Document


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 September 30, 2018
Commission File No. 1-15579
 http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12512991&doc=11
MSA SAFETY INCORPORATED
(Exact name of registrant as specified in its charter)
 
Pennsylvania
 
 46-4914539

(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
1000 Cranberry Woods Drive
Cranberry Township, Pennsylvania
 
16066-5207
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (724) 776-8600
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨

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

Emerging growth company ¨ 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x
As of October 22, 2018, 38,464,650 shares of common stock, of the registrant were outstanding.




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Unaudited
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except per share amounts)
 
2018
 
2017
 
2018
 
2017
Net sales
 
$
331,096

 
$
296,129

 
$
996,320

 
$
850,669

Cost of products sold
 
182,794

 
163,926

 
546,844

 
465,780

Gross profit
 
148,302

 
132,203

 
449,476

 
384,889

 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
78,013

 
72,852

 
240,226

 
223,741

Research and development
 
13,296

 
12,351

 
39,752

 
35,282

Restructuring charges (Note 5)
 
2,615

 
3,214

 
10,223

 
16,920

Currency exchange (gains) losses, net
 
(252
)
 
562

 
2,571

 
3,994

Other operating expense (Note 19)
 
14,627

 
3,346

 
25,469

 
32,956

Operating income
 
40,003

 
39,878

 
131,235

 
71,996

 
 
 
 
 
 
 
 
 
Interest expense
 
4,492

 
3,961

 
14,454

 
10,566

Loss on extinguishment of debt (Note 13)
 
1,494

 

 
1,494

 

Other income, net
 
(4,252
)
 
(1,720
)
 
(8,292
)
 
(4,406
)
Total other expense, net
 
1,734

 
2,241

 
7,656

 
6,160

 
 
 
 
 
 
 
 
 
Income before income taxes
 
38,269

 
37,637

 
123,579

 
65,836

Provision for income taxes (Note 11)
 
4,206

 
5,411

 
23,606

 
6,306

Net income
 
34,063

 
32,226

 
99,973

 
59,530

 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
 
(346
)
 
(160
)
 
(706
)
 
(519
)
 
 
 
 
 
 
 
 
 
Net income attributable to MSA Safety Incorporated
 
$
33,717

 
$
32,066

 
$
99,267

 
$
59,011

 
 
 
 
 
 
 
 
 
Earnings per share attributable to MSA Safety Incorporated common shareholders:
 
 
 
 
 
 
 
 
       Basic
 
$
0.88

 
$
0.84

 
$
2.59

 
$
1.55

Diluted
 
$
0.86

 
$
0.83

 
$
2.55

 
$
1.52

Dividends per common share
 
$
0.38

 
$
0.35

 
$
1.11

 
$
1.03

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

-2-



MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2018
 
2017
 
2018
 
2017
Net income
 
$
34,063

 
$
32,226

 
$
99,973

 
$
59,530

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
     Foreign currency translation adjustments (Note 7)
 
(4,755
)
 
10,021

 
(19,235
)
 
34,888

     Pension and post-retirement plan actuarial gains, net of tax (Note 7)
 
2,651

 
2,180

 
8,039

 
6,321

Reclassification from accumulated other comprehensive (loss) into net income (Note 7)
 

 

 
(774
)
 

Total other comprehensive (loss) income, net of tax
 
(2,104
)
 
12,201

 
(11,970
)
 
41,209

Comprehensive income
 
31,959

 
44,427

 
88,003

 
100,739

Comprehensive income attributable to noncontrolling interests
 
(152
)
 
(4,289
)
 
(409
)
 
(3,185
)
Comprehensive income attributable to MSA Safety Incorporated
 
$
31,807

 
$
40,138

 
$
87,594

 
$
97,554

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

-3-



MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
Unaudited 
(In thousands)
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
 
Cash and cash equivalents
 
$
118,161

 
$
134,244

Trade receivables, less allowance for doubtful accounts of $5,846 and $5,540
 
236,245

 
244,198

Inventories (Note 4)
 
183,829

 
153,739

Investments, short-term (Note 18)
 
56,996

 

Prepaid income taxes
 
34,147

 
31,448

Notes receivable, insurance companies (Note 19)
 
3,525

 
17,333

Prepaid expenses and other current assets
 
40,434

 
41,335

Total current assets
 
673,337

 
622,297

 
 
 
 
 
Property, plant and equipment, net (Note 6)
 
150,569

 
157,014

Prepaid pension cost
 
91,914

 
83,060

Deferred tax assets (Note 11)
 
27,360

 
25,825

Goodwill (Note 14)
 
416,779

 
422,185

Intangible assets (Note 14)
 
173,317

 
183,088

Notes receivable, insurance companies, noncurrent (Note 19)
 
60,726

 
59,567

Insurance receivable (Note 19) and other noncurrent assets
 
56,681

 
131,790

Total assets
 
$
1,650,683

 
$
1,684,826

 
 
 
 
 
Liabilities
 
 
 
 
Notes payable and current portion of long-term debt, net (Note 13)
 
$
20,005

 
$
26,680

Accounts payable
 
71,659

 
87,061

Employees’ compensation
 
37,757

 
39,377

Insurance and product liability (Note 19)
 
78,019

 
59,116

Income taxes payable (Note 11)
 
20,191

 

Warranty reserve (Note 19) and other current liabilities
 
80,316

 
77,045

Total current liabilities
 
307,947

 
289,279

 
 
 
 
 
Long-term debt, net (Note 13)
 
370,195

 
447,832

Pensions and other employee benefits
 
167,373

 
170,773

Deferred tax liabilities (Note 11)
 
8,973

 
9,341

Product liability (Note 19) and other noncurrent liabilities
 
136,489

 
165,023

Total liabilities
 
$
990,977

 
$
1,082,248

Commitments and contingencies (Note 19)
 

 

 
 
 
 
 
Equity
 
 
 
 
Preferred stock, 4 1/2% cumulative, $50 par value (Note 8)
 
$
3,569

 
$
3,569

Common stock, no par value (Note 8)
 
207,315

 
194,953

Treasury shares, at cost (Note 8)
 
(298,466
)
 
(297,834
)
Accumulated other comprehensive loss (Note 7)
 
(183,435
)
 
(171,762
)
Retained earnings
 
925,337

 
868,675

Total MSA Safety Incorporated shareholders' equity
 
654,320

 
597,601

Noncontrolling interests
 
5,386

 
4,977

Total shareholders’ equity
 
659,706

 
602,578

Total liabilities and shareholders’ equity
 
$
1,650,683

 
$
1,684,826


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

-4-



MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
 
 
Nine Months Ended September 30,
(In thousands)
 
