MSA Safety Inc: Form 10-Q for the period ended Jun 30, 2025

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 but not limited to the effects of changes in U.S. trade policy and trade agreements, along with increased tariffs as well as 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 principal product categories are fire service, detection and industrial personal protective equipment ("PPE"). Core products for fire service include self-contained breathing apparatus ("SCBA"), protective apparel and helmets; core products for detection include fixed gas and flame detection ("FGFD") systems and portable gas detection instruments; and core products for industrial PPE include industrial head protection and fall protection devices. In addition to its principal product categories, MSA continues to deploy and grow its MSA+™ solution, a business approach that combines MSA hardware, software, and services to simplify safety operations for customers and deliver recurring revenue.

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, 2024.

We tailor our product and solution 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.

On May 6, 2025, we acquired M&C TechGroup and its affiliated companies ("M&C") in a transaction valued at approximately $188 million, net of cash acquired. Headquartered in Ratingen, Germany, M&C provides a comprehensive range of gas analysis systems that detect, measure and monitor gases in critical environments. M&C’s product portfolio includes systems and solutions for gas sampling, gas conditioning, as well as advanced process control. Refer to Note 15—Acquisitions to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further information.

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RESULTS OF OPERATIONS

Three Months Ended June 30, 2025, Compared to Three Months Ended June 30, 2024

(In millions, except percentage change)

Net Sales. Net sales for the three months ended June 30, 2025, were $474.1 million, an increase of $11.6 million, or 2.5%, compared to $462.5 million in the same period of 2024. Please refer to the Net Sales table below for a reconciliation of the quarter over quarter sales change.

Net sales for the Americas segment were $320.1 million in the second quarter of 2025, an increase of $5.4 million, or 1.7%, compared to $314.7 million in the same period of 2024. Organic sales in the Americas segment increased 1.6% during the period, driven by growth in detection partially offset by a decrease in fire service and a modest decline in industrial PPE. M&C added $3.6 million of sales to the Americas segment during the period.

Net sales for the International segment were $154.0 million in the second quarter of 2025, an increase of $6.2 million, or 4.2%, compared to $147.8 million in the same period of 2024. Organic sales in the International segment decreased 4.1% during the period, driven by declines in fire service, detection and industrial PPE. M&C added $7.3 million of sales to the International segment during the period.

We maintain our low single-digit full-year organic sales growth outlook. Our business remains healthy, supported by stable order trends. Ongoing macroeconomic factors including tariff-related uncertainty and the timing of the National Fire Protection Association (NFPA) standard approval process could present risk to our growth outlook.

Refer to Note 9—Segment Information to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q, for information regarding sales by product group.

Gross profit. Gross profit for the second quarter of 2025 was $220.7 million, a decrease of $2.3 million or 1.0%, compared to $223.0 million in the same period of 2024. The ratio of gross profit to net sales was 46.6% in the second quarter of 2025 compared to 48.2% in the same quarter last year. The decrease in gross profit margin is related to inflation and transactional foreign currency headwinds and to a lesser extent lower organic volumes and the early impacts of tariffs partially offset by price realization and improved productivity. We expect FX and tariff pressure on gross profit to continue in the second half of the year.

Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses were $112.1 million during the second quarter of 2025, an increase of $7.0 million or 6.7%, compared to $105.1 million in the same period of 2024. SG&A expenses were 23.6% of net sales during the second quarter of 2025, compared to 22.7% of net sales in the same period of 2024. SG&A includes $4.1 million of expenses associated with M&C operations and $6.6 million of strategic transaction costs related to the acquisition. Organic SG&A decreased by approximately $5.3 million or 5.0%. The decrease in SG&A was driven primarily by the absence of the net cost for product related legal matter from the prior year. Other drivers of SG&A efficiency include discretionary expense management and lower professional service costs offset by inflation and higher sales commission expense on detection growth.

