MSA SAFETY INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended
March 31, 2017
Commission File No. 1-15579
MSA SAFETY INCORPORATED
(Exact name of registrant as specified in its charter)
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Pennsylvania
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46-4914539
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.)
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1000 Cranberry Woods Drive
Cranberry Township, Pennsylvania
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16066-5207
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (724) 776-8600
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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.
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Large accelerated filer
x
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Accelerated filer
¨
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Non-accelerated filer
¨
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Smaller reporting company
¨
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|||
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(Do not check if a smaller reporting company)
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Emerging growth company
¨
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|||||
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
As of
April 21, 2017
, 37,939,961 shares of common stock, of the registrant were outstanding.
MSA SAFETY INCORPORATED
Unaudited
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Three Months Ended March 31,
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|||||||
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(In thousands, except per share amounts)
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2017
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2016
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||||||
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Net sales
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$
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265,765
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$
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279,268
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Cost of products sold
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146,043
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158,563
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||||
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Gross profit
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119,722
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120,705
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Selling, general and administrative
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75,983
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79,195
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||||
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Research and development
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10,998
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10,363
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||||
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Restructuring charges (Note 4)
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12,739
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470
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Currency exchange losses, net
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580
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1,950
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||||
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Operating income
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19,422
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28,727
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Interest expense
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3,591
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3,902
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||||
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Other income, net
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(655
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)
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(888
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)
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Total other expense, net
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2,936
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3,014
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Income from continuing operations before income taxes
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16,486
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25,713
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Provision for income taxes (Note 10)
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1,796
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12,511
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Income from continuing operations
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14,690
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13,202
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||||
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Loss from discontinued operations (Note 19)
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—
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(1,129
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)
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||||
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Net income
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14,690
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12,073
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Net income attributable to noncontrolling interests
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(277
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)
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(322
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)
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||||
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Net income attributable to MSA Safety Incorporated
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$
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14,413
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$
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11,751
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Amounts attributable to MSA Safety Incorporated common shareholders:
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||||||||
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Income from continuing operations
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$
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14,413
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$
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12,683
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Loss from discontinued operations (Note 19)
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—
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(932
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)
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||||
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Net income
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$
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14,413
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$
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11,751
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Earnings per share attributable to MSA Safety Incorporated common shareholders:
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||||||||
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Basic
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||||||||
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Income from continuing operations
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$
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0.38
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$
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0.34
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Loss from discontinued operations (Note 19)
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$
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—
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$
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(0.03
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)
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Net income
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$
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0.38
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$
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0.31
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Diluted
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||||||
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Income from continuing operations
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$
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0.37
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$
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0.34
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Loss from discontinued operations (Note 19)
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$
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—
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$
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(0.03
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)
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Net income
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$
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0.37
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$
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0.31
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Dividends per common share
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$
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0.33
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$
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0.32
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The accompanying notes are an integral part of the consolidated financial statements.
-
2
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MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
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Three Months Ended March 31,
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|||||||
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(In thousands)
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2017
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2016
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||||||
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Net income
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$
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14,690
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$
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12,073
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Other comprehensive income (loss), net of tax:
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||||||||
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Foreign currency translation adjustments (Note 6)
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10,744
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13,948
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Pension and post-retirement plan adjustments, net of tax (Note 6)
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1,984
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1,892
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Total other comprehensive income, net of tax
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12,728
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15,840
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Comprehensive income
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27,418
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27,913
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Comprehensive loss attributable to noncontrolling interests
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349
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2
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Comprehensive income attributable to MSA Safety Incorporated
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$
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27,767
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$
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27,915
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The accompanying notes are an integral part of the consolidated financial statements.
-
3
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MSA SAFETY INCORPORATED
Unaudited
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(In thousands)
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March 31, 2017
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December 31, 2016
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||||||
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Assets
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||||||||
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Cash and cash equivalents
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$
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104,427
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$
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113,759
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Trade receivables, less allowance for doubtful accounts of $6,288 and $5,610
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208,392
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209,514
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Inventories (Note 3)
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117,621
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103,066
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Prepaid income taxes
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15,432
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16,378
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Notes receivable, insurance companies (Note 18)
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19,723
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4,180
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Prepaid expenses and other current assets
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29,206
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25,909
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Total current assets
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494,801
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472,806
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Property, plant and equipment, net (Note 5)
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144,445
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148,678
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Prepaid pension cost
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54,016
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62,916
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Deferred tax assets (Note 10)
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24,190
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23,240
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Goodwill (Note 13)
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335,297
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333,276
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Intangible assets (Note 13)
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75,763
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77,015
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Notes receivable, insurance companies, noncurrent (Note 18)
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63,416
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63,147
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Insurance receivable (Note 18) and other noncurrent assets
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66,226
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172,842
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Total assets
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$
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1,258,154
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$
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1,353,920
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Liabilities
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||||||||
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Notes payable and current portion of long-term debt, net (Note 12)
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$
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26,848
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$
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26,666
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Accounts payable
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65,682
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62,734
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Employees’ compensation
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23,422
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39,880
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Insurance and product liability (Note 18)
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18,939
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19,438
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Taxes on income (Note10)
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1,202
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3,889
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Other current liabilities
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65,922
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68,803
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Total current liabilities
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202,015
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221,410
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||||
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Long-term debt, net (Note 12)
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268,568
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363,836
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||||
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Pensions and other employee benefits
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158,908
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157,927
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||||
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Deferred tax liabilities (Note 10)
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34,867
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34,044
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||||
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Other noncurrent liabilities
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15,518
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15,491
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||||
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Total liabilities
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$
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679,876
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$
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792,708
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Commitments and contingencies (Note 18)
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||||||
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Equity
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||||||||
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Preferred stock, 4 1/2% cumulative, $50 par value (Note 7)
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3,569
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3,569
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||||
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Common stock, no par value (Note 7)
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182,158
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172,681
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||||
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Treasury shares, at cost (Note 7)
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(289,952
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)
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(289,254
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)
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||||
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Accumulated other comprehensive loss
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(216,892
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)
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(230,246
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)
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||||
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Retained earnings
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897,458
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901,415
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|
||||
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Total MSA Safety Incorporated shareholders' equity
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576,341
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558,165
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|
||||
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Noncontrolling interests
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1,937
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3,047
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|
||||
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Total shareholders’ equity
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578,278
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561,212
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|
||||
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Total liabilities and shareholders’ equity
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$
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1,258,154
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$
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1,353,920
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|
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The accompanying notes are an integral part of the consolidated financial statements.
-
4
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MSA SAFETY INCORPORATED
Unaudited
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Three Months Ended March 31,
|
|||||||
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(In thousands)
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2017
|
2016
|
||||||
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Operating Activities
|
||||||||
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Net income
|
$
|
14,690
|
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$
|
12,073
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|
||
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Depreciation and amortization
|
8,752
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|
9,156
|
|
||||
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Non-cash restructuring charges (Note 4)
|
11,384
|
|
—
|
|
||||
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Stock-based compensation (Note 11)
|
6,325
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|
5,498
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|
||||
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Pension expense (Note 15)
|
1,769
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|
1,698
|
|
||||
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Deferred income tax provision (benefit)
|
171
|
|
(919
|
)
|
||||
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Loss (gain) on asset dispositions, net
|
32
|
|
(18
|
)
|
||||
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Pension contributions (Note 15)
|
(1,475
|
)
|
(1,550
|
)
|
||||
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Currency exchange losses, net
|
580
|
|
1,968
|
|
||||
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Changes in:
|
||||||||
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Trade receivables
|
3,998
|
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(7,332
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)
|
||||
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Inventories (Note 3)
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(12,537
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)
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(4,316
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)
|
||||
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Income taxes receivable, prepaid expenses and other current assets
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1,087
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(4,668
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)
|
||||
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Accounts payable and accrued liabilities
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(20,137
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)
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(19,638
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)
|
||||
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Other noncurrent assets and liabilities
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81,751
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(5,819
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)
|
||||
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Other, net
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—
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2,861
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||||
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Cash Flow From (Used In) Operating Activities
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96,390
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(11,006
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)
|
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Investing Activities
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||||||
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Capital expenditures
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(1,442
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)
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(5,819
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)
|
||||
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Property disposals and other investing (Note 19)
|
165
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|
15,708
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|
||||
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Cash Flow (Used in) From Investing Activities
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(1,277
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)
|
9,889
|
|
||||
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Financing Activities
|
||||||||
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Proceeds from short-term debt, net
|
182
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|
126
|
|
||||
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Proceeds from long-term debt (Note 12)
|
101,500
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|
170,264
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|
||||
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Payments on long-term debt (Note 12)
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(198,119
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)
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(156,757
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)
|
||||
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Restricted cash
|
390
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|
155
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|
||||
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Cash dividends paid
|
(12,455
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)
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(11,936
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)
|
||||
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Company stock purchases
|
(3,811
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)
|
(1,590
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)
|
||||
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Exercise of stock options
|
6,267
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|
2,703
|
|
||||
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Excess tax benefit related to stock plans
|
—
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|
288
|
|
||||
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Cash Flow (Used in) From Financing Activities
|
(106,046
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)
|
3,253
|
|
||||
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Effect of exchange rate changes on cash and cash equivalents
|
1,601
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|
3,840
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|
||||
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(Decrease ) increase in cash and cash equivalents
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(9,332
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)
|
5,976
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||||
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Beginning cash and cash equivalents
|
113,759
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|
105,925
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|
||||
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Ending cash and cash equivalents
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$
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104,427
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$
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111,901
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|
||
The accompanying notes are an integral part of the consolidated financial statements.
-
5
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MSA SAFETY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN RETAINED EARNINGS AND
ACCUMULATED OTHER COMPREHENSIVE LOSS
Unaudited
|
(In thousands)
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
(Loss)
|
|||||
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Balances December 31, 2015
|
$
|
858,553
|
|
$
|
(208,199
|
)
|
|
|
Net income
|
12,073
|
|
—
|
|
|||
|
Foreign currency translation adjustments
|
—
|
|
13,948
|
|
|||
|
Pension and post-retirement plan adjustments, net of tax of $1,044
|
—
|
|
1,892
|
|
|||
|
Income attributable to noncontrolling interests
|
(322
|
)
|
(324
|
)
|
|||
|
Foreign currency translation adjustments reclassified into earnings
|
—
|
|
2,103
|
|
|||
|
Common dividends
|
(11,926
|
)
|
—
|
|
|||
|
Preferred dividends
|
(10
|
)
|
—
|
|
|||
|
Balances March 31, 2016
|
858,368
|
|
(190,580
|
)
|
|||
|
Balances December 31, 2016
|
901,415
|
|
(230,246
|
)
|
|||
|
Net income
|
14,690
|
|
—
|
|
|||
|
Foreign currency translation adjustments
|
—
|
|
10,744
|
|
|||
|
Pension and post-retirement plan adjustments, net of tax of $1,108
|
—
|
|
1,984
|
|
|||
|
(Income) loss attributable to noncontrolling interests
|
(277
|
)
|
626
|
|
|||
|
Common dividends
|
(12,445
|
)
|
—
|
|
|||
|
Preferred dividends
|
(10
|
)
|
—
|
|
|||
|
Cumulative effect of the adoption of ASU 2016-16 (Note 2)
|
(5,915
|
)
|
—
|
|
|||
|
Balances March 31, 2017
|
$
|
897,458
|
|
$
|
(216,892
|
)
|
|
The accompanying notes are an integral part of the consolidated financial statements.
-
6
-
MSA SAFETY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
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, 2016
condensed consolidated balance sheet data was derived from the audited consolidated balance sheet but does not include all disclosures required by generally accepted accounting principles (GAAP). This Form 10-Q report should be read in conjunction with MSA's Form 10-K for the year ended
December 31, 2016
, which includes all disclosures required by GAAP.
Reclassifications
- Certain reclassifications of prior year's data have been made to conform to the current year presentation. These reclassifications relate to how amounts are classified within the operating section of the Condensed Consolidated Statement of Cash Flows but do not change the overall cash flow from operating activities for the prior year as previously reported.
