MSA Safety Incorporated — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. MSA manufactures safety products, including breathing apparatus, gas detection systems, protective apparel and fall-protection equipment. Results include Globe, acquired July 31, 2017.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $331.1M | $296.1M | $996.3M | $850.7M |
| Gross profit | $148.3M | $132.2M | $449.5M | $384.9M |
| Gross margin | 44.8% | 44.6% | 45.1% | 45.2% |
| Operating income | $40.0M | $39.9M | $131.2M | $72.0M |
| Net income attributable to MSA | $33.7M | $32.1M | $99.3M | $59.0M |
| Diluted EPS | $0.86 | $0.83 | $2.55 | $1.52 |
Q3 reported sales grew 11.8%; organic constant-currency sales increased 12.6%. Nine-month reported sales rose 17.1%, including a 7.8% acquisition contribution; organic constant-currency growth was 8.2%. Q3 operating income was nearly flat as higher sales were largely offset by increased product-liability expense. Nine-month improvement reflected higher volumes, lower restructuring and other operating costs, and spending discipline.
Q3 gross margin improved 0.2 percentage points, supported by pricing and indirect-cost leverage, partly offset by inflation and less favorable mix. Nine-month margin edged down 0.1 points, primarily from Globe-related dilution. Q3 effective tax rate was 11.0%; the nine-month rate was 19.1%. Dividend per common share was $0.38 in Q3 and $1.11 year to date.
Cash, debt and liquidity
- Nine-month operating cash flow was $186.2M, versus $189.2M in 2017. The filing attributes the decline mainly to lower net insurance collections after product-liability payments, partly offset by improved operating results.
- Cash, cash equivalents and restricted cash were $118.6M at September 30, 2018. Investing activities used $71.7M and financing activities used $123.9M in the first nine months. Capital expenditures were $18.6M; short-term investment purchases were $57.1M.
- Total debt was $390.2M, down from $474.5M at year-end 2017. The company repaid its 5.41% senior notes in August, recognizing a $1.5M extinguishment loss. Its revolving facility was extended to September 2023 and increased to $600M; $341.7M was reported unused, including letters of credit. MSA reported compliance with debt covenants.
- Current assets were $673.3M and current liabilities $307.9M at quarter-end. The company reported $56.996M in short-term investments.
Material changes and management commentary
- Americas Q3 sales increased 12.0% and International sales 11.5%; both segments reported stronger core-product sales. Adjusted operating margins were 24.6% in Americas and 10.9% in International.
- Management cited high-single-digit incoming-order growth in Q3 and backlog relatively consistent with Q2 2018. It expected R&D spending to be approximately 4.0% of 2018 sales and expected production of the M1 SCBA to begin by year-end. The Cairns XF1 helmet was available for shipment at quarter-end.
- MSA repatriated $59M from foreign affiliates in the first nine months and expected to repatriate $75M–$100M for full-year 2018. Management said it would continue to balance growth investment, dividends and debt service.
- Adoption of the new revenue-recognition standard did not materially affect the financial statements. MSA expected adoption of the lease standard in 2019 to increase assets and liabilities significantly; undiscounted operating-lease commitments were approximately $36.2M.
Risks, contingencies and unusual items
- Cumulative-trauma product liability: The company reported 1,517 lawsuits comprising 2,392 claims. The reserve was $172.3M, including $103.9M for estimated incurred-but-not-reported claims. In Q3, it increased the asserted-claims reserve by $16.9M based on additional information. Management cautioned that actual claims and settlements may differ materially from estimates.
- Insurance receivables were $61.8M and notes receivable from insurers were $64.2M. MSA described itself as largely self-insured for these legacy claims and noted collection timing and amount depend on coverage terms, claim composition and insurer capacity. A July 2018 settlement resolved remaining major coverage litigation with North River; payment was received in Q3.
- Other operating expense was $14.6M in Q3, mainly reflecting the increased asserted-claims reserve and defense costs. Nine-month other operating expense was $25.5M, including an adjustment to estimated insurance recoveries.
- The company recorded $5.1M of foreign taxes related to the U.S./Canada legal and operational realignment, which it expected to be offset by foreign tax credits. Its estimate of the Tax Act transition tax was reduced by $2.0M in Q3; further adjustment remained possible.
- Currency translation reduced nine-month comprehensive results, with a $19.2M foreign-currency translation loss. Argentina became highly inflationary for accounting purposes from July 1, 2018; MSA expected the effect to be immaterial given its limited presence there.
Important facts for investors to verify
- Whether core-product growth and order trends persisted after Q3, and how much reported growth reflected Globe and foreign exchange.
- Future cumulative-trauma claims, reserve revisions, defense costs and the collectibility and timing of insurer recoveries.
- Cash generation after product-liability payments, planned cash repatriations, debt repayment and revolver availability.
- Margin trends as pricing, inflation, product mix and Globe integration affect results; also assess the effect of tax benefits and discrete tax items on reported earnings.
- The eventual balance-sheet effect of lease-standard adoption and any changes in debt-covenant capacity or interest costs.