MSA Safety Incorporated — Q3 2016 Form 10-Q
Business context and period. MSA develops and sells safety products, including breathing apparatus, gas detection, head protection and fall protection. This unaudited report covers the quarter and nine months ended September 30, 2016. Results are presented in Americas, International and Corporate segments; prior-year segment results were recast for comparability.
Financial performance
| Metric | Q3 2016 | Q3 2015 | First nine months 2016 | First nine months 2015 |
|---|---|---|---|---|
| Net sales | $278.2 million | $273.7 million | $853.5 million | $817.5 million |
| Gross profit | $128.8 million | $119.8 million | $385.3 million | $367.1 million |
| Gross margin | 46.3% | 43.8% | 45.1% | 44.9% |
| Operating income | $40.0 million | $26.5 million | $116.6 million | $90.9 million |
| Income from continuing operations attributable to MSA | $25.5 million | $15.7 million | $67.5 million | $48.8 million |
| Diluted EPS from continuing operations | $0.67 | $0.41 | $1.77 | $1.29 |
- Q3 reported sales increased 2%, but organic constant-currency sales declined 2.7%. Americas sales fell 9% organically, including lower G1 SCBA shipments; International organic constant-currency sales grew 10%.
- For the nine-month period, sales rose 4% and organic constant-currency sales grew 1.4%. International growth, including acquisitions, more than offset a modest decline in Americas sales.
- Q3 operating income increased 51%; management attributed the improvement principally to higher gross margin and cost reductions. Favorable product mix and improved G1 SCBA margins supported gross margin.
- Net income attributable to MSA was $24.2 million in Q3 and $67.0 million for the nine months. Q3 discontinued operations recorded a $1.3 million loss; nine-month discontinued-operations income was $0.1 million.
- Nine-month operating cash flow was $31.4 million, versus $9.8 million a year earlier. Cash and equivalents were $106.0 million at September 30, 2016. Cash generation reflected higher earnings and working-capital focus, partly offset by $58.4 million of cumulative-trauma claim settlements.
- Capital expenditures were $16.1 million and Senscient acquisition spending, net of cash acquired, was $18.3 million for the nine months. Dividends paid were $36.7 million.
Balance sheet, debt and liquidity
- At September 30, 2016, total debt was $471.3 million, including $6.7 million current and $464.6 million long-term; cash was $106.0 million. The senior revolving credit facility had $309.5 million unused, including letters of credit. MSA reported compliance with debt covenants.
- MSA issued approximately $80 million of fixed-rate notes at 3.4%, due in installments beginning in 2023 with final maturity in 2031. Revolver borrowings carried a weighted-average rate of 2.03% at quarter-end.
- Approximately $99.8 million of cash was held by foreign subsidiaries and considered indefinitely reinvested; repatriation could result in additional taxes. Management said domestic liquidity sources and available credit were sufficient for domestic needs.
- Insurance receivables were $154.5 million, down from $229.5 million at year-end, while insurance-company notes receivable rose to $103.6 million from $8.7 million. The filing attributes these balance changes largely to settlements and conversion of receivables into notes, not operating income.
Management outlook, risks and unusual items
- MSA forecast full-year 2016 R&D expense of 4.0%–4.5% of sales. It expected $12 million–$15 million of restructuring expense over the next several quarters and approximately $10 million of related savings in 2017. This includes an estimated $10 million non-cash pension termination benefit in Q1 2017 following revocable retirement elections by 83 employees.
- Management anticipated an additional $3 million–$4 million of European reorganization exit taxes in Q4 2016. No formal sales or earnings guidance was provided in the supplied filing text.
- MSA acquired UK-based Senscient, a laser-based gas-detection technology company, for $19.1 million cash on September 19, 2016. Purchase accounting was not complete at filing issuance. Latchways contributed $14.0 million of Q3 sales and $42.9 million for the nine months.
- Product-liability exposure remains a key uncertainty. MSA LLC was named in 1,928 cumulative-trauma lawsuits. Its total cumulative-trauma reserve was $9.0 million; the company had not accrued for unreported claims because it could not reasonably estimate them. A $7.2 million adverse Kentucky verdict was being appealed; management considered reversal reasonably possible and had not accrued the verdict.
- Recovery of the $154.5 million insurance receivable depends on insurer payments, negotiations and coverage litigation. MSA expected to become largely self-insured for cumulative-trauma claims within 6–18 months, even if coverage litigation was generally successful. A separate North River jury verdict awarded MSA $10.9 million in contractual damages; a hearing on statutory bad-faith damages was scheduled for December 2016.
- Other unusual items include a Q2 correction that moved an approximately $2.5 million gain on the South African and Zambian business disposal into the quarter in which it should have been recorded. The company said the correction was not material to the affected periods and did not affect cash flows or covenant compliance.
Important facts for investors to verify
- Whether organic sales trends improve, particularly in the Americas, and how much reported growth depends on acquisitions and currency movements.
- Whether restructuring delivers the projected 2017 savings and whether additional charges arise.
- The timing and collectability of insurance receivables and notes, developments in insurer litigation, and the transition toward greater self-insurance.
- Outcomes of the Kentucky product-liability appeal and other cumulative-trauma claims, including possible unaccrued losses and defense costs.
- Final purchase accounting and subsequent contribution from Senscient, alongside Latchways integration and debt costs.
- Cash availability and potential tax consequences of repatriating foreign-held funds, and the effect of variable-rate debt on interest expense.