Mine Safety 2026 Q2 Earnings Call

Good morning. Welcome to MSA Safety's second quarter 2026 earnings conference call. This is Tyler Herzing, Senior Manager of Investor Relations. I'm joined by Steve Blanco, President and CEO, Julie Beck, Senior Vice President and CFO, and Stephanie Sciullo, President of our Americas segment. During today's call, we will discuss MSA Safety's second quarter 2026 financial results and provide an update on our full year 2026 outlook. Before we begin, I'd like to remind everyone that the matters discussed during this call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, all projections and anticipated levels of future performance. Forward-looking statements involve a number of risks, uncertainties, and other factors that may cause our actual results to differ materially from those discussed today.

These risks, uncertainties, and other factors are detailed in our SEC filings. MSA Safety undertakes no duty to publicly update any forward-looking statement made on this call, except as required by law. We have included certain non-GAAP financial measures as part of our discussion this morning. The non-GAAP reconciliations are available in the appendix of today's presentation. The presentation and press release are available on our investor relations website at investors.msasafety.com. Moving on to today's agenda. Steve will first provide an update on the business. Julie will then review our second quarter 2026 financial performance and 2026 outlook. Steve will then provide closing remarks. He will open the call for your questions. With that, I'll turn the call over to Steve Blanco.

Steve? Thanks, Tyler. Good morning, everyone.

Again, we appreciate your continued interest in MSA Safety. I'm on slide six. The team performed well in the second quarter as we continued to serve our singular mission of protecting workers around the world while advancing the commitments outlined in our Accelerate strategy. For the second quarter, we achieved 6% reported sales growth and delivered robust margin expansion with adjusted earnings per share of $2.40, up 24% from last year. We also generated strong free cash flow, which enabled $47 million of returns to shareholders via buybacks and dividends. In addition, we completed the acquisition of Autronica Fire and Security in early July.

Looking at sales by product category, organic detection sales were consistent with the prior year as mid-single-digit growth in portable gas detection was offset by a low single-digit decline in fixed monitoring, where demand and shipment activity were impacted by the ongoing conflict in the Middle East. In the Americas, we saw strong growth in fixed and portable gas detection, delivering high single-digit growth on top of a double-digit growth comparison from the prior year. In fire service, organic sales decreased 2% year-over-year, primarily due to lower SCBA sales as 2025 AFG grant related orders in the Americas have materialized slower than initially expected in the first half. The U.S. Department of Homeland Security remained closed until late May and created order choppiness in the quarter. Moving forward, we remain very encouraged by order momentum that accelerated through the end of June.

In international, SCBA growth in EMEA was offset by softness in APAC. Organic sales in industrial PPE were up 16%, reflecting healthy demand across our core industrial markets and the broad underlying strength of industrial activity. In Americas, strength was driven by demand tied to the ongoing market adoption of our Type 2 safety helmet, the H2. In international, growth in protective ballistic helmets remained robust, benefiting from the ongoing shift toward defense-related spending in Europe. Our organic orders were strong with a book to bill of approximately one time, which is above second quarter seasonal patterns. Year-over-year order growth was broad-based across our segments and product categories. Sequentially, we saw similar growth trends. Moving to slide seven. The progress we're making across the business reflects the strategic actions we've taken to strengthen our portfolio, expand our technology capabilities, and position MSA for long-term growth.

Let me highlight a few examples from the quarter demonstrating that execution in action. First, growth in our H2 safety helmet, which protects workers against vertical and lateral impacts, reflects our commitment to continued leadership in the premium safety markets we serve. Combining the most comprehensive head protection product line in the industry, unmatched brand recognition, and our ability to support large customized orders at scale, we continue to differentiate ourselves in the market and strengthen our competitive positioning with customers. We also continue to make progress with MSA+, where connected solutions represented more than half of portable gas detection growth in the quarter and now account for 14% of total portable sales versus 10% last year.

