MSA Safety rporated(MSA) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements MSA Safety reported H1 2021 net sales of $649.7 million, a slight decrease, with net income at $61.5 million and total assets growing to $1.96 billion Condensed Consolidated Statements of Income Q2 2021 net sales increased to $341.3 million, but operating income and net income declined due to higher product liability expense, with six-month net income also dropping Condensed Consolidated Statements of Income (In thousands) | Financial Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $341,289 | $314,438 | $649,717 | $655,583 | | Gross Profit | $152,915 | $141,597 | $287,654 | $298,956 | | Operating Income | $35,050 | $48,294 | $79,088 | $107,076 | | Net Income Attributable to MSA | $25,125 | $36,066 | $61,539 | $79,741 | | Diluted EPS | $0.64 | $0.92 | $1.56 | $2.03 | - Product liability expense significantly increased to $11.8 million in Q2 2021 from just $0.9 million in Q2 2020, heavily impacting operating income[6] Condensed Consolidated Balance Sheets Total assets increased to $1.96 billion by June 30, 2021, driven by higher inventories, while total liabilities also grew, and shareholders' equity rose to $848.8 million Condensed Consolidated Balance Sheets (In thousands) | Balance Sheet Item (In thousands) | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $769,982 | $754,278 | | Total Assets | $1,963,233 | $1,872,484 | | Total Current Liabilities | $317,841 | $310,545 | | Total Liabilities | $1,114,465 | $1,062,593 | | Total Shareholders' Equity | $848,768 | $809,891 | - Inventories increased from $197.8 million at the end of 2020 to $232.7 million as of June 30, 2021[13] Condensed Consolidated Statements of Cash Flows Operating cash flow remained stable at $83.9 million for H1 2021, while investing activities used $58.2 million primarily for acquisitions, leading to a $13.4 million increase in cash Condensed Consolidated Statements of Cash Flows (In thousands) | Cash Flow Activity (In thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Cash Flow From Operating Activities | $83,914 | $83,031 | | Cash Flow Used in Investing Activities | $(58,175) | $(29,153) | | Cash Flow Used in Financing Activities | $(11,455) | $(66,176) | | Increase (decrease) in cash | $13,377 | $(15,952) | | Ending cash, cash equivalents and restricted cash | $174,411 | $136,591 | - A significant use of cash in investing activities was $63.0 million for an acquisition, net of cash acquired[15] Notes to Condensed Consolidated Financial Statements Notes detail $8.4 million in restructuring charges, segment sales, a rise in product liability reserves, the $63.0 million Bristol Uniforms acquisition, and subsequent acquisitions of Bacharach for $337 million and a China joint venture interest for $19 million - Restructuring charges of $8.4 million were recorded in the first six months of 2021, primarily related to initiatives in the International segment to drive profitable growth and right-size operations[22] - On January 25, 2021, the company acquired Bristol Uniforms and Bell Apparel for $63.0 million in an all-cash transaction to strengthen its position in the fire service PPE market[96] - Subsequent to the quarter end, on July 1, 2021, the company acquired Bacharach, Inc. for $337 million and also purchased the remaining 10% noncontrolling interest in its China subsidiary for $19 million[106][108] - The total reserve for cumulative trauma product liability was $226.1 million at June 30, 2021, an increase from $221.5 million at year-end 2020, reflecting a rise in asserted claims[78] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Q2 2021 net sales grew 8.6% to $341.3 million, but operating income declined due to increased product liability and SG&A, while H1 net sales slightly decreased, and liquidity remains strong after strategic acquisitions Business Overview and Strategy MSA, a global safety product leader, focuses on core offerings comprising 89% of sales, strategically expanding through acquisitions like Bristol Uniforms and Bacharach into fire service PPE and HVAC-R gas detection markets - Core products, including breathing apparatus, gas detection, and head protection, accounted for about 89% of sales for the first six months of 2021[123] - The acquisition of Bristol Uniforms strengthens MSA's position as a global leader in fire service personal protective equipment (PPE) and provides an