MSA Safety Incorporated — Q1 2018 Form 10-Q Summary
Business context and reporting period
MSA Safety designs, manufactures and sells safety products for markets including fire service, oil and gas, construction, utilities and mining. This unaudited report covers the three months ended March 31, 2018, compared with Q1 2017. Results include Globe, acquired in July 2017; Globe contributed $28.9 million of Q1 2018 sales and $3.5 million of net income.
Key financial metrics
Amounts are in millions, except per-share data and percentages.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $325.9 | $265.8 |
| Gross profit / gross margin | $147.3 / 45.2% | $119.7 / 45.0% |
| Operating income / operating margin | $44.4 / 13.6% | $18.6 / 7.0% |
| Net income attributable to MSA | $32.4 | $14.4 |
| Diluted EPS | $0.83 | $0.37 |
| Operating cash flow | $17.4 | $96.4 |
| Capital expenditures | $3.2 | $1.4 |
| Cash dividends paid | $13.4 | $12.5 |
- Revenue and segments: Sales rose 22.6% as reported. Organic constant-currency growth was 7.2%; acquisitions contributed 10.8 percentage points and currency translation 4.6 points. Americas sales increased 25.5% (8.0% organic constant currency); International sales increased 17.7% (5.9% organic constant currency).
- Adjusted segment performance: Americas adjusted operating income was $50.1 million, with a 23.9% margin, versus $36.2 million and 21.7%. International was $12.8 million, with a 10.9% margin, versus $7.8 million and 7.9%. Corporate adjusted operating loss narrowed to $8.2 million from $10.7 million.
- Expenses and taxes: SG&A was $80.3 million, or 24.6% of sales, versus $76.8 million, or 28.9%. R&D was $12.5 million, or 3.9% of sales. The effective tax rate was 22.6%, compared with 10.9%; Q1 2017 included a larger share-based-payment tax benefit.
- Liquidity and debt: Cash and cash equivalents were $124.9 million at March 31; cash, cash equivalents and restricted cash totaled $128.8 million. Total debt was $468.1 million, implying approximately $343.2 million of net debt using cash and cash equivalents. The company reported $282.6 million of unused revolving facility availability, including letters of credit, and compliance with debt covenants.
- Balance sheet: Total assets were $1.696 billion and total liabilities $1.055 billion. Current assets were $632.3 million and current liabilities $273.4 million.
Material changes and unusual items
- Operating income increased to $44.4 million from $18.6 million, reflecting higher sales, improved gross margin, lower restructuring costs and controlled spending.
- Q1 2018 included $5.3 million of restructuring charges, compared with $12.7 million in Q1 2017. Current-quarter costs mainly related to European staff reductions and a corporate legal-structure review; the prior-year period included a $11.4 million non-cash voluntary-retirement charge.
- Other operating expense was $2.8 million, primarily uninsured defense costs for cumulative-trauma product-liability claims. Currency-exchange losses were $2.0 million versus $0.6 million.
- Operating cash flow fell substantially, mainly because net cash collected from insurance companies after product-liability settlement payments was $12.1 million, versus $83.8 million in Q1 2017. Working-capital movements also affected cash flow.
- Q1 2018 results reflect adoption of the new revenue-recognition standard; the company reported no material impact. The 2017 comparison was not materially changed by adoption.
Outlook, commentary and risks
- Management said backlog increased entering Q2, supported by large breathing-apparatus orders in fire service and a stronger industrial order pace. This is qualitative commentary, not quantified guidance.
- Management expects 2018 R&D expense to be approximately 4.0% of sales and pension contributions to total approximately $5.0 million. It expected to repatriate an additional $61–$86 million of foreign cash by year-end 2018, after repatriating $14 million in Q1.
- The company recorded a $179.0 million cumulative-trauma product-liability reserve, including $108.8 million for estimated incurred-but-not-reported claims. It also reported $131.4 million of insurance receivables and $63.4 million of notes receivable from insurers. The company is largely self-insured for future cumulative-trauma costs, and recovery timing and amounts remain uncertain amid coverage litigation with three insurers.
- Management expects to pay $14.2 million in Q2 2018 toward previously agreed settlements, with the balance paid over the following five quarters through Q3 2019. The filing warns that future reserve changes could be material.
- Other risks include foreign-exchange and variable-rate debt exposure, product-liability claims and potential limits on collecting insurance receivables. The company disclosed $42.7 million of undiscounted operating-lease commitments and is evaluating the accounting impact of the lease standard effective in 2019.
Important facts for investors to verify
- Whether organic sales growth and the stronger reported results persist as Globe acquisition contributions and currency effects change.
- Whether the $179.0 million product-liability reserve remains adequate and whether claims experience or legal developments require material revisions.
- Collection, timing and recoverability of the $131.4 million insurance receivable and $63.4 million insurer notes, including outcomes of outstanding coverage disputes.
- Cash generation excluding insurance collections, working-capital trends and the scheduled settlement payments.
- Debt levels, variable-rate exposure, revolver availability and continued compliance with covenants.
- Any updates to tax-reform estimates, including transition-tax accounting, and the expected cash repatriation.