MSA Safety Incorporated — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Comparisons are with the corresponding 2016 periods unless stated otherwise. Amounts are in U.S. dollars.
Business context and results
MSA develops and supplies safety products, including breathing apparatus, gas detection, head protection, fall protection, and fire-service equipment. It reports Americas and International segments, with Corporate costs presented separately. Core products represented approximately 84% of first-half sales.
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $288.8m | $296.0m | $554.5m | $575.3m |
| Gross profit / gross margin | $133.6m / 46.3% | $135.9m / 45.9% | $253.3m / 45.7% | $256.6m / 44.6% |
| Operating income | $14.3m | $47.9m | $33.7m | $76.6m |
| Net income attributable to MSA | $12.5m | $31.1m | $26.9m | $42.8m |
| Diluted EPS attributable to MSA | $0.32 | $0.82 | $0.70 | $1.13 |
| Dividends per common share | $0.35 | $0.33 | $0.68 | $0.65 |
Q2 sales declined 2.4% reported and 1.9% on a constant-currency basis. First-half sales fell 3.6% reported and 2.9% constant currency. Americas sales were down 1.5% in Q2 and 1.0% in the first half; International sales were down 3.9% and 7.5%, respectively. Lower SCBA shipments, softer fire-service conditions, and lower military helmet, breathing apparatus, and portable-instrument sales weighed on results. Industrial head protection, fall protection, and Middle East fixed gas and flame detection provided partial offsets.
Cash flow, liquidity and debt
- First-half operating cash flow was $146.3m, versus $12.5m in 2016. Management attributed the increase primarily to insurance collections and improved working capital; cash collected from insurance companies, net of product-liability settlements paid, was $93.5m.
- Capital expenditures were $6.1m. Financing activities used $142.5m, including approximately $124.8m of net long-term debt repayments and $25.8m of dividends. Cash increased $1.6m to $115.4m.
- At June 30, cash was $115.4m, including $107.7m held by foreign subsidiaries whose earnings were considered indefinitely reinvested; repatriation could incur additional taxes. Current assets were $532.1m and current liabilities $263.3m.
- Debt was approximately $269.5m at June 30, compared with $390.5m at December 31, 2016. The revolving facility had $64.6m outstanding and $502.6m unused, including letters of credit. The company reported covenant compliance. Most long-term debt was fixed-rate.
Material changes and unusual items
- Operating income fell sharply, principally because of a $29.6m other operating expense tied to cumulative-trauma product-liability settlements agreed in August 2017, plus higher restructuring charges and currency losses. The settlement-related charge did not require a cash payment in the quarter.
- Gross margin improved despite lower sales, reflecting better margins across core products and a more favorable mix. SG&A declined with cost-reduction benefits; R&D expense increased.
- The first-half restructuring charge was $13.7m, including an $11.4m noncash voluntary-retirement benefit charge for 83 employees, paid from an overfunded North American pension plan.
- The effective tax rate was a 7.7% benefit in Q2 and 3.2% for the first half, largely affected by share-based-payment tax benefits under newly adopted accounting guidance. Management cautioned that the guidance may make future quarterly tax rates volatile. The filing reports a $6.8m first-half tax benefit from this adoption.
- Other comprehensive income included a $24.9m first-half foreign-currency translation gain, compared with a $1.1m loss in 2016.
Outlook, risks and contingencies
- Management expects 2017 R&D expense to be 4.0%–4.5% of sales. The filing provides no broader numerical revenue or earnings guidance.
- In August 2017, MSA LLC agreed to resolve a substantial number of legacy cumulative-trauma claims for $75.2m, partly covered by insurance. It expected to pay $25.2m in the second half of 2017 and the balance over seven quarters from Q1 2018 through Q3 2019. The company recorded a total cumulative-trauma reserve of $93.1m at June 30, including the settlements and other estimable asserted claims; the reserve excludes incurred-but-not-reported claims. MSA said it is now largely self-insured for these claims.
- At June 30, insurance receivables were $108.6m and notes receivable from insurers were $78.0m. Recovery timing and amounts remain subject to insurance disputes, insurer capacity, and other uncertainties. The company warned that litigation developments, new claims, or inability to recover insurance could materially affect results, financial condition, or liquidity.
- Subsequent to quarter-end, on July 31, MSA acquired Globe Holding Company for $215m in cash, funded with revolving-credit borrowings. Globe supplies firefighter protective clothing and boots. Purchase accounting and pro forma results were not complete or available in this filing.
- Other stated exposures include product-liability claims generally, foreign-exchange and interest-rate movements, pension contributions, and tax uncertainties. Management expected approximately $5.9m of pension contributions for 2017.
Important facts for investors to verify
- Whether operating performance and sales trends improve, particularly in International markets and fire-service products, apart from the one-time settlement charge.
- The final cash timing and insurance coverage for the $75.2m settlements, future reserve revisions, and the possible magnitude of unreserved IBNR claims.
- Collectibility and timing of the $108.6m insurance receivable and $78.0m insurer notes receivable, including outcomes of remaining insurance disputes.
- The debt, liquidity, covenant headroom, and integration impact following the $215m Globe acquisition.
- How share-based-payment tax benefits affect subsequent effective tax rates and reported earnings.