In May 2014, the FASB issued ASU 2014-09,
Revenue with Contracts from Customers
. This ASU establishes a single revenue recognition model for all contracts with customers based on recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, eliminates industry specific requirements, and expands disclosure requirements. This ASU is required to be adopted beginning January 1, 2018. Our revenue streams include agreements with distributors, agreements with end users and agreements with governmental entities. The Company continues to evaluate the impact that the adoption of this ASU will have on the consolidated financial statements, including the timing of revenue recognition associated with certain customized products. We have conducted a risk assessment and have worked with outside consultants to develop a transition plan that will enable us to meet the implementation requirement. We are still finalizing the analysis to quantify the adoption impact of the provisions of the new standard, but we do not currently expect it to have a material impact on our consolidated financial position or results of operations. Based on the evaluation of our current contracts and revenue streams, most will be recorded consistently under both the current and new standard. The majority of our revenue transactions are not accounted for under industry-specific guidance that will be superseded by the ASU and generally consist of a single performance obligation to transfer promised goods or services. The FASB has issued, and may issue in the future, interpretive guidance which may cause our evaluation to change. We anticipate using the modified retrospective method of adoption and having enhanced disclosures surrounding revenue recognition.
In April 2015, the FASB issued ASU 2015-04,
Retirement Benefits - Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets.
This ASU allows entities with a fiscal year end that does not coincide with a month end to use the closest month end for measurement purposes. This ASU also allows entities that have a significant event in an interim period that calls for a remeasurement of defined benefit plan assets and obligations to use the month end date that is closest to the date of the significant event. This ASU was adopted on January 1, 2016. The adoption of this ASU did not have a material effect on our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory.
This ASU was adopted on January 1, 2017. This ASU applies only to inventory measured using the first-in, first-out (FIFO) or average cost methods and requires inventory to be measured at the lower of cost and net realizable value (NRV). This ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. The adoption of this ASU did not have a material effect on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
. This ASU requires lessees to record a right of use asset and a liability for virtually all leases. This ASU will be effective beginning in 2019. The Company is working to develop a transition plan and continues to evaluate the impact that the adoption of this ASU will have on the consolidated financial statements. At a minimum, total assets and total liabilities will increase in the period the ASU is adopted. At
March 31, 2017
, the Company's undiscounted future minimum rent commitments under noncancellable leases were approximately
$47.1 million
.
-
7
-
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. This ASU simplifies the accounting for many aspects associated with share-based payment accounting including income taxes and the use of forfeiture rates.
This ASU was adopted on January 1, 2017. The provisions of this ASU which impacted us included a requirement that all excess tax benefits and deficiencies that pertain to share-based payment arrangements be recognized as a component of income tax expense rather than as a component of shareholders’ equity. The Company expects this to create volatility in its effective tax rate on a go-forward basis as the impact is treated as a discrete item within our quarterly tax provision. The extent of excess tax benefits/deficiencies is subject to variation in our stock price and timing/extent of stock-based compensation share vestings and employee stock option exercises. This ASU also removes the impact of the excess tax benefits and deficiencies from the calculation of diluted earnings per share and no longer requires a presentation of excess tax benefits and deficiencies related to the vesting and exercise of share-based compensation as both an operating outflow and financing inflow on the statement of cash flows. We have applied all of these changes on a prospective basis and therefore, prior years were not adjusted. Additionally, this ASU allows for an accounting policy election to estimate the number of awards that are expected to vest or account for forfeitures when they occur. We elected to maintain our current forfeitures policy and will continue to include an estimate of those forfeitures when recognizing stock-based compensation expense. This ASU also requires cash payments to tax authorities when an employer uses a net-settlement feature to withhold shares to meet statutory tax withholding provisions to be presented as a financing activity (eliminating previous diversity in practice). Adoption of this ASU resulted in an additional discrete tax benefit of approximately
$2.8 million
during the quarter ended
March 31, 2017
.
In June 2016, the FASB issued ASU 2016-13,
Allowance for Loan and Lease 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 will be effective beginning in 2020. The Company is currently evaluating the impact that the adoption of this ASU will have on the consolidated financial statements and expects that adoption will result in increased disclosure.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Payments and Cash Receipts.
This ASU clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU will be effective beginning in 2018. The Company is currently evaluating the impact that the adoption of this ASU will have on the consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16,
Intra-entity Transfers of Assets Other than Inventory
. This ASU states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU was early adopted on January 1, 2017 using the modified retrospective approach which resulted in a
$5.9 million
cumulative-effect adjustment directly to retained earnings for any previously deferred income tax effects.
In November 2016, the FASB issued ASU 2016-18,
Restricted Cash
. This ASU requires that amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective beginning in 2018 to be adopted on a retrospective basis and early adoption is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations - Clarifying the Definition of a Business
. This ASU provides further guidance for identifying whether a set of assets and activities is a business by providing a screen outlining that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This ASU is effective beginning in 2018 and will be applied prospectively. The adoption of this ASU may have a material effect on our consolidated financial statements in the event that we have an acquisition or disposal that falls within this screen.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
. This ASU simplifies the accounting for goodwill impairments under Step 2 by eliminating the requirement to perform procedures to determine the fair value of the assets and liabilities of the reporting unit, including previously unrecognized assets and liabilities, in order to determine the fair value of the goodwill and any impairment charge to be recognized. Under this ASU, the impairment charge to be recognized should be the amount by which the reporting unit's carrying value exceeds the reporting unit's fair value as calculated under Step 1 provided that the loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. This ASU is effective beginning in 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The adoption of this ASU may have a material effect on our consolidated financial statements in the event that we determine that goodwill for any of our reporting units is impaired.
-
8
-
In March 2017, the FASB issued ASU 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost
, to improve the presentation of net periodic pension and net periodic post-retirement benefit cost. This ASU requires companies to present the service cost component of net periodic benefit cost in the same income statement line item as other compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. Additionally, this ASU requires that companies present the other components of the net periodic benefit cost separately from the line item that includes the service cost and outside of any subtotal of income from operations, if one is presented. This ASU is effective for annual periods beginning after December 15, 2017 and early adoption is permitted. The Company plans to adopt the ASU on January 1, 2018 and is currently evaluating the impact that the adoption of this ASU will have on the consolidated financial statements. If the Company would have applied the provisions of this ASU for the year ended December 31, 2016, operating income would have decreased by
$3.5 million
.
The following table sets forth the components of inventory:
|
(In thousands)
|
March 31, 2017
|
December 31, 2016
|
||||||
|
Finished products
|
$
|
62,011
|
|
$
|
54,348
|
|
||
|
Work in process
|
7,611
|
|
6,542
|
|
||||
|
Raw materials and supplies
|
89,892
|
|
84,069
|
|
||||
|
Inventories at current cost
|
159,514
|
|
144,959
|
|
||||
|
Less: LIFO valuation
|
(41,893
|
)
|
(41,893
|
)
|
||||
|
Total inventories
|
$
|
117,621
|
|
$
|
103,066
|
|
||
During the
three
months ended
March 31, 2017
, we recorded restructuring charges of
$12.7 million
. Americas segment restructuring charges of
$12.3 million
during the
three months ended March 31, 2017
related primarily to the voluntary retirement incentive package described below as well as severance from staff reductions in Brazil. International segment restructuring charges of
$0.4 million
during the
three months ended March 31, 2017
were related to severance costs for staff reductions in Europe and Australia.
In September 2016, certain employees in the Americas segment were offered a voluntary retirement incentive package (“VRIP”). The election window for participation closed on October 17, 2016. The employees were required to render service through January 31, 2017 to receive the VRIP and had until February 6, 2017 to revoke their election. None of the
83
employees who accepted the VRIP revoked their election to retire under the terms of the plan. Non-cash special termination benefit expense of
$11.4 million
was incurred in the first quarter of 2017 related to these elections. All benefits were paid from our over funded North America pension plan.
During the
three
months ended
March 31, 2016
, we recorded restructuring charges of
$0.5 million
. International segment charges of
$0.9 million
during the three months ended March 31, 2016 were related to severance costs for staff reductions associated with ongoing initiatives to right size our operations in Europe. Americas segment restructuring charges of
$0.2 million
during the three months ended March 31, 2016 related primarily to severance from staff reductions in Latin America. Favorable adjustments for changes in estimates on employee restructuring reserves of
$0.6 million
were made during the
three months ended March 31, 2016
.
-
9
-
Activity and reserve balances for restructuring charges by segment were as follows:
|
(in millions)
|
Americas
|
International
|
Corporate
|
Total
|
|||||||||||
|
Reserve balances at December 31, 2015
|
$
|
1.6
|
|
$
|
5.4
|
|
$
|
1.1
|
|
$
|
8.1
|
|
|||
|
Restructuring charges
|
1.8
|
|
5.3
|
|
0.2
|
|
7.3
|
|
|||||||
|
Adjustments to estimates on restructuring reserves
|
(0.5
|
)
|
(0.6
|
)
|
(0.5
|
)
|
(1.6
|
)
|
|||||||
|
Cash payments
|
(2.0
|
)
|
(7.3
|
)
|
(0.5
|
)
|
(9.8
|
)
|
|||||||
|
Reserve balances at December 31, 2016
|
$
|
0.9
|
|
$
|
2.8
|
|
$
|
0.3
|
|
$
|
4.0
|
|
|||
|
Restructuring charges
|
12.3
|
|
0.4
|
|
—
|
|
12.7
|
|
|||||||
|
Cash payments/utilization
|
(12.6
|
)
|
(1.0
|
)
|
(0.3
|
)
|
(13.9
|
)
|
|||||||
|
Reserve balances at March 31, 2017
|
$
|
0.6
|
|
$
|
2.2
|
|
$
|
—
|
|
$
|
2.8
|
|
|||
The following table sets forth the components of property, plant and equipment:
|
(In thousands)
|
March 31, 2017
|
December 31, 2016
|
|||||
|
Land
|
$
|
2,714
|
|
$
|
2,684
|
|
|
|
Buildings
|
112,650
|
|
111,762
|
|
|||
|
Machinery and equipment
|
364,990
|
|
361,010
|
|
|||
|
Construction in progress
|
9,181
|
|
10,714
|
|
|||
|
Total
|
489,535
|
|
486,170
|
|
|||
|
Less: accumulated depreciation
|
(345,090
|
)
|
(337,492
|
)
|
|||
|
Net property, plant and equipment
|
$
|
144,445
|
|
$
|
148,678
|
|
|
The changes in Accumulated Other Comprehensive Loss by component were as follows:
|
MSA Safety Incorporated
|
Noncontrolling Interests
|
|||||||||||||||
|
Three Months Ended March 31,
|
Three Months Ended March 31,
|
|||||||||||||||
|
(In thousands)
|
2017
|
2016
|
2017
|
2016
|
||||||||||||
|
Pension and other post-retirement benefits
|
||||||||||||||||
|
Balance at beginning of period
|
$
|
(118,068
|
)
|
$
|
(119,389
|
)
|
$
|
—
|
|
$
|
—
|
|
||||
|
Amounts reclassified from Accumulated other comprehensive loss:
|
||||||||||||||||
|
Amortization of prior service cost
|
(109
|
)
|
(90
|
)
|
—
|
|
—
|
|
||||||||
|
Recognized net actuarial losses
|
3,201
|
|
3,026
|
|
—
|
|
—
|
|
||||||||
|
Tax benefit
|
(1,108
|
)
|
(1,044
|
)
|
—
|
|
—
|
|
||||||||
|
Total amount reclassified from Accumulated other comprehensive loss, net of tax
|
1,984
|
|
1,892
|
|
—
|
|
—
|
|
||||||||
|
Balance at end of period
|
$
|
(116,084
|
)
|
$
|
(117,497
|
)
|
$
|
—
|
|
$
|
—
|
|
||||
|
Foreign Currency Translation
|
||||||||||||||||
|
Balance at beginning of period
|
$
|
(112,178
|
)
|
$
|
(88,810
|
)
|
$
|
(1,964
|
)
|
$
|
(3,616
|
)
|
||||
|
Reclassification into earnings
|
—
|
|
2,103
|
|
—
|
|
—
|
|
||||||||
|
Foreign currency translation adjustments
|
11,370
|
|
13,624
|
|
(626
|
)
|
324
|
|
||||||||
|
Balance at end of period
|
$
|
(100,808
|
)
|
$
|
(73,083
|
)
|
$
|
(2,590
|
)
|
$
|
(3,292
|
)
|
||||
The reclassifications out of accumulated other comprehensive loss are included in the computation of net periodic pension and other post-retirement benefit costs (see Note 15—Pensions and Other Post-Retirement Benefits).
-
10
-
Preferred Stock
- The Company has authorized
100,000
shares of
$50
par value
4.5%
cumulative preferred nonvoting stock which is callable at
$52.50
. There are
71,340
shares issued and
52,878
shares held in treasury at
March 31, 2017
. There were
no
treasury purchases of preferred stock during the three months ended
March 31, 2017
or
2016
. The Company has also authorized
1,000,000
shares of
$10
par value second cumulative preferred voting stock.
