MSA Safety Incorporated — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. MSA develops and sells safety equipment, including breathing apparatus, gas detection, protective apparel and helmets, head protection, and fall protection products.
Financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $330.7 million | $308.4 million |
| Gross profit / gross margin | $142.8 million / 43.2% | $134.8 million / 43.7% |
| Operating income | $42.7 million | $44.1 million |
| Net income attributable to MSA | $35.5 million | $36.5 million |
| Diluted EPS | $0.90 | $0.92 |
| Operating cash flow | $24.5 million | $45.6 million |
| Capital expenditures | $8.0 million | $9.6 million |
Sales increased 7.2% reported and 9.3% on a constant-currency basis; organic constant-currency growth was 3.8%. Americas sales rose 8.4% reported and International sales rose 4.9%. Adjusted operating income, a non-GAAP measure, was $53.8 million versus $47.5 million; adjusted EBITDA was $65.7 million versus $58.0 million. The filing cautions that these non-GAAP measures may not be comparable across companies.
SG&A was $78.6 million, or 23.8% of sales, versus $75.5 million, or 24.5%. R&D was $13.3 million. The effective tax rate was 21.7%, compared with 21.0%. Dividends were $0.44 per common share, versus $0.43.
Financial position and liquidity
- At March 31, 2022, cash and cash equivalents were $147.3 million; short-term investments were $40.0 million.
- Total debt was $599.4 million, including $8.0 million due within one year; long-term debt was $591.4 million. The revolving credit facility had $568.6 million of unused capacity, including letters of credit. MSA reported compliance with its debt covenants.
- Operating cash flow fell to $24.5 million, primarily due to working-capital needs, especially a $40.8 million inventory increase associated with higher backlog. Cash, cash equivalents, and restricted cash increased $6.3 million during the quarter.
- Investing activities provided $1.1 million, mainly reflecting net maturities of short-term investments. Financing activities used $15.9 million, including $17.3 million in dividends. Net debt proceeds were $5.0 million.
- Current assets were $826.2 million and current liabilities were $333.9 million. The company said it had ample liquidity and capital access.
Changes and operating developments
- Acquisition-related sales from Bacharach, acquired July 1, 2021, contributed to growth. Organic constant-currency sales increased 3.1% in Americas and 5.4% in International.
- Core products accounted for approximately 91% of sales, up from 88%. Growth across core products was partly offset by lower demand for air-purifying respirators.
- Gross margin declined 0.5 percentage points. Management cited inflation in materials, less favorable product mix, and $2.3 million of acquisition-related intangible amortization; strategic pricing and lower inventory charges for respirators partly offset these pressures.
- Operating income declined despite higher sales, primarily because currency exchange losses were $3.3 million versus gains of $2.1 million a year earlier. Interest expense also increased, partly related to the Bacharach acquisition.
- Order activity increased 22% year over year, with 16% organic growth and 6% from acquisitions. Backlog reached record levels amid supply-chain and labor constraints.
- During Q1, MSA suspended product shipments to Russia and Belarus indefinitely due to the military conflict in Ukraine. Customers in Russia, Belarus, and Ukraine together accounted for approximately $6 million of 2021 sales.
- Prior-period figures were retrospectively adjusted after MSA changed certain U.S. inventory accounting from LIFO to FIFO in 2021.
Outlook, risks, and contingencies
Management expected sequential improvement in revenue and earnings in Q2 2022, but provided no numerical full-year guidance in the supplied filing text. It identified supply constraints, raw-material availability, potential COVID-related lockdowns, industrial employment, geopolitical risk, and the pace of economic recovery as factors that could affect results. It had implemented price increases and said inflationary pressures could continue for the foreseeable future.
- Product liability: The cumulative-trauma reserve was $410.8 million at March 31, 2022, including amounts for asserted and incurred-but-not-reported claims. MSA LLC was named in 1,691 lawsuits comprising 4,595 claims. Management emphasized that future claims and costs are difficult to predict and actual losses could exceed reserves.
- After quarter-end, MSA LLC agreed to negotiate, resolve, and dismiss several hundred claims over the following months; related amounts were already accrued. Expected cash outlays of up to $26.3 million were anticipated over the next four quarters.
- Insurance receivables were $126.4 million and insurance-company notes receivable were $48.8 million. MSA LLC is largely self-insured for these historical claims; collection timing and amounts remain subject to assumptions, including insurer solvency and future claim characteristics.
- MSA subsidiaries were defending a small number of lawsuits alleging injury or environmental harm associated with products containing PFAS. The company said these matters were at an early stage and that it believed it had valid defenses.
- Other disclosed commitments included $8.9 million of bank guarantees and standby letters of credit, and expected 2022 pension contributions of approximately $7.7 million.
Important facts for investors to verify
- Whether record backlog converts into sales as supply-chain, electronic-component, and labor constraints ease.
- Whether pricing offsets inflation in inputs without materially affecting demand, product mix, or margins.
- Developments in cumulative-trauma claims, reserve assumptions, the planned claim resolutions, and related insurance recoveries and cash outlays.
- Debt levels, variable-rate exposure, and liquidity needs; the filing reports $329.9 million of variable-rate revolver borrowings and a $3.6 million annual earnings impact from a 100-basis-point rate change.
- The impact of the Russia and Belarus shipment suspension and broader geopolitical and economic conditions.
- The filing reports $3.7 million of cash used for company stock purchases, while stating no shares were repurchased under the public repurchase program; the share-purchase table says quarter purchases related to stock-based compensation transactions.