UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2018
Commission File No. 1-15579
MSA SAFETY INCORPORATED
(Exact name of registrant as specified in its charter)
Pennsylvania | 46-4914539 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
1000 Cranberry Woods Drive Cranberry Township, Pennsylvania | 16066-5207 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (724) 776-8600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) | Emerging growth company ¨ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 23, 2018, 38,435,229 shares of common stock, of the registrant were outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Unaudited
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(In thousands, except per share amounts) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net sales | $ | 339,331 | $ | 288,775 | $ | 665,225 | $ | 554,540 | ||||||||
Cost of products sold | 185,495 | 155,812 | 364,050 | 301,855 | ||||||||||||
Gross profit | 153,836 | 132,963 | 301,175 | 252,685 | ||||||||||||
Selling, general and administrative | 81,962 | 74,104 | 162,213 | 150,890 | ||||||||||||
Research and development | 13,909 | 11,933 | 26,456 | 22,931 | ||||||||||||
Restructuring charges (Note 5) | 2,335 | 967 | 7,609 | 13,706 | ||||||||||||
Currency exchange losses, net | 815 | 2,851 | 2,823 | 3,431 | ||||||||||||
Other operating expense (Note 19) | 8,018 | 29,610 | 10,842 | 29,610 | ||||||||||||
Operating income | 46,797 | 13,498 | 91,232 | 32,117 | ||||||||||||
Interest expense | 5,181 | 3,014 | 9,962 | 6,605 | ||||||||||||
Other income, net | (1,701 | ) | (1,228 | ) | (4,041 | ) | (2,686 | ) | ||||||||
Total other expense, net | 3,480 | 1,786 | 5,921 | 3,919 | ||||||||||||
Income before income taxes | 43,317 | 11,712 | 85,311 | 28,198 | ||||||||||||
Provision (benefit) for income taxes (Note 11) | 9,896 | (902 | ) | 19,401 | 894 | |||||||||||
Net income | 33,421 | 12,614 | 65,910 | 27,304 | ||||||||||||
Net income attributable to noncontrolling interests | (242 | ) | (82 | ) | (360 | ) | (359 | ) | ||||||||
Net income attributable to MSA Safety Incorporated | $ | 33,179 | $ | 12,532 | $ | 65,550 | $ | 26,945 | ||||||||
Earnings per share attributable to MSA Safety Incorporated common shareholders: | ||||||||||||||||
Basic | $ | 0.86 | $ | 0.33 | $ | 1.71 | $ | 0.71 | ||||||||
Diluted | $ | 0.85 | $ | 0.32 | $ | 1.69 | $ | 0.70 | ||||||||
Dividends per common share | $ | 0.38 | $ | 0.35 | $ | 0.73 | $ | 0.68 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income | $ | 33,421 | $ | 12,614 | $ | 65,910 | $ | 27,304 | ||||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||
Foreign currency translation adjustments (Note 7) | (27,880 | ) | 14,123 | (14,480 | ) | 24,867 | ||||||||||
Pension and post-retirement plan actuarial gains, net of tax (Note 7) | 3,059 | 2,157 | 5,388 | 4,141 | ||||||||||||
Reclassification from accumulated other comprehensive (loss) into net income (Note 7) | (774 | ) | — | (774 | ) | — | ||||||||||
Total other comprehensive (loss) income, net of tax | (25,595 | ) | 16,280 | (9,866 | ) | 29,008 | ||||||||||
Comprehensive income | 7,826 | 28,894 | 56,044 | 56,312 | ||||||||||||
Comprehensive loss (income) attributable to noncontrolling interests | 31 | 755 | (257 | ) | 1,104 | |||||||||||
Comprehensive income attributable to MSA Safety Incorporated | $ | 7,857 | $ | 29,649 | $ | 55,787 | $ | 57,416 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
Unaudited
(In thousands) | June 30, 2018 | December 31, 2017 | ||||||
Assets | ||||||||
Cash and cash equivalents | $ | 116,650 | $ | 134,244 | ||||
Trade receivables, less allowance for doubtful accounts of $5,786 and $5,540 | 239,406 | 244,198 | ||||||
Inventories (Note 4) | 177,256 | 153,739 | ||||||
Prepaid income taxes | 34,023 | 31,448 | ||||||
Notes receivable, insurance companies (Note 19) | 3,494 | 17,333 | ||||||
Prepaid expenses and other current assets | 38,682 | 41,335 | ||||||
Total current assets | 609,511 | 622,297 | ||||||
Property, plant and equipment, net (Note 6) | 148,780 | 157,014 | ||||||
Prepaid pension cost | 88,237 | 83,060 | ||||||
Deferred tax assets (Note 11) | 25,806 | 25,825 | ||||||
Goodwill (Note 14) | 418,384 | 422,185 | ||||||
Intangible assets (Note 14) | 176,600 | 183,088 | ||||||
Notes receivable, insurance companies, noncurrent (Note 19) | 60,340 | 59,567 | ||||||
Insurance receivable (Note 19) and other noncurrent assets | 122,901 | 131,790 | ||||||
Total assets | $ | 1,650,559 | $ | 1,684,826 | ||||
Liabilities | ||||||||
Notes payable and current portion of long-term debt, net (Note 13) | $ | 26,895 | $ | 26,680 | ||||
Accounts payable | 76,331 | 87,061 | ||||||
Employees’ compensation | 34,760 | 39,377 | ||||||
Insurance and product liability (Note 19) | 57,495 | 59,116 | ||||||
Income taxes payable (Note 11) | 12,177 | — | ||||||
Warranty reserve (Note 19) and other current liabilities | 75,614 | 77,045 | ||||||
Total current liabilities | 283,272 | 289,279 | ||||||
Long-term debt, net (Note 13) | 403,712 | 447,832 | ||||||
Pensions and other employee benefits | 167,906 | 170,773 | ||||||
Deferred tax liabilities (Note 11) | 8,589 | 9,341 | ||||||
Product liability (Note 19) and other noncurrent liabilities | 148,010 | 165,023 | ||||||
Total liabilities | $ | 1,011,489 | $ | 1,082,248 | ||||
Commitments and contingencies (Note 19) | ||||||||
Equity | ||||||||
Preferred stock, 4 1/2% cumulative, $50 par value (Note 8) | $ | 3,569 | $ | 3,569 | ||||
Common stock, no par value (Note 8) | 204,171 | 194,953 | ||||||
Treasury shares, at cost (Note 8) | (298,623 | ) | (297,834 | ) | ||||
Accumulated other comprehensive loss (Note 7) | (181,525 | ) | (171,762 | ) | ||||
Retained earnings | 906,244 | 868,675 | ||||||
Total MSA Safety Incorporated shareholders' equity | 633,836 | 597,601 | ||||||
Noncontrolling interests | 5,234 | 4,977 | ||||||
Total shareholders’ equity | 639,070 | 602,578 | ||||||
Total liabilities and shareholders’ equity | $ | 1,650,559 | $ | 1,684,826 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
Six Months Ended June 30, | ||||||||
(In thousands) | 2018 | 2017 | ||||||
Operating Activities | ||||||||
Net income | $ | 65,910 | $ | 27,304 | ||||
Depreciation and amortization | 19,207 | 17,736 | ||||||
Restructuring charges (Note 5) | — | 11,384 | ||||||
Stock-based compensation (Note 12) | 7,692 | 8,233 | ||||||
Pension expense (Note 16) | 2,976 | 3,538 | ||||||
Deferred income tax benefit (Note 11) | (2,626 | ) | (10,725 | ) | ||||
Loss on asset dispositions, net | 1,148 | 48 | ||||||
Pension contributions (Note 16) | (2,486 | ) | (2,950 | ) | ||||
Currency exchange losses, net | 2,823 | 3,431 | ||||||
Other operating expense (Note 19) | 10,842 | 29,610 | ||||||
Changes in: | ||||||||
Trade receivables | (1,897 | ) | (3,710 | ) | ||||
Inventories (Note 4) | (29,257 | ) | (22,280 | ) | ||||
Prepaid expenses and other current assets | 12,234 | 22,473 | ||||||
Accounts payable and accrued liabilities | (26,099 | ) | (7,591 | ) | ||||
Other noncurrent assets and liabilities | 4,915 | 69,781 | ||||||
Cash Flow From Operating Activities | 65,382 | 146,282 | ||||||
Investing Activities | ||||||||
Capital expenditures | (8,812 | ) | (6,127 | ) | ||||
Property disposals | 3,059 | 677 | ||||||
Cash Flow Used in Investing Activities | (5,753 | ) | (5,450 | ) | ||||
Financing Activities | ||||||||
Proceeds from short-term debt, net | 215 | 160 | ||||||
Proceeds from long-term debt (Note 13) | 248,500 | 182,500 | ||||||
Payments on long-term debt (Note 13) | (291,000 | ) | (307,300 | ) | ||||
Cash dividends paid | (27,981 | ) | (25,824 | ) | ||||
Company stock purchases (Note 8) | (3,835 | ) | (4,784 | ) | ||||
Exercise of stock options (Note 8) | 4,293 | 12,057 | ||||||
Employee stock purchase plan (Note 8) | 280 | 282 | ||||||
Cash Flow Used in Financing Activities | (69,528 | ) | (142,909 | ) | ||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (8,130 | ) | 3,327 | |||||
(Decrease) increase in cash, cash equivalents and restricted cash | (18,029 | ) | 1,250 | |||||
Beginning cash, cash equivalents and restricted cash | 137,889 | 114,962 | ||||||
Ending cash, cash equivalents and restricted cash | $ | 119,860 | $ | 116,212 | ||||
Supplemental cash flow information: | ||||||||
Cash and cash equivalents | $ | 116,650 | $ | 115,361 | ||||
Restricted cash included in prepaid expenses and other current assets | 3,210 | 851 | ||||||