No
shares have been issued as of
March 31, 2017
.
Common Stock
- The Company has authorized
180,000,000
shares of
no
par value common stock. There were
62,081,391
shares issued as of
December 31, 2016
.
No
new shares have been issued in 2017. There were
37,942,242
and
37,736,578
shares outstanding at
March 31, 2017
and
December 31, 2016
, respectively.
Treasury Shares
- In 2015, the Board of Directors adopted a stock repurchase program. The program authorizes up to
$100.0 million
to repurchase MSA common stock in the open market and in private transactions. The share purchase program has no expiration date. The maximum shares that may be purchased is calculated based on the dollars remaining under the program and the respective month-end closing share price.
No
shares were repurchased during the three months ended
March 31, 2017
or
2016
. We do not have any other share purchase programs. There were
24,139,149
and
24,344,813
Treasury Shares at
March 31, 2017
and
December 31, 2016
, respectively.
The Company issues Treasury Shares for all share based benefit plans. Shares are issued from Treasury at the average Treasury Share cost on the date of the transaction. There were
260,614
Treasury Shares issued for these purposes during the three months ended
March 31, 2017
.
We are organized into
six
geographic operating segments based on management responsibilities. The operating segments have been aggregated (based on economic similarities, the nature of their products, end-user markets and methods of distribution) into
three
reportable segments: Americas, International, and Corporate.
The Americas and International segments were established on January 1, 2016. The Americas segment is comprised of our operations in North America and Latin America geographies. The International segment is comprised of our operations of all geographies outside of the Americas. Certain global expenses are allocated to each segment in a manner consistent with where the benefits from the expenses are derived.
The Company's sales are allocated to each country based primarily on the destination of the end-customer.
Adjusted operating income (loss) and adjusted operating margin are the measures used by the chief operating decision maker to evaluate segment performance and allocate resources. Adjusted operating income (loss) is defined as operating income from continuing operations excluding restructuring charges and currency exchange gains (losses). Adjusted operating margin is defined as adjusted operating income (loss) divided by segment sales to external customers. Adjusted operating income (loss) and adjusted operating margin are not recognized terms under GAAP and therefore do not purport to be alternatives to operating income or operating margin from continuing operations as a measure of operating performance. Further, the Company's measure of adjusted operating income and adjusted operating margin may not be comparable to similarly titled measures of other companies. Adjusted operating income on a consolidated basis is presented in the following table to reconcile the segment operating performance measure to operating income as presented on the Condensed Consolidated Statement of Income.
The accounting principles applied at the operating segment level in determining operating income (loss) are generally the same as those applied at the consolidated financial statement level. Sales and transfers between operating segments are accounted for at market-based transaction prices and are eliminated in consolidation.
-
11
-
Reportable segment information is presented in the following table:
|
(In thousands)
|
Americas
|
International
|
Corporate
|
Reconciling
Items 1 |
Consolidated
Totals |
|||||||||||||||
|
Three Months Ended March 31, 2017
|
||||||||||||||||||||
|
Sales to external customers
|
$
|
166,568
|
|
$
|
99,197
|
|
$
|
—
|
|
$
|
—
|
|
$
|
265,765
|
|
|||||
|
Intercompany sales
|
30,189
|
|
70,196
|
|
—
|
|
(100,385
|
)
|
—
|
|
||||||||||
|
Operating income
|
19,422
|
|
||||||||||||||||||
|
Restructuring charges
|
12,739
|
|
||||||||||||||||||
|
Currency exchange losses, net
|
580
|
|
||||||||||||||||||
|
Adjusted operating income (loss)
|
38,106
|
|
6,644
|
|
(12,009
|
)
|
—
|
|
32,741
|
|
||||||||||
|
Adjusted operating margin %
|
22.9
|
%
|
6.7
|
%
|
||||||||||||||||
|
(In thousands)
|
Americas
|
International
|
Corporate
|
Reconciling
Items 1 |
Consolidated
Totals |
|||||||||||||||
|
Three Months Ended March 31, 2016
|
||||||||||||||||||||
|
Sales to external customers
|
$
|
167,342
|
|
$
|
111,926
|
|
$
|
—
|
|
$
|
—
|
|
$
|
279,268
|
|
|||||
|
Intercompany sales
|
27,832
|
|
60,688
|
|
—
|
|
(88,520
|
)
|
—
|
|
||||||||||
|
Operating income
|
28,727
|
|
||||||||||||||||||
|
Restructuring charges
|
470
|
|
||||||||||||||||||
|
Currency exchange losses, net
|
1,950
|
|
||||||||||||||||||
|
Adjusted operating income (loss)
|
31,345
|
|
8,408
|
|
(8,606
|
)
|
—
|
|
31,147
|
|
||||||||||
|
Adjusted operating margin %
|
18.7
|
%
|
7.5
|
%
|
||||||||||||||||
1
Reconciling items consist primarily of intercompany eliminations and items not directly attributable to operating segments.
The percentage of total sales by product group were as follows:
|
Three Months Ended March 31,
|
2017
|
2016
|
|
|
Breathing Apparatus
|
26%
|
28%
|
|
|
Fixed Gas & Flame Detection
|
19%
|
20%
|
|
|
Portable Gas Detection
|
14%
|
12%
|
|
|
Industrial Head Protection
|
12%
|
9%
|
|
|
Fall Protection
|
8%
|
9%
|
|
|
Fire & Rescue Helmets
|
5%
|
5%
|
|
|
Other
|
16%
|
17%
|
|
-
12
-
Basic earnings per share attributable to MSA Safety Incorporated common shareholders is computed by dividing net income, after the deduction of preferred stock dividends and undistributed earnings allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to MSA Safety Incorporated common shareholders assumes the issuance of common stock for all potentially dilutive share equivalents outstanding not classified as participating securities. Participating securities are defined as unvested stock-based payment awards that contain nonforfeitable rights to dividends.
|
Amounts attributable to MSA Safety Incorporated common shareholders:
|
Three Months Ended March 31,
|
|||||||
|
(In thousands, except per share amounts)
|
2017
|
2016
|
||||||
|
Net income from continuing operations
|
$
|
14,413
|
|
$
|
12,683
|
|
||
|
Preferred stock dividends
|
(10
|
)
|
(10
|
)
|
||||
|
Income from continuing operations available to common equity
|
14,403
|
|
12,673
|
|
||||
|
Dividends and undistributed earnings allocated to participating securities
|
(17
|
)
|
(20
|
)
|
||||
|
Income from continuing operations available to common shareholders
|
14,386
|
|
12,653
|
|
||||
|
Net (loss) income from discontinued operations
|
$
|
—
|
|
$
|
(932
|
)
|
||
|
Preferred stock dividends
|
—
|
|
—
|
|
||||
|
(Loss) income from discontinued operations available to common equity
|
—
|
|
(932
|
)
|
||||
|
Dividends and undistributed earnings allocated to participating securities
|
—
|
|
1
|
|
||||
|
(Loss) income from discontinued operations available to common shareholders
|
—
|
|
(931
|
)
|
||||
|
Basic weighted-average shares outstanding
|
37,766
|
|
37,330
|
|
||||
|
Stock options and other stock compensation
|
827
|
|
429
|
|
||||
|
Diluted weighted-average shares outstanding
|
38,593
|
|
37,759
|
|
||||
|
Antidilutive stock options
|
—
|
|
893
|
|
||||
|
Earnings per share attributable to continuing operations:
|
||||||||
|
Basic
|
$
|
0.38
|
|
$
|
0.34
|
|
||
|
Diluted
|
$
|
0.37
|
|
$
|
0.34
|
|
||
|
(Loss) earnings per share attributable to discontinued operations:
|
||||||||
|
Basic
|
$
|
—
|
|
$
|
(0.03
|
)
|
||
|
Diluted
|
$
|
—
|
|
$
|
(0.03
|
)
|
||
The Company's effective tax rate for the
first quarter
of
2017
was
10.9%
, which differs from the U.S. federal statutory rate of
35%
primarily due to a significant tax benefit of approximately
16.9%
related to certain share-based payments related to the adoption of ASU 2016-09 as well as increased profitability in more favorable tax jurisdictions and benefits associated with U.S. tax credits for research and development and the manufacturing deduction. The company's effective tax rate for the
first quarter
of
2016
was
48.7%
, inclusive of
14.0%
associated with exit taxes related to the European reorganization. The
48.7%
rate for the
first quarter
of
2016
differs from the U.S. federal statutory rate of
35%
primarily due to the exit taxes discussed above, partially offset by increased profitability in more favorable tax jurisdictions and benefits associated with U.S. tax credits for research and development and the manufacturing deduction.
At
March 31, 2017
, the Company had a gross liability for unrecognized tax benefits of
$14.6 million
. The Company has recognized tax benefits associated with these liabilities of
$6.3 million
at
March 31, 2017
. The gross liability includes amounts associated with prior period foreign tax exposure.
The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company's liability for accrued interest related to uncertain tax positions was
$1.5 million
at
March 31, 2017
.
-
13
-
In October 2016, the FASB issued ASU 2016-16,
Intra-entity Transfers of Assets Other than Inventory
. This ASU states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. We have early adopted this ASU on January 1, 2017 using the modified retrospective approach which resulted in a
$5.9 million
cumulative-effect adjustment directly to retained earnings for any previously deferred income tax effects.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which we have adopted effective January 1, 2017. From an income tax perspective, this ASU requires that all excess tax benefits and deficiencies that pertain to share-based payment arrangements be recognized as a component of income tax expense rather than as a component of additional paid-in-capital. We expect this to create volatility in the effective tax rate on a go-forward basis as the impact is treated as a discrete item within our quarterly tax provision. The adoption of this standard resulted in a
$2.8 million
tax benefit during the
first quarter
of 2017.
Please refer to Note 2 to the unaudited condensed consolidated financial statements of this Form 10-Q for additional information regarding the two standards adopted.
The 2016 Management Equity Incentive Plan provides for various forms of stock-based compensation for eligible key employees through May 2026. Management stock-based compensation includes stock options, restricted stock, restricted stock units and performance stock units. The 2008 Non-Employee Directors’ Equity Incentive Plan provides for grants of stock options and restricted stock to non-employee directors through May 2018. We issue treasury shares for stock option exercises, restricted stock grants, restricted stock unit grants, and performance stock unit grants. Please refer to Note 7 for further information regarding stock compensation share issuance.
Stock compensation expense is as follows:
|
|
Three Months Ended March 31,
|
||||||
|
(In thousands)
|
2017
|
2016
|
|||||
|
Stock compensation expense
|
$
|
6,325
|
|
$
|
5,498
|
|
|
|
Income tax benefit
|
2,386
|
|
2,132
|
|
|||
|
Stock compensation expense, net of income tax benefit
|
$
|
3,939
|
|
$
|
3,366
|
|
|
A summary of stock option activity for the
three months ended March 31, 2017
follows:
|
Shares
|
Weighted Average
Exercise Price
|
||||||
|
Outstanding at January 1, 2017
|
1,576,092
|
|
$
|
37.63
|
|
||
|
Exercised
|
(175,953
|
)
|
35.61
|
|
|||
|
Outstanding at March 31, 2017
|
1,400,139
|
|
37.89
|
|
|||
|
Exercisable at March 31, 2017
|
1,032,135
|
|
$
|
34.94
|
|
||
Restricted stock and restricted stock units are valued at the market value of the stock on the grant date. A summary of restricted stock and unit activity for the
three months ended March 31, 2017
follows:
|
Shares
|
Weighted Average
Grant Date Fair Value
|
||||||
|
Unvested at January 1, 2017
|
234,592
|
|
$
|
49.76
|
|
||
|
Granted
|
37,048
|
|
72.25
|
|
|||
|
Vested
|
(58,503
|
)
|
51.18
|
|
|||
|
Forfeited
|
(1,166
|
)
|
48.87
|
|
|||
|
Unvested at March 31, 2017
|
211,971
|
|
$
|
53.82
|
|
||
-
14
-
Performance stock units have a market condition modifier and are valued on the grant date using a Monte Carlo valuation model to determine fair value. The final number of shares to be issued for performance stock units granted in the first quarter of
2017
may range from
0%
to
200%
of the target award based on achieving the specified performance targets over the performance period. The following weighted average assumptions were used in the Monte Carlo model for units granted in the first quarter of
2017
with a market condition modifier.
|
Fair value per unit
|
$72.28
|
|
Risk-free interest rate
|
1.45%
|
|
Expected dividend yield
|
2.31%
|
|
Expected volatility
|
29.1%
|
|
MSA stock beta
|
1.272
|
The risk-free interest rate is based on the U.S. Treasury Constant Maturity rates as of the grant date converted into an implied spot rate yield curve. Expected dividend yield is based on the most recent annualized dividend divided by the
1
year average closing share price. Expected volatility is based on the historical volatility using daily stock prices. Stock beta is calculated with
three
years of daily price data.
