MSA Safety Incorporated — 2015 Form 10-K
Business context and reporting period. MSA designs and supplies safety equipment, including breathing apparatus, gas detection, helmets and fall-protection products. This filing covers the fiscal year ended December 31, 2015; quarterly data below highlights the fourth quarter. Results include Latchways from its October 21, 2015 acquisition date. Core products represented approximately 81% of 2015 sales.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $1,130.8 million | $1,133.9 million |
| Gross profit / margin | $501.1 million / 44.3% | $515.3 million / 45.4% |
| Continuing-operations income attributable to MSA common shareholders | $69.6 million | $87.4 million |
| Diluted EPS from continuing operations | $1.84 | $2.30 |
| Operating cash flow | $55.3 million | $107.0 million |
| Capital expenditures | $36.2 million | $33.6 million |
| Cash and cash equivalents at year-end | $105.9 million | $106.0 million |
| Long-term debt at year-end | $460.0 million | $245.0 million |
| Shareholders’ equity | $516.5 million | $533.8 million |
The consolidated income statement reports $66.6 million of continuing-operations income before attribution to shareholders; the $69.6 million figure above is the amount attributable to MSA common shareholders. The filing’s selected financial data presents the latter measure.
In Q4 2015, continuing-operations sales were $313.3 million, gross profit was $134.0 million, and income attributable to MSA was $20.8 million ($0.55 diluted EPS). Q4 2014 comparables were $311.2 million, $140.1 million, and $33.1 million ($0.87 diluted EPS).
Cash flow from operations fell mainly because of lower profitability and working-capital changes. Investing activities used $208.5 million, including $180.3 million net cash for Latchways; financing activities provided $164.9 million, primarily reflecting increased borrowing. The $575 million revolving facility had $244.9 million unused at year-end, including letters of credit. MSA reported compliance with debt covenants. In January 2016, it issued approximately $80 million of fixed-rate notes at 3.4% and used the proceeds to repay part of the revolver.
Material changes versus prior year
- Reported sales were nearly flat, but local-currency sales grew 8%; foreign-exchange translation reduced reported sales by 8%. Organic local-currency growth was 7%, with 1% from acquisitions and other items.
- North America sales rose 11% to $609.0 million, led by G1 self-contained breathing apparatus. Europe sales declined 9% reported, though local-currency sales increased 7%. International sales fell 14% reported and 1% in local currency amid weaker energy and commodity demand and challenging conditions in Brazil and China.
- Local-currency core-product sales increased 11%; breathing apparatus grew 52%, while portable gas detection and head protection declined 7% and 9%, respectively.
- Profitability weakened: gross margin fell 1.1 percentage points, and continuing-operations income attributable to MSA common shareholders declined 20%. The filing cites mix, indirect costs, Latchways-related amortization and expenses, restructuring, and European reorganization exit taxes.
- Latchways was acquired for $190.9 million. It contributed $10.1 million in sales and a $0.7 million net loss from acquisition through year-end; its purchase-price allocation was preliminary.
Outlook, commentary, risks and unusual items
- No specific sales or earnings guidance is provided. Management expected the strong U.S. dollar to continue affecting 2016 results and anticipated $3–5 million of additional European reorganization exit taxes in 2016.
- The 2015 global cost-reduction program is expected to save approximately $10 million in 2016 operating costs; further cost-reduction opportunities were under evaluation. Planned 2016 capital expenditures were approximately $35 million.
- Reported 2015 effective tax rate was 40.0%, including $7.7 million of European reorganization exit-tax charges; excluding those charges, the rate was 33.1%.
- Product-liability exposure is a significant uncertainty. MSA recorded a $50.1 million cumulative-trauma reserve, including a $7.1 million estimate for certain reported claims, but recorded no liability for incurred-but-not-reported cumulative-trauma claims. Related insurance receivables were $229.5 million and are subject to insurer recovery and timing risks. A Kentucky jury returned a $7.2 million verdict against a subsidiary in February 2016; MSA was evaluating legal options and counsel advised it had grounds to appeal.
- Other key risks include economic weakness in energy, mining and emerging markets; foreign exchange; regulatory approvals and product liability; acquisition integration; pension assumptions; and variable-rate debt. Approximately 46% of 2015 net sales came from Europe and International. A hypothetical 10% U.S.-dollar movement was estimated to change reported sales by about $51 million and net income by $0.9 million.
- MSA sold its South African distribution business and Zambian operations on February 29, 2016 for $15.9 million; the filing says the impact on net income and EPS was not significant. Management and the auditor reported effective internal control over financial reporting; Latchways was excluded from the control assessment.
Important facts for investors to verify
- Reconcile the differing continuing-operations income presentation: consolidated income versus income attributable to MSA common shareholders.
- Track cash conversion and working capital, particularly receivables and inventories, alongside the expected benefits and integration costs of Latchways.
- Assess debt repayment capacity, variable-rate exposure, refinancing needs and covenant headroom after the acquisition-related borrowing.
- Monitor cumulative-trauma claims, the adequacy of recorded reserves, insurance litigation and actual collection of the $229.5 million insurance receivable.
- Evaluate whether planned restructuring savings offset ongoing currency, tax, acquisition and regional-market pressures.