MSA Safety Incorporated — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. MSA develops and sells safety equipment and related technologies across the Americas and International markets. Results are unaudited.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $351.0 million | $331.1 million | $1,026.7 million | $996.3 million |
| Gross profit | $158.7 million | $148.3 million | $469.8 million | $449.5 million |
| Gross margin | 45.2% | 44.8% | 45.8% | 45.1% |
| Operating income | $59.6 million | $40.0 million | $146.3 million | $131.2 million |
| Net income attributable to MSA | $42.2 million | $33.7 million | $105.3 million | $99.3 million |
| Diluted EPS | $1.08 | $0.86 | $2.69 | $2.55 |
- Q3 sales rose 6.0% year over year; nine-month sales rose 3.1%. Constant-currency growth was 7.6% and 5.5%, respectively.
- Q3 operating margin was approximately 17.0%, versus 12.1% a year earlier. Management attributed the increase principally to higher sales and lower product-liability expense.
- Nine-month operating cash flow was $88.3 million, down from $186.2 million. The filing cites lower insurance-receivable collections and greater working-capital use. Capital expenditures were $23.5 million; cash flow less capital expenditures was approximately $64.7 million, a derived measure.
- At September 30, cash and cash equivalents were $108.5 million and short-term investments were $72.2 million. Debt totaled $372.1 million, including $20.0 million current and $352.1 million long-term. The $600 million revolving facility had $351.5 million unused, including letters of credit. The company reported covenant compliance.
- Nine-month dividends paid were $47.2 million; dividends per common share were $0.42 for Q3 and $1.22 for the nine-month period.
Material changes and business developments
- Americas sales grew 12.1% in Q3 and 7.2% over nine months. International sales fell 4.4% and 4.3%, respectively, on a reported basis; constant-currency results were down 1.0% in Q3 but up 0.9% for nine months.
- Gross-margin improvement reflected new product launches and pricing initiatives. Americas adjusted operating income improved; International adjusted operating income declined for the nine-month period, primarily due to lower volumes.
- MSA acquired Sierra Monitor Corporation on May 20 for $33.2 million net of cash acquired, funded with revolving-credit borrowings. SMC contributed $8.2 million in sales and a $3.0 million net loss from acquisition through September 30. Purchase-price allocation remained provisional.
- The company approved closure of its South Africa affiliates. It recorded approximately $15.1 million of noncash cumulative translation losses in earnings as part of $17.3 million of nine-month currency losses.
- Adoption of the new lease standard added approximately $54 million each in right-of-use assets and lease liabilities at adoption; it materially affected the balance sheet but did not materially affect income or cash flows.
Outlook, commentary, and risks
- Management continued to target mid-single-digit 2019 constant-currency revenue growth. It expected $7–$8 million of annual savings from restructuring, beginning in late 2019 and continuing into 2020; restructuring actions were expected to continue in Q4.
- Management planned approximately $35 million of 2019 capital expenditures and expected full-year interest expense of $14–$16 million.
- Q3 breathing-apparatus sales were affected by certification delays that postponed the next-generation G1 SCBA launch by about six weeks. MSA began shipping after certification on September 30.
- Product liability remains a significant uncertainty. At September 30, the cumulative-trauma reserve was $151.6 million; MSA LLC faced 1,591 lawsuits comprising 2,493 claims and was largely self-insured. Management cautioned that actual claims, settlements, and defense costs could differ materially from estimates.
- Insurance receivables were $57.9 million and notes receivable from insurers were $55.6 million. Collection timing, claim composition, and insurers’ ability to pay could affect recoveries. The filing states that most receivables are supported by signed agreements.
- The nine-month effective tax rate was 26.3%, versus 19.1% a year earlier, reflecting jurisdictional earnings and losses, foreign exchange on entity closures, and prior-year tax benefits. Currency movements, Brexit-related uncertainty, and Argentina’s highly inflationary accounting may also affect results.
Important facts for investors to verify
- Whether the targeted mid-single-digit constant-currency growth and expected restructuring savings are achieved, and how Q4 execution affects reported results.
- Whether G1 SCBA shipments and other product launches convert into sustained revenue and margin growth.
- Future cumulative-trauma claims, reserve assumptions, defense costs, and the timing and collectibility of insurer receivables.
- Debt, variable-rate exposure, cash generation, and working-capital needs, especially as insurance collections fluctuate.
- Final SMC purchase accounting, integration costs, and acquisition contribution; the valuation was not yet complete at filing.