A summary of performance stock unit activity for the
three months ended March 31, 2017
follows:
|
Shares
|
Weighted Average
Grant Date Fair Value
|
||||||
|
Unvested at January 1, 2017
|
186,621
|
|
$
|
46.18
|
|
||
|
Granted
|
92,580
|
|
72.28
|
|
|||
|
Performance adjustments
|
28,215
|
|
57.42
|
|
|||
|
Vested
|
(70,403
|
)
|
57.27
|
|
|||
|
Unvested at March 31, 2017
|
237,013
|
|
$
|
54.42
|
|
||
The performance adjustments above relate to the final number of shares issued for the 2014 Management Performance Units, which were
189.2%
of the target award based on Total Shareholder Return during the
three
year performance period, and vested in the first quarter of
2017
.
|
(In thousands)
|
March 31, 2017
|
December 31, 2016
|
|||||
|
2006 Senior Notes payable through 2021, 5.41%, net of debt issuance costs
|
$
|
33,333
|
|
$
|
33,333
|
|
|
|
2010 Senior Notes payable through 2021, 4.00%, net of debt issuance costs
|
100,000
|
|
100,000
|
|
|||
|
2016 Senior Notes payable through 2031, 3.40%, net of debt issuance costs
|
68,831
|
|
67,713
|
|
|||
|
Senior revolving credit facility maturing in 2020, net of debt issuance costs
|
93,070
|
|
189,456
|
|
|||
|
Total
|
295,234
|
|
390,502
|
|
|||
|
Amounts due within one year, net of debt issuance costs
|
26,666
|
|
26,666
|
|
|||
|
Long-term debt, net of debt issuance costs
|
$
|
268,568
|
|
$
|
363,836
|
|
|
Under the 2015 Amended and Restated Credit Agreement associated with our senior revolving credit facility, the Company may elect either a Base rate of interest (“BASE”) or an interest rate based on the London Interbank Offered Rate (“LIBOR”). The BASE is a daily fluctuating per annum rate equal to the highest of (i) the Prime Rate, (ii) the Federal Funds Open Rate plus one half of one percent (
0.5%
) or (iii) the Daily Libor Rate plus one percent (
1.00%
). The Company pays a credit spread of
0
to
175
basis points based on the Company’s net EBITDA leverage ratio and elected rate (BASE or LIBOR). The Company has a weighted average revolver interest rate of
2.18%
as of
March 31, 2017
. At
March 31, 2017
,
$473.6 million
of the existing
$575.0 million
senior revolving credit facility was unused including letters of credit.
On January 22, 2016, the Company entered into a multi-currency note purchase and private shelf agreement, pursuant to which MSA issued notes in an aggregate original principal amount of
£54.9 million
(approximately
$68.8 million
at March 31, 2017). The notes are repayable in annual installments of
£6.1 million
(approximately
$7.7 million
at March 31, 2017), commencing January 22, 2023, with a final payment of any remaining amount outstanding on January 22, 2031. The interest
-
15
-
rate on these notes is fixed at
3.4%
. The note purchase agreement requires MSA to comply with specified financial covenants including a requirement to maintain a minimum fixed charges coverage ratio of not less than
1.50
to
1.00
and a consolidated leverage ratio not to exceed
3.25
to
1.00
; in each case calculated on the basis of the trailing four fiscal quarters. In addition, the note purchase agreement contains negative covenants limiting the ability of MSA and its subsidiaries to incur additional indebtedness or issue guarantees, create or incur liens, make loans and investments, make acquisitions, transfer or sell assets, enter into transactions with affiliated parties, make changes in its organizational documents that are materially adverse to lenders or modify the nature of MSA's or its subsidiaries' business.
The revolving credit facilities and note purchase agreements require the Company to comply with specified financial covenants. In addition, the credit facilities and the note purchase agreements contain negative covenants limiting the ability of the Company and its subsidiaries to enter into specified transactions. The Company was in compliance with all covenants at
March 31, 2017
.
The Company had outstanding bank guarantees and standby letters of credit with banks as of
March 31, 2017
totaling
$12.3 million
, of which
$6.9 million
relate to the senior revolving credit facility. The letters of credit serve to cover customer requirements in connection with certain sales orders and insurance companies.
No
amounts were drawn on these arrangements at
March 31, 2017
. The Company is also required to provide cash collateral in connection with certain arrangements. At
March 31, 2017
, the Company has
$0.8
million of restricted cash in support of these arrangements.
Changes in goodwill during the
three months ended March 31, 2017
are as follows:
|
(In thousands)
|
Goodwill
|
||
|
Balance at January 1, 2017
|
$
|
333,276
|
|
|
Currency translation
|
2,021
|
|
|
|
Balance at March 31, 2017
|
$
|
335,297
|
|
At
March 31, 2017
, the Company had goodwill of
$198.8 million
and
$136.5 million
related to the Americas and International reportable segments, respectively.
Changes in intangible assets, net of accumulated amortization during the
three months ended March 31, 2017
are as follows:
|
(In thousands)
|
Intangible Assets
|
||
|
Net balance at January 1, 2017
|
$
|
77,015
|
|
|
Amortization expense
|
(1,968
|
)
|
|
|
Currency translation
|
716
|
|
|
|
Balance at March 31, 2017
|
$
|
75,763
|
|
Acquisition of Senscient, Inc.
On September 19, 2016, we acquired
100%
of the common stock of Senscient, Inc. ("Senscient") for
$19.1 million
in cash. There is
no
contingent consideration. Senscient, which is headquartered in the UK, is a leader in laser-based gas detection technology. The acquisition of Senscient expands and enhances MSA’s technology offerings in the global market for fixed gas and flame detection systems, as the Company continues to execute its core product growth strategy. The acquisition was funded through borrowings on our unsecured senior revolving credit facility.
-
16
-
The following table summarizes the preliminary fair values of the Senscient assets acquired and liabilities assumed at the date of acquisition:
|
(In millions)
|
September 19, 2016
|
||
|
Current assets (including cash of $0.7 million)
|
$
|
5.9
|
|
|
Property, plant and equipment and other noncurrent assets
|
0.3
|
|
|
|
Acquired technology
|
1.6
|
|
|
|
Customer-related intangibles
|
2.8
|
|
|
|
Goodwill
|
10.5
|
|
|
|
Total assets acquired
|
21.1
|
|
|
|
Total liabilities assumed
|
2.0
|
|
|
|
Net assets acquired
|
$
|
19.1
|
|
The amounts in the table above are subject to change as we complete our valuation of the assets acquired and liabilities assumed. This valuation is expected to be completed by mid-2017.
Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values. Fair values were determined by management, based, in part on an independent valuation performed by a third party valuation specialist. The valuation methods used to determine the fair value of intangible assets included the relief from royalty method for the technology related intangible assets and the cost method for assembled workforce which is included in goodwill. A number of significant assumptions and estimates were involved in the application of these valuation methods, including sales volumes and prices, costs to produce, tax rates, capital spending, discount rates, and working capital changes. Cash flow forecasts were generally based on pre-acquisition forecasts coupled with estimated MSA sales synergies. Identifiable intangible assets with finite lives are subject to amortization over their estimated useful lives, which are
ten
and
five
years for the technology and customer-related intangibles, respectively. Estimated future amortization expense related to identifiable intangible assets is approximately
$0.5 million
for the remaining portion of 2017 and
$0.7 million
each year from 2018 through 2021.
Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired were the acquisition of an assembled workforce, the expected synergies and other benefits that we believe will result from combining the operations of Senscient with our operations. Goodwill of
$10.5 million
related to the Senscient acquisition is included in the International operating segment and is deductible for tax purposes.
Our results for the
three months ended March 31, 2017
, include transaction and integration costs of
$0.3 million
related to the Senscient acquisition. These costs are all reported in selling, general and administrative expenses.
The operating results of Senscient have been included in our consolidated financial statements from the acquisition date.
The following unaudited pro forma information presents our combined results as if the Senscient acquisition had occurred at the beginning of 2016. The unaudited pro forma financial information was prepared to give effect to events that are (1) directly attributable to the acquisition; (2) factually supportable; and (3) expected to have a continuing impact on the combined company’s results. There were no material transactions between MSA and Senscient during the periods presented that are required to be eliminated. Intercompany transactions between Senscient companies during the periods presented have been eliminated in the unaudited pro forma condensed combined financial information. The unaudited pro forma financial information does not reflect any cost savings, operating synergies or revenue enhancements that the combined companies may achieve as a result of the acquisitions or the costs to integrate the operations or the costs necessary to achieve cost savings, operating synergies or revenue enhancements.
-
17
-
Pro forma financial information (Unaudited)
|
Three Months Ended March 31,
|
|||
|
(In millions, except per share amounts)
|
2016
|
||
|
Net sales
|
$
|
279.5
|
|
|
Income from continuing operations
|
11.7
|
|
|
|
Basic earnings per share from continuing operations
|
0.31
|
|
|
|
Diluted earnings per share from continuing operations
|
0.31
|
|
|
The unaudited pro forma condensed combined financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations or financial position that we would have reported had the acquisition been completed as of the date and for the period presented, and should not be taken as representative of our consolidated results of operations or financial condition following the acquisition. In addition, the unaudited proforma condensed combined financial information is not intended to project the future financial position or results of operations of the combined company.
Components of net periodic benefit cost consisted of the following:
|
|
Pension Benefits
|
Other Benefits
|
||||||||||||||
|
(In thousands)
|
2017
|
2016
|
2017
|
2016
|
||||||||||||
|
Three Months Ended March 31,
|
||||||||||||||||
|
Service cost
|
$
|
2,721
|
|
$
|
2,634
|
|
$
|
106
|
|
$
|
106
|
|
||||
|
Interest cost
|
4,572
|
|
4,702
|
|
237
|
|
237
|
|
||||||||
|
Expected return on plan assets
|
(8,738
|
)
|
(8,682
|
)
|
—
|
|
—
|
|
||||||||
|
Amortization of prior service cost
|
(4
|
)
|
15
|
|
(105
|
)
|
(105
|
)
|
||||||||
|
Recognized net actuarial losses
|
3,184
|
|
3,009
|
|
17
|
|
17
|
|
||||||||
|
Settlements
|
34
|
|
20
|
|
—
|
|
—
|
|
||||||||
|
Net periodic benefit cost, excluding below
|
1,769
|
|
1,698
|
|
255
|
|
255
|
|
||||||||
|
Special termination charge
|
11,384
|
|
(a)
|
—
|
|
—
|
|
—
|
|
|||||||
|
Net periodic benefit cost
|
13,153
|
|
1,698
|
|
255
|
|
255
|
|
||||||||
(a)
Represents the charge for special termination benefits related to the VRIP which were paid from our over funded North America pension plan and recorded as restructuring charges on the condensed consolidated statement of income. See further details in Note 4.
We made contributions of
$1.5 million
and
$1.6 million
to our pension plans during the
three months ended March 31, 2017
and
2016
, respectively. We expect to make total contributions of approximately
$5.9 million
to our pension plans in
2017
which are primarily associated with our International segment.
-
18
-
As part of our currency exchange rate risk management strategy, we may enter into certain derivative foreign currency forward contracts that do not meet the U.S. GAAP criteria for hedge accounting, but which have the impact of partially offsetting certain foreign currency exposures. We account for these forward contracts at fair value and report the related gains or losses in currency exchange gains or losses in the condensed consolidated statement of income. The notional amount of open forward contracts was
$83.8 million
and
$75.3 million
at
March 31, 2017
and
December 31, 2016
, respectively.
