MSA Safety Incorporated — Q2 2023 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2023, compared with the corresponding 2022 periods. MSA makes safety products, including breathing apparatus, gas detection systems, protective apparel and fall protection equipment. Its reportable segments are Americas and International.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $447.3 million | $372.3 million | $845.6 million | $703.0 million |
| Gross profit / margin | $213.8 million / 47.8% | $164.4 million / 44.2% | $395.2 million / 46.7% | $307.2 million / 43.7% |
| Operating income (loss) | $95.0 million | $61.5 million | $34.9 million | $104.2 million |
| Net income (loss) | $67.1 million | $47.7 million | $(83.1) million | $83.2 million |
| Diluted EPS | $1.70 | $1.21 | $(2.12) | $2.11 |
- Q2 sales rose 20.1% year over year; constant-currency growth was 19.9%. Americas sales increased 22.2% and International sales 15.8%.
- Management attributed sales growth to volume, pricing, healthy demand, improved output and backlog conversion as supply conditions improved. Gross-margin expansion reflected volume leverage, price/cost management and productivity.
- Q2 adjusted operating income, a non-GAAP measure, was $103.8 million versus $65.6 million. For the first half it was $181.2 million versus $119.5 million. Adjusted measures exclude specified items, including restructuring, currency effects and acquisition-related amortization.
- First-half GAAP results include a $129.2 million pre-tax loss on the MSA LLC divestiture and related tax expense; the tax-effected loss was $199.6 million. The resulting reported first-half effective tax rate was 520.8%, versus 23.5% in 2022.
Cash, debt and liquidity
- Cash and cash equivalents were $146.9 million at June 30, 2023, down from $162.9 million at December 31, 2022. Cash, cash equivalents and restricted cash totaled $148.9 million.
- First-half operating cash flow was a use of $190.8 million, compared with $40.0 million provided in 2022, primarily because MSA contributed $341.2 million in cash in connection with the divestiture. Investing activities used $15.6 million; financing activities provided $196.6 million.
- Total debt was $814.0 million, up from $572.8 million at year-end 2022. The company reported $637.2 million of unused capacity under its $900 million revolving facility, including letters of credit. It was in compliance with its debt covenants at quarter-end.
- Interest expense was $13.2 million in Q2 and $24.7 million for the first half, up from $4.6 million and $8.2 million, respectively, in 2022. Management cited higher rates and increased debt balances. About $504.9 million of borrowings were variable-rate; the filing estimates a 100-basis-point rate change would affect annual earnings by $4.7 million.
- Capital expenditures were $18.3 million for the first half. Cash dividends paid were $36.5 million; the declared common dividend was $0.47 per share for Q2.
Material changes, outlook and risks
- MSA LLC divestiture: Completed January 5, 2023. MSA transferred the subsidiary holding legacy cumulative-trauma claims to a joint venture of R&Q Insurance Holdings and Obra Capital, contributing $341.2 million in cash; the partners contributed a further $35.0 million. MSA says the buyer and MSA LLC assumed the legacy claims and related obligations and agreed to indemnify MSA and its affiliates for those liabilities. MSA also agreed to indemnify MSA LLC for other historical liabilities. The filing states that the legacy reserves, insurance assets and associated deferred tax assets were derecognized.
- Other contingencies: Globe was named, as of July 27, 2023, in 137 PFAS-related lawsuits comprising approximately 8,231 claims, plus a putative Florida class action. The company says the cases are at an early stage, believes it has valid defenses, and is pursuing insurance coverage and indemnification. The filing also discusses ordinary-course product warranties, tax audits and single-incident product-liability claims.
- Business outlook: The filing provides no quantified revenue or earnings guidance. Management describes a dynamic environment and identifies supply constraints, raw-material availability, industrial employment, interest rates, military conflict, currency volatility, economic recovery and geopolitical risk as factors that could affect second-half 2023 results. Management expects continued investment in research and development and does not anticipate reducing total annual R&D-related spending.
- Restructuring charges were $3.4 million in Q2 and $5.1 million for the first half, tied to cost-structure and productivity initiatives. Foreign-exchange losses were $3.1 million in Q2 and $7.3 million for the first half.
Important facts for investors to verify
- Whether strong sales growth and improved gross margins continue, including the contribution of volume, pricing and backlog conversion.
- How debt, variable-rate exposure and cash generation evolve after the divestiture-related financing and cash contribution.
- The practical effectiveness and financial capacity of the buyer and related indemnities for legacy MSA LLC claims, as well as MSA’s retained indemnity obligations.
- Developments in Globe’s PFAS litigation, including insurance or indemnification coverage and potential financial exposure; the filing does not provide a clear estimate of any potential loss.
- Whether supply, input-cost, currency, interest-rate and geopolitical conditions materially affect the company’s stated operating outlook.