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Text: These risks, uncertainties and other factors are detailed in our Form 10-K filings with the Securities and Exchange Commission.
With that, I'll hand the call over to Nish.
Ken will then provide a quarterly financial review and give more texture on the strength we're seeing in the demand trends across our portfolio.
After that, we'll start the Q&A session.
So let's start with quarterly results.
Our revenue was $340 million, up 12% overall and 3% on an organic constant currency basis.
Our core organic product revenue increased 9% and driven by growth across our fire service and industrial PPE segments, partially offset by lower fixed gas and flame detection business, which was impacted by supply constraints.
Looking more closely at the quarterly comparison, I want to note that our 2020 third quarter benefited from higher pandemic-driven demand for air-purifying respirators.
In the current quarter, we saw our APR business return to more normal levels, which was a headwind to overall growth.
I noted on our second quarter call that our order book was strengthening, and that continued to be the case in the third quarter.
As an example, our backlog has increased $50 million, year-over-year.
Notably, the backlog across our gas detection as well as our firefighter apparel is trending at record levels.
Overall, our business remained healthy in the quarter, but supply chain disruptions in electronics and, to a lesser degree, labor shortages, did have impact on our delivery capabilities for some products.
In addition, our quarterly profitability was impacted by variable compensation resets and higher selling commissions along with discretionary costs as business conditions improve relative to last year.
Lastly, in this inflationary environment, pricing continues to be a key area of focus for us.
We implemented off-cycle increases to help mitigate higher input costs, and we continue to evaluate pricing as market conditions evolve.
With that as a backdrop, there are three key takeaways from the quarter that support my confidence in the outlook for MSA and our ability to navigate this environment.
First, our strong balance sheet provides plenty of capacity to invest in organic and inorganic growth opportunities.
Two, the MSA brand continues to be a pillar of strength.
I'm grateful that our customers see value in our products, and have been patient in waiting on delivery.
We're not experiencing any significant cancellations of orders.
And three, the engagement level of our associates and their passion for the mission of MSA has never been greater, adding fuel to our dedication of protecting the lives of workers throughout the world.
So first, let me talk about inorganic growth.
We completed the acquisition of Bacharach in a quarter and are making good progress in our efforts to integrate Bacharach into the MSA organization.
Recent milestones include the completion of a number of key initiatives that will help us meet financial targets that we've discussed with you on past calls.
Ken will provide more detail on the excellent progress we're making with Bacharach.
And with our net debt to trailing EBITDA below two times, we continue to evaluate additional inorganic growth opportunities, staying focused on how we can continue to create value for our customers and our shareholders.
Second, we remain very well positioned as the technology leader in safety.
We continue to invest in new product development to drive organic growth while providing our customers with innovative market-leading solutions to address their challenges of protecting their employees, and increasing productivity.
The most recent example of this is the new connected work platform, our team unveiled at the National Safety Congress earlier this month.
With the many complexities associated with implementing a world-class safety program, the value of technology that drives both compliance and efficiency by simplifying safety procedures, and remotely connecting safety managers to our employees has never been more important.
This connected services platform will help customers create safer and more efficient work environments through reliable and actionable data in real time.
The new offering is a powerful hardware, software combination.
It features a new wearable cloud-ready gas detection device, the ALTAIR io4 that enables a broad range of capabilities not previously available with unconnected devices.
With direct cellular connectivity, real-time location, live gas readings and automated compliance reporting.
This platform provides work site managers with new safety insights and added peace of mind.
Another element of MSA's connected work platform is a safety subscription that extends warranty coverage, and provides automatic and ongoing software upgrades.
With this subscription, safety managers have a convenient way to stay on the forefront of safety innovation and on budget.
This new connected technology platform is a great example of the market-leading work being done by our engineering, marketing and sales teams to drive productivity for our customers.
MSA was recently recognized as a 2021 top workplace by the Pittsburgh Post-Gazette.
What makes this award particularly gratifying is the fact that it's based exclusively on employee feedback.
For 2021, we also earned the New Ideas Award.
The award is based on having the highest positive response rate to the prompt question, new ideas are encouraged at this company.
These recognitions are reflective of the truly special culture we have at MSA.
Associate engagement is always important to us.
And it's especially inspiring to know that this kind of sentiment exists at a time when we faced a myriad of challenges associated with the pandemic.
We're executing a number of strategic programs to position MSA for continued success, and none of that happens without attracting, developing and retaining the brightest talent, and these recognitions will certainly help us on that front.
I'll start the discussion with financial highlights centered around revenue, profitability and cash flow.
Revenue growth was healthy in the third quarter with core revenue growth of 19%.
This included 9% growth in organic core revenue on a constant currency basis.
We're seeing robust customer demand, especially in the Americas segment.
However, the persistent electronic component shortage, and labor challenges to a lesser extent, have impacted our ability to fulfill orders and is driving backlog to record levels.
Adjusted operating margin was 15% in the quarter, which was down year-over-year driven by -- driven primarily by variable compensation resets and higher selling commissions and discretionary costs.
These costs are resetting from an abnormally low base in 2020.
Cash flow performance was very healthy in the quarter and continues to support ongoing investment in growth opportunities and return of capital to our shareholders.
We're managing working capital well, and that resulted in strong improvements in quarterly cash flow.
Now let's take a closer look at the financial results in the third quarter.
I'll start with a focus on revenue.
Quarterly revenue of $340 million was up 12% overall and 3% on an organic constant currency basis.
While our noncore business was off considerably on the lower level of APR revenues, it was encouraging to see core product revenues up 19% with 9% organic growth in the quarter.
We are seeing robust demand in the Americas segment, while revenue in the International segment is being impacted by the prevalence of COVID-19, resulting in a very uneven economic recovery across those regions, with particular weakness in the emerging markets in the International segment.
