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Text: Joining me on the call today are Nish Vartanian, Chairman, President and CEO; and Ken Krause, Senior Vice President, CFO and Treasurer.
These risks, uncertainties and other factors are detailed in our Form 10-K filings with the SEC.
As you've seen, we've accomplished a lot in the second quarter.
Most importantly, we closed the acquisition of Bacharach on July 1, which I'll discuss after a brief overview of the quarter.
We had a pretty good quarter.
Our revenue returned to growth, up 5% from a year ago.
Core product revenue was up 12%.
Margins are on track as we effectively manage through inflation we see in our supply chain.
I mentioned on the April call that we were optimistic that the worst was behind us from a demand perspective.
I'm glad to reiterate that sentiment today.
Not only did revenue come in a bit higher than our expectations, our order book continued to strengthen throughout the quarter and drove significant increase in backlog.
Our fire service business remains strong, and we're seeing improved demand for gas detection and industrial products.
Overall, our U.S. business continues to lead the recovery.
Europe is starting to recover as the vaccine situation improves.
Like everyone, we continue to manage through supply chain issues, which is a dynamic situation that requires daily attention.
Our most challenging areas are electronic components used in our SCBA and gas detection products.
Our level of revenue indicates we've done a good job of managing through these issues.
Still, we did have pockets of production starts and stops and extended lead times that contributed to our backlog bill.
But even with those challenges, I remain very confident in our ability to enhance our market positions as business conditions improve.
Ken will provide more color on the quarter.
I'd like to now provide more insight into three areas that support my confidence in the long-term future of MSA as the leader in advanced safety technology.
First, we continue to launch safety technologies that solve our customers' toughest safety challenges, and I'll talk about those in a moment.
Second, our continuous improvement culture is driving efficiencies for our organization.
The strong execution of our international margin expansion road map is one example.
And third, we're using our balance sheet to make strategic acquisitions and investments that strengthen our leadership positions in key markets.
We recently closed the acquisition of Bacharach and the integration of our two organizations is off to a strong start.
Starting with the first area, our innovation engine and R&D pipeline.
We're bringing innovation to the fire service market in the form of connected technologies.
We officially launched LUNAR this spring, and our Q2 results include about $1 million of revenue related to product sales.
LUNAR, for those of you who haven't seen or read about it, is a handheld device that uses cloud technology to deliver fire scene management capabilities for incident commanders.
The feedback we're getting from early adopters provides encouragement that we've hit the mark with this new technology.
We're also using our strong balance sheet to invest in other forward-thinking organizations who share similar mission to protect firefighters.
We established this partnership to improve firefighter safety and enhance their capabilities when it comes to fire seeing situational awareness and decision making.
Fotokite is the brand name for a tethered drone system that gives incident commanders a bird's eye perspective of a fire scene without requiring a pilot.
This collaboration is an exciting venture for us because it represents a new avenue to advance the MSA mission through revolutionary technology for firefighters.
The second area I want to highlight is our culture of continuous improvement and our margin expansion progress in the international business segment.
Our entire international team continues to execute a playbook focused on three areas; driving growth in select markets, optimizing our channels approach and delivering operational efficiencies.
We've been executing this playbook for three years now, and it's encouraging to see the margin improvement as revenue starts to recover from the pandemic.
In the second quarter, the International segment operating margin rose 70 basis points to 16.5%.
And looking back to Q2 of 2019, segment margin is up more than 350 basis points.
With the pipeline of programs we have in place, we remain confident in our ability to continue driving margin expansion in international.
The third area I want to highlight is how we use our balance sheet to make acquisitions that strengthen our leadership position in key markets.
On July 1, we closed the acquisition of Bacharach.
Bacharach is a leader in gas detection technologies, which is used in the HVAC refrigeration markets.
With annual revenue of about $70 million, it's headquartered here in Pittsburgh, not far from our gas detection center of excellence, where we've recently made significant investments.
Bacharach aligns well with our product and manufacturing expertise.
Moreover, it provides a strong brand and access to attractive end markets that build further diversification in our gas detection business.
From an integration perspective, we'll be focused broadly on growing the business and reducing complexity.
I'm very confident in our team's ability to capture value from the acquisition while strengthening the brands at both Bacharach and MSA.
From a balance sheet perspective, our leverage remains healthy.
If we add Bacharach into our quarter end net leverage, the pro forma would be about 1.7 times net.
So we're well positioned to continue investing in our business.
One additional topic I'd like to mention is our approach to ESG.
Social responsibility is not new to MSA.
For 17 years, we've been dedicated to helping protect the world's workers.
So we help our customers achieve their own ESG goals by enhancing workplace safety.
But we also focus internally on ESG objectives that help us to build greater resiliency and adaptability into our overall business model to safeguard the value that we've created.
It's become clear to me that our investments in worker safety, talent, environmental sustainability, supply chain resiliency and various risk mitigation programs all help to create a better business model.
And I believe that companies who do these things effectively will be the ones to prosper and be fit for the future.