We're encouraged by the ongoing adoption of MSA+ and early performance indicators of our newly launched ALTAIR io 6 solution, as well as the growth we're seeing in the traditional portable gas detection business. Additionally, the advancement of the MSA Business System continues to improve the way we execute across the company. By creating greater discipline and consistency across the enterprise, our teams are finding better ways to serve our customers and enhance productivity. As expected, positive price cost was a contributor to performance in the first half, reflecting the benefits of strategic pricing actions and improved productivity enabled by MBS. While our continuous improvement journey is ongoing, the benefits of those efforts are increasingly evident in the strength of our operating performance and the financial results we delivered in the first half of the year.

Finally, our strong balance sheet and disciplined approach to capital allocation continue to provide meaningful strategic flexibility. In the first half, we returned $118 million to shareholders, a 45% increase from the prior year, and increased our dividend for the 56th consecutive year. With that, I'd now like to turn the call over to Julie to walk through the financial results for the second quarter in more detail and our 2026 outlook.

Thank you, Steve, and good day, everyone. We appreciate you joining the call. Starting on slide nine with the quarterly financial highlights. Second quarter sales were $503 million, an increase of 6% on a reported basis over the prior year. Sales were up 3% on our organic basis, while currency translation was a 2% tailwind and M&A added 1% to overall growth. GAAP gross margin was 49.5%, an increase of 210 basis points sequentially and 290 basis points over the prior year. Year-over-year gross margin reflects the strengths of our MSA Business System, including strategic pricing, productivity, value-added engineering efforts, as well as favorable transactional foreign exchange. Also included in the quarter was approximately $4 million of tariff refunds, which favorably impacted gross margin by approximately 100 basis points. Adjusted gross margin, excluding tariff refunds, trended at approximately 49% for the first half.

GAAP operating margin was 22.2%, a 410 basis point increase driven by the gross margin expansion. Adjusted operating margin was 24.1%, up 230 basis points sequentially and 270 basis points over last year. Excluding the tariff refund, adjusted incremental operating margin was 52%. We continue to invest in our innovative safety products and solutions with research and development expenses of $19 million in the quarter. We continue to effectively manage SG&A with a year-over-year increase, primarily due to M&A SG&A, higher variable compensation and merit inflation, partially offset by cost discipline. Quarterly GAAP net income increased 37% year-over-year to $86 million, while diluted earnings per share increased 40% to $2.23 per share. Increased sales and margin expansion were primary drivers of earnings per share growth, with benefits from M&A, lower tariffs, share repurchases, and a lower effective tax rate.

On an adjusted basis, diluted earnings per share were $2.40, up 24% from last year. I'd like to review our segment performance. In our Americas segment, sales increased 7% year-over-year on a reported basis. 5% of that was organic. We delivered double-digit organic growth in industrial PPE and high single-digit growth in detection. Currency translation added a 2% tailwind to reported growth. The adjusted operating margin was 32%, a 290 basis point increase compared to the previous year. The margin improvement was primarily due to strong execution, including strategic pricing, productivity, favorable transactional foreign exchange, and lower tariffs, partially offset by inflation. Excluding the tariff refund, adjusted incremental operating margin was 53%. As expected, sales in our International segment increased sequentially, growing 17%. Sales increased 5% year-over-year on a reported basis with a 3% contribution from M&A and a 2% tailwind from foreign exchange.

Organic sales were consistent with the prior year as strong growth in industrial PPE offset a double-digit decline in detection, primarily due to the Middle East conflict. Sales and fire service were consistent with the prior year. Adjusted operating margin was 15.5%, 240 basis points above last year and 500 basis points higher than the first quarter on stronger volume. Margin expansion from a year ago was driven by the inclusion of M&A, productivity, and favorable transactional foreign exchange, partially offset by inflation. Adjusted incremental operating margin was 62%. Turning to slide 10. We generated free cash flow of $83 million, which was 96% of earnings, marking a 118% increase in free cash flow generation compared to a year ago on higher operating earnings and lower capital expenditures. First half free cash flow conversion was 94%.