2018
 
2017
Operating Activities
 
 
 
 
Net income
 
$
99,973

 
$
59,530

Depreciation and amortization
 
28,585

 
27,665

Restructuring charges (Note 5)
 

 
11,384

Stock-based compensation (Note 12)
 
9,595

 
9,668

Pension expense (Note 16)
 
4,464

 
5,307

Deferred income tax benefit (Note 11)
 
(5,152
)
 
(9,590
)
Loss on asset dispositions, net
 
416

 
65

Pension contributions (Note 16)
 
(3,729
)
 
(4,425
)
Currency exchange losses, net
 
2,571

 
3,994

Other operating expense (Note 19)
 
25,469

 
32,956

Collections on insurance receivables and notes receivable, insurance companies
 
94,875

 
109,769

Product liability payments
 
(44,041
)
 
(21,279
)
Loss on extinguishment of debt
 
1,494

 

Changes in:
 
 
 
 
     Trade receivables
 
598

 
10,108

     Inventories (Note 4)
 
(36,467
)
 
(36,894
)
     Prepaid expenses and other current assets
 
(16,758
)
 
(4,252
)
     Accounts payable and accrued liabilities
 
32,465

 
5,183

     Other noncurrent assets and liabilities
 
(8,161
)
 
(9,943
)
Cash Flow From Operating Activities
 
186,197

 
189,246

Investing Activities
 

 

Capital expenditures
 
(18,620
)
 
(11,730
)
Acquisition, net of cash acquired (Note 14)
 

 
(213,990
)
Purchase of short-term investments (Note 18)
 
(57,090
)
 

Property disposals
 
4,001

 
729

Cash Flow Used in Investing Activities
 
(71,709
)
 
(224,991
)
Financing Activities
 
 
 
 
Payments on short-term debt, net
 
(8
)
 

Proceeds from long-term debt (Note 13)
 
340,500

 
491,500

Payments on long-term debt (Note 13)
 
(421,167
)
 
(415,600
)
Debt issuance costs
 
(1,216
)
 

Cash dividends paid
 
(42,605
)
 
(39,200
)
Company stock purchases (Note 8)
 
(4,299
)
 
(16,656
)
Exercise of stock options (Note 8)
 
6,154

 
12,392

Employee stock purchase plan (Note 8)
 
280

 
282

Other, net
 
(1,494
)
 
(590
)
Cash Flow (Used in) Provided by Financing Activities
 
(123,855
)
 
32,128

Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
(9,952
)
 
1,622

Decrease in cash, cash equivalents and restricted cash
 
(19,319
)
 
(1,995
)
Beginning cash, cash equivalents and restricted cash
 
137,889

 
114,962

Ending cash, cash equivalents and restricted cash
 
$
118,570

 
$
112,967

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Cash and cash equivalents
 
$
118,161

 
$
112,185

Restricted cash included in prepaid expenses and other current assets
 
409

 
782

Total cash, cash equivalents and restricted cash
 
$
118,570

 
$
112,967

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

-5-



MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN RETAINED EARNINGS,
ACCUMULATED OTHER COMPREHENSIVE LOSS AND NONCONTROLLING INTERESTS
Unaudited
(In thousands)
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss)
Balances June 30, 2017
$
896,621

 
$
(199,775
)
Net income
32,226

 

Foreign currency translation adjustments

 
10,021

Pension and post-retirement plan adjustments, net of tax of $1,009

 
2,180

Income attributable to noncontrolling interests
(160
)
 
(4,129
)
Common dividends
(13,366
)
 

Preferred dividends
(10
)
 

Balances September 30, 2017
$
915,311

 
$
(191,703
)
 
 
 
 
Balances June 30, 2018
$
906,244

 
$
(181,525
)
Net income
34,063

 

Foreign currency translation adjustments

 
(4,755
)
Pension and post-retirement plan adjustments, net of tax of $886

 
2,651

(Income) loss attributable to noncontrolling interests
(346
)
 
194

Common dividends
(14,614
)
 

Preferred dividends
(10
)
 

Balances September 30, 2018
$
925,337

 
$
(183,435
)
 
 
 
 
Balances December 31, 2016
$
901,415

 
$
(230,246
)
Net income
59,530

 

Foreign currency translation adjustments

 
34,888

Pension and post-retirement plan adjustments, net of tax of $3,052

 
6,321

Income attributable to noncontrolling interests
(519
)
 
(2,666
)
Common dividends
(39,170
)
 

Preferred dividends
(30
)
 

Cumulative effect of the adoption of ASU 2016-16 (Note 2)
(5,915
)
 

Balances September 30, 2017
$
915,311

 
$
(191,703
)
 
 
 
 
Balances December 31, 2017
$
868,675

 
$
(171,762
)
Net income
99,973

 

Foreign currency translation adjustments

 
(19,235
)
Pension and post-retirement plan adjustments, net of tax of $2,566

 
8,039

Reclassification from accumulated other comprehensive (loss) into earnings

 
(774
)
(Income) loss attributable to noncontrolling interests
(706
)
 
297

Common dividends
(42,575
)
 

Preferred dividends
(30
)
 

Balances September 30, 2018
$
925,337

 
$
(183,435
)
The accompanying notes are an integral part of the consolidated financial statements.

-6-



MSA SAFETY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1—Basis of Presentation
The condensed consolidated financial statements of MSA Safety Incorporated and its subsidiaries ("MSA" or the "Company") are unaudited. These condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary by management to fairly state the Company's results. Intercompany accounts and transactions have been eliminated. The results reported in these condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. The December 31, 2017 condensed consolidated balance sheet data was derived from the audited consolidated balance sheet, but does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP). This Form 10-Q report should be read in conjunction with MSA's Form 10-K for the year ended December 31, 2017, which includes all disclosures required by U.S. 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 activities 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.
Note 2—Recently Adopted and Recently Issued Accounting Standards
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. We adopted ASU 2014-09 using the modified retrospective method as of January 1, 2018. The majority of our revenue transactions consist of a single performance obligation to transfer promised goods or services. The adoption of this new standard did not impact the Company's consolidated statement of income or balance sheet and there was no cumulative effect of initially applying the standard to the opening balance of retained earnings. See Note 3—Significant Accounting Policies Update for further information on our updated revenue recognition policy.
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 condensed consolidated financial statements.

