MSA Safety Inc. — Q1 2023 Form 10-Q
Business context and period. MSA develops and sells safety products, including breathing apparatus, gas detection systems, protective apparel, head protection and fall protection. This unaudited report covers the three months ended March 31, 2023, compared with the first quarter of 2022. On January 5, 2023, MSA divested MSA LLC, which held legacy cumulative-trauma product-liability claims.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $398.3 million | $330.7 million |
| Gross profit / margin | $181.4 million / 45.5% | $142.8 million / 43.2% |
| Operating income (loss) | $(60.1) million | $42.7 million |
| Net income (loss) | $(150.2) million | $35.5 million |
| Diluted EPS | $(3.83) | $0.90 |
| Operating cash flow | $(285.9) million | $24.5 million |
| Capital expenditures | $8.4 million | $8.0 million |
Sales increased 20.4% reported and 22.0% at constant currency, driven by pricing and volume growth. Americas sales rose 24.2% reported (23.7% constant currency); International sales rose 12.4% reported (18.0% constant currency). Management cited strength across product categories, particularly Americas portable gas detection and firefighter helmets and apparel. Gross margin improved on volume leverage, pricing and productivity that kept pace with inflation.
SG&A increased 16.0% to $91.1 million, but declined to 22.9% of sales from 23.8%. R&D was $15.2 million, or 3.8% of sales, versus $13.3 million, or 4.0%. Adjusted operating income, a non-GAAP measure, was $77.4 million versus $53.8 million; adjusted EBITDA was $89.6 million versus $65.7 million. These measures exclude specified items, including restructuring, currency losses and the divestiture loss.
Liquidity, debt and material changes
Cash and cash equivalents were $138.9 million at March 31, 2023, down from $162.9 million at year-end 2022. Total debt, including current maturities, was $869.6 million, up from $572.8 million. Long-term debt was $837.1 million. The $900 million revolving facility had $536.1 million unused, including letters of credit; a new $250 million term loan helped fund the divestiture. The revolver’s weighted-average rate was 5.74% and the term-loan rate was 6.22%. MSA reported compliance with its debt covenants.
Operating cash use chiefly reflected MSA’s $341.2 million cash contribution in the divestiture. Financing activities provided $272.8 million, including net long-term debt proceeds of $295.4 million. The quarterly dividend was $0.46 per common share, versus $0.44 a year earlier.
The divestiture generated a $129.2 million pre-tax loss and a $199.6 million tax-effected loss, including the write-off of deferred tax assets and $5.6 million of transaction costs. MSA LLC’s legacy cumulative-trauma reserves and related insurance assets were removed from MSA’s balance sheet; the buyer assumed management of the divested company and related legacy claims. The resulting tax expense contributed to a reported effective tax rate of (121.7)%, compared with 21.7% in Q1 2022.
Outlook, risks and contingencies
MSA provided no specific numerical earnings or revenue guidance in the supplied filing text. Management said the operating environment remained dynamic and cited supply-chain constraints, raw-material and semiconductor availability, industrial employment, interest rates, military conflict, currency volatility, economic recovery and geopolitical and energy uncertainty—particularly risks affecting Germany and broader Europe. Management said it expected to continue managing pricing against costs, remain focused on cost optimization, and not reduce the relative annual level of R&D investment.
Globe, an MSA subsidiary, was named as a defendant in 75 PFAS-related lawsuits comprising approximately 4,870 claims, plus a putative class action, as of May 2, 2023. The matters were described as being at an early stage; MSA stated that it believed Globe had valid defenses and was pursuing insurance and indemnification. The filing does not provide a clear estimate of potential losses from these claims. Other risks include product warranty estimates, foreign-exchange exposure, variable-rate debt and the possibility that tax audits or litigation produce outcomes materially different from recorded amounts.
Important facts for investors to verify
- How the MSA LLC divestiture and its indemnification provisions affect MSA’s continuing exposure to legacy and other claims.
- The status, potential costs and insurance or indemnification coverage of Globe’s PFAS litigation; no clear loss estimate is provided.
- Whether sales growth, improved gross margin and adjusted operating performance continue, and how pricing, input costs and supply constraints evolve.
- Debt, interest expense and covenant headroom following the divestiture-related borrowing; the filing reports covenant compliance at quarter-end.
- The sustainability of cash generation and liquidity, given substantial operating cash use in the quarter and the company’s ongoing investment, dividend and debt obligations.