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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.
I appreciate your interest in MSA.
I'm tremendously proud of the efforts of our team, which stayed focused on our mission, our people, our customers and communities.
I've often said, our greatest asset is our employee engagement and commitment to our mission of protecting workers' lives.
And I've never had greater appreciation for what our company contributes to society each and every day.
We finished a challenging year with a very strong fourth quarter realizing record high revenue of $388 million and double-digit improvements in free cash flow.
From a full-year perspective, our revenue declined 3%.
Strength in our fire service market and air purifying respirators was offset by weakness in industrial products.
But there is no question that diversification of our product provided support through the downturn.
Despite the revenue challenges in certain areas, our annual adjusted operating margin reached 18%, that's up 10 basis points from a year ago.
We've talked about our long-term aspiration to get our operating margins into the 20% range over the coming years.
Our performance in this challenging environment provides me with a great deal of optimism for the future.
With that in mind, there were three key areas I'd like to discuss today that support my confidence.
First, MSA's innovation engine is stronger than ever.
We're launching safety technologies that solve our customers' toughest safety challenges.
Second, our continuous improvement culture across all areas of our business is yielding strong results, especially in the International segment.
Third, we're committed to using our balance sheet to make strategic acquisitions that strengthen our leadership positions in key markets.
Starting with the first area, MSA's innovation engine and R&D pipeline.
The accomplishments of our founders back in 1914 reflects what happens every day in MSA's product development labs around the world.
At the turn of the century, they partnered with Thomas Edison to develop a battery-powered miners' cap lamp.
This electric lamp helped reduce mining fatalities by 75% over the next 25 years.
That same passion for innovation exist throughout MSA today, so we continue to invest in new product development to drive organic growth.
We do this to provide our customers with leading safety technologies that solve complex challenges.
In 2020, we invested nearly $70 million in R&D to bring the most advanced safety solutions to our global customer base.
One example is our new Advantage 290 reusable respirator.
The Advantage 290 is the first government-approved reusable respirator designed without an exhalation valve.
It filters both inhale and exhale breath that gives health-care workers increased flexibility, adding yet another option to the available supply of respiratory protection.
And it can be stored for long periods of time.
The work we're doing in the fire service is another great example.
The MSA Connected Firefighter platform includes the breakthrough G1 or M1 SCBA as well as our soon-to-be-launched LUNAR system.
LUNAR is a handheld device that uses cloud technology to deliver breakthrough fire scene management capabilities for incident commanders.
It also uses real-time direction in distance data to help search and rescue teams locate a separated firefighter and it's a personal thermal imaging camera.
While system-oriented products like LUNAR can have a longer adoption period, we continue to be very excited about the future possibilities that this technology has to offer on a global scale.
Quite simply, our goal is to protect firefighters from head to toe, the same passion for innovation that led to the G1 to M1 in our LUNAR system is being applied to firefighter software solutions, helmets, turnout gear and boots.
At the end of the day, it comes down to this.
We understand our customers at a deep level.
We listen, watch and learn from them.
With this knowledge, we use the latest technology to keep them safe, solve their problems and simplify their day.
Looking beyond the fire service, I'm also encouraged by the trends associated with our safety mission, a mission I believe is more relevant than ever.
As an example, in one of his first acts in office, President Biden signed an executive order calling on OSHA issue guidelines related to COVID-19 in the workplace.
It's reflective where COVID is bringing safety to the forefront of the national discussion.
An example is our International segment.
Our entire international team continues to execute a playbook focused on three areas: driving growth in select markets, optimizing our channel's approach and delivering efficiencies.
We've been executing on this international playbook for three years now, and it's encouraging to see the continued margin improvement.
As an example, our long-term goal was to improve operating margin in the International segment by 500 basis points over 2017.
In 2020, the International segment operating margin rose to 15%.
This is a 270-basis-point improvement compared to 2019 despite the 3% revenue decline.
And to-date, we've achieved 400 basis points of segment margin expansion.
With the pipeline of programs we have in place, we're very confident in our ability to surpass our original goal over time.
And that leads me to the third area I want to discuss today, which is our balance sheet to make strategic acquisitions that strengthen our leadership position in key markets.
In January of this year, we closed the acquisition of Bristol Uniforms.
Bristol is the UK leader for firefighter turnout gear.
And so, Bristol enhances our position as a global leader in fire service PPE.
This acquisition builds on our 2017 North American turnout gear leader Globe, so it's a great fit strategically and culturally.
It also expands our footprint in a defensive area of our portfolio.
Our fire service business increased 10% in the fourth quarter of 2020, even in the face of the pandemic.