-7-



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 January 1, 2019. The Company has developed a transition plan and continues to evaluate the impact that the adoption of ASU 2016-02 will have on the consolidated financial statements. During 2017, we conducted a survey to identify all leases across the organization and are currently working to obtain all lease contracts to accumulate the necessary information for adoption. We have identified that a majority of our leases fall into one of three categories: office equipment, real estate and vehicles. We identified that most office equipment and vehicle leases utilize standard master leasing contracts that have similar terms. During the first nine months of 2018, we selected a service provider to help us inventory and account for our leases and began gathering data necessary to prepare the transition accounting. Total assets and total liabilities will increase significantly in the period the ASU is adopted. At September 30, 2018, the Company's undiscounted future minimum rent commitments under noncancellable operating leases were approximately $36.2 million. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. ASU 2018-10 includes certain clarifications to address potential narrow-scope implementation issues which the Company is incorporating into its assessment and adoption of ASU 2016-02. Additionally, in July 2018, the FASB issued ASU 2018-11, Targeted Improvements to Topic 842, Leases. ASU 2018-11 which provides an additional transition method to adopt ASU 2016-02 identified as comparative reporting at adoption. We expect to use this new transition approach and the comparative periods presented in our financial statements will continue to be reported in accordance with ASC 840, Leases. We anticipate that we will elect the package of practical expedients allowed in the standard, which among other things, allows us to carry forward our historical lease classification. All of our leases have historically been classified as operating leases. We also anticipate that we will make an accounting policy election to use the practical expedient allowed in the standard to not separate lease and non-lease components when calculating the lease liability under ASU 2016-02.
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). Application of this ASU resulted in an additional discrete tax benefit of approximately $2.6 million and $6.9 million during the nine months ended September 30, 2018 and 2017, respectively.
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. Based on a review of its portfolio of financial instruments, the Company does not believe the adoption of this ASU will have a material impact on the condensed consolidated financial statements, but does expect the adoption to result in additional disclosures.
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. The Company's adoption of this ASU on January 1, 2018 did not have a material impact on our presentation of the condensed consolidated statement of cash flows.
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.

-8-



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. We adopted this ASU on January 1, 2018 using the retrospective method. The adoption of ASU 2016-18 had an impact on our financial statement presentation within the condensed consolidated statement of cash flows, as amounts generally described as restricted cash and restricted cash equivalents are now 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 and transfers of these amounts between balance sheet line items are no longer presented as an operating, investing or financing cash flow. For the nine months ended September 30, 2017, cash flow used in financing activities decreased by $0.5 million as a result of the adoption of this ASU. Furthermore, adoption of ASU 2016-18 resulted in additional disclosures.
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 was adopted beginning in 2018 and was applied prospectively. The adoption of this ASU may have a material effect on our condensed 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 condensed consolidated financial statements in the event that we determine that goodwill for any of our reporting units is impaired.
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 amendments in this ASU are to be applied retrospectively for presentation in the condensed consolidated statement of income and prospectively for the capitalization of the service cost component of net periodic pension cost and net periodic post-retirement benefit in assets. A practical expedient allows the Company to use the amount disclosed in its pension and other post-retirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company adopted ASU 2017-07 on January 1, 2018, using the retrospective method and elected to use the practical expedient. The adoption of this ASU resulted in a $3.4 million and $2.3 million decrease in operating income for the nine months ended September 30, 2018 and 2017, respectively. The Company does not capitalize costs in assets so there is no impact from that provision of ASU 2017-07.
In May 2017, the FASB issued ASU 2017-09, Stock Compensation - Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements. This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. This ASU is effective for periods beginning after December 31, 2017. The Company's adoption of ASU on January 1, 2018, did not have a material effect on our condensed consolidated financial statements.

-9-



In January 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which gives entities the option to reclassify to retained earnings the tax effects resulting from the new tax reform legislation commonly known as the Tax Cuts and Jobs Act ("the Act") related to items in AOCI that the FASB refers to as having been stranded in AOCI. The new guidance may be applied retrospectively to each period in which the effect of the Act is recognized in the period of adoption. The Company must adopt this guidance for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period the Act was enacted. The guidance, when adopted, will require new disclosures regarding a company’s accounting policy for releasing the tax effects in AOCI and permit a company the option to reclassify to retained earnings the tax effects resulting from the Act that are stranded in AOCI. The Company has elected not to early adopt this ASU. Further, the Company is currently evaluating how to apply the new guidance and has not determined whether or not it will elect to reclassify stranded amounts, if any. As such, the Company is still evaluating the impact that the adoption of ASU 2018-02 will have on the condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which improves fair value disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements and adding relevant disclosure requirements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted and an entity can choose to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company is still evaluating the impact that the adoption of ASU 2018-13 will have on the condensed consolidated financial statements and has not yet decided whether or not to early adopt the amendments.
In August 2018, the FASB issued ASU 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which improves defined benefit disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements and adding relevant disclosure requirements. This ASU is effective for fiscal years ending after December 15, 2020 and early adoption is permitted.  The amendments in this ASU are required to be applied on a retrospective basis to all periods presented. The Company is still evaluating the impact that the adoption of ASU 2018-14 will have on the condensed consolidated financial statements and has not yet decided whether or not to early adopt the amendments.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which will now allow all cloud computing arrangements classified as service contracts to capitalize certain implementation costs in accordance with ASC 350-40, Intangibles - Goodwill and Other - Internal-Use Software, depending on the project stage within which the costs were incurred. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal periods. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period and the amendments can be applied either retrospectively or prospectively. The Company has adopted this ASU prospectively for all implementation costs incurred related to cloud computing arrangements and the implementation did not have a material impact on our unaudited condensed consolidated financial statements.
Note 3—Significant Accounting Policies Update
Revenue RecognitionWe generate revenue primarily from manufacturing and selling a comprehensive line of safety products to protect the health and safety of workers and facility infrastructures around the world in the oil, gas and petrochemical, fire service, construction, utilities and mining industries. Our core safety products include fixed gas and flame detection instruments, breathing apparatus where SCBA is the principal product, portable gas detection instruments, industrial head protection products, firefighter helmets & protective apparel and fall protection devices. Our customers generally fall into two categories: distributors and industrial or military end-users. In our Americas segment, approximately 75% to 85% of our sales are made through distributors. In our International segment, approximately 55% to 65% of our sales are made through distributors. The underlying principles of revenue recognition are identical for both categories of customers and revenue is generally recognized at a point in time as described below.


-10-



We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2018, using the modified retrospective method. Revenue from the sale of products is recognized when there is persuasive evidence of an arrangement and control passes to the customer, which generally occurs either when product is shipped to the customer or, in the case of most U.S. distributor customers, when product is delivered to the distributor's delivery site. We establish our shipping terms according to local practice and market characteristics. We do not ship product unless we have an order or other documentation authorizing shipment to our customers. Our payment terms vary by the type and location of our customer and the products offered. The term between invoicing and when payment is due is not significant.