The following table presents the balance sheet location and fair value of assets associated with derivative financial instruments:
|
(In thousands)
|
March 31, 2017
|
December 31, 2016
|
||||||
|
Derivatives not designated as hedging instruments:
|
||||||||
|
Foreign exchange contracts: other current liabilities
|
$
|
707
|
|
$
|
258
|
|
||
|
Foreign exchange contracts: other current assets
|
401
|
|
566
|
|
||||
The following table presents the statement of income location and impact of derivative financial instruments:
|
|
|
(Gain) Loss Recognized in Income
|
||||||||
|
|
|
Three Months Ended March 31,
|
||||||||
|
(In thousands)
|
Statement of Income Location
|
2017
|
2016
|
|||||||
|
Derivatives not designated as hedging instruments:
|
||||||||||
|
Foreign exchange contracts
|
Currency exchange gains
|
$
|
(2,410
|
)
|
$
|
(1,319
|
)
|
|||
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:
|
•
|
Level 1—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.
|
|
•
|
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
|
|
•
|
Level 3—Unobservable inputs for the asset or liability.
|
The valuation methodologies we used to measure financial assets and liabilities were limited to the derivative financial instruments described in Note 16. We estimate the fair value of the derivative financial instruments, consisting of foreign currency forward contracts, based upon valuation models with inputs that generally can be verified by observable market conditions and do not involve significant management judgment. Accordingly, the fair values of the derivative financial instruments are classified within Level 2 of the fair value hierarchy.
With the exception of fixed rate long-term debt, we believe that the reported carrying amounts of our financial assets and liabilities approximate their fair values. The reported carrying amount of our fixed rate long-term debt (including the current portion) was
$202.3 million
and
$218.9 million
at
March 31, 2017
and
2016
, respectively. The fair value of this debt was
$224.6 million
and
$236.4 million
at
March 31, 2017
and
2016
, respectively. The fair value of this debt was determined using Level 2 inputs by evaluating like rated companies with publicly traded bonds where available or current borrowing rates available for financings with similar terms and maturities.
-
19
-
Product Liability
The Company categorizes the product liability claims of its subsidiary MSA LLC into
two
main categories: single incident and cumulative trauma.
Single incident claims.
Single incident product liability claims involve incidents of short duration that are typically known to us when they occur and involve observable injuries, which provide an objective basis for quantifying damages. MSA LLC works with an outside valuation consultant to review its single incident product liability exposure on an annual basis, or more frequently if changing circumstances or developments in existing cases make an interim review appropriate. The review process takes into account the number and composition of pending claims, expected settlement costs for reported claims, and an estimate of costs for unreported claims (claims incurred but not reported or "IBNR"). The estimate for IBNR claims is based on experience, sales volumes, and other relevant information. Adjustments are made to the reserve as appropriate. The reserve for single incident product liability claims, which includes reported and IBNR claims, was
$3.4 million
at both
March 31, 2017
and
December 31, 2016
. Single incident product liability expense was insignificant during both the
three months ended March 31, 2017
and
2016
.
Cumulative trauma claims.
Cumulative trauma product liability claims involve exposures to harmful substances (e.g., silica, asbestos and coal dust) that occurred many years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, mesothelioma, or coal worker’s pneumoconiosis. MSA LLC is presently named as a defendant in
1,572
lawsuits comprised of
2,797
claims. These lawsuits mainly involve respiratory protection products allegedly manufactured and sold by MSA LLC or its predecessors. The products at issue were manufactured many years ago and are not currently offered by MSA LLC. Although there is year over year variability in the number and quality of claims defended and resolved, MSA LLC’s aggregate spend for cumulative trauma product liability claims (inclusive of settlements and defense costs) for the
three
years ended December 31, 2016, totaled approximately
$150.9 million
, substantially all of which was recorded as insurance receivables or notes receivable, insurance companies because the amounts are believed to be recoverable under insurance.
A summary of cumulative trauma product liability lawsuit and pending claims activity follows:
|
Three Months Ended March 31, 2017
|
Year Ended December 31, 2016
|
|||||
|
Open lawsuits, beginning of period
|
1,794
|
|
1,988
|
|
||
|
New lawsuits
|
97
|
|
379
|
|
||
|
Settled and dismissed lawsuits
|
(319
|
)
|
(573
|
)
|
||
|
Open lawsuits, end of period
|
1,572
|
|
1,794
|
|
||
|
Three Months Ended March 31, 2017
|
Year Ended December 31, 2016
|
|||||
|
Pending claims, beginning of period
|
3,023
|
|
3,779
|
|
||
|
New claims
|
120
|
|
843
|
|
||
|
Settled and dismissed claims
|
(346
|
)
|
(1,599
|
)
|
||
|
Pending claims, end of period
|
2,797
|
|
3,023
|
|
||
More than half of the open lawsuits at
March 31, 2017
have had a de minimis level of activity over the last
5
years. It is possible that these cases could become active again at any point due to changes in circumstances.
Management works with an outside valuation consultant and outside legal counsel to review its cumulative trauma product liability exposure on an annual basis, or more frequently if changing circumstances or developments in existing cases make an interim review appropriate. The review process takes into account the number and composition of pending claims, outcomes of matters resolved during current and prior periods, and variances associated with different plaintiffs’ counsel and venues as well as other information known about the current docket.
Cumulative trauma product liability litigation is inherently unpredictable. Factors that can limit our ability to estimate potential liability include the lack of claims experience with applicable plaintiffs’ counsel, as claims experience can vary significantly among different counsel, low volume of resolution, lack of confidence with the consistency of claims composition, or other factors. With respect to the risk associated with any particular case, it has typically not been until very
-
20
-
late in the legal process that it can be reasonably determined whether it is probable that any such case will ultimately result in a liability. This uncertainty is caused by many factors, including consideration of the applicable statute of limitations, the sufficiency of product identification and other defenses. Complaints generally do not provide information sufficient to determine if a lawsuit will develop into an actively litigated case. Even when a case is actively litigated, it is often difficult to determine if the lawsuit will be dismissed or otherwise resolved until late in the lawsuit. Moreover, even if it is probable that such a lawsuit will result in a loss, it is often difficult to estimate the amount of actual loss that will be incurred. These actual loss amounts are highly variable and turn on a case by case analysis of the relevant facts, including the nature of the injury, the jurisdiction in which the claim is filed, the plaintiffs' counsel and the number of parties in the lawsuit. In addition, there are uncertainties concerning the impact of bankruptcies of other companies that are co-defendants in claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and case to case. Consequently, MSA LLC is unable to comprehensively estimate its cumulative trauma product liability exposure.
Currently management, in consultation with its outside valuation consultant and outside legal counsel, has been unable to estimate, and therefore has not recorded any liability, for MSA LLC’s IBNR claims as well as for certain of its existing coal dust claims, including those coal dust claims that arose subsequent to the Couch verdict described below.
Total cumulative trauma product liability reserve, including the estimated reserve for reported claims and settlements that have not yet been paid totaled
$9.2 million
and
$11.1 million
at March 31, 2017 and December 31, 2016, respectively. This reserve is recorded in the insurance and product liability line within other current liabilities section of the Condensed Consolidated Balance Sheet. To arrive at the estimated reserve, it was necessary to employ significant assumptions. In addition, the reserve does not include amounts which will be spent to defend the claims covered by the reserve. These costs are recognized as incurred.
As noted above, the liability recorded does not take into account any IBNR claims and certain of the currently pending coal dust claims against MSA LLC. These claims have not been included in the reserve due to a lack of claims experience with the applicable plaintiffs’ counsel, low volume of resolution, or lack of confidence in the consistency of claims composition, or other factors, which have rendered us unable to reasonably assess the probability and estimate the magnitude of potential losses.
Because litigation is subject to inherent uncertainties, and unfavorable rulings or developments could occur, there can be no certainty that MSA LLC may not ultimately incur charges in excess of presently recorded liabilities with respect to claims included within the existing reserve or related to claims not included in the reserve. We will adjust the reserve for our liability relating to cumulative trauma claims from time to time based on the maturation of claims, developing facts and circumstances, and if actual experience is worse than previously projected. These adjustments may reflect changes in estimates for claims currently covered by the reserve, as well as estimated liabilities for claims not presently covered by the reserve and IBNR claims, in the event we become able to reasonably assess the probability and estimate the magnitude of potential losses. These adjustments may be material and could increase the year over year variability of our financial results.
On February 26, 2016, a Kentucky state court jury in the James Couch claim rendered a verdict against MSA LLC of
$7.2 million
dollars (comprised of
$3.2 million
of an apportioned share of compensatory damages and
$4.0 million
in punitive damages). The Couch claim is a cumulative trauma product liability lawsuit involving exposure to coal dust.
Management believes that the verdict against MSA LLC is inconsistent with Kentucky law and many issues have been raised on appeal, including the statute of limitations, failure to meet the standard of causation and the appropriate application of punitive damages. The Company and its outside legal counsel have concluded that, based on their assessment of the appellate issues, a reversal of the adverse judgment is reasonably possible and, consequently, a loss contingency is not probable at this time and is not included in the
$9.2 million
product liability reserve as of March 31, 2017. In the future, if the Company determines that losses with respect to this matter are probable, MSA LLC, consistent with its existing practices, will record an accrual and provide appropriate disclosures as required by ASC 450-20-50, Contingencies. In the event that MSA LLC’s appeal of the adverse verdict is unsuccessful or not fully successful, the loss could total the full amount of the verdict, plus additional amounts for post-judgment interest. If so, the
$3.2 million
compensatory portion of the verdict (and associated interest) would be added to the product liability reserve and the insurance receivable, to the extent insurance is available. The
$4.0 million
punitive portion of the verdict (and associated interest) would be expensed because we do not have insurance to cover punitive damages in this case.
Insurance Receivable and Notes Receivable, Insurance Companies
MSA LLC purchased insurance policies for the policy years from 1952-1986 from over
20
different insurance carriers that, subject to some common contract exclusions, provide coverage for cumulative trauma product liability losses and, in many instances, related defense costs (the "Occurrence-Based Policies"). After 1986, MSA LLC’s insurance policies have
-
21
-
significant per claim retentions. Based on this, the Company does not expect to be materially reimbursed for any claims alleging exposures that occurred entirely after this date.
In the normal course of business, MSA LLC makes payments to settle product liability claims and for related defense costs and records receivables for the amounts that are covered by insurance. The available limits of the applicable Occurrence-Based Policies exceed the recorded insurance receivable balance. Various factors could affect the timing and amount of recovery of the insurance receivable, including the outcome of negotiations with insurers and the outcome of the coverage litigation with respect to the Occurrence-Based Policies, and the extent to which the issuing insurers may become insolvent in the future.
Insurance receivables at
March 31, 2017
totaled
$58.5 million
, of which,
$2.0 million
is reported in prepaid expenses and other current assets and
$56.5 million
is reported in insurance receivable and other non-current assets. Insurance receivables at
December 31, 2016
totaled
$159.9 million
, of which
$2.0 million
is reported in prepaid expenses and other current assets and
$157.9 million
is reported in insurance receivable and other non-current assets.
A summary of insurance receivable balances and activity related to cumulative trauma product liability losses follows:
|
(In millions)
|
Three Months Ended March 31, 2017
|
Year Ended December 31, 2016
|
||||||
|
Balance beginning of period
|
$
|
159.9
|
|
$
|
229.5
|
|
||
|
Additions
|
1.7
|
|
29.2
|
|
||||
|
Collections and settlements converted to notes receivable
|
(103.1
|
)
|
(98.8
|
)
|
||||
|
Balance end of period
|
$
|
58.5
|
|
$
|
159.9
|
|
||
Additions to insurance receivables in the above table represent insured cumulative trauma product liability losses and related defense costs. Collections and settlements primarily represent agreements with insurance companies to pay amounts due that are applicable to cumulative trauma claims. When there are contingencies embedded in these agreements, we apply payments to the undiscounted receivable in the period when the contingency is met.
In some cases, settlements are converted to formal notes receivable from insurance companies. The notes receivable are recorded as a transfer from the insurance receivable balance to the note receivable, insurance companies (current and noncurrent) in the Condensed Consolidated Balance Sheet. In cases where the payment stream covers multiple years and there are no contingencies, the present value of the payments is recorded as a transfer from the insurance receivable balance to the note receivable, insurance companies (current and long-term) in the Condensed Consolidated Balance Sheet. Provided the remaining insurance receivable is recoverable through the insurance carriers, no gain or loss is recognized at the time of transfer from insurance receivable to notes receivable from insurance companies.
Notes receivable from insurance companies at
March 31, 2017
totaled
$83.1 million
, of which
$19.7 million
is reported in Notes receivable, insurance companies, current and
$63.4 million
is reported in Notes receivable, insurance companies, noncurrent. Notes receivable from insurance companies at
December 31, 2016
totaled
$67.3 million
, of which
$4.2 million
is reported in Notes receivable, insurance companies, current and
$63.1 million
is reported in Notes receivable, insurance companies, noncurrent.
