MSA Safety Inc. — Q3 2020 Form 10-Q
Business context and period. MSA Safety develops and sells safety equipment, including breathing apparatus, gas detection, protective apparel, head protection and fall protection products. This unaudited filing covers the three and nine months ended September 30, 2020; comparisons are with the same 2019 periods. Management cited COVID-19-related disruption to customer demand and operations.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $304.4 million | $351.0 million | $960.0 million | $1,026.7 million |
| Gross profit | $132.2 million | $158.7 million | $431.2 million | $469.8 million |
| Gross margin | 43.4% | 45.2% | 44.9% | 45.8% |
| Operating income | $41.1 million | $59.6 million | $148.2 million | $146.3 million |
| Net income attributable to MSA | $28.0 million | $42.2 million | $107.8 million | $105.3 million |
| Diluted EPS | $0.71 | $1.08 | $2.74 | $2.69 |
| Operating cash flow | Not stated separately | Not stated separately | $110.2 million | $88.3 million |
Q3 adjusted operating income, a non-GAAP measure, was $53.6 million versus $63.2 million. For the first nine months it was $176.3 million versus $185.9 million. SG&A was $64.8 million in Q3, down 21.8%; it represented 21.3% of sales versus 23.6% a year earlier. Nine-month SG&A was $214.1 million, down 12.7%.
Liquidity and debt. At September 30, cash and cash equivalents were $132.8 million; short-term investments were $69.9 million. Total debt was $341.7 million, including $20.0 million current and $321.7 million long-term. The $600 million revolving facility had $366.2 million unused capacity, including letters of credit. The company reported compliance with debt covenants. Cash, cash equivalents and restricted cash decreased $19.4 million in the first nine months. Capital expenditures were $32.7 million; dividends paid were $49.8 million and company stock purchases were $28.7 million.
Changes and drivers
- Q3 sales fell 13.3% year over year; nine-month sales fell 6.5%. Constant-currency declines were 13.1% and 5.0%, respectively.
- Americas Q3 sales declined 17.2%, with U.S. sales down 25% in July and August as oil and gas, commercial construction and employment-based industrial PPE demand weakened. Management said Americas sales rose 1% in September. International Q3 sales declined 5.4% as reported and 8.6% in constant currency.
- Lower factory throughput and COVID-19 safety costs pressured gross margin, partly offset by pricing. Q3 operating income declined despite lower SG&A; nine-month operating income edged higher, aided by lower foreign-exchange losses and SG&A leverage.
- Inventory increased to $252.9 million from $185.0 million at year-end, contributing to operating cash needs; management said inventory supported backlog heading into Q4.
Outlook, risks and unusual items
- Management expected sequential quarterly invoicing to improve in Q4, noting September orders were up 11% year over year and October orders remained relatively healthy versus July and August. Backlog was relatively consistent with Q2 and above the prior year, particularly for SCBA, turnout gear and APR. Management emphasized continued uncertainty in the global economy, end markets and U.S. election.
- Restructuring charges were $7.6 million in Q3 and $18.5 million year to date, mainly severance and footprint optimization. Including 2020 cost programs, management expected savings of $10–15 million in 2021 and $15–20 million annually thereafter.
- Management expected a full-year 2020 adjusted effective tax rate of 25%–26% and capital expenditures of $45–50 million. It planned $11–13 million of investment to expand U.S. APR production capacity; approximately $8 million had been spent by September 30.
- COVID-19 could continue to affect demand, supply chains, manufacturing and delivery. MSA continued operations as an essential business, with workforce safety and business continuity measures, and was expanding production of existing air-purifying respirators.
- Cumulative-trauma product liability reserve was $166.5 million. MSA LLC faced 1,743 lawsuits comprising 2,840 claims; the reserve is based on significant assumptions and extends to claims expected through 2069. The company is largely self-insured for these claims. Related insurance and notes receivable totaled $59.1 million and $52.0 million, respectively; collection timing, insurer solvency and claim outcomes remain uncertain.
- Other notable exposures include $5.2 million gross unrecognized tax benefits and $1.0 million accrued interest on uncertain tax positions. No interim remeasurement of the cumulative-trauma reserve was considered necessary during the quarter.
Most important facts for investors to verify
- Whether the improvement in September orders and Q4 invoicing translated into sustained sales recovery, particularly in the Americas and cyclical end markets.
- Whether cost reductions and pricing can offset lower volume and factory underutilization without impairing investment or margins; track restructuring costs against stated savings targets.
- Whether inventory converts to sales and cash, and whether operating cash flow remains adequate alongside dividends, capital spending and debt service.
- Whether cumulative-trauma claims, reserve estimates and expected insurer recoveries change materially; scrutinize the substantial uninsured exposure and receivable collectibility.
- How APR capacity expansion, pandemic-related demand and the stated capital expenditure plan affect returns and future production.