MSA Safety Incorporated — Q1 2020 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2020, compared with Q1 2019. MSA develops and sells safety products, including breathing apparatus, gas detection, protective equipment and fall protection. The company operated as an essential business during the COVID-19 pandemic.
Financial results and liquidity
- Revenue: $341.1 million, up 4.6% reported and 6.7% in constant currency. Americas sales rose 8.2%; International sales declined 2.1% reported but increased 0.8% in constant currency.
- Profit and margins: Gross profit was $157.4 million; gross margin was 46.1%, versus 46.0%. Operating income was $58.8 million, versus $32.2 million. Net income attributable to MSA was $43.7 million, versus $23.2 million; diluted EPS was $1.11, versus $0.59.
- Adjusted operating results: Adjusted operating income, a non-GAAP measure, was $63.9 million, versus $58.3 million. Americas adjusted operating margin was 25.9%, versus 25.6%; International was 11.5%, versus 9.8%.
- Cash flow: Operating activities provided $13.6 million, versus $1.2 million. Capital expenditures were $6.6 million. Cash, cash equivalents and restricted cash decreased $29.6 million to $123.0 million.
- Liquidity and debt: Short-term investments were $69.8 million. Total debt was $371.6 million, including $20.0 million current debt; $333.1 million of the $600 million revolving facility was unused, including letters of credit. The company reported compliance with debt covenants.
- Capital returns: Cash dividends paid were $16.3 million; the quarterly dividend was $0.42 per common share. MSA repurchased 175,000 shares under its repurchase program.
Material changes and unusual items
- Revenue growth was led by the Americas, including higher gas detection and air-purifying respirator (APR) sales. International performance was mixed, with EMEA growth offset by weaker APAC sales, particularly in China.
- Operating income benefited from higher sales and substantially lower currency losses. Q1 2019 included a $15.4 million noncash cumulative translation loss associated primarily with the planned closure of South Africa subsidiaries; currency losses were $0.3 million in Q1 2020 versus $17.0 million in Q1 2019.
- Restructuring charges declined to $2.0 million from $5.8 million. Product liability expense was $2.0 million versus $2.9 million. Q1 2020 adjusted results exclude $0.8 million of COVID-19-related costs, among other specified items.
- Foreign currency translation reduced other comprehensive income by $22.9 million in Q1 2020, compared with a $0.4 million gain in Q1 2019.
Outlook, risks and contingencies
- MSA reported strong April incoming orders, up more than 10% year over year, supported by respirator and firefighter safety demand. APR backlog was sizable and growing, but management said added manufacturing capacity would take time and backlog conversion would occur over several quarters.
- Management cautioned that shipment timing and weaker employment-based industrial PPE demand could make Q2 2020 weaker than Q1. It lowered near-term growth expectations for industrial and energy market PPE. No specific full-year revenue or earnings guidance is provided in the filing.
- MSA was increasing APR production and expected to invest $11 million to $13 million in capacity expansion. The company also cited controlled hiring, reduced travel and other discretionary cost controls.
- COVID-19 may weaken demand in industrial end markets and disrupt manufacturing, supply chains or delivery. The company described substantial economic uncertainty despite its essential-business status.
- Product liability: Cumulative-trauma reserves were $167.3 million, with 1,658 lawsuits comprising 2,520 claims outstanding. The reserve depends on uncertain claims, legal and settlement assumptions and could require material future adjustments. MSA also recorded $61.2 million of insurance receivables and $56.4 million of insurance notes receivable; recovery timing and insurer solvency are risks.
- Other exposures include foreign exchange and variable interest rates, tax audits and pension funding. MSA expected approximately $7.6 million of pension contributions in 2020. Under the CARES Act, it expected to defer $16 million to $20 million of U.S. income tax payments and $6 million to $7 million of employer Social Security tax payments.
Important facts for investors to verify
- Whether APR capacity expansions and the reported backlog convert to sales on the expected timetable, and how industrial PPE demand develops.
- How much reported earnings growth reflects recurring operations versus the unusually high currency loss in Q1 2019 and other adjustment exclusions.
- Future cumulative-trauma claims, reserve adequacy, and collection of insurance receivables and notes receivable.
- Cash generation, debt levels and covenant headroom as the pandemic affects demand and working capital.
- The effects of currency movements, tax matters and deferred CARES Act payments on subsequent periods.