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

Research and development expense. Research and development expense was $17.0 million during the second quarter of 2025, a decrease of $0.1 million, compared to $17.1 million in the same period of 2024. Research and development expense was 3.6% of net sales in the second quarter of 2025 and 3.7% in the second quarter of 2024.

During both the second quarter of 2025 and 2024, we capitalized $3.4 million of software development costs. Depreciation expense for capitalized software development costs of $3.1 million and $2.8 million for the second quarter of 2025 and 2024, respectively, was recorded in Costs of products sold on the unaudited Condensed Consolidated Statements of Income.

MSA remains committed to dedicating significant resources to research and development activities, including the recently announced MSA® G1™ SCBA XR Edition and Globe's all new G-XTREME® PRO Jacket. 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 and capitalized software development costs 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 $20.4 million and $20.5 million during the second quarter of June 30, 2025, and 2024, respectively.

Restructuring charges. Restructuring charges of $0.5 million during the second quarter of 2025 were primarily related to initiatives to right-size the organization in response to macroeconomic conditions. Restructuring charges of $1.5 million in the same period of 2024 were primarily related to initiatives to optimize our manufacturing footprint and improve productivity.

Currency exchange. Currency exchange losses were $5.3 million in the second quarter of 2025 compared to exchange gains of $0.6 million in the same period of 2024. The currency exchange activity for both periods related primarily to foreign currency exposure on unsettled inter-company balances. Refer to Note 17—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 second quarter of 2025 was $85.9 million compared to $99.9 million in same period of 2024. The decrease in operating income was primarily driven by an increase in SG&A expense due to the M&C acquisition and related strategic transaction costs, increased currency exchange losses and lower gross profit, partially offset by lower restructuring charges as discussed further above.

Adjusted operating income. Americas adjusted operating income for the second quarter of 2025 was $93.3 million, a decrease of $5.2 million or 5.2% compared to $98.5 million in the same period of 2024. The decrease in adjusted operating income is attributable to lower gross profit and higher SG&A expense.

International adjusted operating income for the second quarter of 2025 was $20.2 million, a decrease of $4.1 million, or 17.0%, compared to $24.3 million in the same period of 2024. The decrease in adjusted operating income is attributable to lower sales and gross profit as well as higher SG&A expense.

Corporate segment adjusted operating loss for the second quarter of 2025 was $12.0 million, a decrease of $2.6 million, compared to an adjusted operating loss of $14.6 million in the same period of 2024, driven by decreased professional service fees and other discretionary expense management partially offset by inflation.

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The following tables present a summary of adjusted operating income (loss), adjusted operating margin %, adjusted EBITDA and adjusted EBITDA % by reportable segment. 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)

A reconciliation of total adjusted EBITDA and total adjusted operating income from reportable segments to net income is presented in the following table:

(In thousands)

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Total other expense, net. Total other expense, net, for the second quarter of 2025 was $3.1 million, compared to $5.5 million for the same period of 2024, driven primarily by decreased interest expense related to lower interest rates as well as increased pension income driven by a higher expected rate of return.

Income taxes. The reported effective tax rate for the second quarter of 2025 was 24.1% compared to 23.5% in the same period of 2024. The increase from the prior year was primarily driven by an increase in state income taxes and nondeductible executive 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.

On July 4, 2025, the United States enacted into law the One, Big, Beautiful Bill Act ("the Act"). The Act makes permanent key elements of the Tax Cuts and Jobs Act, including 100% bonus depreciation, domestic research cost expensing, and the business interest expense limitation. The legislation has multiple effective dates, with certain provisions effective in 2025 and others implemented through 2027. The Company is currently assessing the impact of these provisions on our consolidated financial statements, including the potential effects on current and deferred income tax balances.

Net income. Net income was $62.8 million for the second quarter of 2025, or $1.59 per diluted share, compared to $72.2 million, or $1.83 per diluted share, in the same period of 2024.