Total cash, cash equivalents and restricted cash | $ | 119,860 | $ | 116,212 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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MSA SAFETY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN RETAINED EARNINGS,
ACCUMULATED OTHER COMPREHENSIVE LOSS AND NONCONTROLLING INTERESTS
Unaudited
(In thousands) | Retained Earnings | Accumulated Other Comprehensive (Loss) | |||||
Balances March 31, 2017 | $ | 897,458 | $ | (216,892 | ) | ||
Net income | 12,614 | — | |||||
Foreign currency translation adjustments | — | 14,123 | |||||
Pension and post-retirement plan adjustments, net of tax of $935 | — | 2,157 | |||||
(Income) loss attributable to noncontrolling interests | (82 | ) | 837 | ||||
Common dividends | (13,359 | ) | — | ||||
Preferred dividends | (10 | ) | — | ||||
Balances June 30, 2017 | $ | 896,621 | $ | (199,775 | ) | ||
Balances March 31, 2018 | $ | 887,656 | $ | (156,203 | ) | ||
Net income | 33,421 | — | |||||
Foreign currency translation adjustments | — | (27,880 | ) | ||||
Pension and post-retirement plan adjustments, net of tax of $614 | — | 3,059 | |||||
Reclassification from accumulated other comprehensive (loss) into earnings | — | (774 | ) | ||||
(Income) loss attributable to noncontrolling interests | (242 | ) | 273 | ||||
Common dividends | (14,581 | ) | — | ||||
Preferred dividends | (10 | ) | — | ||||
Balances June 30, 2018 | $ | 906,244 | $ | (181,525 | ) | ||
Balances December 31, 2016 | $ | 901,415 | $ | (230,246 | ) | ||
Net income | 27,304 | — | |||||
Foreign currency translation adjustments | — | 24,867 | |||||
Pension and post-retirement plan adjustments, net of tax of $2,043 | — | 4,141 | |||||
(Income) loss attributable to noncontrolling interests | (359 | ) | 1,463 | ||||
Common dividends | (25,804 | ) | — | ||||
Preferred dividends | (20 | ) | — | ||||
Cumulative effect of the adoption of ASU 2016-16 (Note 2) | (5,915 | ) | — | ||||
Balances June 30, 2017 | $ | 896,621 | $ | (199,775 | ) | ||
Balances December 31, 2017 | $ | 868,675 | $ | (171,762 | ) | ||
Net income | 65,910 | — | |||||
Foreign currency translation adjustments | — | (14,480 | ) | ||||
Pension and post-retirement plan adjustments, net of tax of $1,682 | — | 5,388 | |||||
Reclassification from accumulated other comprehensive (loss) into earnings | — | (774 | ) | ||||
(Income) loss attributable to noncontrolling interests | (360 | ) | 103 | ||||
Common dividends | (27,961 | ) | — | ||||
Preferred dividends | (20 | ) | — | ||||
Balances June 30, 2018 | $ | 906,244 | $ | (181,525 | ) | ||
The accompanying notes are an integral part of the consolidated financial statements.
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MSA SAFETY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1—Basis of Presentation
The condensed consolidated financial statements of MSA Safety Incorporated and its subsidiaries ("MSA" or the "Company") are unaudited. These condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary by management to fairly state the Company's results. Intercompany accounts and transactions have been eliminated. The results reported in these condensed consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. The December 31, 2017 condensed consolidated balance sheet data was derived from the audited consolidated balance sheet, but does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP). This Form 10-Q report should be read in conjunction with MSA's Form 10-K for the year ended December 31, 2017, which includes all disclosures required by U.S. GAAP.
Note 2—Recently Adopted and Recently Issued Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue with Contracts from Customers. This ASU establishes a single revenue recognition model for all contracts with customers based on recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, eliminates industry specific requirements and expands disclosure requirements. We adopted ASU 2014-09 using the modified retrospective method as of January 1, 2018. The majority of our revenue transactions consist of a single performance obligation to transfer promised goods or services. The adoption of this new standard did not impact the Company's consolidated statement of income or balance sheet and there was no cumulative effect of initially applying the standard to the opening balance of retained earnings. See Note 3—Significant Accounting Policies Update for further information on our updated revenue recognition policy.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. This ASU was adopted on January 1, 2017. This ASU applies only to inventory measured using the first-in, first-out (FIFO) or average cost methods and requires inventory to be measured at the lower of cost and net realizable value (NRV). This ASU replaces market with NRV, defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This eliminates the need to determine and consider replacement cost or NRV less an approximately normal profit margin when measuring inventory. The adoption of this ASU did not have a material effect on our condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to record a right of use asset and a liability for virtually all leases. This ASU will be effective beginning January 1, 2019. The Company has developed a transition plan and continues to evaluate the impact that the adoption of this ASU will have on the consolidated financial statements. During 2017, we conducted a survey to identify all leases across the organization and are currently working to obtain all lease contracts to accumulate the necessary information for adoption. We have identified that a majority of our leases fall into one of three categories: office equipment, real estate and vehicles. We identified that most office equipment and vehicle leases utilize standard master leasing contracts that have similar terms. During the first six months of 2018, we selected a service provider to help us inventory and account for our leases and began gathering data necessary to prepare the transition accounting. Total assets and total liabilities will increase significantly in the period the ASU is adopted. At June 30, 2018, the Company's undiscounted future minimum rent commitments under noncancellable operating leases were approximately $39.4 million. We are still evaluating whether we will elect the practical expedients allowed in the standard.
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In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU simplifies the accounting for many aspects associated with share-based payment accounting, including income taxes and the use of forfeiture rates. This ASU was adopted on January 1, 2017. The provisions of this ASU which impacted us included a requirement that all excess tax benefits and deficiencies that pertain to share-based payment arrangements be recognized as a component of income tax expense rather than as a component of shareholders’ equity. The Company expects this to create volatility in its effective tax rate on a go-forward basis as the impact is treated as a discrete item within our quarterly tax provision. The extent of excess tax benefits/deficiencies is subject to variation in our stock price and timing/extent of stock-based compensation share vestings and employee stock option exercises. This ASU also removes the impact of the excess tax benefits and deficiencies from the calculation of diluted earnings per share and no longer requires a presentation of excess tax benefits and deficiencies related to the vesting and exercise of share-based compensation as both an operating outflow and financing inflow on the statement of cash flows. We have applied all of these changes on a prospective basis and therefore, prior years were not adjusted. Additionally, this ASU allows for an accounting policy election to estimate the number of awards that are expected to vest or account for forfeitures when they occur. We elected to maintain our current forfeitures policy and will continue to include an estimate of those forfeitures when recognizing stock-based compensation expense. This ASU also requires cash payments to tax authorities when an employer uses a net-settlement feature to withhold shares to meet statutory tax withholding provisions to be presented as a financing activity (eliminating previous diversity in practice). Application of this ASU resulted in an additional discrete tax benefit of approximately $1.9 million and $6.8 million during the six months ended June 30, 2018 and 2017, respectively.
