MSA SAFETY INCORPORATED The following discussion and analysis should be read in conjunction with the historical financial statements and other financial information included elsewhere in this quarterly report on Form 10-Q. This discussion may contain forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of our annual report entitled "Forward-Looking Statements" and "Risk Factors," and those discussed in our Form 10-Q quarterly reports filed after such annual report (such as in Part II, Item 1A, "Risk Factors.") Subsequent Events OnJuly 1, 2021 , we acquiredBacharach, Inc. and its affiliated companies (Bacharach) in an all cash transaction valued at$337 million , net of cash acquired. Headquartered nearPittsburgh inNew Kensington, PA , Bacharach is a leader in gas detection technologies used in the heating, ventilation, air conditioning, and refrigeration (HVAC-R) markets. MSA is planning for Bacharach to add$30-$35 million of net sales and adjusted earnings accretion of$0.10 -$0.15 per share in the second half of 2021.
During
BUSINESS OVERVIEW
MSA is a global leader in the development, manufacture and supply of safety
products that protect people and facility infrastructures. Recognized for their
market leading innovation, many MSA products integrate a combination of
electronics, mechanical systems and advanced materials to protect users against
hazardous or life-threatening situations. The Company's comprehensive product
line, which is governed by rigorous safety standards across highly regulated
industries, is used by workers around the world in a broad range of markets,
including fire service, oil, gas and petrochemical industry, construction,
industrial manufacturing applications, utilities, mining and the military. MSA's
core products include breathing apparatus, fixed gas and flame detection
systems, portable gas detection instruments, industrial head protection
products, firefighter helmets and protective apparel, and fall protection
devices. We are committed to providing our customers with service unmatched in
the safety industry and, in the process, enhancing our ability to provide a
growing line of safety solutions for customers in key global markets.
On
-28-
--------------------------------------------------------------------------------
MSA provides safety equipment to a broad range of customers who must continue to work in times of global pandemic as is now the case with COVID-19. Our customers include first responders, who are tasked with keeping citizens safe, and include industrial and utility workers tasked with maintaining critical infrastructure. For this reason, in order to successfully fulfill our mission asThe Safety Company , MSA is an essential business and has continued operating its manufacturing facilities during these times, to the extent practicable, while protecting the health and safety of our workforce, and complying with all applicable laws. InJanuary 2020 , the Company established a special advisory committee to evaluate ongoing concerns, risks and challenges with respect to COVID-19 across its operations and corporate headquarters. The Company's pandemic response plan includes four key priorities: protecting the health and safety of MSA associates, enabling business continuity, expanding manufacturing capacity of MSA's existing air-purifying respirator portfolio, and managing its operating expenses and capital structure. The Company has developed a thoughtful, phased approach to begin reconnecting segments of our workforce that had converted to remote working conditions due to COVID-19. This process includes returning elements of our salesforce to in-person customer interactions on a limited basis, with additional employees scheduled to begin returning to the office, once deemed appropriate under the circumstances for each business location. A phased approach to reconnect employees while adjusting the characteristics of their physical working environments, providing training and executing enhanced safety and cleaning protocols, will promote workspace safety in a manner consistent with the mission and values of MSA. The Company intends to bring the majority of theU.S. workforce back during the third quarter 2021. The Company expects to modify plans as necessary to respond to such changes. We tailor our product offerings and distribution strategy to satisfy distinct customer preferences that vary across geographic regions. To best serve these customer preferences, we have organized our business into four geographical operating segments that are aggregated into three reportable geographic segments:Americas , International and Corporate.Americas . Our largest manufacturing and research and development facilities are located inthe United States (U.S. ). We serve our markets across theAmericas with manufacturing facilities in theU.S. ,Mexico andBrazil . Operations in the other countries within theAmericas segment focus primarily on sales and distribution in their respective home country markets. International. Our International segment includes companies inEurope , theMiddle East andAfrica ("EMEA") and theAsia Pacific region. In our largest International subsidiaries (inGermany ,France ,United Kingdom (U.K. ),Ireland andChina ), we develop, manufacture and sell a wide variety of products. InChina , the products manufactured are sold primarily inChina as well as in regional markets. Operations in other International segment countries focus primarily on sales and distribution in their respective home country markets. Although some of these companies may perform limited production, most of their sales are of products manufactured in our plants inGermany ,France , theU.S. ,U.K. ,Ireland andChina or are purchased from third-party vendors. Corporate. The Corporate segment primarily consists of general and administrative expenses incurred in our corporate headquarters, costs associated with corporate development initiatives, legal expense, interest expense, foreign exchange gains or losses and other centrally-managed costs. Corporate general and administrative costs comprise the majority of the expense in the Corporate segment. -29-
--------------------------------------------------------------------------------