avenue to expand in the U.K. and key European markets[114] - The company estimates its end market exposure is approximately 35-40% to the fire service market and 25-30% to the energy market[125] Results of Operations Q2 2021 net sales grew 8.6% to $341.3 million, but GAAP operating income declined significantly due to higher product liability and SG&A expenses, while H1 net sales slightly decreased with gross margin contraction Q2 2021 vs Q2 2020 Performance | Metric | Q2 2021 | Q2 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $341.3M | $314.4M | +8.6% | | Gross Profit | $152.9M | $141.6M | +8.0% | | GAAP Operating Income | $35.1M | $48.3M | -27.3% | | Net Income | $25.1M | $36.1M | -30.5% | Six Months 2021 vs Six Months 2020 Performance | Metric | H1 2021 | H1 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $649.7M | $655.6M | -0.9% | | Gross Profit | $287.7M | $299.0M | -3.8% | | GAAP Operating Income | $79.1M | $107.1M | -26.1% | | Net Income | $61.5M | $79.7M | -22.8% | - Q2 2021 SG&A expenses increased 20.8% to $83.4 million, driven by $8 million in costs related to the Bacharach and Bristol acquisitions[135] - Product liability expense for Q2 2021 was $11.8 million compared to just $0.9 million in the prior-year quarter, due to an increase in asserted claims[140] Liquidity and Capital Resources The company maintained strong liquidity with $174.4 million in cash and stable operating cash flow, financing the $337 million Bacharach acquisition with new senior notes and revolving credit - Cash and cash equivalents stood at $174.4 million as of June 30, 2021, with $156.0 million held by foreign subsidiaries[180] - Operating cash flow was $83.9 million for the first half of 2021, nearly flat compared to $83.0 million in the same period of 2020[182] - The acquisition of Bacharach on July 1, 2021 for $337 million was financed through a combination of $200 million in new 2.69% Senior Notes and borrowings from the Revolving Credit Facility[186] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from currency fluctuations, with a 10% USD change impacting Q2 sales by $15.6 million, and interest rate risk from $241.0 million in variable-rate debt, mitigated by $99.2 million in forward contracts - A hypothetical 10% strengthening or weakening of the U.S. dollar would impact Q2 2021 reported sales by approximately $15.6 million (4.6%) and net income by $1.2 million (3.5%)[198] - As of June 30, 2021, the company had $241.0 million of variable rate borrowings, exposing it to interest rate fluctuations[202] - The company held open foreign currency forward contracts with a U.S. dollar notional value of $99.2 million to manage currency risk[199] Item 4. Controls and Procedures The company's disclosure controls and procedures were deemed effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[204] - No changes occurred in the company's internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls[204] PART II. OTHER INFORMATION Item 1A. Risk Factors The company faces significant product liability risks, including 1,610 cumulative trauma lawsuits against MSA LLC, which is largely self-insured, potentially leading to losses exceeding current reserves - The company faces inherent risk from product liability claims, which could lead to significant expense, recalls, and negative publicity[205] - Subsidiary MSA LLC was a defendant in 1,610 cumulative trauma lawsuits with 3,942 claims as of June 30, 2021, related to historical products and alleged exposure to substances like silica, asbestos, and coal dust[206] - MSA LLC is now largely self-insured for cumulative trauma claims, meaning future losses could exceed the established reserves and have a material adverse effect on the company's financial condition[206][208] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In Q2 2021, the company purchased 975 shares at an average of $167.29 for stock compensation, separate from its active $100 million share repurchase program Share Purchases in Q2 2021 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2021 | 0 | $— | | May 2021 | 950 | $167.46 | | June 2021 | 25 | $160.99 | - Share purchases during the quarter were related to stock compensation transactions, not the formal share repurchase program[211] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL interactive data files - The exhibits filed with this report include CEO and CFO certifications and XBRL data files[214]