In June 2016, the FASB issued ASU 2016-13, Allowance for Loan and Lease Losses. This ASU introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including loans, held-to-maturity debt securities, loan commitments, financial guarantees and net investments in leases, as well as reinsurance and trade receivables. This ASU will be effective beginning in 2020. Based on a review of its portfolio of financial instruments, the Company does not believe the adoption of this ASU will have a material impact on the condensed consolidated financial statements, but does expect the adoption to result in additional disclosures.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Payments and Cash Receipts. This ASU clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company's adoption of this ASU on January 1, 2018 did not have a material impact on our presentation of the condensed consolidated statement of cash flows.
In October 2016, the FASB issued ASU 2016-16, Intra-entity Transfers of Assets Other than Inventory. This ASU states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU was early adopted on January 1, 2017 using the modified retrospective approach which resulted in a $5.9 million cumulative-effect adjustment directly to retained earnings for any previously deferred income tax effects.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash. This ASU requires that amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted this ASU on January 1, 2018 using the retrospective method. The adoption of ASU 2016-18 had an impact on our financial statement presentation within the condensed consolidated statement of cash flows, as amounts generally described as restricted cash and restricted cash equivalents are now included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows and transfers of these amounts between balance sheet line items are no longer presented as an operating, investing or financing cash flow. For the six months ended June 30, 2017, cash flow used in financing activities increased by $0.4 million as a result of the adoption of this ASU. Furthermore, adoption of ASU 2016-18 resulted in additional disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations - Clarifying the Definition of a Business. This ASU provides further guidance for identifying whether a set of assets and activities is a business by providing a screen outlining that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This ASU was adopted beginning in 2018 and was applied prospectively. The adoption of this ASU may have a material effect on our condensed consolidated financial statements in the event that we have an acquisition or disposal that falls within this screen.
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In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill impairments under Step 2 by eliminating the requirement to perform procedures to determine the fair value of the assets and liabilities of the reporting unit, including previously unrecognized assets and liabilities, in order to determine the fair value of the goodwill and any impairment charge to be recognized. Under this ASU, the impairment charge to be recognized should be the amount by which the reporting unit's carrying value exceeds the reporting unit's fair value as calculated under Step 1 provided that the loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. This ASU is effective beginning in 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The adoption of this ASU may have a material effect on our condensed consolidated financial statements in the event that we determine that goodwill for any of our reporting units is impaired.
In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost, to improve the presentation of net periodic pension and net periodic post-retirement benefit cost. This ASU requires companies to present the service cost component of net periodic benefit cost in the same income statement line item as other compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. Additionally, this ASU requires that companies present the other components of the net periodic benefit cost separately from the line item that includes the service cost and outside of any subtotal of income from operations, if one is presented. This ASU is effective for annual periods beginning after December 15, 2017, and early adoption is permitted. The amendments in this ASU are to be applied retrospectively for presentation in the condensed consolidated statement of income and prospectively for the capitalization of the service cost component of net periodic pension cost and net periodic post-retirement benefit in assets. A practical expedient allows the Company to use the amount disclosed in its pension and other post-retirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company adopted ASU 2017-07 on January 1, 2018, using the retrospective method and elected to use the practical expedient. The adoption of this ASU resulted in a $2.2 million and $1.6 million decrease in operating income for the six months ended June 30, 2018 and 2017, respectively. The Company does not capitalize costs in assets so there is no impact from that provision of ASU 2017-07.
In May 2017, the FASB issued ASU 2017-09, Stock Compensation - Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements. This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. This ASU is effective for periods beginning after December 31, 2017. The Company's adoption of ASU on January 1, 2018, did not have a material effect on our condensed consolidated financial statements.
In January 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which gives entities the option to reclassify to retained earnings the tax effects resulting from the new tax reform legislation commonly known as the Tax Cuts and Jobs Act ("the Act") related to items in AOCI that the FASB refers to as having been stranded in AOCI. The new guidance may be applied retrospectively to each period in which the effect of the Act is recognized in the period of adoption. The Company must adopt this guidance for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period the Act was enacted. The guidance, when adopted, will require new disclosures regarding a company’s accounting policy for releasing the tax effects in AOCI and permit a company the option to reclassify to retained earnings the tax effects resulting from the Act that are stranded in AOCI. The Company has elected not to early adopt this ASU. Further, the Company is currently evaluating how to apply the new guidance and has not determined whether or not it will elect to reclassify stranded amounts, if any. As such, the Company is still evaluating the impact that the adoption of ASU 2018-02 will have on the condensed consolidated financial statements.
Note 3—Significant Accounting Policies Update
Revenue Recognition—We generate revenue primarily from manufacturing and selling a comprehensive line of safety products to protect the health and safety of workers and facility infrastructures around the world in the oil, gas and petrochemical, fire service, construction, utilities and mining industries. Our core safety products include fixed gas and flame detection instruments, breathing apparatus where SCBA is the principal product, portable gas detection instruments, industrial head protection products, firefighter helmets & protective apparel and fall protection devices. Our customers generally fall into two categories: distributors and industrial or military end-users. In our Americas segment, approximately 75% to 85% of our sales are made through distributors. In our International segment, approximately 55% to 65% of our sales are made through distributors. The underlying principles of revenue recognition are identical for both categories of customers and revenue is generally recognized at a point in time as described below.
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We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2018, using the modified retrospective method. Revenue from the sale of products is recognized when there is persuasive evidence of an arrangement and control passes to the customer, which generally occurs either when product is shipped to the customer or, in the case of most U.S. distributor customers, when product is delivered to the distributor's delivery site. We establish our shipping terms according to local practice and market characteristics. We do not ship product unless we have an order or other documentation authorizing shipment to our customers. Our payment terms vary by the type and location of our customer and the products offered. The term between invoicing and when payment is due is not significant.
Refer to Note 9—Segment Information for disaggregation of revenue by segment and product group, as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Amounts billed and due from our customers are classified as receivables on the consolidated balance sheet. We make appropriate provisions for uncollectible accounts receivable which have historically been insignificant in relation to our net sales. Certain contracts with customers, primarily distributor customers, have an element of variable consideration that is estimated when revenue is recognized under the contract to the extent that it is material to the individual contract. Variable consideration includes volume incentive rebates, performance guarantees, price concessions and returns. Rebates are based on achieving a certain level of purchases and other performance criteria that are documented in established distributor programs. These rebates are estimated based on projected sales to the customer and accrued as a reduction of net sales as they are earned by the customer. The rebate accrual is reviewed monthly and adjustments are made as the estimate of projected sales changes. Product returns, including an adjustment for restocking fees if it is material, are estimated based on historical return experience and revenue is adjusted. Sales, value add and other taxes collected with revenue-producing activities and remitted to governmental authorities are excluded from revenue.
Depending on the terms of the arrangement, we may defer revenue for which we have a future obligation, including training and extended warranty and technical services, until such time that the obligation has been satisfied. We use an observable price, or a cost plus margin approach when one is not available, to determine the stand-alone selling price for separate performance obligations. We have elected to recognize the cost for freight and shipping as an expense when control of the product has passed to the customer. These costs are included within the Cost of Products Sold line on the Condensed Consolidated Statement of Income.
We typically receive interim milestone payments under certain contracts, including our fixed gas and flame detection projects, as work progresses. For some of these contracts, we may be entitled to receive an advance payment. Revenue for these contracts is generally recognized as control passes to the customer, which is a point in time upon shipment of the product, and if applicable, acceptance by the customer. We recognize a liability for these advance payments in excess of revenue recognized and present it as contract liabilities on the condensed consolidated balance sheet. The advance payment is typically not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract. In some cases, the customer retains a small portion of the contract price, typically 10%, until completion of the contract, which we present as contract assets on the condensed consolidated balance sheet. Accordingly, during the period of contract performance, billings and costs are accumulated on the condensed consolidated balance sheet as contract assets or contract liabilities, but no income is recognized until completion of the project and control has passed to the customer. As of June 30, 2018, there were no material contract assets or contract liabilities recorded on the Condensed Consolidated Balance Sheet.