PRINCIPAL PRODUCTS The following is a brief description of each of our principal product categories: MSA's corporate strategy includes a focus on driving sales of core products where we have leading market positions and a distinct competitive advantage. Core products, as mentioned above, include breathing apparatus, fixed gas and flame detection systems, portable gas detection instruments, industrial head protection products, firefighter helmets and protective apparel, and fall protection devices. Core products comprised approximately 89% and 85% of sales for the six months endedJune 30, 2021 and 2020. MSA also maintains a portfolio of non-core products. Non-core products reinforce and extend the core offerings, drawing upon our customer relationships, distribution channels, geographical presence and technical experience. These products are complementary to the core offerings and often reflect more episodic or contract-driven growth patterns. Key non-core products include air-purifying respirators ("APR"), eye and face protection, ballistic helmets and gas masks. MSA does not produce disposable respirators of any type; however,Mine Safety Appliances Company, LLC ("MSA LLC "), one of the Company's subsidiaries, does produce advanced elastomeric APR, including half-mask respirators, full-facepiece respirators and powered air purifying respirators, each with replaceable filters providing a minimum of N-95 filtration capability. These products have historically been used in many industrial and first responder applications. APR products represented 6% and 9% of our consolidated sales for the six months endedJune 30, 2021 and 2020, with over 74% and 75% of this business being in ourAmericas segment. During 2020, Emergency Use Authorizations ("EUA") were issued by the FDA to expand the types of respiratory protection available to the medical community in response to COVID-19. Those include an EUA that continues to temporarily permit the use of NIOSH-approved respirators in healthcare settings, including elastomeric APR that are part of MSA's existing portfolio. MSA maintains a diversified portfolio of safety products that protect workers and facility infrastructure across a broad array of end markets. While the company sells its products through distribution, which can limit end-user visibility, the Company provides estimated ranges of end market exposure to facilitate understanding of its growth drivers. The Company estimates that approximately 35%-40% of its overall revenue is derived from the fire service market and 25%-30% of its revenue is derived from the energy market. The remaining 30%-40% is split between construction, utilities, general industrial applications, military and mining. A detailed listing of our significant product offerings in the aforementioned product groups above is included in MSA's Annual Report on Form 10-K for the year endedDecember 31, 2020 . RESULTS OF OPERATIONS Three Months EndedJune 30, 2021 , Compared to Three Months EndedJune 30, 2020 Net Sales . Net sales for the three months endedJune 30, 2021 , were$341.3 million , an increase of$26.9 million , or 8.6%, driven by increased sales across most of the core product groups compared to$314.4 million for the three months endedJune 30, 2020 . Please refer to the Net Sales table for a reconciliation of the quarter over quarter sales change. Net Sales Three Months Ended June 30, Dollar Percent (In millions) 2021 2020 Increase Increase Consolidated$341.3 $314.4 $26.9 8.6% Americas 217.7 204.2 13.5 6.6% International 123.6 110.2 13.4 12.1% Net Sales Three Months Ended June 30, 2021 (Percent Change) Americas International Consolidated GAAP reported sales change 6.6% 12.1% 8.6% Currency translation effects (0.8)% (9.2)% (3.8)% Constant currency sales change 5.8% 2.9% 4.8% Less: Acquisitions -% (6.6)% (2.4)% Organic constant currency change 5.8% (3.7)% 2.4%
Note: Organic constant currency sales change is a non-GAAP financial measure provided by the Company to give a better understanding of the Company's underlying business performance. Organic constant currency sales change is calculated by deducting the percentage impact from acquisitions and currency translation effects from the overall percentage change in net sales.
-30-
--------------------------------------------------------------------------------
Net sales for theAmericas segment were$217.7 million in the second quarter of 2021, an increase of$13.5 million , or 6.6%, compared to$204.2 million in the second quarter of 2020. During the quarter, constant currency sales in theAmericas segment increased 5.8% compared to the prior year period. All core products improved versus the prior year with notable improvements in our industrial business that responded quickly to the improving business environment, partially offset by lower demand for APR products as the business returned to pre-pandemic levels.Americas segment business conditions and order activity continued to improve throughout the quarter and that provides a sense of optimism to start the second half of 2021. Our ability to deliver orders will be dependent upon the extent in which supply chain challenges persist in the second half of 2021. Net sales for the International segment were$123.6 million in the second quarter of 2021, an increase of$13.4 million , or 12.1%, compared to$110.2 million for the second quarter of 2020. Constant currency sales in the International segment increased 2.9% during the quarter due to sales ofBristol turnout gear, which was partially offset by weaker volumes in EMEA operating segment driven by slower economic recovery due to the pandemic inEurope and lower project business in theMiddle East Fixed Gas & Flame Detection ("FGFD") market. However, we are seeing increased incoming orders for gas detection products. Our ability to deliver orders will be dependent upon the extent in which supply chain challenges persist in the second half of 2021. Our backlog increased significantly during the past quarter as a result of an uptick in order pace and ongoing supply chain constraints in certain product lines. Our incoming orders during the quarter were strong across our product portfolio and above 2019 levels. The recently announced acquisition of Bacharach is expected to add$30-$35 million of net sales during the second half of 2021. Looking ahead, we continue to operate in a very dynamic environment. There are a number of other evolving factors that will continue to influence our revenue outlook. These factors include, among other things, the effectiveness/pace of the vaccine rollout globally, risk of additional COVID lockdowns, industrial employment rates, supply chain constraints, raw material availability and the pace of economic recovery. These conditions could impact our future results and growth expectations. Refer to Note 7-Segment Information to the unaudited condensed consolidated financial statements in Part I Item 1 of this Form 10-Q, for information regarding sales by product group. Gross profit. Gross profit for the second quarter of 2021 was$152.9 million , an increase of$11.3 million or 8.0%, compared to$141.6 million for the second quarter of 2020. The ratio of gross profit to net sales was 44.8% in the second quarter of 2021 compared to 45.0% in the same quarter last year. Strategic pricing and stronger throughput in our factories offset higher material costs. Despite a number of headwinds in margin associated with input costs, a less favorable product mix, and inventory charges associated with lower demand for APR products, gross margins were roughly in line with prior year levels. We have implemented an off-cycle price increase to respond to the inflation we are seeing in theU.S. across electronic components, resins and other inputs. While there could be a number of scenarios on how long these challenges may persist, we could see these impact our business for the foreseeable future with more meaningful impact in the second half of 2021. We will continue to evaluate additional pricing opportunities as we continue to navigate inflationary pressures. -31-
--------------------------------------------------------------------------------
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses were
Please refer to the Selling, general and administrative expenses table for a reconciliation of the quarter over quarter expense change.
