MSA Safety Inc's Cost-Cutting Initiatives Continue to Pay Off

While sales of MSA Safety's (MSA 0.01%) G1 self-contained breathing apparatus (SCBA) has cooled off since last year, causing revenue to decline, earnings still rose sharply thanks to margin expansion and a streamlined cost structure. Meanwhile, profitability should get a boost in the coming quarters after the company completed the accretive acquisition of Globe Manufacturing Company. Further, the company still has a strong balance sheet even after paying cash for Globe, which gives it the financial firepower to continue investing so it can grow earnings.

MSA Safety's results: The raw numbers

Data source: MSA Safety.

Image source: Getty Images.

What happened with MSA Safety this quarter?

Cost savings led the way.

• While revenue slipped versus last year's second quarter, it's a tough comparison because the company's latest SCBA was still selling like hotcakes. Sales of that product aren't quite as brisk these days, which is why revenue in its breathing apparatus segment was down 12%. That said, the company was able to offset some of that decline with another strong quarter of hard-hat sales, which were up 15% versus last year, while sales of fall protection equipment were up 16% from last year.
• The company more than offset the revenue decline by streamlining its costs structure and expanding margins. Overall its gross profit margin was up 40 basis point versus the year-ago period, which helped drive the 10% increase in adjusted earnings.
• MSA Safety generated $50 million in cash flow from operating activities during the quarter, which was double what it produced last year.
• The company announced the acquisition of firefighter protective clothing maker Globe Manufacturing Company for $215 million in cash. Globe currently generates $110 million in annual revenue, and MSA expects that it will add $0.20 to $0.25 per share to its adjusted earnings in the first year of ownership.

What management had to say

CEO William Lambert commented on the company's second-quarter results:

Our second quarter operating results reflect our ongoing focus on streamlining MSA's cost structure, expanding product margins, and generating higher levels of cash flow. Most notably, we were able to improve gross profit by 40 basis points and drive 10% adjusted earnings growth in the quarter.

In addition to improving profitability through its cost-cutting initiatives, MSA Safety also benefited from an uptick in sales of industrial products such as hard hats and fall protection equipment. According to Lambert, this growth was the payoff of "previous investments in R&D and acquisitions" that enabled the company to "capitalize on stronger market conditions to drive double-digit revenue growth in each of these areas." In hard hats, Lambert noted that the driver was the company's market-leading Fas-Trac® III Suspension because of its ability to offer customers best-in-class customization options. Meanwhile, the growth in fall protection was driven primarily by Latchways, which it bought in 2015.

Looking forward

Lambert also noted that the company "has a strong history of using our balance sheet to complete acquisitions, like Latchways and General Monitors, that drive shareholder value. That's why he's excited about Globe, which he sees as "an excellent strategic and financial fit." Aside from integrating that business, the company's focus in the coming quarters, according to the CEO, will be to continue managing costs while "strategically deploying capital for investments that will continue to drive profitable growth and market share gains."