million or 2.8%, respectively, for the three months ended September 30, 2024.

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, 2024, we had open foreign currency forward contracts with a U.S. dollar notional value of $184.8 million. A hypothetical 10% strengthening or weakening of the U.S. dollar would result in a $18.5 million increase or decrease in the fair value of these contracts at September 30, 2024.

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, 2024, we had $307.2 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 $7.6 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, 2024, we had $249.5 million of variable rate borrowings. A 100 basis point increase or decrease in interest rates would have a $2.6 million impact on future annual earnings under our current capital structure.

(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.

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