Three Months Ended
Selling, general, and administrative expenses June 30, 2021 versus June 30, 2020
(Percent Change) Consolidated
GAAP reported change 20.8%
Currency translation effects (3.3)%
Constant currency change 17.5%
Less: Acquisitions and related strategic transaction costs (5.3)%
Organic constant currency change 12.2%
Research and development expense. Research and development expense was $14.0
million during the second quarter of 2021, an increase of $0.2 million , compared
to $13.8 million during the second quarter of 2020. Research and development
expense was 4.1% of net sales in the second quarter of 2021 compared to 4.4% in
the same period of 2020. We continue to develop new products for global safety
markets. During the second quarter of 2021, we capitalized $2.1 million of
software development costs.
Restructuring charges. Restructuring charges during the second quarter of 2021,
were $7.1 million primarily related to our ongoing initiatives to drive
profitable growth and right size our operations. Together with cost reduction
programs executed throughout 2020, we expect these programs to collectively
deliver $15 million of savings throughout the income statement in 2021, and
annual savings of $25 million thereafter. This compared to restructuring charges
of $8.9 million during the second quarter of 2020, primarily related to
footprint rationalization and the Company's FGFD manufacturing footprint
optimization and the acceleration of cost reduction programs associated with our
ongoing initiatives to drive profitable growth in our International segment. We
continue to evaluate additional programs to execute in the second half of 2021
in response to changing business conditions.
Currency exchange. Currency exchange losses were $1.6 million in the second
quarter of 2021 compared to losses of $0.8 million in the second quarter of
2020. Currency exchange in both periods were related to foreign currency
exposure on unsettled inter-company balances.
Refer to Note 15-Derivative Financial Instruments to the unaudited condensed
consolidated financial statements in Part I Item 1 of this Form 10-Q, for
information regarding our currency exchange rate risk management strategy.
Product liability expense. Product liability expense for the three months ended
June 30, 2021 was $11.8 million compared to $0.9 million in the same period last
year. Product liability expense increased during the quarter to reflect an
increase in the number of asserted claims pending against MSA LLC and a
corresponding adjustment to the reserve, as discussed further in Note 17. The
expense in the second quarter of 2020 related primarily to defense costs
incurred for cumulative trauma product liability claims.
GAAP operating income. Consolidated operating income for the second quarter of
2021 was $35.1 million compared to $48.3 million in the same period last year.
The decrease in operating results was driven by higher product liability expense
and SG&A expenses, and acquisition related costs as described above, partially
offset by sales volume.
-32-
--------------------------------------------------------------------------------
Adjusted operating income.Americas adjusted operating income for the second quarter of 2021 was$49.2 million , and comparable to$49.0 million from the prior year quarter. International adjusted operating income for the second quarter of 2021 was$20.4 million , an increase of$3.0 million , or 17%, compared to$17.4 million in the prior year quarter. The increase in adjusted operating income is primarily attributable to higher sales volumes and gross profit expansion, partially offset by higher SG&A, which was driven by theBristol acquisition. Corporate segment adjusted operating loss for the second quarter of 2021 was$11.0 million , an increase of$3.5 million compared to an adjusted operating loss of$7.5 million in the second quarter of 2020 due to variable compensation resets, including$4.3 million of incremental stock compensation expense related to theJuly 1, 2021 acquisition of Bacharach. The following tables represent a reconciliation from GAAP operating income to adjusted operating income (loss) and adjusted EBITDA. Adjusted operating margin % is calculated as adjusted operating income (loss) divided by net sales and adjusted EBITDA margin % is calculated as adjusted EBITDA divided by net sales.
© Edgar Online, source