Refer to Note 9—Segment Information for disaggregation of revenue by segment and product group, as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Amounts billed and due from our customers are classified as receivables on the consolidated balance sheet. We make appropriate provisions for uncollectible accounts receivable which have historically been insignificant in relation to our net sales. Certain contracts with customers, primarily distributor customers, have an element of variable consideration that is estimated when revenue is recognized under the contract to the extent that it is material to the individual contract. Variable consideration includes volume incentive rebates, performance guarantees, price concessions and returns. Rebates are based on achieving a certain level of purchases and other performance criteria that are documented in established distributor programs. These rebates are estimated based on projected sales to the customer and accrued as a reduction of net sales as they are earned by the customer. The rebate accrual is reviewed monthly and adjustments are made as the estimate of projected sales changes. Product returns, including an adjustment for restocking fees if it is material, are estimated based on historical return experience and revenue is adjusted. Sales, value add and other taxes collected with revenue-producing activities and remitted to governmental authorities are excluded from revenue.

Depending on the terms of the arrangement, we may defer revenue for which we have a future obligation, including training and extended warranty and technical services, until such time that the obligation has been satisfied. We use an observable price, or a cost plus margin approach when one is not available, to determine the stand-alone selling price for separate performance obligations. We have elected to recognize the cost for freight and shipping as an expense when control of the product has passed to the customer. These costs are included within the Cost of Products Sold line on the Condensed Consolidated Statement of Income.

We typically receive interim milestone payments under certain contracts, including our fixed gas and flame detection projects, as work progresses. For some of these contracts, we may be entitled to receive an advance payment. Revenue for these contracts is generally recognized as control passes to the customer, which is a point in time upon shipment of the product, and if applicable, acceptance by the customer. We recognize a liability for these advance payments in excess of revenue recognized and present it as contract liabilities on the condensed consolidated balance sheet. The advance payment is typically not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract. In some cases, the customer retains a small portion of the contract price, typically 10%, until completion of the contract, which we present as contract assets on the condensed consolidated balance sheet. Accordingly, during the period of contract performance, billings and costs are accumulated on the condensed consolidated balance sheet as contract assets or contract liabilities, but no income is recognized until completion of the project and control has passed to the customer. As of September 30, 2018, there were no material contract assets or contract liabilities recorded on the Condensed Consolidated Balance Sheet.

Practical Expedients and Exemptions

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses in our Condensed Consolidated Statement of Income.  


-11-



Investment securitiesThe Company’s investment securities, primarily fixed income, are classified as available for sale. The securities are recorded at fair market value and reported in “Investments, short-term” in the accompanying Condensed Consolidated Balance Sheet with changes in fair market value recorded in other comprehensive income, net of tax. The purchases and sales of these investments are classified as investing activities in the Condensed Consolidated Statement of Cash Flows.

Note 4—Inventories
The following table sets forth the components of inventory:
(In thousands)
 
September 30, 2018
 
December 31, 2017
Finished products
 
$
81,612

 
$
66,064

Work in process
 
8,783

 
10,141

Raw materials and supplies
 
134,288

 
117,388

Inventories at current cost
 
224,683

 
193,593

Less: LIFO valuation
 
(40,854
)
 
(39,854
)
Total inventories
 
$
183,829

 
$
153,739

Note 5—Restructuring Charges
During the three and nine months ended September 30, 2018, we recorded restructuring charges, net of adjustments, of $2.6 million and $10.2 million, respectively. Americas segment restructuring charges of $2.0 million during the nine months ended September 30, 2018, were related to severance costs for staff reductions in our Northern North America and Latin America Regions. International segment restructuring charges of $3.5 million during the nine months ended September 30, 2018, were primarily related to severance costs for staff reductions associated with our ongoing initiatives to drive profitable growth in Europe. Corporate segment restructuring charges of $4.7 million during the nine months ended September 30, 2018, related primarily to the legal and operational realignment of our U.S. and Canadian operations.
During the three and nine months ended September 30, 2017, we recorded restructuring charges, net of adjustments, of $3.2 million and $16.9 million, respectively. Americas segment restructuring charges of $12.5 million during the nine months ended September 30, 2017, related primarily to a non-cash special termination benefit expense of $11.4 million for a voluntary retirement incentive package ("VRIP") as well as severance from staff reductions in Brazil. All benefits for the VRIP were paid from our over funded North America pension plan. International segment restructuring charges of $4.4 million during the nine months ended September 30, 2017, were related to severance costs for staff reductions associated with our ongoing initiatives to drive profitable growth in Europe and right size our operations in Australia and Africa.
Activity and reserve balances for restructuring charges by segment were as follows:
(In millions)
Americas
 
International
 
Corporate
 
Total
Reserve balances at December 31, 2016
$
0.9

 
$
2.8

 
$
0.3

 
$
4.0

Restructuring charges
13.0

 
4.9

 

 
17.9

Currency translation and other adjustments
(0.2
)
 
(0.1
)
 

 
(0.3
)
Cash payments / utilization
(13.2
)
 
(4.0
)
 
(0.3
)
 
(17.5
)
Reserve balances at December 31, 2017
$
0.5

 
$
3.6

 
$

 
$
4.1

Restructuring charges
2.0

 
3.5

 
4.7

 
10.2

Currency translation and other adjustments
(0.3
)
 
(0.4
)
 

 
(0.7
)
Cash payments
(1.4
)
 
(2.9
)
 
(4.5
)
 
(8.8
)
Reserve balances at September 30, 2018
$
0.8

 
$
3.8

 
$
0.2

 
$
4.8


-12-



Note 6—Property, Plant and Equipment
The following table sets forth the components of property, plant and equipment:
(In thousands)
September 30, 2018
 
December 31, 2017
Land
$
3,218

 
$
3,312

Buildings
117,877

 
119,970

Machinery and equipment
384,146

 
379,747

Construction in progress
14,878

 
12,036

Total
520,119

 
515,065

Less: accumulated depreciation
(369,550
)
 
(358,051
)
Net property, plant and equipment
$
150,569

 
$
157,014

Note 7—Reclassifications Out of Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
 
 
MSA Safety Incorporated
 
Noncontrolling Interests
 
 
Three Months Ended September 30,
 
Three Months Ended September 30,
(In thousands)
 
2018
 
2017
 
2018
 
2017
Pension and other post-retirement benefits (a)
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(92,560
)
 
$
(113,927
)
 