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Six Months Ended June 30, 2025, Compared to Six Months Ended June 30, 2024

Net Sales. Net sales for the six months ended June 30, 2025, were $895.5 million, an increase of $19.7 million, or 2.2%, compared to $875.8 million in the same period of 2024. Please refer to the Net Sales table for a reconciliation of the period over period sales change.

(In millions, except percentage change)

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

Net sales for the Americas segment were $613.3 million in the six months ended June 30, 2025, an increase of $3.1 million, or 0.5%, compared to $610.2 million in the same period of 2024. Organic sales in the Americas segment increased 1.3% during the period, driven by growth in detection and industrial PPE partially offset by a decrease in fire service. M&C added $3.6 million of sales to the Americas segment during the period.

Net sales for the International segment were $282.2 million in the six months ended June 30, 2025, an increase of $16.7 million, or 6.3%, compared to $265.5 million in the same period of 2024. Organic sales in the International segment increased 2.5% during the period, driven by growth in detection and fire service partially offset by a modest decline in industrial PPE. M&C added $7.3 million of sales to the International segment during the period.

Refer to Note 9—Segment Information to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q, for information regarding sales by product group.

Gross profit. Gross profit for the six months ended June 30, 2025, was $414.1 million, a decrease of $4.5 million or 1.1%, compared to $418.6 million in the same period of 2024. The ratio of gross profit to net sales was 46.2% during the six months ended June 30, 2025 compared to 47.8% in the same period of 2024. The decrease in gross profit margin is related to inflation and transactional foreign currency headwinds and to a lesser extent lower organic volumes and the early impacts of tariffs partially offset by price realization and improved productivity. We expect FX and tariff pressure on gross profit to continue in the second half of the year.

Selling, general and administrative expenses. SG&A expenses were $206.0 million during the six months ended June 30, 2025, an increase of $6.8 million or 3.4%, compared to $199.2 million in the same period of 2024. Overall, SG&A expenses were 23.0% of net sales during the six months ended June 30, 2025, compared to 22.7% of net sales in the same period of 2024. SG&A includes $4.1 million of expenses associated with M&C operations and $6.6 million of strategic transaction costs related to the acquisition. Organic SG&A decreased $4.1 million or 2.0%. The decrease in SG&A was driven primarily by the absence of the net cost for product related legal matter from the prior year. Other drivers of SG&A efficiency include discretionary expense management and lower professional service costs offset inflation and higher sales commission expense on double-digit detection growth.

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

Note: Organic 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 $32.7 million during the six months ended June 30, 2025, a decrease of $0.3 million, compared to $33.0 million in the same period of 2024. Research and development expense was 3.6% of net sales in the six months ended June 30, 2025 and 3.8% of net sales in the same period of 2024.

During the six months ended June 30, 2025 and 2024, we capitalized $6.7 million and $6.8 million of software development costs, respectively. Depreciation expense for capitalized software development costs of $6.0 million and $5.5 million during the six months ended June 30, 2025 and 2024, respectively, was recorded in costs of products sold on the unaudited Condensed Consolidated Statements of Income.

MSA remains committed to dedicating significant resources to research and development activities, including the recently announced MSA G1 SCBA XR Edition and Globe's all new G-XTREME PRO Jacket. 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 and capitalized software development costs 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 $39.4 million and $39.8 million during the six months ended June 30, 2025, and 2024, respectively.

Restructuring charges. Restructuring charges of $2.4 million during the six months ended June 30, 2025 were primarily related initiatives to right-size the organization in response to macroeconomic conditions and ongoing initiatives to optimize our manufacturing footprint and improve productivity. Restructuring charges of $4.6 million in the same period of 2024 related to our ongoing initiatives to optimize our manufacturing footprint and improve productivity as well as management restructuring.