Practical Expedients and Exemptions
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses in our Condensed Consolidated Statement of Income.
-10-
Note 4—Inventories
The following table sets forth the components of inventory:
(In thousands) | June 30, 2018 | December 31, 2017 | ||||||
Finished products | $ | 79,059 | $ | 66,064 | ||||
Work in process | 7,542 | 10,141 | ||||||
Raw materials and supplies | 130,509 | 117,388 | ||||||
Inventories at current cost | 217,110 | 193,593 | ||||||
Less: LIFO valuation | (39,854 | ) | (39,854 | ) | ||||
Total inventories | $ | 177,256 | $ | 153,739 | ||||
Note 5—Restructuring Charges
During the three and six months ended June 30, 2018, we recorded restructuring charges, net of adjustments, of $2.3 million and $7.6 million, respectively. Americas segment restructuring charges of $0.6 million during the six months ended June 30, 2018, were related to severance costs for staff reductions in our Latin America Region. International segment restructuring charges of $3.5 million during the six months ended June 30, 2018, were primarily related to severance costs for staff reductions associated with our ongoing initiatives to drive profitable growth in Europe. Corporate segment restructuring charges of $3.5 million during the six months ended June 30, 2018, related primarily to our ongoing review of the Company's legal structure to evaluate potential realignments to better facilitate the execution of our corporate strategy.
During the three and six months ended June 30, 2017, we recorded restructuring charges, net of adjustments, of $1.0 million and $13.7 million, respectively. Americas segment restructuring charges of $12.4 million during the six months ended June 30, 2017, related primarily to a non-cash special termination benefit expense of $11.4 million for a voluntary retirement incentive package ("VRIP") as well as severance from staff reductions in Brazil. All benefits for the VRIP were paid from our over funded North America pension plan. International segment restructuring charges of $1.6 million during the six months ended June 30, 2017, were related to severance costs for staff reductions in Europe, Australia and Africa.
Activity and reserve balances for restructuring charges by segment were as follows:
(In millions) | Americas | International | Corporate | Total | |||||||||||
Reserve balances at December 31, 2016 | $ | 0.9 | $ | 2.8 | $ | 0.3 | $ | 4.0 | |||||||
Restructuring charges | 13.0 | 4.9 | — | 17.9 | |||||||||||
Currency translation and other adjustments | (0.2 | ) | (0.1 | ) | — | (0.3 | ) | ||||||||
Cash payments / utilization | (13.2 | ) | (4.0 | ) | (0.3 | ) | (17.5 | ) | |||||||
Reserve balances at December 31, 2017 | $ | 0.5 | $ | 3.6 | $ | — | $ | 4.1 | |||||||
Restructuring charges | 0.6 | 3.5 | 3.5 | 7.6 | |||||||||||
Currency translation and other adjustments | (0.2 | ) | (0.3 | ) | — | (0.5 | ) | ||||||||
Cash payments | (0.6 | ) | (2.0 | ) | (3.5 | ) | (6.1 | ) | |||||||
Reserve balances at June 30, 2018 | $ | 0.3 | $ | 4.8 | $ | — | $ | 5.1 | |||||||
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Note 6—Property, Plant and Equipment
The following table sets forth the components of property, plant and equipment:
(In thousands) | June 30, 2018 | December 31, 2017 | |||||
Land | $ | 3,244 | $ | 3,312 | |||
Buildings | 119,238 | 119,970 | |||||
Machinery and equipment | 379,740 | 379,747 | |||||
Construction in progress | 11,675 | 12,036 | |||||
Total | 513,897 | 515,065 | |||||
Less: accumulated depreciation | (365,117 | ) | (358,051 | ) | |||
Net property, plant and equipment | $ | 148,780 | $ | 157,014 | |||
Note 7—Reclassifications Out of Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
MSA Safety Incorporated | Noncontrolling Interests | |||||||||||||||
Three Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Pension and other post-retirement benefits (a) | ||||||||||||||||
Balance at beginning of period | $ | (95,619 | ) | $ | (116,084 | ) | $ | — | $ | — | ||||||
Amounts reclassified from Accumulated other comprehensive loss: | ||||||||||||||||
Amortization of prior service cost | (131 | ) | (109 | ) | — | — | ||||||||||
Recognized net actuarial losses | 3,804 | 3,201 | — | — | ||||||||||||
Tax benefit | (614 | ) | (935 | ) | — | — | ||||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax | 3,059 | 2,157 | — | — | ||||||||||||
Balance at end of period | $ | (92,560 | ) | $ | (113,927 | ) | $ | — | $ | — | ||||||
Foreign Currency Translation | ||||||||||||||||
Balance at beginning of period | $ | (60,584 | ) | $ | (100,808 | ) | $ | 971 | $ | (2,590 | ) | |||||
Reclassification from accumulated other comprehensive loss into net income | (774 | ) | — | — | — | |||||||||||
Foreign currency translation adjustments | (27,607 | ) | 14,960 | (273 | ) | (837 | ) | |||||||||
Balance at end of period | $ | (88,965 | ) | $ | (85,848 | ) | $ | 698 | $ | (3,427 | ) | |||||
(a) Reclassifications out of accumulated other comprehensive loss and into net income are included in the computation of net periodic pension and other post-retirement benefit costs (refer to Note 16—Pensions and Other Post-Retirement Benefits).
-12-
MSA Safety Incorporated | Noncontrolling Interests | |||||||||||||||
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Pension and other post-retirement benefits (a) | ||||||||||||||||
Balance at beginning of period | $ | (97,948 | ) | $ | (118,068 | ) | $ | — | $ | — | ||||||
Amounts reclassified from Accumulated other comprehensive loss: | ||||||||||||||||
Amortization of prior service cost | (213 | ) | (218 | ) | — | — | ||||||||||
Recognized net actuarial losses | 7,283 | 6,402 | — | — | ||||||||||||
Tax benefit | (1,682 | ) | (2,043 | ) | — | — | ||||||||||
Total amount reclassified from Accumulated other comprehensive loss, net of tax | 5,388 | 4,141 | — | — | ||||||||||||
Balance at end of period | $ | (92,560 | ) | $ | (113,927 | ) | $ | — | $ | — | ||||||
Foreign Currency Translation | ||||||||||||||||
Balance at beginning of period | $ | (73,814 | ) | $ | (112,178 | ) | $ | 801 | $ | (1,964 | ) | |||||
Reclassification from accumulated other comprehensive loss into net income | (774 | ) | — | — | — | |||||||||||
Foreign currency translation adjustments | (14,377 | ) | 26,330 | (103 | ) | (1,463 | ) | |||||||||
Balance at end of period | $ | (88,965 | ) | $ | (85,848 | ) | $ | 698 | $ | (3,427 | ) | |||||
(a) Reclassifications out of accumulated other comprehensive loss and into net income are included in the computation of net periodic pension and other post-retirement benefit costs (refer to Note 16—Pensions and Other Post-Retirement Benefits).
Note 8—Capital Stock
Preferred Stock - The Company has authorized 100,000 shares of $50 par value 4.5% cumulative preferred nonvoting stock which is callable at $52.50. There are 71,340 shares issued and 52,878 shares held in treasury at June 30, 2018. There were no treasury purchases of preferred stock during the six months ended June 30, 2018 or 2017. The Company has also authorized 1,000,000 shares of $10 par value second cumulative preferred voting stock. No shares have been issued as of June 30, 2018.
Common Stock - The Company has authorized 180,000,000 shares of no par value common stock. There were 62,081,391 shares issued as of December 31, 2017. No new shares have been issued in 2018. There were 38,420,340 and 38,222,928 shares outstanding at June 30, 2018, and December 31, 2017, respectively.
Treasury Shares - On May 12, 2015, the Board of Directors adopted a stock repurchase program replacing the existing program. The program authorizes up to $100.0 million to repurchase MSA common stock in the open market and in private transactions. The share purchase program has no expiration date. The maximum number of shares that may be purchased is calculated based on the dollars remaining under the program and the respective month-end closing share price. No shares were repurchased during the six months ended June 30, 2018 or 2017. We do not have any other share repurchase programs. There were 23,661,051 and 23,858,463 Treasury Shares at June 30, 2018, and December 31, 2017, respectively.