$

 
$

Amounts reclassified from Accumulated other comprehensive loss:
 
 
 
 
 
 
 
 
Amortization of prior service cost
 
(105
)
 
(10
)
 

 

Recognized net actuarial losses
 
3,642

 
3,199

 

 

Tax benefit
 
(886
)
 
(1,009
)
 

 

Total amount reclassified from Accumulated other comprehensive loss, net of tax
 
2,651

 
2,180

 

 

Balance at end of period
 
$
(89,909
)
 
$
(111,747
)
 
$

 
$

Foreign Currency Translation
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(88,965
)
 
$
(85,848
)
 
$
698

 
$
(3,427
)
Foreign currency translation adjustments
 
(4,561
)
 
5,892

 
(194
)
 
4,129

Balance at end of period
 
$
(93,526
)
 
$
(79,956
)
 
$
504

 
$
702

(a) Reclassifications out of accumulated other comprehensive loss and into net income are included in the computation of net periodic pension and other post-retirement benefit costs (refer to Note 16—Pensions and Other Post-retirement Benefits).

-13-



 
 
MSA Safety Incorporated
 
Noncontrolling Interests
 
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2018
 
2017
 
2018
 
2017
Pension and other post-retirement benefits (a)
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(97,948
)
 
$
(118,068
)
 
$

 
$

Amounts reclassified from accumulated other comprehensive loss:
 
 
 
 
 
 
 
 
Amortization of prior service cost
 
(319
)
 
(228
)
 

 

Recognized net actuarial losses
 
10,924

 
9,601

 

 

Tax benefit
 
(2,566
)
 
(3,052
)
 

 

Total amount reclassified from accumulated other comprehensive loss, net of tax
 
8,039

 
6,321

 

 

Balance at end of period
 
$
(89,909
)
 
$
(111,747
)
 
$

 
$

Foreign Currency Translation
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(73,814
)
 
$
(112,178
)
 
$
801

 
$
(1,964
)
Reclassification from accumulated other comprehensive loss into net income
 
(774
)
 

 

 

Foreign currency translation adjustments
 
(18,938
)
 
32,222

 
(297
)
 
2,666

Balance at end of period
 
$
(93,526
)
 
$
(79,956
)
 
$
504

 
$
702

(a) Reclassifications out of accumulated other comprehensive loss and into net income are included in the computation of net periodic pension and other post-retirement benefit costs (refer to Note 16—Pensions and Other Post-retirement Benefits).
Note 8—Capital Stock
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 September 30, 2018. There were no treasury purchases of preferred stock during the nine months ended September 30, 2018 or 2017. 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 September 30, 2018.
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, 2017. No new shares have been issued in 2018. There were 38,464,650 and 38,222,928 shares outstanding at September 30, 2018, and December 31, 2017, respectively.
Treasury Shares - On May 12, 2015, the Board of Directors adopted a stock repurchase program replacing the existing 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 number of 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 nine months ended September 30, 2018 or 2017. We do not have any other share repurchase programs. There were 23,616,741 and 23,858,463 Treasury Shares at September 30, 2018, and December 31, 2017, 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 290,659 and 526,890 Treasury Shares issued for these purposes during the nine months ended September 30, 2018 and 2017, respectively.

-14-



Note 9—Segment Information
We are organized into seven 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 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 excluding restructuring charges, currency exchange gains/losses, other operating expense and strategic transaction costs. 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 U.S. GAAP and therefore do not purport to be alternatives to operating income or operating margin as a measure of operating performance. Further, the Company's measure of adjusted operating income (loss) and adjusted operating margin may not be comparable to similarly titled measures of other companies. Adjusted operating income (loss) 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.
Reportable segment information is presented in the following table:
(In thousands)
 
Americas
 
International
 
Corporate
 
Reconciling
Items
1
 
Consolidated
Totals
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
Sales to external customers
 
$
209,343

 
$
121,753

 
$

 
$

 
$
331,096

Intercompany sales
 
33,877

 
82,852

 

 
(116,729
)
 

Operating income
 
 
 
 
 
 
 
 
 
40,003

Restructuring charges (Note 5)
 
 
 
 
 
 
 
 
 
2,615

Currency exchange gains, net
 
 
 
 
 
 
 
 
 
(252
)
Other operating expense (Note 19)
 
 
 
 
 
 
 
 
 
14,627

Strategic transaction costs (Note 15)
 
 
 
 
 
 
 
 
 
56

Adjusted operating income (loss)
 
51,532

 
13,329

 
(7,812
)
 

 
57,049

Adjusted operating margin %
 
24.6
%
 
10.9
%
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
Sales to external customers
 
$
633,812

 
$
362,508

 
$

 
$

 
$
996,320

Intercompany sales
 
104,520

 
249,745

 

 
(354,265
)
 

Operating income
 
 
 
 
 
 
 
 
 
131,235

Restructuring charges (Note 5)
 
 
 
 
 
 
 
 
 
10,223

Currency exchange losses, net
 
 
 
 
 
 
 
 
 
2,571

Other operating expense (Note 19)
 
 
 
 
 
 
 
 
 
25,469

Strategic transaction costs (Note 15)
 
 
 
 
 
 
 
 
 
208

Adjusted operating income (loss)
 
151,456

 
41,960

 
(23,710
)
 

 
169,706

Adjusted operating margin %
 
23.9
%
 
11.6
%
 
 
 
 
 
 

-15-



(In thousands)
 
Americas
 
International
 
Corporate
 
Reconciling
Items
1
 
Consolidated
Totals
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
Sales to external customers
 
$
186,898

 
$
109,231

 
$

 
$

 
$
296,129

Intercompany sales
 
31,451

 
72,496

 

 
(103,947
)
 

Operating income
 
 
 
 
 
 
 
 
 
39,878

Restructuring charges (Note 5)
 
 
 
 
 
 
 
 
 
3,214

Currency exchange losses, net
 
 
 
 
 
 
 
 
 
562

Other operating expense (Note 19)
 
 
 
 
 
 
 
 
 
3,346

Strategic transaction costs (Note 15)
 
 
 
 
 
 
 
 
 
386

Adjusted operating income (loss)
 
45,365

 
10,229

 
(8,208
)
 

 
47,386

Adjusted operating margin %
 
24.3
%
 
9.4
%
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
Sales to external customers
 
$
528,426

 
$
322,243

 
$

 
$

 
$
850,669

Intercompany sales
 
93,904

 
218,267

 

 
(312,171
)
 

Operating income
 
 
 
 
 
 
 
 
 
71,996

Restructuring charges (Note 5)
 
