msa-20200630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-15579

MSA SAFETY INCORPORATED

(Exact name of registrant as specified in its charter)

Pennsylvania

46-4914539

(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)

1000 Cranberry Woods Drive

Cranberry Township,

Pennsylvania

16066-5207

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (724) 776-8600

Former name or former address, if changed since last report: N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which is registered
Common Stock, no par value	MSA	New York Stock Exchange

As of July 24, 2020, 38,883,634 shares of common stock, of the registrant were outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MSA SAFETY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Unaudited


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands, except per share amounts)	2020		2019		2020		2019
Net sales	$	314,438	$	349,675	$	655,583	$	675,713
Cost of products sold	172,841		188,591		356,627		364,647
Gross profit	141,597		161,084		298,956		311,066

Selling, general and administrative	69,034		84,009		149,271		162,437
Research and development	13,760		14,256		27,872		27,962
Restructuring charges (Note 4)	8,865		3,522		10,872		9,353
Currency exchange losses, net (Note 6)	793		1,290		1,063		18,251
Product liability expense (Note 17)	851		3,529		2,802		6,425
Operating income	48,294		54,478		107,076		86,638

Interest expense	2,459		4,470		5,602		6,830

Other income, net	(2,000)		(3,342)		(3,258)		(5,921)
Total other expense, net	459		1,128		2,344		909

Income before income taxes	47,835		53,350		104,732		85,729
Provision for income taxes (Note 10)	11,429		13,238		24,523		22,241
Net income	36,406		40,112		80,209		63,488

Net income attributable to noncontrolling interests	(340)		(306)		(468)		(450)

Net income attributable to MSA Safety Incorporated	$	36,066	$	39,806	$	79,741	$	63,038

Earnings per share attributable to MSA Safety Incorporated common shareholders (Note 9):
Basic	$	0.93	$	1.03	$	2.05	$	1.63
Diluted	$	0.92	$	1.01	$	2.03	$	1.61
Dividends per common share	$	0.43	$	0.42	$	0.85	$	0.80

The accompanying notes are an integral part of the condensed consolidated financial statements.

-2-

MSA SAFETY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2020		2019		2020		2019
Net income	$	36,406	$	40,112	$	80,209	$	63,488
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (Note 6)	4,669		(385)		(18,278)		(24)
Pension and post-retirement plan actuarial gains, net of tax (Note 6)	3,090		1,378		6,192		3,401
Unrealized gain on available-for-sale securities (Note 6)	124		27		62		563
Reclassification of currency translation from accumulated other comprehensive (loss) into net income (Note 6)	—		—		720		15,359
Total other comprehensive income (loss), net of tax	7,883		1,020		(11,304)		19,299
Comprehensive income	44,289		41,132		68,905		82,787
Comprehensive income attributable to noncontrolling interests	(358)		(169)		(371)		(456)
Comprehensive income attributable to MSA Safety Incorporated	$	43,931	$	40,963	$	68,534	$	82,331

The accompanying notes are an integral part of the condensed consolidated financial statements.

-3-

MSA SAFETY INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited


(In thousands)	June 30, 2020		December 31, 2019
Assets
Cash and cash equivalents	$	136,238	$	152,195
Trade receivables, less allowance for credit loss of $5,044 and $4,860	240,137		255,082
Inventories (Note 3)	225,410		185,027
Investments, short-term (Note 16)	59,945		49,892
Prepaid income taxes	16,418		13,072
Notes receivable, insurance companies (Note 17)	3,736		3,676
Prepaid expenses and other current assets	39,666		34,419
Total current assets	721,550		693,363

Property, plant and equipment, net (Note 5)	170,184		167,038
Operating lease assets, net	47,106		51,675
Prepaid pension cost (Note 14)	80,775		75,066
Deferred tax assets (Note 10)	32,030		32,596
Goodwill (Note 13)	430,671		436,679
Intangible assets, net (Note 13)	162,907		171,326
Notes receivable, insurance companies, noncurrent (Note 17)	52,988		52,336
Insurance receivable (Note 17) and other noncurrent assets	54,724		59,614
Total assets	$	1,752,935	$	1,739,693

Liabilities
Notes payable and current portion of long-term debt (Note 12)	$	20,000	$	20,000
Accounts payable	96,513		89,120
Employees’ compensation	34,783		41,882
Insurance and product liability (Note 17)	27,876		25,870
Income taxes payable (Note 10)	22,415		6,739
Warranty reserve (Note 17) and other current liabilities	91,771		93,898
Total current liabilities	293,358		277,509

Long-term debt, net (Note 12)	314,500		328,394
Pensions and other employee benefits	185,464		186,697
Noncurrent operating lease liabilities	38,826		42,632
Deferred tax liabilities (Note 10)	10,533		9,787
Product liability (Note 17) and other noncurrent liabilities	161,600		162,101
Total liabilities	$	1,004,281	$	1,007,120

Equity
Preferred stock, 4.5% cumulative, $50 par value (Note 7)	$	3,569	$	3,569
Common stock, no par value (Note 7)	233,786		229,127
Treasury shares, at cost (Note 7)	(329,590)		(305,159)
Accumulated other comprehensive loss (Note 6)	(225,210)		(214,003)
Retained earnings	1,058,955		1,012,266
Total MSA Safety Incorporated shareholders' equity	741,510		725,800
Noncontrolling interests	7,144		6,773
Total shareholders’ equity	748,654		732,573
Total liabilities and shareholders’ equity	$	1,752,935	$	1,739,693

The accompanying notes are an integral part of the condensed consolidated financial statements.