We're prioritizing areas specific to our strategy.
For example, we know that attracting and retaining a quality workforce through broad talent pipelines is not just the top business challenge for any organization today, but particularly for manufacturing companies.
For that reason, we invest a lot of time and resources into talent development and retention.
And for the first time, MSA was recently recognized by Forbes as one of the best employers for diversity in 2021.
This recognition was based on a survey of more than 50,000 employees around the country.
We were also ranked number 16 on the Forbes Best Midsize Employers list, and we were number one for engineering and manufacturing industry category.
So it's encouraging to see further recognition of our efforts to create a top workplace.
So to summarize, there are three areas that give me confidence in MSA's future.
Our innovation engine is very strong, and it continues to power new and exciting developments in safety technology.
Our continuous improvement culture across all areas of our business is yielding strong results, especially in the International segment and we're effectively using our balance sheet to grow and strengthen our business.
I'll start the discussion with financial highlights centered on revenue, profitability and cash flow.
We returned to revenue growth in the second quarter with total sales up 5% in constant currency.
I'm pleased that our Q2 order pace tracked well above 2020 and increased high single digits from 2019.
Both fire service and industrial-related products are contributing to the stronger order book.
That momentum provides confidence around demand for our products as we look at the coming quarters.
Second, our operating margin of 17.2% showed a nice sequential uptick from Q1 despite $4 million of higher stock compensation expense related to our recently announced acquisition and its expected revenue and profitability contributions over the coming years.
The expenses, noncash and negatively impacted operating margin by approximately 130 basis points in the quarter.
And third, our cash flow performance was healthy.
Receivable performance was excellent on the increase in revenue, and our inventory levels position us to deliver a stronger second half compared to the first half.
We completed the Bacharach acquisition earlier this month for $337 million with an after-tax cost of debt of less than 2%.
And as Nish had indicated, our balance sheet is strong, and we are positioned very well to invest in our business.
Now let's take a closer look at the financial results in the second quarter.
I'll start with a focus on revenue.
Quarterly revenue was up 9%, reaching $341 million.
Revenue was up 5% on a constant currency basis.
While we saw about a 2.5% benefit associated with the addition of Bristol, our APR business presented a 5% headwind on a year-over-year basis.
In constant currency, revenue in the Americas was up 6%, while international revenues were up 3%.
The international performance reflects a lag in vaccine deployment and economic recovery, which is tracking a few months behind the U.S. Core product revenue was up 12% on growth across fire service and industrial PPE, partially offsetting a lower FGFD business.
The strong core recovery was partially offset by a difficult comparison in air purifying respirators.
Looking at industrial PPE, it's great to see the strong growth rates in these areas, upwards of 20% or 30% compared to 2020.
It was also good to see head protection sales back at 2019 levels in the second quarter.
Touching on fire service, backlog remains very healthy, and we're excited about the recent product launches for LUNAR and connected firefighter.
The mission-critical nature of our products and our strategic investments provide a healthy outlook for the global fire service business.
I should note that the SCBA revenues came in ahead of 2019 levels.
Our FGFD business declined 4% compared to last year on challenging comps in the Middle East.
However, we continue to see incoming business strengthen through the second quarter.
In June, we booked one of the largest FGFD orders in our history.
Our FGFD backlog is back to pre-pandemic levels heading into the second half.
For MSA overall, quarterly incoming orders surpassed 2019 levels.
At the same time, supply chain constraints with electronic components are presenting challenges to our ability to deliver in certain areas.
This has resulted in backlog increasing 15% from the end of Q1, particularly in gas detection products.
While it's difficult to predict how long the supply chain challenges will last, we expect the constraints around electronic components will persist into the second half.
Gross profit was relatively consistent compared to last year.
Pricing and stronger throughput in our factories offset higher material costs.
Despite a number of headwinds in margins associated with input costs, gross margins were roughly in line with prior year levels.
We have implemented an off-cycle price increase to respond to the inflation that we are seeing in the U.S. across electronic components, resins and other inputs.
We will continue to evaluate additional pricing opportunities through the second half as we navigate these inflationary pressures.
SG&A expenses was -- were $83 million or 24.4% of sales and was up $12 million from a year ago in constant currency.
As I had indicated on the April call, we expected a difficult SG&A comp in the second quarter because of the variable comp resets at the onset of the pandemic.
This trend played out as expected and impacted the quarterly comparison in SG&A by about $3 million.
Quarterly SG&A also includes about $8 million of costs related to Bacharach and and Bristol acquisitions, including the stock compensation of about $4 million adjustment that I spoke about previously.
Bacharach transaction costs of about $2 million and the remainder being the Bristol base SG&A.
Our cost savings from restructuring programs effectively offset discretionary costs coming back into the business.
We continue to control the controllables and bring costs back into the business at a slower pace than revenue improvements.
We expect SG&A to approximate 23.5% of sales for the second half of 2021.
We invested $7 million in restructuring programs in the quarter, primarily in our International segment as we continue to execute on our margin expansion road map.