 
 
 
 
 
 
 
 
16,920

Currency exchange losses, net
 
 
 
 
 
 
 
 
 
3,994

Other operating expense (Note 19)
 
 
 
 
 
 
 
 
 
32,956

Strategic transaction costs (Note 15)
 
 
 
 
 
 
 
 
 
3,365

Adjusted operating income (loss)
 
125,087

 
30,146

 
(26,002
)
 

 
129,231

Adjusted operating margin %
 
23.7
%
 
9.4
%
 
 
 
 
 
 
1Reconciling items consist primarily of intercompany eliminations and items not directly attributable to reporting segments.
Total sales by product group was as follows:
Three Months Ended September 30, 2018
Americas
 
International
 
Consolidated
(In thousands)
Dollars
Percent
 
Dollars
Percent
 
Dollars
Percent
Breathing Apparatus
$
50,282

24%
 
$
30,142

25%
 
$
80,424

24%
Fixed Gas & Flame Detection
33,803

16%
 
31,148

26%
 
64,951

20%
Firefighter Helmets & Protective Apparel
30,373

15%
 
5,448

4%
 
35,821

11%
Industrial Head Protection
28,909

14%
 
8,029

7%
 
36,938

11%
Portable Gas Detection
26,755

13%
 
12,650

10%
 
39,405

12%
Fall Protection
16,465

8%
 
11,474

9%
 
27,939

8%
Other
22,756

10%
 
22,862

19%
 
45,618

14%
Total
$
209,343

100%
 
$
121,753

100%
 
$
331,096

100%
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
Americas
 
International
 
Consolidated
(In thousands)
Dollars
Percent
 
Dollars
Percent
 
Dollars
Percent
Breathing Apparatus
$
146,293

23%
 
$
84,031

23%
 
$
230,324

23%
Firefighter Helmets & Protective Apparel
102,906

16%
 
24,075

7%
 
126,981

13%
Fixed Gas & Flame Detection
99,459

16%
 
90,023

25%
 
189,482

19%
Industrial Head Protection
87,901

14%
 
23,631

7%
 
111,532

11%
Portable Gas Detection
82,654

13%
 
40,285

11%
 
122,939

12%
Fall Protection
45,668

7%
 
34,028

9%
 
79,696

8%
Other
68,931

11%
 
66,435

18%
 
135,366

14%
Total
$
633,812

100%
 
$
362,508

100%
 
$
996,320

100%

-16-



Three Months Ended September 30, 2017
Americas
 
International
 
Consolidated
(In thousands)
Dollars
Percent
 
Dollars
Percent
 
Dollars
Percent
Breathing Apparatus
$
40,876

22%
 
$
25,299

23%
 
$
66,175

22%
Fixed Gas & Flame Detection
32,409

17%
 
28,985

27%
 
61,394

21%
Firefighter Helmets & Protective Apparel
25,345

14%
 
6,622

6%
 
31,967

11%
Portable Gas Detection
23,786

13%
 
11,710

11%
 
35,496

12%
Industrial Head Protection
27,539

15%
 
7,059

6%
 
34,598

12%
Fall Protection
13,727

7%
 
11,003

10%
 
24,730

8%
Other
23,216

12%
 
18,553

17%
 
41,769

14%
Total
$
186,898

100%
 
$
109,231

100%
 
$
296,129

100%
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
Americas
 
International
 
Consolidated
(In thousands)
Dollars
Percent
 
Dollars
Percent
 
Dollars
Percent
Breathing Apparatus
$
134,835

26%
 
$
69,978

22%
 
$
204,813

24%
Fixed Gas & Flame Detection
91,048

17%
 
81,302

25%
 
172,350

20%
Firefighter Helmets & Protective Apparel
37,123

7%
 
23,311

7%
 
60,434

7%
Portable Gas Detection
73,469

14%
 
35,547

11%
 
109,016

13%
Industrial Head Protection
80,503

15%
 
20,968

7%
 
101,471

12%
Fall Protection
39,217

7%
 
32,968

10%
 
72,185

8%
Other
72,231

14%
 
58,169

18%
 
130,400

16%
Total
$
528,426

100%
 
$
322,243

100%
 
$
850,669

100%
Note 10—Earnings per Share
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 September 30,
 
Nine Months Ended September 30,
(In thousands, except per share amounts)
 
2018
 
2017
 
2018
 
2017
Net income
 
$
33,717

 
$
32,066

 
$
99,267

 
$
59,011

Preferred stock dividends
 
(10
)
 
(10
)
 
(30
)
 
(30
)
Net income available to common equity
 
33,707

 
32,056

 
99,237

 
58,981

Dividends and undistributed earnings allocated to participating securities
 
(32
)
 
(36
)
 
(94
)
 
(62
)
Net income available to common shareholders
 
33,675

 
32,020

 
99,143

 
58,919

 
 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
 
38,417

 
38,074

 
38,328

 
37,970

Stock options and other stock compensation
 
619

 
628

 
586

 
722

Diluted weighted-average shares outstanding
 
39,036

 
38,702

 
38,914

 
38,692

Antidilutive stock options
 

 

 

 

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.88

 
$
0.84

 
$
2.59

 
$
1.55

Diluted
 
$
0.86

 
$
0.83

 
$
2.55

 
$
1.52


-17-



Note 11—Income Taxes
The Tax Cuts and Jobs Act of 2017 ("the Act"), which was signed into law on December 22, 2017, has resulted in significant changes to the U.S. corporate income tax system including reducing the U.S. corporate rate to 21% starting in 2018. The Act also creates a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries.
On December 22, 2017, SAB 118 was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company calculated its best estimate of the impact of the Act and recorded income tax expense of $19.8 million during the fourth quarter of 2017, the period in which the legislation was enacted. Of this amount, $18.0 million related to the one-time transition tax and the remaining $1.8 million was related to the revaluation of U.S. deferred tax assets and liabilities. In addition, deferred taxes have been recorded on the outside basis differences of non-U.S. subsidiaries in the amount of $7.8 million, fully offset by foreign tax credits. During the third quarter of 2018 , we reduced our estimate for the one-time transition tax by $2 million for updated regulations related to the Act. Changes to applicable tax law, regulations or interpretations of the Act may require further adjustments and changes in our estimates. The final determination of the transition tax and the revaluation of U.S. deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the Act.