The Company issues Treasury Shares for all share based benefit plans. Shares are issued from Treasury at the average Treasury Share cost on the date of the transaction. There were 241,732 and 514,704 Treasury Shares issued for these purposes during the six months ended June 30, 2018 and 2017, respectively.
Note 9—Segment Information
We are organized into seven geographic operating segments based on management responsibilities. The operating segments have been aggregated (based on economic similarities, the nature of their products, end-user markets and methods of distribution) into three reportable segments: Americas, International, and Corporate.
The Americas segment is comprised of our operations in North America and Latin America geographies. The International segment is comprised of our operations of all geographies outside of the Americas. Certain global expenses are allocated to each segment in a manner consistent with where the benefits from the expenses are derived.
The Company's sales are allocated to each country based primarily on the destination of the end-customer.
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Adjusted operating income (loss) and adjusted operating margin are the measures used by the chief operating decision maker to evaluate segment performance and allocate resources. Adjusted operating income (loss) is defined as operating income excluding restructuring charges, currency exchange gains/losses, other operating expense and strategic transaction costs. Adjusted operating margin is defined as adjusted operating income (loss) divided by segment sales to external customers. Adjusted operating income (loss) and adjusted operating margin are not recognized terms under U.S. GAAP and therefore do not purport to be alternatives to operating income or operating margin as a measure of operating performance. Further, the Company's measure of adjusted operating income (loss) and adjusted operating margin may not be comparable to similarly titled measures of other companies. Adjusted operating income (loss) on a consolidated basis is presented in the following table to reconcile the segment operating performance measure to operating income as presented on the Condensed Consolidated Statement of Income.
The accounting principles applied at the operating segment level in determining operating income (loss) are generally the same as those applied at the consolidated financial statement level. Sales and transfers between operating segments are accounted for at market-based transaction prices and are eliminated in consolidation.
Reportable segment information is presented in the following table:
(In thousands) | Americas | International | Corporate | Reconciling Items1 | Consolidated Totals | |||||||||||||||
Three Months Ended June 30, 2018 | ||||||||||||||||||||
Sales to external customers | $ | 215,339 | $ | 123,992 | $ | — | $ | — | $ | 339,331 | ||||||||||
Intercompany sales | 36,445 | 84,514 | — | (120,959 | ) | — | ||||||||||||||
Operating income | 46,797 | |||||||||||||||||||
Restructuring charges (Note 5) | 2,335 | |||||||||||||||||||
Currency exchange losses, net | 815 | |||||||||||||||||||
Other operating expense (Note 19) | 8,018 | |||||||||||||||||||
Strategic transaction costs (Note 15) | 58 | |||||||||||||||||||
Adjusted operating income (loss) | 49,838 | 15,853 | (7,668 | ) | — | 58,023 | ||||||||||||||
Adjusted operating margin % | 23.1 | % | 12.8 | % | ||||||||||||||||
Six Months Ended June 30, 2018 | ||||||||||||||||||||
Sales to external customers | $ | 424,468 | $ | 240,757 | $ | — | $ | — | $ | 665,225 | ||||||||||
Intercompany sales | 70,643 | 166,893 | (237,536 | ) | — | |||||||||||||||
Operating income | 91,232 | |||||||||||||||||||
Restructuring charges (Note 5) | 7,609 | |||||||||||||||||||
Currency exchange losses, net | 2,823 | |||||||||||||||||||
Other operating expense (Note 19) | 10,842 | |||||||||||||||||||
Strategic transaction costs (Note 15) | 152 | |||||||||||||||||||
Adjusted operating income (loss) | 99,924 | 28,631 | (15,897 | ) | — | 112,658 | ||||||||||||||
Adjusted operating margin % | 23.5 | % | 11.9 | % | ||||||||||||||||
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(In thousands) | Americas | International | Corporate | Reconciling Items1 | Consolidated Totals | |||||||||||||||
Three Months Ended June 30, 2017 | ||||||||||||||||||||
Sales to external customers | $ | 174,960 | $ | 113,815 | $ | — | $ | — | $ | 288,775 | ||||||||||
Intercompany sales | 32,264 | 75,575 | — | (107,839 | ) | — | ||||||||||||||
Operating income | 13,498 | |||||||||||||||||||
Restructuring charges (Note 5) | 967 | |||||||||||||||||||
Currency exchange losses, net | 2,851 | |||||||||||||||||||
Other operating expense (Note 19) | 29,610 | |||||||||||||||||||
Strategic transaction costs (Note 15) | 1,642 | |||||||||||||||||||
Adjusted operating income (loss) | 43,573 | 12,122 | (7,127 | ) | — | 48,568 | ||||||||||||||
Adjusted operating margin % | 24.9 | % | 10.7 | % | ||||||||||||||||
Six Months Ended June 30, 2017 | ||||||||||||||||||||
Sales to external customers | $ | 341,528 | $ | 213,012 | $ | — | $ | — | $ | 554,540 | ||||||||||
Intercompany sales | 62,453 | 145,771 | — | (208,224 | ) | — | ||||||||||||||
Operating income | 32,117 | |||||||||||||||||||
Restructuring charges (Note 5) | 13,706 | |||||||||||||||||||
Currency exchange losses, net | 3,431 | |||||||||||||||||||
Other operating expense (Note 19) | 29,610 | |||||||||||||||||||
Strategic transaction costs (Note 15) | 2,979 | |||||||||||||||||||
Adjusted operating income (loss) | 79,724 | 19,918 | (17,799 | ) | — | 81,843 | ||||||||||||||
Adjusted operating margin % | 23.3 | % | 9.4 | % | ||||||||||||||||
1Reconciling items consist primarily of intercompany eliminations and items not directly attributable to reporting segments.
