MSA Safety Incorporated — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are U.S. dollars; financial statement figures are in millions unless noted. The filing is unaudited.
Business context
MSA develops and sells safety products, including breathing apparatus, gas and flame detection, protective apparel and helmets, and fall protection. It reports Americas, International, and Corporate segments. In 2021, MSA acquired Bristol Uniforms (January) and Bacharach (July), and purchased the remaining 10% interest in its China subsidiary.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $340.2 | $304.4 | $989.9 | $960.0 |
| Gross profit | $146.0 | $132.2 | $433.7 | $431.2 |
| Gross margin | 42.9% | 43.4% | 43.8% | 44.9% |
| Operating income | $29.0 | $41.1 | $108.0 | $148.2 |
| Net income attributable to MSA | $18.8 | $28.0 | $80.4 | $107.8 |
| Diluted EPS | $0.48 | $0.71 | $2.04 | $2.74 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $130.1 | $110.2 |
Q3 sales rose 11.8%, but operating income and attributable net income declined. Higher sales volume was offset by increased product-liability expense, SG&A, acquisition costs, and input costs. Nine-month reported sales rose 3.1%; excluding currency and acquisitions, organic constant-currency sales declined 2.7%. Nine-month adjusted operating income, a non-GAAP measure, was $157.1 million versus $176.3 million.
Q3 SG&A was $87.5 million, or 25.7% of sales, versus $64.8 million, or 21.3%. For the nine months, SG&A was $246.3 million, or 24.9% of sales, versus $214.1 million, or 22.3%. The nine-month effective tax rate was 25.8%, compared with 25.1%.
Cash, debt and liquidity
- Cash and cash equivalents were $117.3 million at September 30, 2021, down from $160.7 million at year-end 2020. Short-term investments were $49.0 million.
- Total debt was $612.7 million, up from $307.2 million at December 31, 2020. The company had $321.6 million of variable-rate revolver borrowings and approximately $294 million of fixed-rate debt.
- The $900 million revolving facility matures in 2026; $576.9 million was unused, including letters of credit. MSA reported compliance with debt covenants.
- Nine-month operating cash flow of $130.1 million exceeded the prior-year $110.2 million. Investing used $402.6 million, primarily reflecting acquisitions; financing provided $233.4 million, including net debt proceeds. Capital expenditures were $31.0 million and dividends paid were $51.3 million.
- Inventories increased to $249.4 million from $197.8 million at year-end.
Material changes and management outlook
- Americas Q3 sales increased 17.9%; International sales increased 0.9% reported but declined 1.6% on a constant-currency basis. Management cited stronger Americas demand and weaker International organic volumes, especially in emerging markets.
- Acquisition contributions supported reported growth: Q3 sales included $14.1 million from Bacharach in the Americas and $9.0 million from Bristol and $1.1 million from Bacharach internationally. The acquisitions contributed $36.7 million of sales and $6.8 million of net loss in the nine-month period.
- Management expected Q4 sales to increase approximately 10% from Q3, citing seasonality. It also expected SG&A to be about 23.5% of sales in the second half of 2021.
- Management expected restructuring and earlier cost-reduction programs to produce approximately $15 million of savings in 2021 and $25–$30 million annually thereafter.
- Supply-chain constraints, raw-material availability, labor shortages, inflation, and the uneven COVID-19 recovery could affect deliveries and results into 2022. MSA implemented an off-cycle price increase and said it would assess further pricing actions.
Contingencies, risks and unusual items
- Cumulative-trauma product liability: MSA LLC faced 1,672 lawsuits comprising 4,145 claims at September 30, 2021. The recorded reserve was $232.6 million, up from $221.5 million at year-end. Nine-month product-liability expense was $25.2 million, compared with $4.9 million. MSA said it is largely self-insured; claim trends, settlement outcomes, legal developments, and insurance recoveries remain uncertain.
- Related insurance receivables were $105.9 million and insurance-company notes receivable were $48.2 million. The company believes recorded amounts are probable of collection, but timing and recovery depend on assumptions and insurer creditworthiness.
- MSA subsidiaries were defending a small number of early-stage PFAS-related lawsuits; the filing stated that no loss was probable at the time.
- Acquisition activity increased debt, SG&A, amortization, and transaction costs. Bacharach purchase accounting remained preliminary. The quarter also included $10.7 million of product-liability expense and $3.9 million of restructuring charges.
- COVID-19, supply-chain disruption, product claims or recalls, tax audits, and foreign-exchange and interest-rate changes are among the disclosed risks.
Important facts for investors to verify
- Whether the anticipated Q4 sequential sales increase occurred, and whether International demand and organic growth improved.
- Whether pricing and cost actions offset inflation, supply constraints, and acquisition-related margin pressure.
- How cumulative-trauma claim filings, reserve estimates, cash payments, and insurance recoveries develop, particularly given the rise in asserted claims.
- Whether post-acquisition debt, covenant headroom, and liquidity remain manageable as integration and amortization costs continue.
- How preliminary Bacharach and Bristol purchase-price allocations and expected synergies compare with subsequent reported results.