MSA Safety rporated(MSA) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited statements show decreased Q3 net sales and income, stable liabilities, and improved operating cash flow Condensed Consolidated Statements of Income Q3 2020 net sales and net income declined, while nine-month net income saw a slight increase year-over-year | Indicator (In thousands) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $304,392 | $351,014 | $959,975 | $1,026,726 | | Gross profit | $132,232 | $158,701 | $431,176 | $469,767 | | Operating income | $41,149 | $59,614 | $148,213 | $146,252 | | Net income attributable to MSA | $28,034 | $42,239 | $107,763 | $105,278 | | Diluted EPS | $0.71 | $1.08 | $2.74 | $2.69 | Condensed Consolidated Balance Sheets Total assets increased slightly to $1.79 billion due to higher inventories, with stable liabilities | Balance Sheet Item (In thousands) | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $744,089 | $693,363 | | Total assets | $1,792,665 | $1,739,693 | | Total current liabilities | $284,658 | $277,509 | | Total liabilities | $1,012,562 | $1,007,120 | | Total shareholders' equity | $780,103 | $732,573 | - Inventories increased significantly to $252.9 million as of September 30, 2020, from $185.0 million at the end of 2019[13] Condensed Consolidated Statements of Cash Flows Operating cash flow increased to $110.2 million, while overall cash decreased due to financing activities | Cash Flow Activity (In thousands) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Cash Flow From Operating Activities | $110,155 | $88,250 | | Cash Flow Used in Investing Activities | $(51,701) | $(73,785) | | Cash Flow Used in Financing Activities | $(76,143) | $(40,833) | | Decrease in cash, cash equivalents and restricted cash | $(19,357) | $(31,746) | Notes to Condensed Consolidated Financial Statements Notes detail restructuring charges, segment performance, and significant product liability contingencies Note 4—Restructuring Charges The company recorded $18.5 million in restructuring charges for the first nine months of 2020 | Period | Restructuring Charges (In millions) | | :--- | :--- | | Three Months Ended Sep 30, 2020 | $7.6 | | Nine Months Ended Sep 30, 2020 | $18.5 | | Three Months Ended Sep 30, 2019 | $1.9 | | Nine Months Ended Sep 30, 2019 | $11.2 | - The restructuring reserve balance increased from $6.2 million at the end of 2019 to $19.3 million as of September 30, 2020[26] Note 8—Segment Information Both Americas and International segments saw sales declines in Q3 2020, with Breathing Apparatus leading product sales | Segment (Q3 2020) | Sales to External Customers (In thousands) | Adjusted Operating Income (In thousands) | Adjusted Operating Margin % | | :--- | :--- | :--- | :--- | | Americas | $194,303 | $40,898 | 21.0% | | International | $110,089 | $15,658 | 14.2% | | Product Group (Nine Months 2020) | Sales (In thousands) | Percent of Total | | :--- | :--- | :--- | | Breathing Apparatus | $214,162 | 22% | | Fixed Gas & Flame Detection | $205,334 | 21% | | Firefighter Helmets & Protective Apparel | $121,669 | 13% | Note 17—Contingencies The company faces significant product liability claims with a reserve of $166.5 million for 1,743 open lawsuits - As of September 30, 2020, subsidiary MSA LLC was a defendant in 1,743 lawsuits comprised of 2,840 cumulative trauma claims related to substances like silica, asbestos, and coal dust[76][77] | Contingency Item (As of Sep 30, 2020) | Amount (In millions) | | :--- | :--- | | Cumulative Trauma Product Liability Reserve | $166.5 | | Insurance Receivables | $59.1 | | Notes Receivable, Insurance Companies | $52.0 | | Ending Warranty Reserve | $11.7 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 13.3% Q3 sales decline due to COVID-19 and improved nine-month operating income from cost controls Results of Operations - Three Months Ended September 30, 2020 Q3 2020 net sales fell 13.3% to $304.4 million, partially offset by a 21.8% decrease in SG&A expenses | Metric | Q3 2020 | Q3 2019 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $304.4M | $351.0M | (13.3)% | | Gross Profit | $132.2M | $158.7M | (16.7)% | | SG&A Expenses | $64.8M | $82.9M | (21.8)% | | Operating Income | $41.1M | $59.6M | (31.0)% | - The decrease in SG&A was driven by restructuring program returns, discretionary cost controls ($8-10M savings), and lower variable compensation ($6M savings)[116] - Restructuring charges of $7.6 million were recorded in Q3 2020, aimed at reducing the global cost structure in response to weakened economic conditions[120] Results of Operations - Nine Months Ended September 30, 2020 Nine-month net sales decreased 6.5%, but operating income increased due to reduced SG&A and currency losses | Metric | Nine Months 2020 | Nine Months 2019 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $960.0M | $1,026.7M | (6.5)% | | Gross Profit | $431.2M | $469.8M | (8.2)% | | SG&A Expenses | $214.1M | $245.3M | (12.7)% | | Operating Income | $148.2M | $146.3M | +1.3% | - Currency exchange losses were significantly lower at $3.8 million for the nine-month period in 2020, compared to $17.3 million in 2019, which included a $15.4 million non-cash loss from the closure of South Africa subsidiaries[144] Liquidity and Capital Resources Operating cash flow improved to $110.2 million, and the company maintains sufficient liquidity with $133.2 million in cash - The company maintains a healthy balance sheet with $133.2 million in cash and cash equivalents as of September 30, 2020[161] - Improved operating cash flow was primarily due to lower net product liability payments, with collections from insurance exceeding payments by $4.2 million in the first nine months of 2020[163] - The company is deferring approximately $6 million of employer social security tax payments in 2020 under the CARES Act[164] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to currency exchange and interest rate risks on its variable rate debt - A hypothetical 10% strengthening or weakening of the U.S. dollar would impact Q3 2020 sales by approximately $13.6 million (4%) and net income by $0.8 million (3%)[176] - As of September 30, 2020, the company had $231.9 million of variable rate borrowings, exposing it to interest rate fluctuations[180] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes in internal controls - Management concluded that the company's disclosure controls and procedures are effective[182] - No material changes to internal control over financial reporting occurred during the most recent fiscal quarter[182] PART II. OTHER INFORMATION Item 1A. Risk Factors Key business risks include product liability claims, economic conditions, and pandemic-related disruptions - The company faces inherent business risk from product liability claims, which could lead to significant expense or negative publicity[183] - A key risk is the potential for losses from cumulative trauma product liability claims to exceed current reserves, as the subsidiary MSA LLC is now largely self-insured for this risk[184] - Pandemics like COVID-19 are cited as a risk factor that could adversely affect customer demand, disrupt manufacturing operations, and negatively impact financial results[187] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company purchased 3,488 shares during Q3 2020 related to stock compensation transactions | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July 2020 | — | $— | | August 2020 | 3,488 | $125.30 | | September 2020 | — | $— | - The share repurchase program authorizes up to $100.0 million in repurchases and has no expiration date[188]