Currency exchange. Currency exchange losses were $9.4 million during the six months ended June 30, 2025, compared to $1.7 million in the same period of 2024. The currency exchange activity for both periods related primarily to foreign currency exposure on unsettled inter-company balances. Refer to Note 17—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 six months ended June 30, 2025, was $163.6 million compared to $180.1 million in the same period of 2024. The decrease in operating results was primarily driven by lower gross profit and increased SG&A expenses and currency exchange losses, partially offset by lower restructuring charges as discussed further above.

Adjusted operating income. Americas adjusted operating income for the six months ended June 30, 2025 was $172.0 million, a decrease of $12.7 million, or 6.9%, compared to $184.7 million in the same period of 2024. The decrease in adjusted operating income is attributable to lower gross profit.

International adjusted operating income was $38.9 million, an increase of $1.1 million, or 2.9%, compared to $37.8 million in the same period of 2024. Higher sales volumes and higher gross profit driven by productivity improvements and pricing were partially offset by higher SG&A expense.

Corporate segment adjusted operating loss for the six months ended June 30, 2025, was $21.9 million, a decrease of $4.4 million compared to an adjusted operating loss of $26.3 million in the same period of 2024 driven by decreased professional service fees and other discretionary expense management partially offset by inflation.

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The following tables present a summary of adjusted operating income (loss), adjusted operating margin %, adjusted EBITDA and adjusted EBITDA % by reportable segment. 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)

A reconciliation of total adjusted EBITDA and total adjusted operating income from reportable segments to net income is presented in the following table:

(In thousands)

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Total other expense, net. Total other expense, net, for the six months ended June 30, 2025 was $2.9 million, compared to $10.0 million in the same period of 2024, driven primarily by decreased interest expense related to lower interest rates as well as increased pension income driven by a higher expected rate of return.

Income taxes. The reported effective tax rate for the six months ended June 30, 2025 was 23.8% compared to 23.3% in the same period of 2024. The increase from the prior year was primarily driven by an increase in state income taxes and nondeductible executive 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 $122.4 million for the six months ended June 30, 2025, or $3.10 per diluted share compared to net income of $130.4 million, or $3.30 per diluted share, in the same period of 2024.

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 (referred to in our historical filings as constant currency) sales change, organic SG&A change, adjusted operating income (loss), adjusted operating margin %, adjusted EBITDA and adjusted EBITDA margin %.

Organic 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 sales and SG&A change are calculated by deducting the percentage impact from currency translation effects as well as the impact from acquisitions and divestitures completed in the preceding 12 months from the overall percentage change in net sales and SG&A. The Company believes that organic sales 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 sales and SG&A change highlight ongoing business performance excluding the impact of fluctuating foreign currencies, acquisitions and divestitures.

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. Total reportable segment adjusted operating income is reconciled above to the nearest GAAP financial measure, operating income, and excludes restructuring, currency exchange, net cost for product related legal matter, transaction costs and acquisition-related amortization. Total reportable segment adjusted EBITDA is reconciled above to the nearest GAAP financial measure, net income and, in addition to the items summarized above that are excluded from adjusted operating income (loss), excludes depreciation and amortization expense; interest expense; other income, net; and provision for income taxes. Adjusted operating margin % is defined as adjusted operating income (loss) divided by net sales to external customers and adjusted EBITDA margin % is defined as adjusted EBITDA divided by net sales to external customers. 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 make strategic decisions about the business and allocate resources. 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.

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, dividend payments and share repurchases. At June 30, 2025, approximately 44% 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 June 30, 2025, approximately 82% of our borrowings are denominated in U.S. dollars, which limits our exposure to currency exchange rate fluctuations.

At June 30, 2025, the Company had cash and cash equivalents totaling $147.0 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 decreased $17.2 million during the six months ended June 30, 2025, compared to increasing $0.4 million during the same period in 2024.