A summary of notes receivable balances from insurance companies is as follows:
|
(In millions)
|
Three Months Ended March 31, 2017
|
Year Ended December 31, 2016
|
||||||
|
Balance beginning of period
|
$
|
67.3
|
|
$
|
8.7
|
|
||
|
Additions
|
19.8
|
|
95.6
|
|
||||
|
Collections
|
(4.0
|
)
|
(37.0
|
)
|
||||
|
Balance end of period
|
$
|
83.1
|
|
$
|
67.3
|
|
||
-
22
-
The collectibility of MSA LLC's insurance receivables is regularly evaluated and we believe that the amounts recorded are probable of collection. These determinations are based on analysis of the terms of the underlying insurance policies, experience in successfully recovering cumulative trauma product liability claims from our insurers under other policies, the financial ability of the insurance carriers to pay the claims, understanding and interpretation of the relevant facts and applicable law and the advice of MSA LLC's outside legal counsel. We believe that successful resolution of insurance litigation with various insurance carriers over the years, as well as the recent trial verdict against North River, which resulted in a favorable outcome, demonstrate that we have strong legal positions concerning MSA LLC's rights to coverage. The trial verdict is described below.
Uninsured cumulative trauma product liability losses were
$0.2 million
for the
three months ended March 31, 2017
and insignificant for
three months ended March 31, 2016
.
Insurance Litigation
MSA LLC is currently involved in insurance coverage litigation with a number of its insurance carriers regarding its Occurrence-Based Policies.
In 2009, MSA LLC (as Mine Safety Appliances Company) sued The North River Insurance Company (North River) in the United States District Court for the Western District of Pennsylvania, alleging that North River breached
one
of its insurance policies by failing to pay amounts owed to MSA LLC and that it engaged in bad-faith claims handling. MSA LLC believes that North River’s refusal to indemnify it under the policy for product liability losses and legal fees paid by MSA LLC is wholly contrary to Pennsylvania law and MSA LLC is vigorously pursuing the legal actions necessary to collect all due amounts. A trial date has not yet been scheduled.
In 2010, North River sued MSA LLC (as Mine Safety Appliances Company) in the Court of Common Pleas of Allegheny County, Pennsylvania seeking a declaratory judgment concerning their responsibilities under
three
additional policies. MSA LLC asserted claims against North River for breaches of contract for failures to pay amounts owed to MSA LLC. MSA LLC also alleged that North River engaged in bad-faith claims handling.
On October 6, 2016, a Pennsylvania state court jury found that North River breached the
three
contracts at issue in the case, and that North River also violated common law standards of bad faith in handling MSA LLC's clams. As a result of the jury's findings, the court entered a verdict in favor of MSA LLC and against North River for
$10.9 million
, the full amount of the contractual damages at issue in the case. The
$10.9 million
, which is comprised of previously recorded payments to settle product liability claims and related defense costs, is part of MSA LLC's insurance receivable. In addition to the claims decided by the jury, MSA LLC also presented a claim under Pennsylvania's bad faith statue, which is decided by the court. Following the jury verdict, the court also issued a verdict finding that North River had acted in bad faith. In December 2016 and January 2017, the Pennsylvania state court heard evidence regarding the extent of damages awardable as a result of the statutory bad faith claim. In an order dated February 9, 2017, the Court of Common Pleas of Allegheny County awarded MSA LLC an additional
$46.9 million
in damages related to this statutory bad faith claim. The
$46.9 million
award was comprised of
$30.0 million
in punitive damages,
$11.8 million
in attorneys' fees, and
$5.1 million
in pre-judgment interest, each of which is authorized by a Pennsylvania statute covering bad faith claims handling matters. In April 2017, the court denied North River’s motions for post-trial relief.
In the first quarter, MSA LLC received payments of approximately
$80.9 million
(the "Payment") pursuant to insurance policies issued by North River. The Payment reflects amounts previously invoiced to North River for reimbursement on cumulative trauma product liability claims and therefore was recorded as a reduction from the insurance receivable. North River has reserved its rights to recover from MSA LLC any portion of the Payment that may later be judicially determined is not owed MSA LLC under the relevant policies. The Payment does not constitute a full and final settlement from North River regarding its coverage obligations owed to MSA LLC. MSA LLC continues to seek additional amounts due from North River, including those amounts relating to the awards referenced above, which were not part of the Payment.
In July 2010, MSA LLC (as Mine Safety Appliances Company) filed a lawsuit in the Superior Court of the State of Delaware seeking declaratory and other relief from the majority of its excess insurance carriers concerning the future rights and obligations of MSA LLC and its excess insurance carriers under various insurance policies. The reason for this insurance coverage action is to secure a comprehensive resolution of MSA LLC's rights under the insurance policies issued by the insurers. Due to the settlements referenced below, and by mutual agreement of the remaining, unsettled parties, the trial previously set for April 24, 2017 did not occur. In the second and third quarters of 2017, the remaining unsettled parties, including North River, will ask the court to decide outstanding disputed legal issues.
-
23
-
During April 2017, MSA LLC resolved through negotiated settlements its coverage litigation with Travelers Insurance Company ("Travelers") and Wausau Indemnity Company ("Wausau"). Travelers and Wausau have agreed to make cash payments in 2018; those amounts will be recorded as a transfer from the insurance receivable balance to the note receivable, insurance companies (current) in the second quarter of 2017. Travelers also has agreed to pay a percentage of future cumulative trauma product liability settlements as incurred on a claim-by-claim basis. As part of both settlements, MSA LLC dismissed all claims against Travelers and Wausau in the above-referenced coverage litigation in the Superior Court of the State of Delaware.
Through negotiated settlements, MSA LLC has reached resolution with many of its insurance carriers regarding its Occurrence-Based Policies. Assuming satisfactory resolution, once disputes are resolved with each of the three remaining carriers, including North River, MSA LLC anticipates having commitments to provide future payment streams which should be sufficient to satisfy its presently recorded insurance receivables due from insurance carriers.
Even if insurance coverage litigation is generally successful, we have determined that at some point in the next
18 months
, MSA LLC will become largely self-insured for costs associated with cumulative trauma product liability claims. The exact point when this transition will happen is difficult to predict and subject to a number of variables, including the pace at which future cumulative trauma product liability costs are incurred and the results of litigation and negotiations with insurance carriers. After it becomes largely self-insured, MSA LLC expects to still obtain some limited insurance reimbursement from negotiated coverage-in-place agreements (although that coverage may not be immediately triggered or accessible) or from other sources of coverage. The precise amount of insurance reimbursement available at that time cannot be determined with specificity at this time.
-
24
-
On February 29, 2016, the Company sold
100%
of the stock associated with its South African personal protective equipment distribution business and its Zambian operations. The Company received
$15.9 million
from the closing of this transaction and recorded a loss of approximately
$0.3 million
during the first quarter of 2016.
During the second quarter of 2016, the Company corrected its gain calculation on the disposition of the South African personal protective equipment distribution business and its Zambian operations. This resulted in a gain of approximately
$2.5 million
being recorded during the second quarter in discontinued operations that should have been recorded in the first quarter of 2016. The Company evaluated materiality in accordance with SEC Staff Accounting Bulletins Topics 1.M and 1.N and considered relevant qualitative and quantitative factors. The Company concluded that this modification was not material to the first quarter of 2016 or the trend in earnings over the affected periods. The modification had no effect on cash flows or debt covenant compliance.
The operations of this business qualify as a component of an entity under FASB ASC 205-20 "Presentation of Financial Statements - Discontinued Operations", and thus the operations have been reclassified as discontinued operations and prior periods have been reclassified to conform to this presentation.
Summarized financial information for discontinued operations is as follows:
|
Three Months Ended March 31,
|
|||||||
|
(In thousands)
|
2017
|
2016
|
|||||
|
Discontinued Operations
|
|||||||
|
Net sales
|
$
|
—
|
|
$
|
5,261
|
|
|
|
Other loss, net
|
—
|
|
(288
|
)
|
|||
|
Cost and expenses:
|
|||||||
|
Cost of products sold
|
—
|
|
4,819
|
|
|||
|
Selling, general and administrative
|
—
|
|
937
|
|
|||
|
Currency exchange losses, net
|
—
|
|
18
|
|
|||
|
Loss from discontinued operations before income taxes
|
—
|
|
(801
|
)
|
|||
|
Provision for income taxes
|
—
|
|
328
|
|
|||
|
Loss from discontinued operations, net of tax
|
$
|
—
|
|
$
|
(1,129
|
)
|
|
Certain balance sheet items that are related to the Company's South African personal protective equipment distribution business and its Zambian operations are reported as discontinued operations. These items are reported in the following consolidated balance sheet lines:
|
(In thousands)
|
March 31, 2017
|
December 31, 2016
|
|||||
|
Discontinued Operations assets and liabilities
|
|||||||
|
Total assets
|
$
|
—
|
|
$
|
—
|
|
|
|
Accrued and other liabilities
|
686
|
|
686
|
|
|||
|
Total liabilities
|
686
|
|
686
|
|
|||
|
Net assets
|
$
|
(686
|
)
|
$
|
(686
|
)
|
|
The following summary provides financial information for discontinued operations related to the net (income) loss attributable to noncontrolling interests:
|
Three Months Ended March 31,
|
|||||||
|
(In thousands)
|
2017
|
2016
|
|||||
|
Net (income) loss attributable to noncontrolling interests
|
|||||||
|
Income from continuing operations
|
$
|
(277
|
)
|
$
|
(519
|
)
|
|
|
Loss from discontinued operations
|
—
|
|
197
|
|
|||
|
Net income
|
$
|
(277
|
)
|
$
|
(322
|
)
|
|
-
25
-
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion and analysis should be read in conjunction with the historical financial statements and other financial information included elsewhere in this 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.”
BUSINESS OVERVIEW
We are a global leader in the development, manufacture and supply of products that protect people and facility infrastructures. Our safety products typically integrate any combination of electronics, mechanical systems and advanced materials to protect users against hazardous or life threatening situations. Our comprehensive lines of safety products are used by workers around the world in a broad range of markets including the oil, gas, and petrochemical, fire service, construction, utilities, and mining industries, as well as the military. We are committed to providing our customers with service unmatched in the safety industry and, in the process, enhancing our ability to provide a growing line of safety solutions for customers in key global markets.
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 six geographical operating segments that are aggregated into three reportable geographic segments: Americas, International and Corporate. In
2016
, 59% and 41% of our net sales were made by our Americas and International segments, respectively.
Americas
. Our largest manufacturing and research and development facilities are located in the United States. We serve our markets across the Americas with sales and distribution functions in the U.S., Mexico, Brazil, and Canada.
International
. Our International segment includes companies in Europe, Middle East, Africa, and the Asia Pacific region, some of which are in developing regions of the world. In our largest International affiliates (in Germany, France, United Kingdom, Ireland and China), we develop, manufacture and sell a wide variety of products. In China, the products manufactured are sold primarily in the home country as well as 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., United Kingdom, Ireland, Sweden and China or are purchased from third party vendors.
Corporate
. The Corporate segment primarily consists of general and administrative expenses incurred in our corporate headquarters, costs associated with corporate development initiatives, legal expense, interest expense, foreign exchange gains or losses, and other centrally-managed costs. Corporate general and administrative costs comprise the majority of the expense in the Corporate segment.
PRINCIPAL PRODUCTS
The following is a brief description of each of our principal product categories:
MSA's corporate strategy includes a focus on driving sales of core products, which have leading market positions and a competitive advantage. Core products include fixed gas and flame detection systems, breathing apparatus where SCBA is the principal product, portable gas detection instruments, industrial head protection products, fire and rescue helmets and fall protection devices. These products receive the highest levels of investment and resources as they typically realize a higher gross profit margin and provide higher levels of return on investment than non-core products. Core products comprised approximately 84% and 83% of sales for the
three months ended March 31, 2017
and 2016, respectively.
MSA maintains a portfolio of non-core products, which include both adjacent and peripheral offerings. Adjacent products reinforce and extend the core, drawing upon our customer relationships, distribution channels, geographical presence and technical experience. These products are complementary to the core offerings and have their roots within the core product value chain. Key adjacent products include respirators, eye and face protection, thermal imaging cameras, and gas masks. Gas masks and ballistic helmet sales are the primary purchases from our military customers and were approximately $10.4 million and $13.5 million globally during the
three months ended March 31, 2017
and 2016, respectively. Peripheral products are primarily sold to the mining industry and reflect a small portion of consolidated sales.
A detailed listing of our significant product offerings in the aforementioned product groups above is included in the MSA's Annual Report on Form 10-K for the year ended
December 31, 2016
.
-
26
-
RESULTS OF OPERATIONS
Three Months Ended
March 31, 2017
Compared to Three Months Ended
March 31, 2016
Net Sales from continuing operations.
