MSA Safety Incorporated — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. MSA designs, manufactures and sells safety products, including breathing apparatus, gas detection systems, protective equipment and fall protection products. Results reflect the COVID-19 pandemic’s effects on customer demand, manufacturing costs and order patterns.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $314.4 | $349.7 | $655.6 | $675.7 |
| Gross profit / margin | $141.6 / 45.0% | $161.1 / 46.1% | $299.0 / 45.6% | $311.1 / 46.0% |
| Operating income | $48.3 | $54.5 | $107.1 | $86.6 |
| Net income attributable to MSA | $36.1 | $39.8 | $79.7 | $63.0 |
| Diluted EPS | $0.92 | $1.01 | $2.03 | $1.61 |
| Operating cash flow | Not separately stated | Not separately stated | $83.0 | $37.5 |
- Q2 sales fell 10.1% year over year; constant-currency sales declined 7.8%. Americas sales decreased 11.8% and International sales decreased 6.8%.
- Q2 gross margin declined 1.1 percentage points. Management cited lower factory throughput, higher freight and COVID-19 safety costs, and unfavorable mix, partly offset by pricing improvements.
- Q2 SG&A fell 17.8% to $69.0 million, reflecting prior restructuring, discretionary spending controls and lower variable compensation. GAAP operating income declined despite the savings, mainly due to weaker sales, lower gross profit and higher restructuring charges.
- For the first half, operating income rose despite lower sales, primarily because currency losses and SG&A were lower than in 2019. First-half 2019 included a $15.4 million noncash currency translation loss related to planned subsidiary closures.
- First-half adjusted operating income, a non-GAAP measure, was $122.7 million versus $122.7 million in 2019; adjusted EBITDA was $142.2 million versus $141.4 million. Q2 adjusted operating income was $58.9 million versus $64.3 million; adjusted EBITDA was $68.7 million versus $73.8 million.
Cash, debt and liquidity
- Cash and cash equivalents were $136.2 million at June 30, 2020, down from $152.2 million at year-end 2019. Including restricted cash, the balance was $136.6 million; $109.2 million was held by foreign subsidiaries.
- First-half operating cash flow was $83.0 million. Capital expenditures were $19.8 million, implying approximate operating cash flow less capital expenditures of $63.2 million. Operating cash flow benefited from working-capital movements and lower product-liability payments.
- Total debt was $334.5 million, down from $348.4 million at December 31, 2019. The $600 million revolving facility had $370.4 million unused, including letters of credit. MSA reported covenant compliance at quarter-end.
- Short-term investments were $59.9 million. The company paid $33.1 million in dividends and used $28.3 million to repurchase shares during the first half.
- MSA expected full-year 2020 capital expenditures of $45–$50 million, including $11–$13 million to expand and modernize U.S. air-purifying respirator production; approximately $5 million of that project had been spent by June 30.
Outlook, risks and unusual items
- Management said incoming orders were choppy in Q2 and remained uneven into Q3, with a June rebound followed by a July slowdown amid renewed virus spread and economic challenges. It cited substantial uncertainty and did not provide a clear full-year sales or earnings outlook. Backlog was described as healthy and consistent with Q1.
- MSA continued operating manufacturing facilities where practicable, prioritized workforce safety and business continuity, and ramped up production of its existing respirator portfolio. Management said it expected to work down the respirator backlog over the next several quarters.
- The adjusted effective tax-rate outlook, excluding the tax benefit from share-based payment accounting, was 24%–25% for full-year 2020.
- Restructuring charges were $8.9 million in Q2 and $10.9 million in the first half, mainly for International cost reductions and manufacturing footprint optimization. The company also identified $0.8 million of first-half COVID-19-related costs in its non-GAAP reconciliation.
- Cumulative-trauma product-liability reserves were $166.1 million at June 30, 2020, for claims expected to be resolved through 2069; these estimates are undiscounted. MSA LLC faced 1,705 lawsuits involving 2,655 claims and is largely self-insured. Management cautioned that litigation outcomes and future costs are inherently uncertain.
- Related insurance receivables were $58.7 million and notes receivable from insurers were $56.7 million. Recovery timing and collectibility depend on settlement terms, claims assumptions and insurer solvency.
- MSA deferred approximately $14 million of U.S. income-tax payments under the CARES Act and expected to defer approximately $6 million of employer Social Security tax payments in 2020.
- Currency translation reduced equity by $18.2 million in the first half. The filing also identifies exposure to foreign exchange and variable interest rates, alongside pandemic-related demand, supply-chain and operating risks.
Most important facts for investors to verify
- Whether order trends, backlog conversion and respirator production support recovery in sales, particularly in industrial PPE and International markets.
- Whether cost controls and restructuring can offset COVID-related manufacturing costs without impairing growth or execution.
- Whether cumulative-trauma claim experience, reserve assumptions and insurer recoveries remain consistent with recorded amounts.
- Whether liquidity, debt covenants, capital spending and dividend commitments remain manageable if operating conditions weaken.
- How much of first-half earnings improvement reflects recurring operations versus lower prior-year currency losses and other period-specific effects; adjusted measures are non-GAAP.