Our restructuring actions have produced excellent results to date and position us well for the economic recovery.
Together with the programs we had discussed in 2020, we continue to expect to deliver approximately $15 million of savings across the income statement in 2021 and annual savings of $25 million thereafter.
Our quarterly adjusted operating margin was down 150 basis points from a year ago.
The decline reflects the impact of the Bristol noncash stock compensation adjustment I mentioned earlier, which is booked in our corporate segment.
Looking at our segment performance.
International margins were up 70 basis points to 16.5% of sales.
Our cost reductions and pricing programs remain very much on track.
It's great to see the return to margin expansion for the segment as the volume starts to improve.
America margins were down 140 basis points to 22.6% of sales.
Variable compensation resets associated with the improved revenue performance drove 140 basis point decline in the quarter.
And we continue to navigate the inflationary pressures and are assessing additional levers that will help mitigate these pressures in future quarters.
Our quarterly tax rate was 27.8% on a GAAP basis or 27.4% on an adjusted basis.
There were two discrete items that drove the quarterly rate up.
First, the statutory tax rate increase in the U.K. from 19% to 25% drove a onetime adjustment to our deferred taxes.
Second, we incurred higher nondeductible expenses associated with the acquisition of Bacharach.
From a cash flow and capital allocation perspective, quarterly free cash flow conversion was more than 100% of net income.
While overall working capital performance was strong on improvements in receivables, we did build some inventory in the quarter, which aligns with our backlog build as well as managing supply chain risks.
Our strong balance sheet positions us well to gain share as the market rebounds.
We continue to execute on a balanced capital allocation strategy.
In the second quarter, we paid down $25 million of debt, funded $17 million of dividends to shareholders and invested $11 million in capex programs.
Since we completed the Bacharach acquisition on July 1, its impact is not yet reflected on our balance sheet.
On a pro forma basis, following the acquisition, net debt-to-EBITDA would be 1.7 times compared to 0.6 times at June 30.
We continue to expect Bacharach to provide $0.10 to $0.15 of adjusted earnings per share in the second half of 2021.
In line with our existing methodology, adjusted earnings will exclude purchase accounting amortization.
In connection with the acquisition, we funded $200 million of 15-year senior notes with a fixed interest rate of 2.69%.
The remainder of the transaction was funded with our revolving credit facility, which we amended and extended in May to provide greater borrowing capacity and flexibility.
We also included a sustainability-linked pricing structure on our revolver.
Our borrowing cost flexes up or down based on our performance on certain ESG metrics.
With the pro forma debt for Bacharach, we'd expect interest expense to be in the range of $3.5 million to $4 million in Q3 and Q4 of this year.
We also completed a buyout of our minority partner in our China business for about $19 million in July.
China is a key market for us, and it's an important part of our growth strategy moving forward.
China has consistently been accretive to MSA's growth over time.
As a result, we continue to invest in this business, and this buyout represents a key strategic milestone for us.
We funded the investment with local cash balances.
And as part of this deal, we expect to repatriate between $10 million to $15 million of cash back to the U.S. in the third quarter.
The transaction provides full ownership of our business in a highly strategic market as well as helping us optimize foreign cash balances.
Before we move on, let's touch on the adjustment to the product liability reserve, which drove $12 million of expense in the quarter.
We increased our product liability reserve as a result of an increase in the number of asserted cumulative trauma claims pending against our subsidiary, MSA LLC
We continue to monitor development and filing rates.
We plan to conduct our annual review process later this year, where we will evaluate many factors, including the potential developments in filing trends.
As we look ahead, we're operating in a very dynamic environment.
While the strong rebound in order pace in the second quarter and elevated backlog provide a sense of optimism heading into the second half, the supply chain challenges we are facing are having an impact.
From where we operate today, the supply chain constraints are the largest variable for us.
Raw material availability as well as the cost of those inputs can be difficult to predict.
We're closely monitoring the situation, and we're laser-focused on executing initiatives to mitigate the impact of this on our business, both on the top line and our margin profile.
Our market positions have never been stronger, and we continue to invest in growth programs and acquisitions that support our position as the safety technology leader.
We've taken a number of steps through this recession to position ourselves for strong performance upon the recovery.
The Bristol and Bacharach acquisitions, significant cost takeout programs, midyear pricing actions and expanding our borrowing capacity at historically low rates are just a few examples.
I remain very confident that these actions will benefit our shareholders and stakeholders as conditions continue to improve.
The return to revenue growth and improving order book positions us well for the future in the second half of 2021.
My level of optimism about demand is higher today and has been since the onset of the pandemic.
In the coming months, we'll remain focused on acquisition integration, evaluating additional pricing opportunities, navigating supply chain constraints and improving our leadership positions across core markets and geographies.
At this time, Ken and I will be glad to take any questions you may have.
Please remember, MSA does not give guidance.

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q2 revenue $341 million versus refinitiv ibes estimate of $329.2 million.

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