MSA Safety Inc annual report, FY2019

MSA Safety Incorporated (NYSE: MSA) — FY 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. This annual filing also reports fourth-quarter results. MSA manufactures safety equipment, including breathing apparatus, gas detection, head protection, firefighter equipment and fall protection products. Amounts below are U.S. dollars.

Financial performance and liquidity

MetricFY 2019FY 2018
Net sales$1,402.0 million$1,358.1 million
Gross profit / gross margin$636.6 million / 45.4%$611.9 million / 45.1%
Operating income$186.2 million$173.5 million
Net income attributable to MSA$136.4 million$124.2 million
Diluted EPS$3.48$3.18
Cash from operating activities$165.0 million$263.9 million
Capital expenditures$36.6 million$34.0 million

Reported sales increased 3.2%; constant-currency sales increased 5.2%. The gross margin improved 0.3 percentage points. The company paid $1.64 per common share in dividends, up from $1.49.

Fourth quarter: Sales were $375.3 million versus $361.8 million in Q4 2018; gross profit was $166.8 million versus $162.4 million; net income attributable to MSA was $31.2 million versus $24.9 million. Diluted EPS was $0.79 versus $0.64.

Year-end financial position: Cash and cash equivalents were $152.2 million, with an additional $49.9 million in short-term investments. Total debt was $348.4 million, including $20.0 million current and $328.4 million long-term. The $600 million revolving credit facility had $361.3 million unused, including letters of credit; MSA reported covenant compliance. Current assets were $693.4 million and current liabilities were $277.5 million.

Material changes versus the prior year

  • Americas sales rose 7.1% reported (7.8% constant currency) to $915.1 million. International sales fell 3.4% reported to $486.9 million, but increased 0.8% constant currency. The International decline reflected a large prior-year Pacific Asia breathing-apparatus order and weaker non-core sales, partly offset by industrial and gas-detection growth.
  • Operating cash flow declined by $98.9 million, primarily due to lower collections on insurance receivables and greater working-capital use as sales and backlog increased. MSA paid $54.5 million in product-liability claims and collected $21.0 million on insurance and related notes receivable in 2019.
  • Interest expense fell to $13.6 million from $18.9 million. Currency-exchange losses increased to $19.8 million from $2.3 million, including a $15.3 million non-cash translation charge following the planned closure of South African affiliates.
  • Product liability and other operating expense declined to $28.4 million from $45.3 million. Restructuring charges were $13.8 million, compared with $13.2 million; 99 positions were eliminated in 2019.
  • MSA acquired Sierra Monitor Corporation (SMC) in May 2019 for $33.2 million net of cash acquired. SMC contributed $13.5 million in sales and a reported $3.3 million net loss for the included period; the filing reports $1.5 million adjusted earnings after specified acquisition-related exclusions.

Outlook, commentary and risks

  • Management planned for mid-single-digit 2020 revenue growth on a constant-currency basis. Expected 2020 capital expenditures were approximately $45 million; forecast total interest expense was $12 million–$14 million.
  • Management identified new products, pricing initiatives and productivity efforts as contributors to growth and margin improvement. Planned 2020 launches included a connected firefighter ecosystem powered by LUNAR and the Altair io 360 gas detector.
  • Cumulative-trauma product liability remains a significant uncertainty. The reserve was $167.5 million at year-end, based on asserted and incurred-but-not-reported claims, with exposures estimated through 2069 and not discounted. MSA LLC was named in 1,605 lawsuits comprising 2,456 claims. MSA also recorded $63.8 million of insurance receivables and $56.0 million of notes receivable from insurers; recovery timing and collectibility remain risks.
  • Other material risks include exposure to energy-market conditions (estimated at 25%–30% of global business), foreign exchange and international markets, product defects or recalls, supply availability and cost, regulatory standards, cybersecurity, acquisition integration, pension assumptions, and variable-rate debt. MSA expects an approximately $8 million non-cash unfavorable swing in pension expense in 2020 versus 2019 due to lower discount rates, while forecasting improved U.S. qualified-plan funding status.
  • The company adopted lease accounting in 2019, recording approximately $54 million of right-of-use assets and lease liabilities. The filing reports effective disclosure controls and internal control over financial reporting; SMC was excluded from the 2019 internal-control assessment under the acquisition transition guidance.

Important facts for investors to verify

  • How cumulative-trauma claims, settlement assumptions and insurer recoveries evolve relative to the $167.5 million reserve and recorded receivables.
  • Whether operating cash flow recovers after the 2019 decline and whether working-capital needs or product-liability payments constrain cash generation.
  • Progress against the 2020 mid-single-digit constant-currency growth outlook, especially in International markets and energy-exposed product lines.
  • SMC integration, profitability and contribution to connected safety products, including the impact of acquisition-related costs.
  • Debt refinancing and repayment capacity ahead of the $245.2 million scheduled 2023 maturity, as well as exposure to floating interest rates.