During the third quarter of 2018, the Company recorded $5.1 million of foreign taxes related to the legal and operational realignment of our U.S. and Canadian operations. These taxes are expected to be fully offset by foreign tax credits.
The Company's effective tax rate for the third quarter of 2018 was 11.0% and differs from the U.S. federal statutory rate of 21% primarily due to benefits associated with the reduction in the one-time transition tax as discussed above, additional manufacturing deduction benefits and certain share-based payments related to the application of ASU 2016-09. The Company's effective tax rate for the third quarter of 2017 was 14.4% and differs from the U.S. federal statutory rate of 35% primarily due to a benefit of approximately 6.6% associated with the reduction of exit taxes related to our European reorganization, additional manufacturing deduction benefits and the release of valuation allowance on foreign losses.
The Company's effective tax rate for the nine months ended September 30, 2018, was 19.1% and differs from the U.S. federal statutory rate of 21% primarily due to tax benefits associated with the reduction in the one-time transition tax as discussed above, additional manufacturing benefits and certain share-based payments related to the application of ASU 2016-09 partially offset by increased profitability in less favorable tax jurisdictions and higher foreign entity losses in jurisdictions where we cannot take tax benefits. The Company's effective tax rate for the nine months ended September 30, 2017, was 9.6% which differs from the U.S. federal statutory rate of 35% primarily due to a significant tax benefit of approximately 10.5% related to certain share-based payments related to the application of ASU 2016-09 as well as a 3.8% associated with the reduction of exit taxes related to our European reorganization, additional manufacturing deduction benefits and the release of a valuation allowance on foreign losses.
At September 30, 2018, the Company had a gross liability for unrecognized tax benefits of $14.5 million. The Company has recognized tax benefits associated with these liabilities of $5.2 million at September 30, 2018. 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 $3.0 million at September 30, 2018.
Note 12—Stock Plans
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 2017 Non-Employee Directors’ Equity Incentive Plan provides for grants of stock options and restricted stock to non-employee directors through May 2027. We issue treasury shares for stock option exercises, and grants of restricted stock and performance stock. Please refer to Note 8—Capital Stock for further information regarding stock compensation share issuance.

-18-



Stock compensation expense is as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2018
 
2017
 
2018
 
2017
Stock compensation expense
 
$
1,904

 
$
1,435

 
$
9,595

 
$
9,668

Income tax benefit
 
463

 
543

 
2,332

 
3,650

Stock compensation expense, net of income tax benefit
 
$
1,441

 
$
892

 
$
7,263

 
$
6,018

A summary of stock option activity for the nine months ended September 30, 2018, follows:
 
 
Shares
 
Weighted Average
Exercise Price
Outstanding at January 1, 2018
 
955,446

 
$
42.75

Exercised
 
(160,617
)
 
38.31

Forfeited
 
(4,721
)
 
44.50

Outstanding at September 30, 2018
 
790,108

 
43.66

Exercisable at September 30, 2018
 
692,773

 
$
43.55

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 nine months ended September 30, 2018, follows:
 
 
Shares
 
Weighted Average
Grant Date Fair Value
Unvested at January 1, 2018
 
227,161

 
$
57.50

Granted
 
73,062

 
87.00

Vested
 
(88,298
)
 
58.18

Forfeited
 
(4,661
)
 
58.94

Unvested at September 30, 2018
 
207,264

 
$
68.76

Performance stock units have a market condition modifier and are valued at an estimated fair value using the Monte Carlo model. The final number of shares to be issued for performance stock units granted in the first quarter of 2018 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 2018 with a market condition modifier.
Fair value per unit
$83.58
Risk-free interest rate
2.36%
Expected dividend yield
1.82%
Expected volatility
28.3%
MSA stock beta
1.240
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 one year average closing share price. Expected volatility is based on the ten year historical volatility using daily stock prices. Expected life is based on historical stock option exercise data.

-19-



A summary of performance stock unit activity for the nine months ended September 30, 2018, follows:
 
 
Shares
 
Weighted Average
Grant Date Fair Value
Unvested at January 1, 2018
 
242,186

 
$
55.06

Granted
 
62,775

 
84.79

Performance adjustments
 
(3,356
)
 
44.61

Vested
 
(41,660
)
 
40.23

Forfeited
 
(8,659
)
 
44.53

Unvested at September 30, 2018
 
251,286

 
$
65.45

The performance adjustments above relate to the final number of shares issued for the 2015 Management Performance Units, which were 93.6% of the target award based on Total Shareholder Return during the three year performance period, and vested in the first quarter of 2018.
Note 13—Long-Term Debt
(In thousands)
September 30, 2018
 
December 31, 2017
2006 Senior Notes payable through 2021, 5.41%, net of debt issuance costs
$

 
$
26,667

2010 Senior Notes payable through 2021, 4.00%, net of debt issuance costs
80,000

 
80,000

2016 Senior Notes payable through 2031, 3.40%, net of debt issuance costs
71,422

 
74,139

Senior revolving credit facility maturing in 2023, net of debt issuance costs
238,773

 
293,693

Total
390,195

 
474,499

Amounts due within one year, net of debt issuance costs
20,000

 
26,667

Long-term debt, net of debt issuance costs
$
370,195

 
$
447,832

On September 7, 2018, the Company entered into an Amended and Restated Credit Agreement associated with our senior revolving credit facility which extended the term of the revolving credit facility through September 2023 and increased the capacity to $600.0 million. Under this 2018 Amended and Restated Credit Agreement, 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) 0.00%, (ii) the Prime Rate, (ii) the Federal Funds Open Rate plus one half of one percent (0.5%), (iii) the Overnight Bank Funding Rate, plus one half of one percent (0.50%), or (iv) 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 3.33% as of September 30, 2018. At September 30, 2018, $341.7 million of the existing $600.0 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 $71.5 million at September 30, 2018). The notes are repayable in annual installments of £6.1 million (approximately $7.9 million at September 30, 2018), commencing January 22, 2023, with a final payment of any remaining amount outstanding on January 22, 2031. The interest rate on these notes is fixed at 3.4%. On September 7, 2018, the Company entered into an Amended and Restated agreement associated with this multi-currency note purchase and private shelf agreement dated January 22, 2016. Under this 2018 Second Amended and Restated Multi-Currency Note Purchase and Private Shelf Agreement, the Company may request from time to time during a three-year period ending September 7, 2021, the issuance of up to $150 million of additional senior notes. The amended 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 3.50 to 1.00; in each case calculated on the basis of the trailing four fiscal quarters. In addition, the amended 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.
On August 24, 2018, we repaid our 5.41% 2006 Senior Notes. In connection with the payoff of these notes, MSA recognized a loss on extinguishment of debt of $1.5 million which was recorded in loss on extinguishment of debt on our condensed consolidated statement of income.