The quarterly book-to-bill was above one times in the quarter.
While order pace strengthened throughout the quarter, supply chain constraints around electronic components, and labor availability to a lesser extent, are impacting our ability to deliver in certain areas.
This has resulted in backlog increasing approximately $50 million year-over-year at the end of the quarter.
It's difficult to predict how long the supply chain challenges will last, but at this point, we expect that the constraints around electronic components will persist well into 2022.
Gross profit was 42.9% of sales in the quarter compared to 43.4% of sales in the prior year.
Gross profit margin was negatively impacted by 120 basis points for deal-related costs and amortization.
Excluding this, gross profit margin was up a healthy 70 basis points compared to a year ago.
We have implemented off-cycle price increases to offset inflation, we're seeing in electronic components, resins and other materials.
That said, the timing difference between pricing going effective and persistent cost inflation resulted in a tough price cost environment in the quarter.
We continue to evaluate pricing opportunities and have another price adjustment in Q4 in North America and early next year in international.
SG&A expense of $87 million was up $23 million from a year ago on a reported basis.
I want to spend a moment to dissect that amount as there are a lot of moving pieces in the quarter.
To level set, Q3 2020 SG&A of $65 million was abnormally low due to favorable compensation-related adjustments and the lack of discretionary spending.
The key drivers of the year-over-year increases are: First, we had an increase of approximately $10 million of expense from the acquisitions of Bacharach in Bristol, of which about $6 million will be recurring going forward; second, variable compensation resets and higher selling commissions added $6 million compared to last year; lastly, Discretionary costs are up $3 million associated with the increase in customer-facing activities.
Our quarterly adjusted operating margin was 15%, down 260 basis points from a year ago.
Looking at our segment performance, the Americas margin was 19.4%, down 160 basis points year-over-year.
The higher SG&A costs, I discussed previously had a significant impact on the segment.
International margin was 11.3%, down 290 basis points year-over-year.
International margins were impacted by lower organic revenue and higher SG&A on the drivers, discussed previously.
Our quarterly effective tax rate was 31.5% on a GAAP basis.
Adjusting for nonrecurring transaction costs and other restructuring matters, the effective tax rate was 24.7% in the quarter.
Turning to cash flow and the balance sheet.
Quarterly free cash flow was $36 million, well above 100% conversion.
While overall working capital performance was strong, and improvements in receivables.
We built some inventory in the quarter, which aligns with our backlog.
We continue to execute on a balanced capital allocation strategy.
In the third quarter, we completed the acquisition of Bacharach and the buyout of our joint venture interest in China.
In the quarter, we borrowed a net $282 million of debt to fund our corporate development activity, funded $17 million of dividends to shareholders and invested $11 million in capex.
We finished the quarter with cash of $117 million and net debt of $495 million or 1.8 times adjusted EBITDA.
While we continue to take a measured approach on M&A, our strong balance sheet provides ample capacity to continue to invest in organic and inorganic growth opportunities.
Before moving on, I want to provide an update on Bacharach now that we have had a full quarter of contribution.
The integration effort is progressing as planned, and the teams are working well together.
Bacharach contributed about $15 million of sales in the quarter, in line with what we communicated when we closed the acquisition earlier this quarter.
The Bacharach business is contending with many of the same electronic component challenges we are experiencing at MSA.
Looking forward, we're pleased with the order book and backlog, and are focused on driving conversion to sales.
We continue to expect earnings accretion from the acquisition in line with the range we previously discussed.
In the quarter, we had a noncash adjustment to the product liability reserve, which resulted in just about $9 million of additional expense compared to a year ago.
This increase is a result of an increase in the number of asserted cumulative trauma claims pending against our subsidiary, MSA LLC
We continue to monitor developments and filing rates.
We will be conducting our annual review process in the fourth quarter, which we expect to be finalized with our 10-K filing early next year.
As we look ahead, we continue to operate in a very dynamic environment.
Supply chain is the largest variable for us.
Raw material availability as well as the cost of those inputs can be difficult to predict.
To put it in perspective, we had $11 million lower revenue versus 2019 this quarter.
The backlog is up well over $70 million versus the same period in 2019.
We're laser-focused on executing initiatives to mitigate the impact of the supply chain challenges on our business, both on the top line and the margin profile.
It is clear that the economic recovery is progressing, and we see good strength in our Americas segment.
COVID-19 continues to have an impact on the world to varying degrees.
We are seeing the impact in our International segment, where the demand recovery has taken a little longer.
Over the course of the year, we have continued to invest in organic and inorganic growth programs that enhance our position as the safety technology leader.
I'm proud of our team's unwavering commitment to our mission, our business and our customers.
We've recently launched innovative new products and services with the ALTAIR io4 and MSA+ service and enhanced our gas detection product suite with the acquisition of Bacharach.
And to finish it out, we remain committed to investing in growth and profit improvement programs that will drive value and best position MSA for long-term value creation.
For all of us at MSA, safety is our mission, our passion and it's our purpose.
It goes to our associates who work at our Cranberry Township production facility and corporate center.
This team recently surpassed a remarkable 10 million hours without a lost time incident.
This means it's been more than five years since we've had an LTI at our Cranberry Township campus.
While the balance of 2021 will continue to present us with various challenges, I have tremendous confidence in our strategy and the team we have executing it.
Our business has demonstrated, its resiliency through a number of economic cycles today our products, people and passion position us to manage through this current cycle.
As I've communicated to our global workforce, I believe we are positioned extremely well as the leader in safety technology, ready to emerge as an even stronger organization in 2022 and beyond.
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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q3 revenue rose 12 percent to $340 million.

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