MSA Safety Incorporated — Q2 2018 Form 10-Q
Business context and period. MSA manufactures safety equipment for markets including fire service, industrial, oil and gas, construction, utilities and mining. This unaudited report covers the quarter and six months ended June 30, 2018; comparisons are with 2017. The Americas and International segments report geographic sales; Corporate primarily includes central costs.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $339.3m | $288.8m | $665.2m | $554.5m |
| Gross profit / margin | $153.8m / 45.3% | $133.0m / 46.0% | $301.2m / 45.3% | $252.7m / 45.6% |
| Operating income | $46.8m | $13.5m | $91.2m | $32.1m |
| Net income attributable to MSA | $33.2m | $12.5m | $65.6m | $26.9m |
| Diluted EPS | $0.85 | $0.32 | $1.69 | $0.70 |
- Q2 sales rose 17.5% reported; organic constant-currency growth was 5.1%. Six-month sales rose 20.0% reported; organic constant-currency growth was 6.1%. Globe, acquired in July 2017, contributed 11.2 percentage points of reported Q2 consolidated growth and 11.0 points for the first half.
- Q2 Americas sales increased 23.0% and International sales 9.0%. Adjusted operating margins were 23.1% for Americas and 12.8% for International, versus 24.9% and 10.7%, respectively, a year earlier. Adjusted operating income is a non-GAAP measure.
- Q2 gross margin declined 0.7 percentage point, primarily from Globe acquisition dilution, higher raw-material costs and quarter-specific customer-experience costs; new-product pricing partly offset these pressures. SG&A was 24.2% of sales versus 25.7% in Q2 2017. Management cited acquisition and growth-investment costs, a customer bankruptcy-related bad-debt expense, and higher health-care costs.
- Operating cash flow for the first half was $65.4m, down from $146.3m, primarily because insurance collections were lower. Investing activities used $5.8m, including $8.8m of capital expenditures; financing activities used $69.5m. Cash, cash equivalents and restricted cash were $119.9m at June 30, down $18.0m from year-end.
- At June 30, gross debt was $430.4m, including $26.7m current debt; long-term debt was $403.7m. Cash and cash equivalents were $116.7m. The $575m revolving facility had $316.7m unused, including letters of credit; the company reported covenant compliance. Revolver borrowings carried a 3.31% weighted-average rate.
- Current assets were $609.5m and current liabilities $283.3m. The company paid $28.0m in dividends in the first half; dividends per common share were $0.38 for Q2 and $0.73 for the first half.
Material changes, outlook and management commentary
- Growth reflected stronger core-product sales across both segments and the inclusion of Globe. Core products represented approximately 87% of first-half sales, up from 84% a year earlier. Management said backlog remained strong entering Q3, citing large fire-service breathing-apparatus orders and sustained industrial-product orders.
- Management expects 2018 research and development expense to be approximately 4.0% of sales. The filing provides no broader quantified sales or earnings guidance.
- First-half restructuring charges were $7.6m, versus $13.7m in 2017, and related mainly to staff reductions in Europe and review of the company’s legal structure. Other operating expense was $10.8m, versus $29.6m, largely reflecting legacy cumulative-trauma product-liability costs and an insurance-receivable adjustment.
- The Q2 effective tax rate was 22.8%, versus a 7.7% tax benefit in Q2 2017; first-half rates were 22.7% and 3.2%, respectively. Share-based-payment tax benefits were substantially larger in 2017, making year-over-year net income comparisons less directly indicative of operating change. The company had recorded estimated Tax Cuts and Jobs Act effects in 2017 and made no adjustment in the first half of 2018; finalization remained subject to further information and applicable interpretations.
- In July 2018, MSA settled remaining North River insurance coverage litigation; payment was expected in Q3, with no expected operating-results impact. Management expected approximately $80m of third-quarter receipts from previously settled insurance policies. The company also gave notice to repay $26.7m of 5.41% senior notes by the end of August, using revolver borrowings; repayment was expected to include approximately $1.2m for make-whole and accrued interest.
- Argentina became highly inflationary effective June 30, 2018. Remeasurement from July 1 may increase reported-results volatility, though management did not expect a material impact given the company’s limited presence there.
Risks, contingencies and unusual items
- MSA reported 1,470 cumulative-trauma lawsuits comprising 2,345 claims at June 30. The reserve was $162.3m, including $107.8m for estimated incurred-but-not-reported claims projected through 2060. Management emphasized that claim counts, severity, settlements, legal developments and other assumptions remain uncertain; future reserve revisions could materially affect results, financial condition or liquidity.
- Related insurance receivables were $125.7m and insurance-company notes receivable were $63.8m. Recovery timing and collectibility remain exposed to claims-composition assumptions and insurer financial condition, notwithstanding the July North River settlement.
- Q2 comprehensive income attributable to MSA was $7.9m, despite $33.2m attributable net income, primarily reflecting a $27.9m foreign-currency translation loss. The first-half translation loss was $14.5m.
- The company adopted the new revenue-recognition standard on January 1, 2018, with no reported impact on the income statement or balance sheet. Adoption of the new lease standard was planned for 2019; undiscounted operating-lease commitments were approximately $39.4m, and assets and liabilities were expected to increase significantly upon adoption.
Important facts for investors to verify
- Whether organic growth, backlog and core-product demand persist, and how Globe affects sales mix and gross margins.
- Actual Q3 insurance-collection timing and amount, including the North River settlement, and the resulting operating cash flow.
- Future cumulative-trauma claims and reserve estimates, insurance recoveries, and any material changes in litigation or legal assumptions.
- Debt repayment and revolver usage, interest expense, covenant headroom, and the company’s ability to sustain dividends while funding investment.
- Whether gross-margin pressures, customer-specific costs, bad debt and tax-rate variability continue to affect reported earnings.