MSA Safety Incorporated — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. MSA develops and sells safety products, including breathing apparatus, gas detection systems, protective apparel, head protection and fall protection. The filing is unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $446.7 million | $381.7 million | $1,292.3 million | $1,084.7 million |
| Gross profit | $218.8 million | $169.4 million | $614.0 million | $476.6 million |
| Gross margin | 49.0% | 44.4% | 47.5% | 43.9% |
| Operating income | $94.1 million | $64.3 million | $129.1 million | $168.5 million |
| Net income (loss) | $65.3 million | $44.9 million | $(17.8) million | $128.1 million |
| Diluted EPS | $1.65 | $1.14 | $(0.46) | $3.25 |
| Operating cash flow | Not presented separately | Not presented separately | $(66.1) million | $103.9 million |
- Q3 sales rose 17.0% (14.7% in constant currency); growth reflected volume and pricing, with gains in both Americas and International. Nine-month sales increased 19.1% (18.6% constant currency).
- Q3 gross margin improved 4.6 percentage points, attributed to volume leverage, price/cost management and productivity. SG&A rose 23.5% in Q3, faster than sales, reflecting higher activity, variable compensation, targeted investment and inflation.
- Q3 adjusted operating income was $101.3 million and adjusted EBITDA was $114.5 million. For the nine months, those non-GAAP measures were $282.5 million and $320.5 million, respectively. Management’s definitions and reconciliations exclude specified items; these measures are not GAAP results.
- The nine-month net loss and lower operating income principally reflect the MSA LLC divestiture charge. Excluding that transaction, the business showed higher sales and gross profit; the filing does not present a GAAP “adjusted” net income figure.
Balance sheet, cash flow and capital
- At September 30, cash and cash equivalents were $164.5 million; total debt was $742.0 million, including $26.2 million current and $715.8 million long term. Debt increased from $572.8 million at December 31, 2022. Approximately 42% of long-term debt was fixed-rate; variable-rate borrowings were $435.2 million.
- The $900 million revolving facility had $700.8 million unused, including letters of credit, and matures in 2026. The company reported compliance with debt covenants. Revolver and term-loan rates were 6.72% and 6.93%, respectively, at quarter-end.
- Nine-month operating cash use of $66.1 million was largely affected by the $341.2 million cash contribution connected with the MSA LLC divestiture; management also cited improved operating results and working capital, particularly inventory. Investing used $28.3 million, including $31.0 million of capital expenditures. Financing provided $110.5 million, including net debt proceeds of $168.6 million. Cash, cash equivalents and restricted cash increased $2.0 million.
- Dividends paid were $55.0 million for the nine months; the declared common dividend was $0.47 per share in Q3. No shares were repurchased under the public repurchase program during the quarter.
Material changes, unusual items and risks
- On January 5, 2023, MSA divested MSA LLC, which held legacy cumulative-trauma product liability claims. MSA contributed $341.2 million cash and derecognized related reserves, insurance assets and deferred tax assets, recording a $129.2 million pretax loss and a $199.6 million tax-effected loss. The buyer and MSA LLC assumed responsibility for the legacy claims and agreed to indemnify MSA for specified liabilities; the indemnification is described as uncapped and without a time limit.
- The divestiture drove a 116.6% effective tax rate for the first nine months, primarily because the loss was nondeductible and related deferred tax assets were written off. Q3 effective tax rate was 25.6%.
- Globe, an MSA subsidiary, faced 165 PFAS-related lawsuits comprising approximately 8,432 claims, plus a putative class action, as of October 20, 2023. The matters were at an early stage; Globe said it believes it has valid defenses and is pursuing insurance coverage and indemnification. The filing does not quantify a potential loss.
- Management cited supply-chain constraints, raw-material availability, industrial employment, interest rates, military conflict, currency volatility, economic recovery and geopolitical risk as factors that could affect results. No specific numerical guidance was provided. Management expects to maintain significant annual investment in R&D and software development.
- Other exposures include foreign exchange and interest-rate movements, product warranties, single-incident product liability claims, and potential differences from estimates or outcomes of tax audits and litigation. A hypothetical 100-basis-point rate change was estimated to affect future annual earnings by $4.6 million under the current capital structure.
Most important facts for investors to verify
- How much of revenue growth and margin expansion is sustainable from volume, pricing, backlog conversion and productivity, versus temporary conditions.
- The cash-flow and leverage trajectory after the MSA LLC transaction, including debt repayment, variable-rate exposure and covenant headroom.
- The final financial and legal consequences of the MSA LLC divestiture and the buyer’s ability to meet its indemnification obligations.
- Developments in Globe’s PFAS litigation, including potential costs, insurance recovery and any change in the ability to source compliant protective fabrics.
- Whether inflation, supply constraints, foreign exchange, interest rates and geopolitical conditions alter demand, costs or management’s outlook.