MSA Safety Incorporated — FY 2018 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2018; quarterly figures are also reported. MSA designs and sells safety equipment, including breathing apparatus, gas detection, head protection, firefighter apparel and fall-protection products. Core products accounted for approximately 87% of 2018 sales. The Americas and International segments generated 63% and 37% of sales, respectively.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $1,358.1 million | $1,196.8 million |
| Gross profit / gross margin | $611.9 million / 45.1% | $538.9 million / 45.0% |
| Operating income / operating margin | $173.5 million / 12.8% | $39.6 million / 3.3% |
| Net income attributable to MSA | $124.2 million | $26.0 million |
| Diluted EPS | $3.18 | $0.67 |
| Cash from operating activities | $263.9 million | $230.3 million |
| Capital expenditures | $34.0 million | $23.7 million |
| Cash, cash equivalents and restricted cash | $140.6 million | $137.9 million |
| Total debt, including current portion | $361.4 million | $474.5 million |
Reported sales increased 13.5%; organic constant-currency sales grew 8.0%. Americas sales rose 15.9% (8.2% organic constant currency) and International sales rose 9.5% (7.5% organic constant currency). Globe, acquired in 2017, contributed $113.9 million of 2018 sales. Operating cash flow less capital expenditures was approximately $229.9 million, calculated from the reported figures. The current ratio was approximately 2.3, calculated from current assets of $656.6 million and current liabilities of $282.1 million.
Material changes and notable quarterly results
- Compared with 2017, revenue rose $161.3 million and operating income improved substantially. The comparison is significantly affected by the $126.4 million 2017 charge for cumulative-trauma product liability claims; 2018 included a further $45.3 million increase in other operating expense for those claims.
- Gross margin was broadly stable: improved pricing and indirect-cost leverage were offset by inflation and Globe-related product mix. Management estimated Globe reduced gross margin by about 100 basis points.
- Fourth-quarter 2018 sales were $361.8 million, versus $346.1 million a year earlier. Fourth-quarter net income attributable to MSA was $24.9 million, versus a $33.0 million loss in Q4 2017, when the legacy-claims charge materially affected results.
- MSA paid $57.2 million in common dividends in 2018 ($1.49 per share), up from $52.5 million ($1.38 per share) in 2017. It made no open-market repurchases in 2018; reported quarterly share purchases related to stock-compensation transactions.
Liquidity, debt and contingencies
- Operating cash flow increased to $263.9 million, supported by higher earnings and improved working capital. Investing activities used $84.4 million; financing activities used $163.3 million, including $107.7 million of net debt repayments and $57.2 million of dividends.
- The $600 million revolving credit facility matures in 2023; $363.5 million was unused at year-end, including letters of credit. MSA reported access to approximately $514 million of capital and compliance with debt covenants. About 64% of debt was variable-rate; the weighted-average interest rate was 3.47%.
- Cumulative-trauma product-liability reserves totaled $187.3 million at year-end. MSA LLC faced 1,481 lawsuits comprising 2,355 claims. The reserve depends on uncertain future claim levels, outcomes and settlement costs; management cautions that future adjustments could be material.
- Related insurance receivables were $71.7 million and notes receivable from insurers were $59.6 million. MSA is now largely self-insured for these legacy claims. A July 2018 settlement resolved remaining major coverage litigation with North River, and payment was received in the third quarter.
- Foreign currency remains a material exposure: approximately half of sales came from operations outside the United States. Management estimated that a hypothetical 10% U.S.-dollar strengthening or weakening would change reported annual sales by about $63.6 million and net income by about $6.4 million.
Outlook and management commentary
Management targeted mid-single-digit revenue growth for 2019 after 8.0% organic constant-currency growth in 2018, which it said exceeded its target. It expected approximately $35 million of 2019 capital expenditures and $7.1 million of net pension contributions. Management also expected progress on International footprint rationalization in early 2019; related actions could generate noncash currency-translation write-offs. The filing gives no specific earnings or margin guidance.
Other notable items: the effective tax rate was 22.9% in 2018 versus 9.5% in 2017, with the prior-year rate notably affected by share-based-payment tax benefits and tax-reform accounting. Adoption of the new revenue standard did not materially affect the financial statements. Adoption of the new lease standard was expected to increase assets and liabilities by $52–$58 million on January 1, 2019. Management disclosed a $2.9 million post-earnings-release cash-flow reclassification that reduced reported capital expenditures and increased operating cash outflow; the filing does not indicate a change in total cash flow.
Key facts for investors to verify
- Review the assumptions and sensitivity of the $187.3 million cumulative-trauma reserve, claim trends, settlement payments and recovery of insurer receivables.
- Separate organic growth from Globe acquisition effects and assess whether the 2019 mid-single-digit revenue target is supported by demand across segments and products.
- Assess variable-rate debt exposure, the 2023 revolving-facility maturity, refinancing assumptions and capacity under debt covenants.
- Track margins and restructuring costs as Europe footprint changes proceed, including potential currency-translation charges.
- Confirm the treatment and implications of the disclosed $2.9 million cash-flow reclassification and the expected lease-accounting transition.