MSA Safety Incorporated (NYSE: MSA) — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This annual filing also reports fourth-quarter results. MSA manufactures safety equipment, including breathing apparatus, gas detection, head protection, firefighter equipment and fall protection products. Amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $1,402.0 million | $1,358.1 million |
| Gross profit / gross margin | $636.6 million / 45.4% | $611.9 million / 45.1% |
| Operating income | $186.2 million | $173.5 million |
| Net income attributable to MSA | $136.4 million | $124.2 million |
| Diluted EPS | $3.48 | $3.18 |
| Cash from operating activities | $165.0 million | $263.9 million |
| Capital expenditures | $36.6 million | $34.0 million |
Reported sales increased 3.2%; constant-currency sales increased 5.2%. The gross margin improved 0.3 percentage points. The company paid $1.64 per common share in dividends, up from $1.49.
Fourth quarter: Sales were $375.3 million versus $361.8 million in Q4 2018; gross profit was $166.8 million versus $162.4 million; net income attributable to MSA was $31.2 million versus $24.9 million. Diluted EPS was $0.79 versus $0.64.
Year-end financial position: Cash and cash equivalents were $152.2 million, with an additional $49.9 million in short-term investments. Total debt was $348.4 million, including $20.0 million current and $328.4 million long-term. The $600 million revolving credit facility had $361.3 million unused, including letters of credit; MSA reported covenant compliance. Current assets were $693.4 million and current liabilities were $277.5 million.
Material changes versus the prior year
- Americas sales rose 7.1% reported (7.8% constant currency) to $915.1 million. International sales fell 3.4% reported to $486.9 million, but increased 0.8% constant currency. The International decline reflected a large prior-year Pacific Asia breathing-apparatus order and weaker non-core sales, partly offset by industrial and gas-detection growth.
- Operating cash flow declined by $98.9 million, primarily due to lower collections on insurance receivables and greater working-capital use as sales and backlog increased. MSA paid $54.5 million in product-liability claims and collected $21.0 million on insurance and related notes receivable in 2019.
- Interest expense fell to $13.6 million from $18.9 million. Currency-exchange losses increased to $19.8 million from $2.3 million, including a $15.3 million non-cash translation charge following the planned closure of South African affiliates.
- Product liability and other operating expense declined to $28.4 million from $45.3 million. Restructuring charges were $13.8 million, compared with $13.2 million; 99 positions were eliminated in 2019.
- MSA acquired Sierra Monitor Corporation (SMC) in May 2019 for $33.2 million net of cash acquired. SMC contributed $13.5 million in sales and a reported $3.3 million net loss for the included period; the filing reports $1.5 million adjusted earnings after specified acquisition-related exclusions.
Outlook, commentary and risks
- Management planned for mid-single-digit 2020 revenue growth on a constant-currency basis. Expected 2020 capital expenditures were approximately $45 million; forecast total interest expense was $12 million–$14 million.
- Management identified new products, pricing initiatives and productivity efforts as contributors to growth and margin improvement. Planned 2020 launches included a connected firefighter ecosystem powered by LUNAR and the Altair io 360 gas detector.
- Cumulative-trauma product liability remains a significant uncertainty. The reserve was $167.5 million at year-end, based on asserted and incurred-but-not-reported claims, with exposures estimated through 2069 and not discounted. MSA LLC was named in 1,605 lawsuits comprising 2,456 claims. MSA also recorded $63.8 million of insurance receivables and $56.0 million of notes receivable from insurers; recovery timing and collectibility remain risks.
- Other material risks include exposure to energy-market conditions (estimated at 25%–30% of global business), foreign exchange and international markets, product defects or recalls, supply availability and cost, regulatory standards, cybersecurity, acquisition integration, pension assumptions, and variable-rate debt. MSA expects an approximately $8 million non-cash unfavorable swing in pension expense in 2020 versus 2019 due to lower discount rates, while forecasting improved U.S. qualified-plan funding status.
- The company adopted lease accounting in 2019, recording approximately $54 million of right-of-use assets and lease liabilities. The filing reports effective disclosure controls and internal control over financial reporting; SMC was excluded from the 2019 internal-control assessment under the acquisition transition guidance.
Important facts for investors to verify
- How cumulative-trauma claims, settlement assumptions and insurer recoveries evolve relative to the $167.5 million reserve and recorded receivables.
- Whether operating cash flow recovers after the 2019 decline and whether working-capital needs or product-liability payments constrain cash generation.
- Progress against the 2020 mid-single-digit constant-currency growth outlook, especially in International markets and energy-exposed product lines.
- SMC integration, profitability and contribution to connected safety products, including the impact of acquisition-related costs.
- Debt refinancing and repayment capacity ahead of the $245.2 million scheduled 2023 maturity, as well as exposure to floating interest rates.