-4-

MSA SAFETY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited


	Six Months Ended June 30,
(In thousands)	2020		2019
Operating Activities
Net income	$	80,209	$	63,488
Depreciation and amortization	19,428		18,792

Stock-based compensation (Note 11)	4,352		6,086
Pension expense (Note 14)	4,430		2,856
Deferred income (benefit) tax provision (Note 10)	(711)		849
Loss on asset dispositions, net	127		233
Pension contributions (Note 14)	(3,781)		(3,534)
Currency exchange losses, net	1,063		18,251
Product liability expense (Note 17)	2,802		6,425
Collections on insurance receivables and notes receivable, insurance companies (Note 17)	5,736		11,289
Product liability payments (Note 17)	(4,672)		(34,170)

Changes in:
Trade receivables	9,286		(9,189)
Inventories (Note 3)	(46,886)		(25,421)
Prepaid expenses and other current assets	(10,424)		(3,489)
Accounts payable and accrued liabilities	22,653		(13,401)
Other noncurrent assets and liabilities	(581)		(1,520)
Cash Flow From Operating Activities	83,031		37,545
Investing Activities
Capital expenditures	(19,834)		(13,525)
Acquisition, net of cash acquired (Note 19)	—		(33,196)
Purchase of short-term investments (Note 16)	(119,402)		(87,260)
Proceeds from maturities of short-term investments (Note 16)	110,000		69,958
Property disposals	83		81
Cash Flow Used in Investing Activities	(29,153)		(63,942)
Financing Activities
Payments on short-term debt, net	—		64
Proceeds from long-term debt (Note 12)	581,000		375,000
Payments on long-term debt (Note 12)	(590,000)		(338,000)

Cash dividends paid	(33,052)		(30,934)
Company stock purchases (Note 7)	(28,254)		(10,967)
Exercise of stock options (Note 7)	3,740		3,232
Employee stock purchase plan (Note 7)	390		344

Cash Flow Used in Financing Activities	(66,176)		(1,261)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(3,654)		(985)
Decrease in cash, cash equivalents and restricted cash	(15,952)		(28,643)
Beginning cash, cash equivalents and restricted cash	152,543		140,604
Ending cash, cash equivalents and restricted cash	$	136,591	$	111,961

Supplemental cash flow information:
Cash and cash equivalents	$	136,238	$	111,511
Restricted cash included in prepaid expenses and other current assets	353		450
Total cash, cash equivalents and restricted cash	$	136,591	$	111,961

The accompanying notes are an integral part of the condensed consolidated financial statements.

-5-

MSA SAFETY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS,

ACCUMULATED OTHER COMPREHENSIVE LOSS AND NONCONTROLLING INTERESTS

Unaudited


(In thousands)	Retained Earnings		Accumulated Other Comprehensive (Loss)		Noncontrolling Interests
Balances March 31, 2019	$	947,929	$	(204,563)	$	5,924
Net income	40,112		—		—
Foreign currency translation adjustments	—		(385)		—
Pension and post-retirement plan adjustments, net of tax of $1,384	—		1,378		—
Unrealized net gain on available-for-sale securities	—		27		—
Income attributable to noncontrolling interests	(306)		137		169
Common dividends	(16,272)		—		—
Preferred dividends ($0.5625 per share)	(10)		—		—
Balances June 30, 2019	$	971,453	$	(203,406)	$	6,093

Balances March 31, 2020	$	1,039,609	$	(233,075)	$	6,786
Net income	36,406		—		—
Foreign currency translation adjustments	—		4,669		—
Pension and post-retirement plan adjustments, net of tax of $1,079	—		3,090		—
Unrealized net gain on available-for-sale securities (Note 17)	—		124		—
Reclassification from accumulated other comprehensive (loss) into net income	—		—		—
Income attributable to noncontrolling interests	(340)		(18)		358
Common dividends	(16,710)		—		—
Preferred dividends ($0.5625 per share)	(10)		—		—
Balances June 30, 2020	$	1,058,955	$	(225,210)	$	7,144

Balances December 31, 2018	$	935,577	$	(218,927)	$	5,637
Net income	63,488		—		—
Foreign currency translation adjustments	—		(24)		—
Pension and post-retirement plan adjustments, net of tax of $666	—		3,401		—
Unrealized net gain on available-for-sale securities (Note 16)	—		563		—
Reclassification from accumulated other comprehensive (loss) into net income (Note 6)	—		15,359		—
Income attributable to noncontrolling interests	(450)		(6)		456
Common dividends	(30,914)		—		—
Preferred dividends ($0.5625 per share)	(20)		—		—
Cumulative effect of the adoption of ASU 2018-02	3,772		(3,772)		—
Balances June 30, 2019	$	971,453	$	(203,406)	$	6,093