So to summarize, there are three key areas that give me confidence in MSA's future.
First, MSA's innovation engine is stronger than ever.
Second, our continuous improvement culture across all areas of our business is yielding strong results, especially in the International segment.
And third, we're effectively using our balance sheet to make strategic acquisitions that strengthen our leadership positions in key markets.
Our integration plan for Bristol is well under way and we continue to move forward with an M&A pipeline focused on evaluating assets that align with our safety mission.
First, looking at overall growth, I was very pleased to see the team execute well and deliver record revenue for the fourth quarter despite the challenges we all face throughout the year.
Second, our profitability was strong as adjusted operating margin expanded by 10 basis points.
This equates to a 14% decremental operating margin.
We delivered on our goal to manage decremental margins at a lower rate than our incremental margins, improving overall operating margins to 18% on lower revenue volume is another step in the right direction for reaching our long-term margin aspirations.
And third, we generated more than $200 million of operating cash flow in 2020 or 25% higher than a year ago.
Through the downturn, we've continued to execute a balanced capital allocation strategy focused on growing our business and returning value to our shareholders.
We invested $49 million in capex projects.
We paid down $44 million of debt.
We funded $67 million in dividends to our shareholders and deployed $20 million for share repurchases.
And just last month, we deployed approximately $60 million for the acquisition of Bristol Uniforms.
Our net leverage continues to track below 1 times as we enter 2021.
So although 2020 was a year unlike any other, our growth, profitability and cash flow demonstrated the resilience of our business model and the disciplined execution of our teams around the world.
Now let's take a closer look at the financial results in the quarter.
Let's start with the focus on growth.
Quarterly revenue was a record high of $388 million, growing over 3% from a year ago or 2% in constant currency.
From a geographic perspective, revenue increased 5% in the Americas segment and decreased 2% in the International segment in constant currency.
As I had indicated on the October call, we entered the third quarter with a large backlog in SCBA and air purifying respirators.
We started to see a recovery in our business, especially in the fire service, in the latter part of Q3 that carried into Q4.
Order activity was healthy to finish the year and we exited the quarter with a very healthy book-to-bill ratio and an overall backlog that was consistent with the end of Q3 despite the record invoicing.
The fire service market was a key driver of results in the fourth quarter on strong SCBA growth.
We continue to convert competitive SCBA accounts in the US and had good order flow in key geographies around the world, including Germany, China and Latin America.
While we've had production constraints at Globe due to COVID, we continue to focus on driving operational improvements, and it's great to see continued wins with key pillar cities in the United States.
Firefighter safety is a resilient business and has performed well through various business cycles.
We continue to extend the breadth and depth of our market position in fire service through organic and/or inorganic investments like the upcoming launch of LUNAR and the recent acquisition of Bristol.
Shifting gears to the employment-based industrial PPE products, which were down 4% year-over-year after declining by 25% in the third quarter.
While we are most likely not out of the woods just yet, it was good to see such sequential growth versus the third quarter.
Our FGFD business was down 7% in the quarter on tough comparisons in both the Americas and International segments.
For the full year, we had a 2% decline in FGFD, reflecting the support from that recurring revenue streams in the product line that we've discussed with you previously.
With that said, while we have seen a recent uptick in oil prices, which could provide some support for projects going forward, we have a challenging comparison to start the first quarter of 2021.
Revenues from air purifying respirator lines increased 32% from a year ago.
As expected, we have largely delivered on our backlog from the pandemic surge of 2020 and we are well prepared to pursue new opportunities with healthcare and government end markets.
In the near-term, we are planning for a difficult comparison in the first quarter of 2021.
If you recall, our Q1 results a year ago included approximately $10 million of incremental revenue from APR at the onset of the pandemic.
The landscape continues to evolve as stimulus packages are allocated to enhance PPE supply for workers in a range of industries and we stand ready to help and fulfill our mission of protecting workers' life and health.
Turning to profitability and earnings.
Gross profit declined 350 basis points from a year ago as we incurred about $11 million of higher costs in the quarter.
$5 million of these costs were associated with lower throughput in certain factories and $6 million is primarily associated with inventory-related charges, which we don't expect to continue into 2021.
To a much lesser degree, the less favorable revenue mix was a headwind to margins.
These items had the most significant impact on our Americas segment margin in the quarter and for the full year.
SG&A expense of $76 million was down 10% from a year ago.
We delivered $6 million to $8 million of savings from previously executed restructuring programs and discretionary cost savings in the quarter associated with reduced travel, controlled hiring, professional services and other costs, and $3 million of savings from variable compensation on a year-over-year basis.