Total sales by product group was as follows:
Three Months Ended June 30, 2018 | Americas | International | Consolidated | |||||||||||
(In thousands) | Dollars | Percent | Dollars | Percent | Dollars | Percent | ||||||||
Breathing Apparatus | $ | 46,678 | 22% | $ | 28,605 | 23% | $ | 75,283 | 22% | |||||
Fixed Gas & Flame Detection | 33,128 | 15% | 30,471 | 25% | 63,599 | 19% | ||||||||
Firefighter Helmets & Protective Apparel | 37,779 | 18% | 8,897 | 7% | 46,676 | 14% | ||||||||
Portable Gas Detection | 27,137 | 13% | 14,170 | 11% | 41,307 | 12% | ||||||||
Industrial Head Protection | 31,151 | 14% | 8,488 | 7% | 39,639 | 12% | ||||||||
Fall Protection | 15,094 | 7% | 10,958 | 9% | 26,052 | 8% | ||||||||
Other | 24,372 | 11% | 22,403 | 18% | 46,775 | 13% | ||||||||
Total | $ | 215,339 | 100% | $ | 123,992 | 100% | $ | 339,331 | 100% | |||||
Six Months Ended June 30, 2018 | Americas | International | Consolidated | |||||||||||
(In thousands) | Dollars | Percent | Dollars | Percent | Dollars | Percent | ||||||||
Breathing Apparatus | $ | 96,012 | 23% | $ | 53,889 | 22% | $ | 149,901 | 23% | |||||
Fixed Gas & Flame Detection | 65,654 | 15% | 58,876 | 24% | 124,530 | 19% | ||||||||
Firefighter Helmets & Protective Apparel | 72,533 | 17% | 18,626 | 8% | 91,159 | 14% | ||||||||
Portable Gas Detection | 55,899 | 13% | 27,635 | 11% | 83,534 | 13% | ||||||||
Industrial Head Protection | 58,992 | 14% | 15,602 | 6% | 74,594 | 11% | ||||||||
Fall Protection | 29,203 | 7% | 22,554 | 9% | 51,757 | 8% | ||||||||
Other | 46,175 | 11% | 43,575 | 20% | 89,750 | 12% | ||||||||
Total | $ | 424,468 | 100% | $ | 240,757 | 100% | $ | 665,225 | 100% | |||||
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Three Months Ended June 30, 2017 | Americas | International | Consolidated | |||||||||||
(In thousands) | Dollars | Percent | Dollars | Percent | Dollars | Percent | ||||||||
Breathing Apparatus | $ | 45,269 | 26% | $ | 25,124 | 22% | $ | 70,393 | 24% | |||||
Fixed Gas & Flame Detection | 30,660 | 18% | 29,515 | 26% | 60,175 | 21% | ||||||||
Firefighter Helmets & Protective Apparel | 5,676 | 3% | 8,385 | 7% | 14,061 | 5% | ||||||||
Portable Gas Detection | 24,669 | 14% | 12,346 | 11% | 37,015 | 13% | ||||||||
Industrial Head Protection | 28,205 | 16% | 7,792 | 7% | 35,997 | 12% | ||||||||
Fall Protection | 14,262 | 8% | 11,250 | 10% | 25,512 | 9% | ||||||||
Other | 26,219 | 15% | 19,403 | 17% | 45,622 | 16% | ||||||||
Total | $ | 174,960 | 100% | $ | 113,815 | 100% | $ | 288,775 | 100% | |||||
Six Months Ended June 30, 2017 | Americas | International | Consolidated | |||||||||||
(In thousands) | Dollars | Percent | Dollars | Percent | Dollars | Percent | ||||||||
Breathing Apparatus | $ | 93,959 | 28% | $ | 44,679 | 21% | $ | 138,638 | 25% | |||||
Fixed Gas & Flame Detection | 58,639 | 17% | 52,317 | 25% | 110,956 | 20% | ||||||||
Firefighter Helmets & Protective Apparel | 11,778 | 3% | 16,688 | 8% | 28,466 | 5% | ||||||||
Portable Gas Detection | 49,683 | 15% | 23,838 | 11% | 73,521 | 13% | ||||||||
Industrial Head Protection | 52,964 | 16% | 13,909 | 7% | 66,873 | 12% | ||||||||
Fall Protection | 25,490 | 7% | 21,965 | 10% | 47,455 | 9% | ||||||||
Other | 49,015 | 14% | 39,616 | 18% | 88,631 | 16% | ||||||||
Total | $ | 341,528 | 100% | $ | 213,012 | 100% | $ | 554,540 | 100% | |||||
Note 10—Earnings per Share
Basic earnings per share attributable to MSA Safety Incorporated common shareholders is computed by dividing net income, after the deduction of preferred stock dividends and undistributed earnings allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to MSA Safety Incorporated common shareholders assumes the issuance of common stock for all potentially dilutive share equivalents outstanding not classified as participating securities. Participating securities are defined as unvested stock-based payment awards that contain nonforfeitable rights to dividends.
Amounts attributable to MSA Safety Incorporated common shareholders: | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(In thousands, except per share amounts) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income | $ | 33,179 | $ | 12,532 | $ | 65,550 | $ | 26,945 | ||||||||
Preferred stock dividends | (10 | ) | (10 | ) | (20 | ) | (20 | ) | ||||||||
Net income available to common equity | 33,169 | 12,522 | 65,530 | 26,925 | ||||||||||||
Dividends and undistributed earnings allocated to participating securities | (31 | ) | (10 | ) | (63 | ) | (26 | ) | ||||||||
Net income available to common shareholders | 33,138 | 12,512 | 65,467 | 26,899 | ||||||||||||
Basic weighted-average shares outstanding | 38,327 | 38,065 | 38,272 | 37,914 | ||||||||||||
Stock options and other stock compensation | 576 | 715 | 569 | 771 | ||||||||||||
Diluted weighted-average shares outstanding | 38,903 | 38,780 | 38,841 | 38,685 | ||||||||||||
Antidilutive stock options | — | — | — | — | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.86 | $ | 0.33 | $ | 1.71 | $ | 0.71 | ||||||||
Diluted | $ | 0.85 | $ | 0.32 | $ | 1.69 | $ | 0.70 | ||||||||
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Note 11—Income Taxes
The Tax Cuts and Jobs Act of 2017 ("the Act"), which was signed into law on December 22, 2017, has resulted in significant changes to the U.S. corporate income tax system including reducing the U.S. corporate rate to 21% starting in 2018. The Act also creates a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries.
On December 22, 2017, SAB 118 was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company calculated its best estimate of the impact of the Act and recorded income tax expense of $19.8 million during the fourth quarter of 2017, the period in which the legislation was enacted. Of this amount, $18.0 million related to the one-time transition tax and the remaining $1.8 million was related to the revaluation of U.S. deferred tax assets and liabilities. In addition, deferred taxes have been recorded on the outside basis differences of non-U.S. subsidiaries in the amount of $7.8 million, fully offset by foreign tax credits. We have made no adjustments to those amounts during the six months ended June 30, 2018. Changes to applicable tax law, regulations or interpretations of the Act may require further adjustments and changes in our estimates. The final determination of the transition tax and the revaluation of U.S. deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the Act.
The Company's effective tax rate for the second quarter of 2018 was 22.8% and differs from the U.S. federal statutory rate of 21% primarily due to increased profitability in less favorable tax jurisdictions and higher foreign entity losses in jurisdictions where we cannot take tax benefits, partially offset by a tax benefit of approximately 2.2% related to certain share-based payments related to the application of ASU 2016-09. The Company's effective tax rate for the second quarter of 2017 was a benefit of 7.7%, which differs from the U.S. federal statutory rate of 35% primarily due to a significant tax benefit of approximately 34.4% related to certain share-based payments related to the application of ASU 2016-09 as well as increased profitability in more favorable tax jurisdictions and benefits associated with U.S. tax credits for research and development and the manufacturing deduction.
The Company's effective tax rate for the six months ended June 30, 2018, was 22.7% and differs from the U.S. federal statutory rate of 21% primarily due to increased profitability in less favorable tax jurisdictions and higher foreign entity losses in jurisdictions where we cannot take tax benefits, partially offset by a tax benefit of approximately 2.2% related to certain share-based payments related to the application of ASU 2016-09. The Company's effective tax rate for the six months ended June 30, 2017, was 3.2% which differs from the U.S. federal statutory rate of 35% primarily due to a significant tax benefit of approximately 24.2% related to certain share-based payments related to the application of ASU 2016-09 as well as increased profitability in more favorable tax jurisdictions, reduced foreign entity losses in jurisdictions where we cannot take tax benefits and benefits associated with U.S. tax credits for research and development and the manufacturing deduction.
At June 30, 2018, the Company had a gross liability for unrecognized tax benefits of $14.6 million. The Company has recognized tax benefits associated with these liabilities of $5.2 million at June 30, 2018. The gross liability includes amounts associated with prior period foreign tax exposure.
The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company's liability for accrued interest related to uncertain tax positions was $2.8 million at June 30, 2018.
Note 12—Stock Plans
The 2016 Management Equity Incentive Plan provides for various forms of stock-based compensation for eligible key employees through May 2026. Management stock-based compensation includes stock options, restricted stock, restricted stock units and performance stock units. The 2017 Non-Employee Directors’ Equity Incentive Plan provides for grants of stock options and restricted stock to non-employee directors through May 2027. We issue treasury shares for stock option exercises, and grants of restricted stock and performance stock. Please refer to Note 8—Capital Stock for further information regarding stock compensation share issuance.
-17-
Stock compensation expense is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Stock compensation expense | $ | 2,085 | $ | 1,908 | $ | 7,692 | $ | 8,233 | ||||||||
Income tax benefit | 507 | 721 | 1,869 | 3,107 | ||||||||||||
Stock compensation expense, net of income tax benefit | $ | 1,578 | $ | 1,187 | $ | 5,823 | $ | 5,126 | ||||||||
A summary of stock option activity for the six months ended June 30, 2018, follows:
Shares | Weighted Average Exercise Price | ||||||
Outstanding at January 1, 2018 | 955,446 | $ | 42.75 | ||||
Exercised | (118,957 | ) | 36.09 | ||||
Forfeited | (3,358 | ) | 44.50 | ||||
Outstanding at June 30, 2018 | 833,131 | 43.72 | |||||
Exercisable at June 30, 2018 | 719,299 | $ | 43.59 | ||||
Restricted stock and restricted stock units are valued at the market value of the stock on the grant date. A summary of restricted stock and unit activity for the six months ended June 30, 2018, follows:
Shares | Weighted Average Grant Date Fair Value | ||||||
Unvested at January 1, 2018 | 227,161 | $ | 57.50 | ||||
Granted | 65,133 | 85.57 | |||||
Vested | (81,031 | ) | 58.32 | ||||
Forfeited | (3,555 | ) | 57.76 | ||||
Unvested at June 30, 2018 | 207,708 | $ | 66.89 | ||||
Performance stock units have a market condition modifier and are valued at an estimated fair value using the Monte Carlo model. The final number of shares to be issued for performance stock units granted in the first quarter of 2018 may range from 0% to 200% of the target award based on achieving the specified performance targets over the performance period. The following weighted average assumptions were used in the Monte Carlo model for units granted in the first quarter of 2018 with a market condition modifier.