-20-



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 September 30, 2018.
The Company had outstanding bank guarantees and standby letters of credit with banks as of September 30, 2018, totaling $11.1 million, of which $3.0 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. The full amount of the letters of credit remains unused and available at of September 30, 2018. The Company is also required to provide cash collateral in connection with certain arrangements. At September 30, 2018, the Company has $0.4 million of restricted cash in support of these arrangements.
Note 14—Goodwill and Intangible Assets
Changes in goodwill during the nine months ended September 30, 2018 are as follows:
(In thousands)
Goodwill
Balance at January 1, 2018
$
422,185

Disposals
(525
)
Currency translation
(4,881
)
Balance at September 30, 2018
$
416,779

At September 30, 2018, the Company had goodwill of $273.3 million and $143.5 million related to the Americas and International reportable segments, respectively.
Changes in intangible assets, net of accumulated amortization during the nine months ended September 30, 2018, are as follows:
(In thousands)
Intangible Assets
Net balance at January 1, 2018
$
183,088

Amortization expense
(7,916
)
Currency translation
(1,855
)
Net balance at September 30, 2018
$
173,317

At September 30, 2018, the Company had a trade name with an indefinite life totaling $60.0 million related to the acquisition of Globe Holding Company, LLC. Refer to Note 15—Acquisitions for additional information.

-21-



Note 15—Acquisitions

Acquisition of Globe Holding Company, LLC
On July 31, 2017, we acquired 100% of the common stock in Globe Holding Company, LLC ("Globe") in an all-cash transaction valued at $215 million plus a working capital adjustment of $1.4 million. There is no contingent consideration.
Based in Pittsfield, NH, Globe is a leading innovator and provider of firefighter protective clothing and boots. This acquisition aligns with our corporate strategy in that it strengthens our leading position in the North American fire service market. The transaction was funded through borrowings on our unsecured senior revolving credit facility.
Globe operating results are included in our consolidated financial statements from the acquisition date as part of the Americas reportable segment. The acquisition qualifies as a business combination and will be accounted for using the acquisition method of accounting.
We finalized the purchase price allocation as of June 30, 2018. The following table summarizes the fair values of the Globe assets acquired and liabilities assumed at the date of acquisition:
(In millions)
July 31, 2017
Current assets (including cash of $58 thousand)
$
28.6

Property, plant and equipment and other noncurrent assets
8.3

Trade name
60.0

Distributor relationships
40.2

Acquired technology and other intangible assets
10.5

Goodwill
74.5

Total assets acquired
222.1

Total liabilities assumed
5.7

Net assets acquired
$
216.4

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 trade name and technology related intangible assets; the excess earnings approach for distributor relationships using distributor inputs and contributory charges; 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, royalty rates, costs to produce, tax rates, capital spending, discount rates, and working capital changes. Cash flow forecasts were generally based on Globe pre-acquisition forecasts coupled with estimated MSA sales synergies. Identifiable intangible assets with finite lives are subject to amortization over their estimated useful lives. The distributor relationships acquired in the Globe transaction will be amortized over a period of 20 years and the remaining identifiable assets will be amortized over 5 years. The trade name was determined to have an indefinite useful life. We will perform an impairment assessment annually on the trade name, or sooner if there is a triggering event. Additionally, as part of each impairment assessment, we will reassess whether the asset continues to have an indefinite life or whether it should be reassessed with a finite life. Estimated future amortization expense related to the identifiable intangible assets is approximately $1 million for the remainder of 2018, $4.1 million in each of the next three years 2019 through 2021 and $3.2 million in 2022. Estimated future depreciation expense related to Globe property, plant and equipment is approximately $0.3 million for the remainder of 2018 and $1.0 million in each of the next four years.
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 Globe with our operations. Goodwill of $74.5 million related to the Globe acquisition has been recorded in the Americas reportable segment and is deductible for tax purposes.

-22-



Our results for the nine months ended September 30, 2018, include strategic transaction costs of $0.2 million, including an insignificant amount of transaction and integration costs related to the acquisition of Globe Holding Company LLC. Our results for the nine months ended September 30, 2017, include strategic transaction costs of $3.4 million. These costs are reported in selling, general and administrative expenses.
The operating results of the Globe acquisition have been included in our consolidated financial statements from the acquisition date through September 30, 2018. Our results for the nine months ended September 30, 2018, include Globe sales and net income of $86.6 million and $9.7 million, respectively.
The following unaudited pro forma information presents our combined results as if the Globe acquisition had occurred at the beginning of 2017. 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 Globe during the periods presented that are required to be eliminated. Intercompany transactions between Globe companies during the periods presented have been eliminated in the unaudited pro forma condensed combined financial information. The unaudited pro forma condensed combined 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.
Pro forma condensed combined financial information (Unaudited)
(In millions, except per share amounts)
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
Net sales
$
305

 
$
915

Net income
$
32

 
$
67

Basic earnings per share
$
0.83

 
$
1.77

Diluted earnings per share
$
0.81

 
$
1.74

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 acquisitions 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 acquisitions. 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.
The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting under existing U.S. GAAP. MSA has been treated as the acquirer.

-23-



Note 16—Pensions and Other Post-retirement Benefits
Components of net periodic benefit cost consisted of the following:
 
 
Pension Benefits
 
Other Benefits
(In thousands)
 
2018
 
2017
 
2018
 
2017
Three Months Ended September 30,
 
 
 
 
 
 
 
 
Service cost
 
$
2,891

 
$
2,721

 
$
92

 
$
96

Interest cost
 
4,218

 
4,572

 
199

 
204

Expected return on plan assets
 
(9,097
)
 
(8,738
)
 

 

Amortization of prior service cost
 
(4
)
 
(4
)
 
(101
)
 
(6
)
Recognized net actuarial losses
 
3,454

 
3,184

 
188

 
15

Settlements
 
26

 
34

 

 

Net periodic benefit cost (a)
 
1,488

 
1,769

 
378

 
309

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
Service cost
 
$
8,673

 
$
8,163

 
$
276

 
$
308

Interest cost
 
12,656

 
13,716

 
595

 
678

Expected return on plan assets
 
(27,289
)
 
(26,214
)
 

 

Amortization of prior service cost
 
(16
)
 
(12
)
 
(303
)
 
(216
)
Recognized net actuarial losses
 
10,360

 
9,552

 
564

 
49

Settlement/curtailment loss (credit)
 
80

 
102

 

 

Net periodic benefit cost, excluding below
 
4,464

 
5,307

 
1,132

 
819

Special termination charge
 

 
11,384

(b) 

 

Net periodic benefit cost (a)