MSA Safety Incorporated — Q3 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2022, compared with the same 2021 periods. MSA develops and sells safety products, including breathing apparatus, gas detection, protective apparel, head protection, and fall protection. It reports Americas, International, and Corporate segments. Prior periods reflect the retrospective change from LIFO to FIFO accounting for certain U.S. inventory.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $381.7 million | $340.2 million | $1,084.7 million | $989.9 million |
| Gross profit / margin | $169.4 million / 44.4% | $149.4 million / 43.9% | $476.6 million / 43.9% | $437.2 million / 44.2% |
| Operating income | $64.3 million | $32.4 million | $168.5 million | $111.6 million |
| Net income attributable to MSA | $44.9 million | $21.2 million | $128.1 million | $82.8 million |
| Diluted EPS | $1.14 | $0.54 | $3.25 | $2.10 |
- Q3 sales increased 12.2% reported and 16.2% in constant currency. Americas sales rose 20.5%; International sales fell 5.0% reported but grew 6.1% in constant currency.
- Nine-month sales increased 9.6% reported and 12.7% in constant currency; organic constant-currency growth was 9.3%. Results included Bacharach, acquired July 2021.
- Q3 operating income improved with higher volume and pricing, lower SG&A, product liability expense, and restructuring charges, partly offset by increased currency losses. Q3 gross margin benefited from pricing and the absence of Bacharach inventory step-up amortization, offset in part by inflation and about $4.5 million of inventory and warranty charges.
- Nine-month operating cash flow was $103.9 million, down from $130.1 million, primarily reflecting working-capital needs, including an $86.6 million inventory cash outflow as backlog increased. Capital expenditures were $28.8 million.
- At September 30, cash and cash equivalents were $159.6 million; total debt was $604.7 million, including $6.8 million due within one year. The $900 million revolving facility had $552.8 million unused, including letters of credit. The company reported compliance with debt covenants.
- Current assets were $862.1 million and current liabilities $349.1 million. Dividends paid in the first nine months were $53.4 million; share repurchases used $34.4 million.
Material changes and management outlook
- Americas performance was strong, led by breathing apparatus and firefighter protective apparel. International growth in constant currency was constrained by supply-chain pressures, inflation, and unfavorable currency translation. Portable gas detection remained affected by supply constraints.
- Management reported record backlog across substantially all core products, citing stronger order pace alongside supply-chain and labor constraints. It expected Q4 2022 revenue to increase in the low- to mid-single-digit range versus Q4 2021.
- Management cited supply-chain and semiconductor availability, inflation, possible COVID-related lockdowns, industrial employment, military conflict, currency volatility, economic recovery, and geopolitical and energy uncertainty in Europe as factors that could affect results into 2023. Additional price increases were implemented in October; further pricing opportunities would be evaluated.
- Shipments to Russia and Belarus were suspended indefinitely following the conflict in Ukraine. Those markets, together with Ukraine, generated about $6 million in 2021 sales.
- Foreign-currency translation reduced other comprehensive income by $58.1 million in the first nine months. Q3 currency-exchange losses included noncash translation losses associated with a planned foreign-subsidiary closure.
Risks, contingencies, and unusual items
- Cumulative-trauma product liability: MSA LLC had 1,544 lawsuits involving 4,193 claims at September 30. Its reserve was $410.3 million, including amounts for claims settled but unpaid and related defense costs; the estimate extends through 2074 and is not discounted. Management said actual claims and costs could materially exceed estimates. MSA LLC is largely self-insured.
- Related insurance receivables were $125.9 million and insurer notes receivable were $44.3 million. Collection timing and amounts remain exposed to assumptions about future claims and insurer solvency.
- A West Virginia case includes claims for substantial compensatory damages and unspecified punitive damages, as well as a consumer-protection claim. A trial was scheduled for November 28, 2022, and the company sought a continuance. No reserve was recorded; the company considered loss not probable and could not estimate a reasonably possible loss.
- Globe and MSA LLC face early-stage lawsuits alleging injury or environmental harm from products involving PFAS. The company stated it believes it has defenses; defense costs are recognized as incurred.
- Other items affecting comparison included higher interest expense, a write-down of an equity investment, lower restructuring expense, and lower product-liability expense than in 2021. Q3 2022 SG&A included about $2 million of favorable nonrecurring adjustments.
- Management expects 2022 pension contributions of approximately $7.7 million. Tax audits and litigation may produce outcomes that differ materially from recorded tax amounts.
Important facts for investors to verify
- Whether record backlog converts to shipments and supports the Q4 low- to mid-single-digit revenue outlook despite supply, labor, and component constraints.
- Whether pricing offsets input-cost inflation without weakening demand or gross margins.
- Developments in the cumulative-trauma reserve, including the annual review, claim trends, settlement payments, and insurance recoveries.
- The status and potential financial impact of the West Virginia and PFAS litigation, and the timing and collectibility of insurer receivables.
- Working-capital and inventory trends, operating cash flow, variable-rate borrowing costs, and continued covenant compliance.