Similar to past cycles, we invested in restructuring programs throughout 2020 to improve our margin profile in the downturn and to position MSA for strong incremental margins during the recovery.
We incurred $9 million of quarterly restructuring expense to accrue for cost reduction programs related to footprint rationalization and business model optimization, primarily in the International segment where operating margin is up 270 basis points for the year.
Together with the programs we've discussed throughout 2020, we expect to deliver approximately $15 million of savings across the income statement in 2021 and annual savings of $20 million thereafter.
These savings will partially offset the impact of variable compensation resets and other discretionary costs coming back into the P&L in 2021.
Quarterly adjusted operating margin was flat with the prior year at 17.3% as the cost discipline and SG&A was offset by the gross profit headwinds.
International margins were up 320 basis points and were 17.5% in the quarter, which very much reflects the results the team are driving in pricing and cost reduction initiatives.
Americas' margins were down 260 basis points and were 20.8%.
The $11 million of higher cost in gross profit that I mentioned a moment ago was incurred primarily in the Americas segment.
Pricing is holding up well and we expect improvements in this segment margin going forward.
Just stepping back and looking at margins over the long-term, it is good to see improvements each and every year in operating margins since 2015, despite some challenging economic cycles along the way.
From a cash flow and capital allocation perspective, quarterly free cash flow conversion was well north of 100%.
We saw strong performance across working capital, which declined 320 basis points as a percentage of sales.
As I had indicated on the October call, we were planning for our improvement in the inventory balance through year-end.
Our strong balance sheet and inventory position at the end of the third quarter enabled us to deliver record high revenue in the fourth quarter.
We continue to focus on improving our performance in AR and AP and are seeing very strong results on that front as well.
Consistent with past years, we completed our annual cumulative trauma evaluation in the fourth quarter.
As part of that review, we reflected changes in underlying assumptions in our model that increase our product liability reserve and resulted in a pre-tax charge of $34 million, net of insurance recoveries on the income statement.
While the timing of cash flows for product liability and insurance receivable vary from quarter to quarter in MSA LLC, we've been successful in establishing cash flow streams that have allowed us to fund these liabilities without a material impact on our capital allocation priorities.
For example, over the past five years, our average cash conversion has exceeded 100% of net income both with and without the impact of product liability and insurance receivables.
We continue to focus on growth as our primary capital allocation priority, most recently completing the acquisition of Bristol Uniforms in January.
We're excited about the opportunity to build our position in turnout gear and expand MSA's addressable market globally.
We're also well positioned to realize a range of synergies from the transaction over the coming years.
From a financial standpoint, the acquisition provides attractive returns and aligns with the criteria we've shared in the past.
While we are in the midst of finalizing our purchase accounting for the acquisition, we expect earnings accretion in the first year of ownership, excluding acquisition-related amortization of about $0.03 to $0.05 per share.
With the closing date of January 25, we will recognize just over two months of Bristol results in our first quarter 2021 financial statements within our International business segment.
The acquisition does not have a material impact on our leverage.
So we remain very active in pursuing opportunities as well as funding organic R&D and capex projects that drive long-term growth for MSA.
As we turn the page to 2021, we're operating in a very dynamic environment.
There is a number of evolving macro level factors that will have an impact on our revenue outlook in 2021.
These factors include, among other things, the effectiveness of the vaccine rollout, risk of additional COVID lock-downs, the pace of economic recovery as well as the potential for government stimulus.
While the outcome is certainly hard to predict, the steps we are taking to improve our business model positions us to emerge as a much stronger company as macro conditions improve.
Our investments in organic and inorganic growth programs are driving an improved market position and that will be beneficial helping us return to growth as we see conditions improve.
Again, our ability to deliver revenue growth in 2021 is very much influenced by a range of external factors.
As a result, we are approaching the first half cautiously and are positioned for a stronger second half of 2021 as compared to the first half.
With that said, we remain committed to executing our strategy and advancing our mission, which has never been any more important.
We remain confident in our ability to maintain and grow our market share positions, improve our margin profile and drive strong cash flow performance.
The team delivered a strong Q4 with record revenue and strong working capital improvement.
Throughout the year, we funded the R&D portfolio and strategic capex projects.
We also executed on restructuring programs to make sustainable improvements in our business model.
And most recently, we completed an acquisition that positions us as a global leader in firefighter turnout gear.
To wrap up, I'm very confident that MSA is well positioned to advance our mission and create value for all -- all of our stakeholders.
At this time, Ken and I will be glad to take any questions you may have.
Please remember that MSA does not give guidance.

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qtrly revenue was $388 million, increasing 3 percent from a year ago on a reported basis.

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