At June 30, 2025, we had $379.6 million borrowings outstanding under our $1.3 billion senior revolving credit facility. The facility also provides an accordion feature that allows the Company to access an additional $500.0 million of capacity pending approval by MSA’s board of directors and from the bank group.

We believe MSA's healthy balance sheet and access to significant capital at June 30, 2025 positions us well to navigate through a dynamic operating environment and other unexpected events. We maintain a balanced capital deployment strategy that focuses on investing for organic growth and pursuing inorganic growth opportunities, as well as returning cash to shareholders in the form of dividends and share buybacks.

Operating activities. Operating activities provided cash of $129.1 million during the six months ended June 30, 2025, compared to $104.2 million during the same period in 2024. The increased cash flow from operating activities was primarily related to lower cash used for variable compensation as compared to the prior year, partially offset by higher cash usage for working capital needs. The working capital cash usage increase related primarily to accounts receivable, partially offset by lower cash source from accounts payable and lower cash usage for inventory.

Investing activities. Investing activities used cash of $227.9 million during the six months ended June 30, 2025, compared to using $25.5 million during the same period in 2024. The acquisition of M&C and capital expenditures, including a $19.6 million strategic footprint investment, drove the increase in cash outflows from investing activities during the six months ended June 30, 2025. We remain committed to evaluating acquisition opportunities that will allow us to continue to grow in key end markets and geographies.

Financing activities. Financing activities provided cash of $74.0 million during the six months ended June 30, 2025, compared to using cash of $67.7 million during the same period in 2024. During the six months ended June 30, 2025, we had net proceeds on long-term debt of $165.2 million, used primarily to fund the M&C acquisition, as compared to net payments of $13.3 million during the same period in 2024. We paid cash dividends of $40.9 million during the six months ended June 30, 2025, compared to $38.6 million in the same period in 2024. We used cash of $48.9 million during the six months ended June 30, 2025, to repurchase shares, including $40.0 million related to our share repurchase program, compared to $16.8 million in the same period in 2024, including $10.0 million related to our share repurchase program. The remainder in both periods related to our employee stock compensation programs.

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CUMULATIVE TRANSLATION ADJUSTMENTS

The position of the U.S. dollar relative to international currencies, primarily the euro and British pound, at June 30, 2025, resulted in a translation gain of $66.7 million being recorded to the cumulative translation adjustments shareholders' equity account during the six months ended June 30, 2025, compared to a $19.5 million translation loss being recorded to the cumulative translation adjustments shareholders' equity account during the same period in 2024.

COMMITMENTS AND CONTINGENCIES

We made contributions of $3.7 million to our pension plans during the six months ended June 30, 2025. We expect to make net contributions between $6.0 million and $8.0 million to our pension plans in 2025, which are primarily associated with statutorily required plans in the International reporting segment.

The Company had outstanding bank guarantees and standby letters of credit with banks as of June 30, 2025, totaling $10.3 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 June 30, 2025, the Company has $1.0 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 19—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, 2024. During the second quarter of 2025 we made an acquisition that raised business combinations to a critical accounting policy and estimate used in the preparation of our consolidated financial statements.

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

Refer to Note 1—Basis of Presentation to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q for further information regarding recently adopted and recently issued accounting standards.

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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 $19.9 million or 4.2% and $1.6 million or 2.5%, respectively, for the three months ended June 30, 2025.

When appropriate, we may attempt to limit our transactional exposure to changes in currency exchange rates through forward contracts or other actions intended to reduce existing exposures by creating offsetting currency exposures. At June 30, 2025, we had open foreign currency forward contracts with a U.S. dollar notional value of $107.8 million. A hypothetical 10% strengthening or weakening of the U.S. dollar would result in a $10.8 million increase or decrease in the fair value of these contracts at June 30, 2025.

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

At June 30, 2025, we had $300.3 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 $5.8 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 June 30, 2025, we had $383.1 million of variable rate borrowings. A 100 basis point increase or decrease in interest rates would have a $3.2 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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