Net sales for the
three months ended March 31, 2017
were
$265.8 million
, a decrease of
$13.5 million
, or
5%
, compared to
$279.3 million
for the
three months ended March 31, 2016
. Please refer to the Net Sales from Continuing Operations table for a reconciliation of the quarter over quarter sales change.
|
Net Sales
|
Three Months Ended March 31,
|
Dollar
Increase
(Decrease)
|
Percent
Increase
(Decrease)
|
||||
|
(In millions)
|
2017
|
2016
|
|||||
|
Consolidated Continuing Operations
|
$265.8
|
$279.3
|
$(13.5)
|
(5)%
|
|||
|
Americas
|
166.6
|
167.4
|
(0.8)
|
—%
|
|||
|
International
|
99.2
|
111.9
|
(12.7)
|
(11)%
|
|||
|
Net Sales from Continuing Operations
|
Three Months Ended March 31, 2017 versus March 31, 2016
|
||
|
(Percent Change)
|
Americas
|
International
|
Consolidated Continuing Operations
|
|
GAAP reported sales change
|
(0.5)%
|
(11.4)%
|
(4.8)%
|
|
Currency translation effects
|
(0.4)%
|
2.5%
|
0.7%
|
|
Constant currency sales change
|
(0.9)%
|
(8.9)%
|
(4.1)%
|
Note: Constant currency sales change is a non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance. Constant currency sales change is calculated by removing the percentage impact of currency translation effects from the overall percentage change in net sales.
Net sales for the Americas segment were
$166.6 million
in the
first quarter
of
2017
, a decrease of
$0.8 million
, compared to
$167.4 million
in the
first quarter
of
2016
. During the quarter, constant currency sales in the Americas segment decreased
0.9%
compared to the prior year period on a lower level of shipments of self-contained breathing apparatus ("SCBA") as the first quarter of 2016 benefited from a remaining backlog from 2015. This decrease was mostly offset by growth in industrial head protection and portable gas instruments on improving conditions in industrial markets.
Net sales for the International segment were
$99.2 million
in the
first quarter
of
2017
, a decrease of
$12.7 million
, or
11%
, compared to
$111.9 million
for the
first quarter
of
2016
. Constant currency sales in the International segment decreased
8.9%
during the first quarter, primarily due to a lower volume of military helmet and fall protection sales in Europe and less breathing apparatus sales across the segment, particularly in Asia.
Gross profit
.
Gross profit for the
first quarter
of
2017
was
$119.7 million
, an decrease of $1.0 million, or 1%, compared to
$120.7 million
for the
first quarter
of
2016
. The ratio of gross profit to net sales was
45.0%
in the
first quarter
of
2017
compared to
43.2%
in the same quarter last year. The higher gross profit ratio during the current quarter is attributable to improved margins across substantially all of our core products, particularly the G1 SCBA, associated with our value engineering initiatives and to a lesser degree, a more favorable product mix due to an increase in portable instruments and industrial head protection sales.
Selling, general and administrative expenses
.
Selling, general and administrative expenses were
$76.0 million
during the
first quarter
of
2017
, a decrease of $3.2 million or 4%, compared to
$79.2 million
in the
first quarter
of
2016
as we continue to realize benefits from our global cost reduction program. Selling, general and administrative expenses were
28.6%
of net sales in the
first quarter
of
2017
, compared to
28.4%
of net sales in the
first quarter
of
2016
.
Research and development expense
.
Research and development expense was
$11.0 million
during the
first quarter
of
2017
, an increase of $0.6 million, or 6%, compared to
$10.4 million
during the
first quarter
of 2016. Research and development expense was 4.1% of net sales in the
first quarter
of
2017
, compared to 3.7% of net sales in the
first quarter
of
2016
. We expect research and development expense to range from 4.0% to 4.5% of sales for the full year ending
December 31, 2017
as we continue to develop new products for global safety markets, such as our new integrated thermal imaging camera ("iTIC") which was launched in late February 2017.
Restructuring, net of adjustments
.
During the
first quarter
of
2017
, the Company recorded restructuring charges of
$12.7 million
, primarily related to the voluntary retirement incentive package described below.
-
27
-
In September 2016, certain employees in the Americas segment were offered a voluntary retirement incentive package (“VRIP”). The election window for participation closed on October 17, 2016. The employees were required to render service through January 31, 2017 to receive the VRIP and had until February 6, 2017 to revoke their election. None of the 83 employees who accepted the VRIP revoked their election to retire under the terms of the plan. Non-cash special termination benefit expense of $11.4 million was incurred in the first quarter of 2017 related to these elections. All benefits were paid from our over funded North America pension plan.
During the
first quarter
of
2016
, the Company recorded restructuring, net of adjustments, of
$0.5 million
, primarily related to severance costs for staff reductions associated with ongoing initiatives to right size our operations in Europe and Latin America.
Currency exchange
.
Currency exchange losses were
$0.6 million
in the
first quarter
of
2017
, compared to
$2.0 million
in the
first quarter
of
2016
. Currency exchange losses in the first quarter of 2017 were related to management of foreign currency exposure on unsettled inter-company balances. Refer to Note 16 to the unaudited Condensed Consolidated Financial Statements in Part I Item I of this Form 10-Q, for information regarding our currency exchange rate risk management strategy.
GAAP operating income.
Consolidated operating income for the
first quarter
of
2017
was
$19.4 million
, a decrease of $9.3 million, or 32%, compared to
$28.7 million
in the same period last year. The reduction in operating income was primarily driven by restructuring charges associated with the voluntary retirement incentive package and was partially offset by improvements in gross margins discussed above and lower selling, general, and administrative expenses resulting from our cost reduction programs.
Adjusted operating income.
Americas adjusted operating income for the
first quarter
of
2017
was
$38.1 million
, an increase of $6.8 million, or 22%, compared to $31.3 million in the
first quarter
of
2016
. We continued to see strength in gross margins during the first quarter from improvements in margins across substantially all of our core products, particularly the G1 SCBA, associated with our value engineering efforts and to a lesser degree, a favorable product mix related to higher sales of portable instruments and industrial head protection. Lower selling, general, and administrative costs also contributed to operating income results through effective cost management.
International adjusted operating income for the
first quarter
of
2017
was
$6.6 million
, a decrease of $1.8 million, or 21%, compared to $8.4 million in the prior year quarter. The decrease in adjusted operating income is primarily attributable to lower sales volumes.
Corporate segment adjusted operating loss for the
first quarter
of
2017
was
$12.0 million
, an increase of $3.4 million, or 40%, compared to an adjusted operating loss of $8.6 million in the
first quarter
of
2016
, reflecting higher insurance, stock compensation and legal expense.
The following table represents a reconciliation from GAAP operating income to adjusted operating income. Adjusted operating margin % is calculated as adjusted operating income divided by net sales.
|
Adjusted operating income
|
Three Months Ended March 31, 2017
|
|||||||||||
|
(In millions)
|
Americas
|
International
|
Corporate
|
Consolidated Continuing Operations
|
||||||||
|
Net sales
|
$
|
166,568
|
|
$
|
99,197
|
|
$
|
—
|
|
$
|
265,765
|
|
|
GAAP operating income
|
19,422
|
|
||||||||||
|
Restructuring and other charges
|
12,739
|
|
||||||||||
|
Currency exchange losses, net
|
580
|
|
||||||||||
|
Adjusted operating income
|
38,106
|
|
6,644
|
|
(12,009
|
)
|
32,741
|
|
||||
|
Adjusted operating margin %
|
22.9
|
%
|
6.7
|
%
|
||||||||
Note: Adjusted operating income is a non-GAAP financial measure used by the chief operating decision maker to evaluate segment performance and allocate resources. Adjusted operating income is reconciled above to the nearest GAAP financial measure, Operating income.
Total other expense, net.
Other expense for the
first quarter
of
2017
was
$2.9 million
, compared to
$3.0 million
for the same period in
2016
.
Income taxes.
The reported effective tax rate for the
first quarter
of
2017
was 10.9%, which included 16.9% of a tax benefit for certain share-based payments related to the adoption of ASU 2016-09 as discussed below. The reported effective tax rate for the
-
28
-
first quarter of
2016
was 48.7%, which included 14% of a tax provision associated with exit taxes related to our European reorganization. The remaining effective tax rate decrease was primarily due to increased profitability in more favorable tax jurisdictions.
MSA finalized its European reorganization during 2016. The reorganization was designed to drive optimal performance by aligning certain strategic planning and decision making into a single location enabled by a common IT platform. During the first quarter of 2017, the Company incurred no charges associated with exit taxes related to our European reorganization, compared to $3.6 million for the first quarter of 2016.
In October 2016, the FASB issued ASU 2016-16,
Intra-entity Transfers of Assets Other than Inventory
. This ASU states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. We have early adopted this ASU on January 1, 2017 using the modified retrospective approach which resulted in a $5.9 million cumulative-effect adjustment directly to retained earnings for any previously deferred income tax effects.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which we have adopted effective January 1, 2017. From an income tax perspective, this ASU requires that all excess tax benefits and deficiencies that pertain to share-based payment arrangements be recognized as a component of income tax expense rather than as a component of additional paid-in-capital. We expect this to create volatility in the effective tax rate on a go-forward basis as the impact is treated as a discrete item within our quarterly tax provision. The adoption of this standard resulted in a $2.8 million tax benefit during the
first quarter
of 2017.
Please refer to Note 2 to the unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this Form 10-Q for additional information regarding the two standards adopted.
Net income from continuing operations attributable to MSA Safety Incorporated
.
Net income from continuing operations was
$14.4 million
for the
first quarter
of
2017
, or
$0.37
per diluted share, an increase of $1.7 million, or 13%, compared to
$12.7 million
, or
$0.34
per diluted share, for the same period last year.
Net (loss) income from discontinued operations attributable to MSA Safety Incorporated
.
Net loss from discontinued operations was $0.9 million for the
first quarter
of
2016
, or $0.03 per diluted share. There was no discontinued operations activity for the
first quarter
of
2017
. Please refer to Note 19 to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q.
Non-GAAP Financial Information
We may provide information regarding adjusted operating income, which is not a recognized term under U.S. GAAP and does not purport to be alternatives to operating income or net income as a measure of operating performance. We believe that the use of this non-GAAP financial measure provides investors with additional useful information and provide a more complete understanding of the underlying results. Because not all companies use identical calculations, this presentation may not be comparable to similarly titled measures from other companies. For more information about this non-GAAP measure and a reconciliation to the nearest GAAP measure, please refer to the reconciliations referenced above in Management's Discussion & Analysis section and in Note 8 to the unaudited condensed consolidated financial statements of this Form 10-Q.
We may also provide financial information on a constant currency basis, which is a non-GAAP financial measure. These references to a constant currency basis do not include operational impacts that could result from fluctuations in foreign currency rates, which are outside of management's control. To provide information on a constant currency basis, the applicable financial results are adjusted by translating current and prior period results in local currency to a fixed foreign exchange rate. This approach is used for countries where the functional currency is the local country currency. This information is provided so that certain financial results can be viewed without the impact of fluctuations in foreign currency rates, thereby facilitating period-to-period comparisons of business performance. Constant currency information is not recognized under U.S. GAAP, and it is not intended as an alternative to U.S. GAAP measures.
LIQUIDITY AND CAPITAL RESOURCES
Our main source of liquidity is operating cash flows, supplemented by borrowings. Our principal liquidity requirements are for working capital, capital expenditures, principal and interest payments on debt, acquisitions and dividend payments. Approximately 68% of our long-term debt is at fixed interest rates with repayment schedules through 2031. The remainder of our long-term debt is at variable rates, primarily on our unsecured revolving credit facility that is due in 2020. At
March 31, 2017
, approximately 74% of our borrowings are denominated in US dollars, which limits our exposure to currency exchange rate fluctuations.
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29
-
At
March 31, 2017
, we had cash and cash equivalents totaling
$104.4 million
, of which $101.4 million was held by our foreign subsidiaries. Cash and cash equivalents are held by our foreign subsidiaries whose earnings are considered indefinitely reinvested at
March 31, 2017
. These funds could be subject to additional income taxes if repatriated. It is not practicable to determine the potential income tax liability that we would incur if these funds were repatriated to the U.S. because the time and manner of repatriation is uncertain. We believe that domestic cash and cash equivalents, domestic cash flows from operations, annual repatriation of a portion of the current period’s foreign earnings, and availability of our domestic line of credit continue to be sufficient to fund our domestic liquidity requirements.