Fair value per unit | $83.58 |
Risk-free interest rate | 2.36% |
Expected dividend yield | 1.82% |
Expected volatility | 28.3% |
MSA stock beta | 1.240 |
The risk-free interest rate is based on the U.S. Treasury Constant Maturity rates as of the grant date converted into an implied spot rate yield curve. Expected dividend yield is based on the most recent annualized dividend divided by the one year average closing share price. Expected volatility is based on the ten year historical volatility using daily stock prices. Expected life is based on historical stock option exercise data.
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A summary of performance stock unit activity for the six months ended June 30, 2018, follows:
Shares | Weighted Average Grant Date Fair Value | ||||||
Unvested at January 1, 2018 | 242,186 | $ | 55.06 | ||||
Granted | 62,775 | 84.79 | |||||
Performance adjustments | (3,356 | ) | 44.61 | ||||
Vested | (41,660 | ) | 40.23 | ||||
Forfeited | (8,659 | ) | 44.53 | ||||
Unvested at June 30, 2018 | 251,286 | $ | 65.45 | ||||
The performance adjustments above relate to the final number of shares issued for the 2015 Management Performance Units, which were 93.6% of the target award based on Total Shareholder Return during the three year performance period, and vested in the first quarter of 2018.
Note 13—Long-Term Debt
(In thousands) | June 30, 2018 | December 31, 2017 | |||||
2006 Senior Notes payable through 2021, 5.41%, net of debt issuance costs | $ | 26,667 | $ | 26,667 | |||
2010 Senior Notes payable through 2021, 4.00%, net of debt issuance costs | 80,000 | 80,000 | |||||
2016 Senior Notes payable through 2031, 3.40%, net of debt issuance costs | 72,464 | 74,139 | |||||
Senior revolving credit facility maturing in 2020, net of debt issuance costs | 251,248 | 293,693 | |||||
Total | 430,379 | 474,499 | |||||
Amounts due within one year, net of debt issuance costs | 26,667 | 26,667 | |||||
Long-term debt, net of debt issuance costs | $ | 403,712 | $ | 447,832 | |||
Under the 2015 Amended and Restated Credit Agreement associated with our senior revolving credit facility, the Company may elect either a Base rate of interest (“BASE”) or an interest rate based on the London Interbank Offered Rate (“LIBOR”). The BASE is a daily fluctuating per annum rate equal to the highest of (i) the Prime Rate, (ii) the Federal Funds Open Rate plus one half of one percent (0.5%) or (iii) the Daily Libor Rate plus one percent (1.00%). The Company pays a credit spread of 0 to 175 basis points based on the Company’s net EBITDA leverage ratio and elected rate (BASE or LIBOR). The Company has a weighted average revolver interest rate of 3.31% as of June 30, 2018. At June 30, 2018, $316.7 million of the existing $575.0 million senior revolving credit facility was unused, including letters of credit.
On January 22, 2016, the Company entered into a multi-currency note purchase and private shelf agreement, pursuant to which MSA issued notes in an aggregate original principal amount of £54.9 million (approximately $72.5 million at June 30, 2018). The notes are repayable in annual installments of £6.1 million (approximately $8.1 million at June 30, 2018), commencing January 22, 2023, with a final payment of any remaining amount outstanding on January 22, 2031. The interest rate on these notes is fixed at 3.4%. The note purchase agreement requires MSA to comply with specified financial covenants, including a requirement to maintain a minimum fixed charges coverage ratio of not less than 1.50 to 1.00 and a consolidated leverage ratio not to exceed 3.25 to 1.00; in each case calculated on the basis of the trailing four fiscal quarters. In addition, the note purchase agreement contains negative covenants limiting the ability of MSA and its subsidiaries to incur additional indebtedness or issue guarantees, create or incur liens, make loans and investments, make acquisitions, transfer or sell assets, enter into transactions with affiliated parties, make changes in its organizational documents that are materially adverse to lenders or modify the nature of MSA's or its subsidiaries' business.
In July 2018, we provided notice of repayment to the holders of our 5.41% 2006 Senior Notes. We expect to repay the balance due by the end of August 2018 using borrowings on our senior revolving credit facility with an average interest rate of 3.31%.
The revolving credit facilities and note purchase agreements require the Company to comply with specified financial covenants. In addition, the credit facilities and the note purchase agreements contain negative covenants limiting the ability of the Company and its subsidiaries to enter into specified transactions. The Company was in compliance with all covenants at June 30, 2018.
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The Company had outstanding bank guarantees and standby letters of credit with banks as of June 30, 2018, totaling $15.1 million, of which $6.2 million relate to the senior revolving credit facility. The letters of credit serve to cover customer requirements in connection with certain sales orders and insurance companies. The full amount of the letters of credit remains unused and available at of June 30, 2018. The Company is also required to provide cash collateral in connection with certain arrangements. At June 30, 2018, the Company has $3.2 million of restricted cash in support of these arrangements.
Note 14—Goodwill and Intangible Assets
Changes in goodwill during the six months ended June 30, 2018 are as follows:
(In thousands) | Goodwill | ||
Balance at January 1, 2018 | $ | 422,185 | |
Disposals | (525 | ) | |
Currency translation | (3,276 | ) | |
Balance at June 30, 2018 | $ | 418,384 | |
At June 30, 2018, the Company had goodwill of $273.3 million and $145.1 million related to the Americas and International reportable segments, respectively.
Changes in intangible assets, net of accumulated amortization during the six months ended June 30, 2018, are as follows:
(In thousands) | Intangible Assets | ||
Net balance at January 1, 2018 | $ | 183,088 | |
Amortization expense | (5,307 | ) | |
Currency translation | (1,181 | ) | |
Net balance at June 30, 2018 | $ | 176,600 | |
At June 30, 2018, the Company had a trade name with an indefinite life totaling $60.0 million related to the acquisition of Globe Holding Company, LLC. Refer to Note 15—Acquisitions for additional information.
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Note 15—Acquisitions
Acquisition of Globe Holding Company, LLC
On July 31, 2017, we acquired 100% of the common stock in Globe Holding Company, LLC ("Globe") in an all-cash transaction valued at $215 million plus a working capital adjustment of $1.4 million. There is no contingent consideration.
Based in Pittsfield, NH, Globe is a leading innovator and provider of firefighter protective clothing and boots. This acquisition aligns with our corporate strategy in that it strengthens our leading position in the North American fire service market. The transaction was funded through borrowings on our unsecured senior revolving credit facility.
Globe operating results are included in our consolidated financial statements from the acquisition date as part of the Americas reportable segment. The acquisition qualifies as a business combination and will be accounted for using the acquisition method of accounting.