Balances December 31, 2019	$	1,012,266	$	(214,003)	$	6,773
Net income	80,209		—		—
Foreign currency translation adjustments	—		(18,278)		—
Pension and post-retirement plan adjustments, net of tax of $2,146	—		6,192		—
Unrealized net gain on available-for-sale securities (Note 16)	—		62		—
Reclassification of currency translation from accumulated other comprehensive (loss) into net income (Note 6)	—		720		—
Income attributable to noncontrolling interests	(468)		97		371
Common dividends	(33,032)		—		—
Preferred dividends ($0.5625 per share)	(20)		—		—

Balances June 30, 2020	$	1,058,955	$	(225,210)	$	7,144

The accompanying notes are an integral part of the condensed consolidated financial statements.

-6-

MSA SAFETY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

Note 1—Basis of Presentation

The condensed consolidated financial statements of MSA Safety Incorporated and its subsidiaries ("MSA" or the "Company") are unaudited. These condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary by management to fairly state the Company's results. Intercompany accounts and transactions have been eliminated. The results reported in these condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. The December 31, 2019, Condensed Consolidated Balance Sheet data was derived from the audited Consolidated Balance Sheet, but does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP). This Form 10-Q report should be read in conjunction with MSA's Form 10-K for the year ended December 31, 2019, which includes all disclosures required by U.S. GAAP.

Note 2—Recently Adopted and Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. This ASU introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including loans, held-to-maturity debt securities, loan commitments, financial guarantees and net investments in leases, as well as reinsurance and trade receivables. This ASU was adopted on January 1, 2020, which did not have an impact on the unaudited condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which improves fair value disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements and adding relevant disclosure requirements. The Company adopted this ASU on January 1, 2020. The adoption of this ASU did not have a material impact on the unaudited condensed consolidated financial statements. The Company expects to include changes to our annual disclosures as a result of the adoption of this ASU.

In August 2018, the FASB issued ASU 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which improves defined benefit disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements and adding relevant disclosure requirements. This ASU is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The amendments in this ASU are required to be applied on a retrospective basis to all periods presented. The Company is still evaluating the impact that the adoption of this ASU will have on our consolidated financial statements. The Company does expect changes to our disclosures upon adoption.

Note 3—Inventories

The following table sets forth the components of inventory:


(In thousands)	June 30, 2020		December 31, 2019
Finished products	$	92,074	$	71,918
Work in process	7,697		4,083
Raw materials and supplies	167,990		151,129
Inventories at current cost	267,761		227,130
Less: LIFO valuation	(42,351)		(42,103)
Total inventories	$	225,410	$	185,027

-7-

Note 4—Restructuring Charges

During the three and six months ended June 30, 2020, we recorded restructuring charges of $8.9 million and $10.9 million, respectively. International segment restructuring charges of $8.5 million during the six months ended June 30, 2020, were primarily related to severance costs for staff reductions and footprint optimization associated with our ongoing initiatives to drive profitable growth. Americas segment restructuring charges of $2.2 million during the six months ended June 30, 2020, were primarily related to costs associated with our global Fixed Gas & Flame Detection manufacturing footprint optimization.

During the three and six months ended June 30, 2019, we recorded restructuring charges of $3.5 million and $9.4 million, respectively. International segment restructuring charges of $8.9 million during the six months ended June 30, 2019, were primarily related to severance costs for staff reductions associated with our ongoing initiatives to drive profitable growth and a non-cash settlement charge for the closure of our pension plan in the United Kingdom. Corporate segment restructuring charges of $0.4 million during the six months ended June 30, 2019, were primarily related to the legal and operational realignment of our U.S. and Canadian operations.

Activity and reserve balances for restructuring charges by segment were as follows:


(In millions)	Americas		International		Corporate		Total
Reserve balances at December 31, 2018	$	0.5	$	4.0	$	—	$	4.5
Restructuring charges	0.5		12.7		0.6		13.8
Currency translation and other adjustments	(0.1)		(0.6)		—		(0.7)
Cash payments / utilization	(0.6)		(10.2)		(0.6)		(11.4)
Reserve balances at December 31, 2019	$	0.3	$	5.9	$	—	$	6.2
Restructuring charges	2.2		8.5		0.2		10.9
Currency translation and other adjustments	(0.1)		0.1		—		—
Cash payments	(0.3)		(3.2)		(0.2)		(3.7)
Reserve balances at June 30, 2020	$	2.1	$	11.3	$	—	$	13.4

Note 5—Property, Plant and Equipment

The following table sets forth the components of property, plant and equipment, net:


(In thousands)	June 30, 2020		December 31, 2019
Land	$	4,116	$	4,194
Buildings	125,393		125,223
Machinery and equipment	403,403		397,287
Construction in progress	31,669		24,759
Total	564,581		551,463
Less: accumulated depreciation	(394,397)		(384,425)
Property, plant and equipment, net	$	170,184	$	167,038

-8-

Note 6—Reclassifications Out of Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss were as follows:

MSA Safety Incorporated

Noncontrolling Interests

Three Months Ended
June 30,

(In thousands)

2020