Cash and cash equivalents decreased
$9.3 million
during the
three months ended March 31, 2017
, compared to increasing
$6.0 million
during the same period in
2016
. The decrease in cash primarily relates to net payments on long-term debt of approximately $96.6 million partially offset by an increase in insurance receivable collections net of product liability settlements of $85.0 million and improved working capital management.
The Company currently has access to approximately $573.6 million of capital at
March 31, 2017
. Refer to Note 12 to the Condensed Consolidated Financial Statements in Part I Item 1 of this Form 10-Q.
Operating activities.
Operating activities provided cash of
$96.4 million
during the
first quarter
of
2017
, compared to using
$11.0 million
during the same period in
2016
. The increase in operating cash flows during the period was attributable to higher insurance receivable collections, improved working capital management and higher net income, driven by improved gross profit, SG&A cost management and lower taxes. We collected $85.0 million from insurance companies, net of product liability settlements paid, in the first quarter of 2017 while we paid settlements, net of collections from insurance companies, of $19.7 million in the first quarter of 2016.
Investing activities.
Investing activities used cash of
$1.3 million
during the
three months ended March 31, 2017
,
compared to providing
$9.9 million
in the same period last year. The sale of our South African personal protective equipment distribution business and its Zambian operations drove cash inflows from investing activities in the first quarter of 2016. Refer to Note 19 to the Condensed Consolidated Financial Statements in Part I Item 1 of this Form 10-Q.
Financing activities.
Financing activities used cash of
$106.0 million
during the
three months ended March 31, 2017
, compared to providing
$3.3 million
during the same period in
2016
. During the
three months ended March 31, 2017
, we used our insurance receivables proceeds to make net payments on long-term debt of approximately $96.6 million. This compared to net borrowings of $13.5 million during the same period in 2016. We paid cash dividends of $12.5 million during the
three months ended March 31, 2017
compared to $11.9 million in the same period last year.
CUMULATIVE TRANSLATION ADJUSTMENTS
The position of the U.S. dollar relative to international currencies at March 31, 2017 resulted in a translation gain of
$11.4 million
being recorded to the cumulative translation adjustments shareholders' equity account during the
three months ended March 31, 2017
, compared to a gain
of
$13.6 million
during the same period in
2016
. The translation gain during the first quarter of 2017 was primarily related to the strengthening of the euro, British pound, and Mexican peso relative to the U.S. dollar. The translation gain during the first three months of 2016 was primarily related to the strengthening of the euro and Brazilian real against the U.S. dollar.
COMMITMENTS AND CONTINGENCIES
We made contributions of $1.5 million to our pension plans during the
three months ended March 31, 2017
. We expect to make total contributions of approximately $5.9 million to our pension plans in
2017
which are primarily associated with our International segment.
The Company had outstanding bank guarantees and standby letters of credit with banks as of
March 31, 2017
totaling
$12.3 million
, of which
$6.9 million
related to the senior revolving credit facility. These letters of credit serve to cover customer requirements in connection with certain sales orders and insurance companies. No amounts were drawn on these arrangements at
March 31, 2017
. The Company is also required to provide cash collateral in connection with certain arrangements. At
March 31, 2017
, the Company has $0.8 million of restricted cash in support of these arrangements.
We have purchase commitments for materials, supplies, services, and property, plant and equipment as part of our ordinary conduct of business.
Please refer to Note 18 to the Condensed Consolidated Financial Statements in Part I Item 1 of this Form 10-Q for further discussion on the Company's product liabilities.
-
30
-
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these 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 consolidated financial statements.
The more critical judgments and estimates used in the preparation of our consolidated financial statements are discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS
Please refer to Note 2 to the Condensed Consolidated Financial Statements in Part I Item 1 of this Form 10-Q.
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31
-
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Market risk represents the risk of adverse changes in the value of a financial instrument caused by changes in currency exchange rates, interest rates, and equity prices. We are exposed to market risks related to currency exchange rates and interest rates.
Currency exchange rate sensitivity.
We are subject to the effects of fluctuations in currency exchange rates on various transactions and on the translation of the reported financial position and operating results of our non-U.S. companies from local currencies to U.S. dollars. A hypothetical 10% strengthening or weakening of the U.S. dollar would decrease or increase our reported sales and net income by approximately $12.0 million and $1.6 million, respectively, for the
three months ended March 31, 2017
.
When appropriate, we may attempt to limit our transactional exposure to changes in currency exchange rates through contracts or other actions intended to reduce existing exposures by creating offsetting currency exposures. At
March 31, 2017
, we had open foreign currency forward contracts with a U.S. dollar notional value of
$83.8 million
. A hypothetical 10% increase in
March 31, 2017
forward exchange rates would result in a
$8.4 million
increase in the fair value of these contracts.
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. Because of the relatively short maturities of temporary investments, these financial instruments are reported at carrying values that approximate fair values.
At
March 31, 2017
, we had $202.3 million of fixed rate debt which matures at various dates through 2031. The incremental increase in the fair value of fixed rate long-term debt resulting from a hypothetical 10% decrease in interest rates would be approximately $14.2 million. However, our sensitivity to interest rate declines and the corresponding increase in the fair value of our debt portfolio would unfavorably affect earnings and cash flows only to the extent that we elected to repurchase or retire all or a portion of our fixed rate debt portfolio at prices above carrying values.
At
March 31, 2017
, we had $94.5 million of variable rate borrowings under our revolving credit facility. A 100 basis point increase or decrease in interest rates could impact our future earnings under our current capital structure.
|
Item 4.
|
Controls and Procedures
|
|
(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 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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32
-
|
Item 1A.
|
Risk Factors
|
We may experience losses from cumulative trauma product liability claims. The inability to collect insurance receivables and the transition to becoming largely self-insured for cumulative trauma product liability claims, could have a materially adverse effect on our business, operating results, financial condition and liquidity.
Our subsidiary, Mine Safety Appliances Company, LLC (“MSA LLC”) is presently named as a defendant in
1,572
cumulative trauma lawsuits comprised of
2,797
claims. Cumulative trauma product liability claims involve exposures to harmful substances (e.g., silica, asbestos and coal dust) that occurred many years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, mesothelioma, or coal worker’s pneumoconiosis. The products at issue were manufactured many years ago and are not currently offered by MSA LLC. Although we have reserved against the portion of claims outstanding, the reserve does not take into account all the currently pending coal dust claims against MSA LLC or any incurred but not reported (“IBNR”) claims, which losses could have a materially adverse effect on our business, operating results, financial condition and liquidity. Because litigation is subject to inherent uncertainties, and unfavorable rulings or developments could occur, there can be no certainty that MSA LLC may not ultimately incur charges in excess of presently recorded liabilities with respect to claims included within the existing reserve or related to claims not included in the reserve. We will adjust the reserve for our liability relating to cumulative trauma claims from time to time based on the maturation of claims, developing facts and circumstances, and if actual experience is worse than previously projected. These adjustments may reflect changes in estimates for claims currently covered by the reserve, as well as estimated liabilities for claims not presently covered by the reserve and IBNR claims, in the event we become able to reasonably assess the probability and estimate the magnitude of potential losses. These adjustments may be material and could increase the year over year variability of our financial results.
In the normal course of business, MSA LLC, makes payments to settle these types of cumulative trauma product liability claims and for related defense costs, and records receivables for the amounts believed to be recoverable under insurance. MSA LLC has recorded insurance receivables totaling
$58.5 million
at
March 31, 2017
. As described in greater detail in Note 18 of the Condensed Consolidated Financial Statements, MSA LLC is currently involved in insurance coverage litigation regarding the rights and obligations under numerous insurance policies, and for the payment of amounts recorded as insurance receivables. Various factors could affect the timing and amount of recovery of insurance receivables, including: the outcome of coverage litigation, the outcome of negotiations with insurers, and the extent to which insurers may become insolvent in the future. Failure to recover amounts due from MSA LLC’s insurance carriers would result in it being unable to recover amounts already paid to resolve claims (and recorded as insurance receivables) and could have a materially adverse effect on our business, consolidated operating results, financial condition and liquidity.
Even if insurance coverage litigation is generally successful, we have determined that at some point in the next
18 months
, MSA LLC will become largely self-insured for costs associated with cumulative trauma product liability claims and most of the related costs will be expensed without the expectation such costs will be covered by insurance reimbursement. The exact point when this transition will happen is difficult to predict and subject to a number of variables, including the pace at which future cumulative trauma product liability costs are incurred and the results of litigation and negotiations with insurance carriers. After it becomes largely self-insured, MSA LLC expects to still obtain some limited insurance reimbursement from negotiated coverage-in-place agreements (although that coverage may not be immediately triggered or accessible) or from other sources of coverage. However, the precise amount of insurance reimbursement that may be available cannot be determined with specificity at this time.
MSA LLC may experience an increase in newly filed claims or more aggressive settlement demands from plaintiffs at any time, which could accelerate the point at which MSA LLC becomes self-insured. We expect that once we become largely self-insured for cumulative trauma claims, we could experience greater year over year variability in our consolidated financial results.
On February 26, 2016, a Kentucky state court jury in the James Couch claim rendered a verdict against MSA LLC (the "Couch verdict") of $7.2 million dollars (comprised of $3.2 million of an apportioned share of compensatory damages and $4.0 million in punitive damages). The Couch claim is a cumulative trauma product liability lawsuit involving exposure to coal dust. MSA LLC is appealing the Couch verdict. MSA LLC experienced an increase in coal dust related claims filed in 2016. Such claims could result in increased product liability expense in the future, and the impact of such an increase in claims to our results of operations may be worsened to the extent MSA LLC is self-insured. Please refer to Note 18 of the Condensed Consolidated Financial Statements for further details on the Couch verdict.
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33
-
Claims of injuries from our products, product defects or recalls of our products could have a materially adverse effect on our business, operating results, financial condition and liquidity.
MSA and its subsidiaries face an inherent business risk of exposure to product liability claims arising from the alleged failure of our products to prevent the types of personal injury or death against which they are designed to protect. In the event the parties using our products are injured or any of our products prove to be defective, we could be subject to claims with respect to such injuries. In addition, we may be required to or may voluntarily recall or redesign certain products that could potentially be harmful to end users. Any claim or product recall that results in significant expense or adverse publicity against us could have a materially adverse effect on our business, consolidated operating results, financial condition and liquidity, including any successful claim brought against us in excess or outside of available insurance coverage.
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34
-
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
|
(c)
|
Issuer Purchases of Equity Securities
|
|
Period
|
Total Number of
Shares
Purchased
|
Average Price Paid
Per Share
|
Total Number of
Shares Purchased
As Part of Publicly
Announced Plans or
Programs
|
Maximum Number
of Shares
That May Yet Be
Purchased Under
the Plans or
Programs
|
|||||||||
|
January 1 - 31, 2017
|
—
|
|
$
|
—
|
|
—
|
|
1,301,982
|
|
||||
|
February 1 - 28, 2017
|
—
|
|
—
|
|
—
|
|
1,285,764
|
|
|||||
|
March 1 - 31, 2017
|
8,931
|
|
68.72
|
|
—
|
|
1,314,138
|
|
|||||
The share repurchase program authorizes up to
$100.0 million
in repurchases of MSA common stock in the open market and in private transactions. The share purchase program has no expiration date. The maximum shares that may be purchased is calculated based on the dollars remaining under the program and the respective month-end closing share price.
Shares purchased during the quarter relate to stock compensation transactions.
We do not have any other share repurchase programs.
|
Item 6.
|
Exhibits
|
|
(a) Exhibits
|
||
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
|
|
32
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. (S)1350
|
|
101.INS
|
XBRL Instance Document
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
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35
-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
MSA SAFETY INCORPORATED
|
|
April 28, 2017
|
|
/s/ Kenneth D. Krause
|
|
|
Kenneth D. Krause
|
|
|
|
Vice President, Chief Financial Officer and Treasurer
Duly Authorized Officer and Principal Financial Officer
|
|
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36
-
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1 Basis Of PresentationNote 2 Recently Adopted and Recently Issued Accounting StandardsNote 3 InventoriesNote 4 Restructuring ChargesNote 5 Property, Plant and EquipmentNote 6 Reclassifications Out Of Accumulated Other Comprehensive LossNote 7 Capital StockNote 8 Segment InformationNote 9 Earnings Per ShareNote 10 Income TaxesNote 11 Stock PlansNote 12 Long-term DebtNote 13 Goodwill and Intangible AssetsNote 14 AcquisitionsNote 15 Pensions and Other Post-retirement BenefitsNote 16 Derivative Financial InstrumentsNote 17 Fair Value MeasurementsNote 18 ContingenciesNote 19 Discontinued OperationsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits