MSA Safety Incorporated — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Financial statements are unaudited; comparisons are with Q1 2015 unless otherwise noted. MSA develops and supplies safety products globally. The company reorganized its reporting segments into Americas, International and Corporate effective January 1, 2016, and recast 2015 segment data.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales from continuing operations | $279.3 million | $256.7 million |
| Gross profit / gross margin | $120.7 million / 43.2% | $116.8 million / 45.5% |
| Operating income | $31.1 million | $24.5 million |
| Income from continuing operations attributable to common shareholders | $12.7 million; $0.34 diluted EPS | $9.3 million; $0.25 diluted EPS |
| Net income attributable to MSA | $11.8 million; $0.31 diluted EPS | $9.7 million; $0.26 diluted EPS |
| Cash flow from operating activities | $(11.0) million | $(16.7) million |
- Sales increased 9% reported; management attributed the change to 7% organic growth, a 6% contribution from Latchways, and a 4% unfavorable foreign-exchange impact. Local-currency core product sales rose 15%, or 8% excluding Latchways.
- Americas sales increased 6% to $167.3 million; International sales increased 14% to $111.9 million. Segment operating income was $31.3 million in Americas, $8.4 million in International and a corporate loss of $8.6 million.
- Gross margin declined 2.3 percentage points. Management cited product mix, including higher SCBA and large-order shipments, and manufacturing variances. SG&A fell 3% to $79.2 million; R&D fell 5% to $10.4 million.
- Reported effective tax rate was 48.7%, versus 62.7%. Excluding European reorganization exit-tax charges of $3.6 million in 2016 and $7.6 million in 2015, the rates were 34.7% and 31.7%, respectively.
Balance sheet, liquidity and cash flow
- Cash and cash equivalents were $111.9 million at March 31, 2016, up $6.0 million from year-end; $103.6 million was held by foreign subsidiaries and considered indefinitely reinvested.
- Total debt was approximately $478.3 million, including $6.8 million current and $471.5 million long-term. MSA issued approximately $80 million of 3.4% fixed-rate notes in January and used the proceeds to repay part of its revolver. The company reported $310.2 million unused on its $575 million revolving facility, including letters of credit, and compliance with debt covenants.
- Operating cash outflow improved from $16.7 million to $11.0 million. Cash use included a $35.7 million outflow from specified working-capital changes; operating cash flow before those changes was $24.7 million. Investing activities provided $9.9 million, including proceeds from divestitures; financing activities provided $3.3 million. Dividends paid were $11.9 million.
- MSA reported access to approximately $655.2 million of capital. Foreign cash repatriation could trigger additional taxes; management said domestic resources and credit availability were sufficient for domestic liquidity needs.
Material changes, outlook and notable items
- MSA sold its South African personal protective equipment distribution business and Zambian operations on February 29, 2016, for $15.9 million and recorded an approximately $0.3 million loss. These operations are presented as discontinued operations; their Q1 2016 after-tax loss was $1.1 million, compared with $0.3 million income in Q1 2015.
- Latchways, acquired in October 2015, contributed $15.7 million of Q1 2016 sales and $1.3 million of adjusted net income. Preliminary purchase accounting included $98.0 million of goodwill; valuation work was expected to be completed by mid-2016.
- Management said it was evaluating additional 2016 cost reductions in response to weaker oil and gas demand and slower growth in key emerging markets. It expected manufacturing variances to moderate in Q2 and noted continued G1 SCBA value-engineering work. No quantified full-year guidance was provided in the supplied filing text.
- Management cited strong G1 SCBA demand, while energy-related weakness weighed on selected product categories. Local-currency sales excluding Latchways were up 4% in International; segment results also reflected currency headwinds.
- Product-liability exposure remains significant. At quarter-end, the cumulative-trauma reserve was $38.3 million and related insurance receivables were $239.2 million. MSA LLC faced 1,984 cumulative-trauma lawsuits. A Kentucky jury verdict of $7.2 million was being appealed and was not accrued because management considered a loss not probable; an unsuccessful or partial appeal could result in costs, including uninsured punitive damages.
- Insurance recovery depends on insurer negotiations, coverage litigation and insurers’ ability to pay. MSA warned it may become largely self-insured for cumulative-trauma claims in the next few years; the timing and available future reimbursements are uncertain.
- Market sensitivities disclosed included an estimated $13.0 million change in quarterly reported sales and $0.3 million in net income from a hypothetical 10% U.S. dollar movement, and exposure to variable-rate borrowings. Foreign-exchange forward contracts had a $65.2 million notional value.
Important facts for investors to verify
- Whether sales growth and core-product demand persist after separating organic growth, acquisition contribution and currency effects.
- Whether gross-margin pressure from product mix and manufacturing variances moderates as management expected.
- Progress on 2016 cost reductions and the impact of weaker oil and gas markets and slower emerging-market growth.
- Debt levels, revolver availability, covenant compliance and the effect of interest-rate or currency movements.
- Developments in the Kentucky verdict appeal, cumulative-trauma claims and insurance coverage litigation, including collectability of the $239.2 million insurance receivable.
- Completion and any material adjustments to the Latchways purchase-price valuation, as well as performance against the acquisition’s strategic expectations.