MSA Safety Incorporated — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. MSA manufactures safety products, including breathing apparatus, gas detection, protective equipment and fall-protection products.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $326.0 million | $325.9 million | Flat reported; up 3.4% at constant currency |
| Gross profit / margin | $150.0 million / 46.0% | $147.3 million / 45.2% | Margin up 0.8 percentage points |
| Operating income | $32.2 million | $44.4 million | Down $12.3 million |
| Net income attributable to MSA | $23.2 million | $32.4 million | Down 28% |
| Diluted EPS | $0.59 | $0.83 | Down $0.24 |
| Operating cash flow | $1.2 million | $17.4 million | Down $16.1 million |
Gross-margin improvement reflected product launches and pricing initiatives. SG&A was $78.4 million, or 24.1% of sales, versus $80.3 million, or 24.6%; R&D increased to $13.7 million from $12.5 million. The effective tax rate rose to 27.8% from 22.6%. Management-reported adjusted operating income, a non-GAAP measure, increased to $58.3 million from $54.6 million.
Segments and material changes
- Americas: Sales grew 2.2% reported and 3.3% at constant currency to $213.7 million. Adjusted operating income rose 9% to $54.8 million, supported by sales, pricing and new products.
- International: Sales declined 3.9% reported to $112.4 million but increased 3.5% at constant currency. Adjusted operating income fell 14% to $11.0 million, primarily due to weaker Middle East volumes; Europe and China demand was stronger.
- Currency exchange losses were $17.0 million versus $2.0 million, chiefly reflecting a $15.4 million noncash cumulative translation loss reclassified to earnings after MSA approved closure of its South Africa affiliates.
- Product liability expense was $2.9 million, broadly consistent with the prior-year quarter. Restructuring charges were $5.8 million versus $5.3 million.
Cash, debt and liquidity
- Cash, cash equivalents and restricted cash totaled $108.2 million at quarter-end, down $32.4 million during the quarter. Short-term investments were $73.6 million.
- Total reported debt was approximately $377.5 million, including $20.2 million current and $357.3 million long-term. The $600 million revolving facility had $349.8 million unused, including letters of credit; MSA reported compliance with debt covenants.
- Operating cash flow was limited by product-liability payments and working-capital needs. Product-liability payments were $20.0 million gross, partly offset by $8.1 million of collections on insurance and notes receivable.
- Investing activities used $23.8 million, including net purchases of short-term investments and $4.9 million of capital expenditures. Financing activities used $6.5 million; dividends paid were $14.7 million.
Outlook, commentary and risks
- Management continued to target mid-single-digit constant-currency revenue growth for 2019. The quarter’s book-to-bill ratio was 107%, and backlog was described as strong entering Q2; management expected backlog to decline in the second half depending on order activity.
- Management expected full-year 2019 interest expense of $13–$15 million. Ongoing restructuring programs were expected to generate $4–$5 million in annual savings beginning in late 2019 and into 2020.
- MSA agreed to acquire Sierra Monitor Corporation for approximately $33 million in cash; closing was expected in Q2 2019, subject to customary conditions. The deal is intended to expand connected safety and gas-detection offerings.
- Cumulative-trauma product-liability reserves were $170.7 million at March 31, 2019, with no interim remeasurement in Q1. MSA LLC faced 1,481 lawsuits comprising 2,371 claims and is largely self-insured. Management cautioned that actual claims and settlement costs could differ materially from estimates.
- Related insurance receivables were $64.1 million and notes receivable from insurers were $60.0 million. Recovery timing and amounts depend on coverage terms, claims composition and insurers’ ability to pay.
- MSA expected to pay the remaining $7.1 million related to previously agreed settlements in Q2 2019. Foreign-exchange volatility, including Argentina’s highly inflationary accounting and Brexit-related uncertainty, was also identified as a risk.
Important facts for investors to verify
- Whether constant-currency growth, backlog and order trends support the 2019 mid-single-digit revenue-growth target.
- Progress on the South Africa closure, restructuring savings and the Sierra Monitor acquisition, including actual closing and integration costs.
- Developments in cumulative-trauma claims, reserve assumptions, settlement payments and collection of insurer receivables.
- Cash conversion and working-capital trends, especially inventory growth and the timing of product-liability payments and insurance collections.
- Debt levels, revolver availability, variable-rate exposure and compliance with financial covenants.