MSA Safety Incorporated — Q2 2019 Form 10-Q
Business context and period: Global safety-products manufacturer; quarter and six months ended June 30, 2019. Comparisons are with the corresponding 2018 periods. Amounts below are in millions of dollars except per-share data.
Financial performance
- Q2 revenue: $349.7, up 3.0% reported and 5.4% at constant currency. Americas sales rose 7.5% reported (8.1% constant currency); International sales fell 4.6% reported but grew 0.5% constant currency.
- Q2 earnings and margins: Gross profit was $161.1, with a 46.1% gross margin versus 45.3%. Operating income was $54.5 (15.6% margin), compared with $46.8 (13.8%). Net income attributable to MSA was $39.8 versus $33.2; diluted EPS was $1.01 versus $0.85.
- First-half revenue and earnings: Revenue was $675.7, up 1.6% reported and 4.4% constant currency. Gross margin was 46.0% versus 45.3%. Operating income declined to $86.6 from $91.2 (12.8% versus 13.7% of sales). Net income attributable to MSA was $63.0 versus $65.6; diluted EPS was $1.61 versus $1.69.
- Cash flow: First-half operating cash flow was $37.5 versus $65.4. Capital expenditures were $13.5, implying operating cash flow less capex of $24.0 versus $56.6. Cash, cash equivalents and restricted cash declined $28.6 to $112.0.
- Liquidity and debt: Current assets were $687.6 and current liabilities $257.5 at June 30. Total debt was approximately $398.5, including $20.1 current and $378.4 long-term; the revolving facility had $327.0 unused capacity, including letters of credit. Short-term investments were $72.5. The company reported compliance with debt covenants.
- Other: Dividends were $0.42 per share in Q2 versus $0.38. First-half restructuring charges were $9.4, currency-exchange losses $18.3, and product-liability expense $6.4.
Material changes and notable items
- Q2 growth and improved gross margin reflected stronger core-product sales, new product launches and pricing initiatives. Americas adjusted operating income improved; International adjusted operating income declined with lower sales volume.
- First-half operating income was pressured by currency losses, partly offset by higher sales. About $15.4 of currency losses was a non-cash reclassification of cumulative translation losses following approval of the South Africa affiliate closures.
- MSA acquired Sierra Monitor Corporation (SMC) on May 20 for $33.2 net of acquired cash, funded with revolver borrowings. SMC contributed $2.6 of sales and a $1.5 net loss through June 30. Purchase-price allocation remains preliminary.
- First-half operating cash flow fell partly because of working-capital needs and higher product-liability payments. Net product-liability cash payments, after insurance collections, were $22.9 versus $7.7 in the prior-year period.
- Lease accounting adoption added approximately $54 of right-of-use assets and lease liabilities at adoption; it did not materially affect income or cash flow.
Outlook, risks and contingencies
- Management continued to target mid-single-digit constant-currency revenue growth for 2019. It expected $4–$5 of annual savings from restructuring, beginning in late 2019 and into 2020; programs were expected to continue in the second half.
- Management expected 2019 capital expenditures of approximately $35 and full-year interest expense of $15–$17. Expected pension contributions for 2019 were approximately $7.1.
- Cumulative-trauma product-liability reserve was $158.8 at June 30; MSA LLC was named in 1,552 lawsuits comprising 2,450 claims. The company is largely self-insured for these claims; outcomes and future reserve adjustments are uncertain and could be material.
- Insurance receivables were $59.9 and notes receivable from insurers $60.3. Recovery timing and amounts depend on coverage agreements, claims composition and insurers’ ability to pay.
- Other disclosed exposures include foreign-exchange volatility, variable-rate borrowings, Brexit-related uncertainty and Argentina’s highly inflationary accounting environment. Management said the Argentina impact and Brexit-related supply-chain exposure were not material at the time of filing.
Important facts for investors to verify
- Whether constant-currency growth and the mid-single-digit 2019 target were sustained in subsequent results, particularly in International markets.
- Whether the planned restructuring savings were achieved and whether additional restructuring costs arose.
- SMC’s post-acquisition performance, integration costs and final purchase-price allocation.
- Cash conversion, working-capital trends, debt levels and capacity under the revolving facility.
- Changes in cumulative-trauma claims, reserve assumptions, insurance recoveries and related cash payments.