We finalized the purchase price allocation as of June 30, 2018. The following table summarizes the fair values of the Globe assets acquired and liabilities assumed at the date of acquisition:
(In millions) | July 31, 2017 | ||
Current assets (including cash of $58 thousand) | $ | 28.6 | |
Property, plant and equipment and other noncurrent assets | 8.3 | ||
Trade name | 60.0 | ||
Distributor relationships | 40.2 | ||
Acquired technology and other intangible assets | 10.5 | ||
Goodwill | 74.5 | ||
Total assets acquired | 222.1 | ||
Total liabilities assumed | 5.7 | ||
Net assets acquired | $ | 216.4 | |
Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values. Fair values were determined by management, based, in part on an independent valuation performed by a third party valuation specialist. The valuation methods used to determine the fair value of intangible assets included the relief from royalty method for trade name and technology related intangible assets; the excess earnings approach for distributor relationships using distributor inputs and contributory charges; and the cost method for assembled workforce which is included in goodwill. A number of significant assumptions and estimates were involved in the application of these valuation methods, including sales volumes and prices, royalty rates, costs to produce, tax rates, capital spending, discount rates, and working capital changes. Cash flow forecasts were generally based on Globe pre-acquisition forecasts coupled with estimated MSA sales synergies. Identifiable intangible assets with finite lives are subject to amortization over their estimated useful lives. The distributor relationships acquired in the Globe transaction will be amortized over a period of 20 years and the remaining identifiable assets will be amortized over 5 years. The trade name was determined to have an indefinite useful life. We will perform an impairment assessment annually on the trade name, or sooner if there is a triggering event. Additionally, as part of each impairment assessment, we will reassess whether the asset continues to have an indefinite life or whether it should be reassessed with a finite life. Estimated future amortization expense related to the identifiable intangible assets is approximately $2.1 million for the remainder of 2018, $4.1 million in each of the next three years 2019 through 2021 and $3.2 million in 2022. Estimated future depreciation expense related to Globe property, plant and equipment is approximately $0.5 million for the remainder of 2018 and $1.0 million in each of the next four years.
Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired were the acquisition of an assembled workforce, the expected synergies and other benefits that we believe will result from combining the operations of Globe with our operations. Goodwill of $74.5 million related to the Globe acquisition has been recorded in the Americas reportable segment and is deductible for tax purposes.
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Our results for the six months ended June 30, 2018, include strategic transaction costs of $0.2 million, including an insignificant amount of transaction and integration costs related to the acquisition of Globe Holding Company LLC. Our results for the six months ended June 30, 2017, include strategic transaction costs of $3.0 million. These costs are reported in selling, general and administrative expenses.
The operating results of the Globe acquisition have been included in our consolidated financial statements from the acquisition date through June 30, 2018. Our results for the six months ended June 30, 2018, include Globe sales and net income of $60.9 million and $7.4 million, respectively.
The following unaudited pro forma information presents our combined results as if the Globe acquisition had occurred at the beginning of 2017. The unaudited pro forma financial information was prepared to give effect to events that are (1) directly attributable to the acquisition; (2) factually supportable; and (3) expected to have a continuing impact on the combined company’s results. There were no material transactions between MSA and Globe during the periods presented that are required to be eliminated. Intercompany transactions between Globe companies during the periods presented have been eliminated in the unaudited pro forma condensed combined financial information. The unaudited pro forma condensed combined financial information does not reflect any cost savings, operating synergies or revenue enhancements that the combined companies may achieve as a result of the acquisitions or the costs to integrate the operations or the costs necessary to achieve cost savings, operating synergies or revenue enhancements.
Pro forma condensed combined financial information (Unaudited)
(In millions, except per share amounts) | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2017 | |||||
Net sales | $ | 317 | $ | 610 | |||
Net income | $ | 19 | $ | 39 | |||
Basic earnings per share | $ | 0.49 | $ | 1.03 | |||
Diluted earnings per share | $ | 0.48 | $ | 1.00 | |||
The unaudited pro forma condensed combined financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations or financial position that we would have reported had the acquisitions been completed as of the date and for the period presented, and should not be taken as representative of our consolidated results of operations or financial condition following the acquisitions. In addition, the unaudited proforma condensed combined financial information is not intended to project the future financial position or results of operations of the combined company.
The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting under existing U.S. GAAP. MSA has been treated as the acquirer.
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Note 16—Pensions and Other Post-retirement Benefits
Components of net periodic benefit cost consisted of the following:
Pension Benefits | Other Benefits | |||||||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Three Months Ended June 30, | ||||||||||||||||
Service cost | $ | 2,891 | $ | 2,721 | $ | 83 | $ | 106 | ||||||||
Interest cost | 4,219 | 4,572 | 175 | 237 | ||||||||||||
Expected return on plan assets | (9,096 | ) | (8,738 | ) | — | — | ||||||||||
Amortization of prior service cost | (6 | ) | (4 | ) | (125 | ) | (105 | ) | ||||||||
Recognized net actuarial losses | 3,453 | 3,184 | 351 | 17 | ||||||||||||
Settlements | 27 | 34 | 141 | — | ||||||||||||
Net periodic benefit cost (a) | 1,488 | 1,769 | 625 | 255 | ||||||||||||
Six Months Ended June 30, | ||||||||||||||||
Service cost | $ | 5,782 | $ | 5,442 | $ | 184 | $ | 212 | ||||||||
Interest cost | 8,438 | 9,144 | 396 | 474 | ||||||||||||
Expected return on plan assets | (18,193 | ) | (17,476 | ) | — | — | ||||||||||
Amortization of prior service cost | (11 | ) | (8 | ) | (202 | ) | (210 | ) | ||||||||
Recognized net actuarial losses | 6,907 | 6,368 | 376 | 34 | ||||||||||||
Settlement/curtailment loss (credit) | 53 | 68 | — | — | ||||||||||||
Net periodic benefit cost, excluding below | 2,976 | 3,538 | 754 | 510 | ||||||||||||
Special termination charge | — | 11,384 | (b) | — | — | |||||||||||
Net periodic benefit cost (a) | 2,976 | 14,922 | 754 | 510 | ||||||||||||
(a) Components of net periodic benefit cost other than service cost are included in the line item "Other income, net" in the income statement.
(b) Represents the charge for special termination benefits related to the VRIP which were paid from our over funded North America pension plan and recorded as restructuring charges on the Condensed Consolidated Statement of Income. See further details in Note 5—Restructuring Charges.
Effective December 31, 2017, the Company changed the method it uses to estimate the service and interest cost components of net periodic benefit cost for pension and other post-retirement benefits for a majority of its U.S. and foreign plans. Historically, the service and interest cost components for these plans were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period. The Company has elected to utilize a spot rate approach, which discounts the individual plan specific expected cash flows underlying the service and interest cost using the applicable spot rates derived from a yield curve used in the determination of the benefit obligation to the relevant projected cash flows. The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest costs. This change does not affect the measurement of total benefit obligations. We estimate that service and interest cost for the pension and OPEB plans will be reduced by approximately $1.8 million in 2018 as a result of this change. The Company has accounted for this change to the spot rate approach as a change in accounting estimate that is inseparable from a change in accounting principle, pursuant to Accounting Standards Codification (ASC) 250, Accounting Changes and Error Corrections, and accordingly has accounted for it prospectively. For plans where the discount rate is not derived from plan specific expected cash flows, the Company will continue to employ the current approaches for measuring both the projected benefit obligations and the service and interest cost components of net periodic benefit cost for pension and other post-retirement benefits.
We made contributions of $2.5 million and $3.0 million to our pension plans during the six months ended June 30, 2018 and 2017, respectively. We expect to make total contributions of approximately $5.0 million to our pension plans in 2018 which are primarily associated with our International segment.
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Note 17—Derivative Financial Instruments
As part of our currency exchange rate risk management strategy, we may enter into certain derivative foreign currency forward contracts that do not meet the U.S. GAAP criteria for hedge accounting, but which have the impact of partially offsetting certain foreign currency exposures. We account for these forward contracts at fair value and report the related gains or losses in currency exchange losses (gains) in the Condensed Consolidated Statement of Income. The notional amount of open forward contracts was $71.0 million and $124.7 million at June 30, 2018, and December 31, 2017, respectively.
The following table presents the Condensed Consolidated Balance Sheet location and fair value of assets and liabilities associated with derivative financial instruments:
(In thousands) | June 30, 2018 | December 31, 2017 | ||||||
Derivatives not designated as hedging instruments: | ||||||||
Foreign exchange contracts: other current liabilities | $ | 25 | $ | 314 | ||||
Foreign exchange contracts: other current assets | 106 | 840 | ||||||
The following table presents the Condensed Consolidated Statement of Income location and impact of derivative financial instruments:
Loss (Gain) Recognized in Income | ||||||||||
Six Months Ended June 30, | ||||||||||
(In thousands) | Statement of Income Location | 2018 | 2017 | |||||||
Derivatives not designated as hedging instruments: | ||||||||||
Foreign exchange contracts | ||||||||||