Business context and reporting period
MSA Safety Incorporated (NYSE: MSA) filed this Form 10-K for the fiscal year ended December 31, 2016. It develops and sells safety products, including gas detection systems, breathing apparatus, helmets and fall-protection equipment. Core products represented approximately 82% of sales. The company reported Americas and International operating segments; sales were 59% and 41% of the total, respectively.
2016 results include Senscient from its September 19 acquisition. The 2015 comparison includes Latchways, acquired in October 2015. The company sold its South African personal protective equipment distribution business and Zambian operations in February 2016; those results are presented as discontinued operations.
Key financial results
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $1,149.5 million | $1,130.8 million |
| Gross profit / margin | $523.6 million / 45.6% | $501.1 million / 44.3% |
| Operating income / margin | $164.2 million / 14.3% | $122.7 million / 10.9% |
| Income from continuing operations attributable to MSA / diluted EPS | $92.7 million / $2.44 | $69.6 million / $1.84 |
| Net income attributable to MSA / diluted EPS | $91.9 million / $2.42 | $70.8 million / $1.87 |
| Operating cash flow | $134.9 million | $55.3 million |
| Capital expenditures | $25.5 million | $36.2 million |
| Cash and cash equivalents at year-end | $113.8 million | $105.9 million |
| Debt, including current portion, at year-end | $390.5 million | $464.7 million |
Operating cash flow less capital expenditures was approximately $109.4 million in 2016. The effective tax rate was 38.1%, versus 40.0% in 2015. Dividends paid were $1.31 per share. Of year-end cash, $106.9 million was held by foreign subsidiaries whose earnings were considered indefinitely reinvested.
In the fourth quarter, sales were $296.0 million, compared with $313.3 million in Q4 2015. Income from continuing operations attributable to MSA was $25.2 million, compared with $20.8 million; diluted EPS was $0.66, compared with $0.55.
Material changes versus the prior comparable period
- Reported annual sales rose 1.7%, but organic constant-currency sales declined 1.0%. Acquisitions added 4.8 percentage points and currency translation reduced sales by 2.1 percentage points.
- Americas sales declined 3.7% (organic constant-currency decline of 3.1%), reflecting lower G1 SCBA shipments after unusually strong 2015 shipments, weaker industrial head protection and reduced energy-related fixed detection projects. International sales increased 10.6%, including acquisition contribution; organic constant-currency growth was 2.7%.
- Gross margin improved to 45.6%, which management attributed mainly to G1 SCBA value engineering and lower warranty and inventory-obsolescence expense. SG&A fell 2.9% reported, and restructuring charges declined to $5.7 million from $12.3 million.
- Operating cash flow increased substantially, helped by higher earnings, receivables collections and inventory management. Working capital as a percentage of sales improved to 21.7% from 25.7%.
- Debt declined by $74.2 million on a year-end balance-sheet basis. The company also acquired Senscient for $19.1 million and completed the South African and Zambian divestiture.
Outlook, management commentary and risks
Management did not provide specific 2017 revenue or earnings guidance in the supplied filing text. It expected R&D expense to remain 4.0%–4.5% of sales, capital expenditures of approximately $30 million, and $13–$15 million of restructuring expense over the following several quarters; it anticipated approximately $10 million of related savings in 2017. An additional approximately $11.5 million non-cash pension termination benefit expense was expected in Q1 2017 for 83 employees electing voluntary retirement.
- Product-liability exposure: MSA LLC was named in 1,794 cumulative-trauma lawsuits comprising 3,023 claims at year-end. The recorded cumulative-trauma reserve was $11.1 million, but excluded certain coal-dust claims and incurred-but-not-reported claims that management could not reasonably estimate. The company warned it could become largely self-insured for these claims within 18 months, potentially increasing expense volatility.
- Insurance recovery and litigation: Insurance receivables were $159.9 million and notes receivable from insurers were $67.3 million at year-end. Recovery depends partly on insurer solvency, negotiations and coverage litigation. A February 2017 court award against North River added $46.9 million in statutory bad-faith damages to an earlier $10.9 million contractual verdict; post-trial motions remained pending. The award is subsequent to year-end.
- Other contingencies: A Kentucky jury had awarded $7.2 million against MSA LLC in the Couch coal-dust claim. MSA was appealing; management considered reversal reasonably possible and had not included the verdict in its reserve. The $4.0 million punitive portion was not insured.
- Market and operating risks: Management cited uneven economic conditions, including weakness in China, Brazil and some mining regions. Approximately 25%–30% of global business was sold into the energy market, with a portion exposed to lower employment or capital spending. Other risks include foreign-exchange movements, government funding and product approvals, competition, acquisitions and integration, supply availability, cybersecurity, pension assumptions and debt service.
- Liquidity and debt: The $575 million revolving facility matures in 2020; $377.2 million was unused at year-end, including letters of credit. Approximately $191.0 million of debt was due in 2020. The company reported compliance with debt covenants at December 31, 2016.
Most important facts for investors to verify
- Whether organic sales trends, especially in the Americas and energy-exposed product lines, improved after 2016, and how much growth reflects acquisitions versus underlying demand.
- Whether gross-margin gains and cost reductions persisted, and whether expected restructuring savings offset the associated charges.
- The collectibility, timing and accounting treatment of insurance receivables and insurer notes, including the North River award and pending coverage litigation.
- Updates to cumulative-trauma claims, reserves, the Couch appeal and the timing and financial effect of becoming largely self-insured.
- Cash generation, working capital, debt maturities and refinancing plans ahead of the 2020 revolver maturity, as well as the availability of foreign-held cash.
- Integration and performance of Senscient and Latchways, and any changes in pension funding, foreign-exchange exposure or regulatory requirements.