Prepared remarks
Good day, and welcome to the MSA Safety Second Quarter 2026 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Tyler Herzing. Please go ahead.
Thank you. Good morning, and 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 of 2026 financial performance and 2026 outlook. Steve will then provide closing remarks. He will then open the call for your questions. With that, I'll turn the call over to Steve Blanco. Steve?
Thanks, Tyler, and good morning, everyone. Again, we appreciate your continued interest in MSA Safety. I'm on Slide 6. The team performed well in the second quarter as we continue 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 & 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 1x, 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 7. 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 9 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 an organic basis, while currency translation was a 2% tailwind and M&C 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 strength 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 points 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. And we continue to effectively manage SG&A with the year-over-year increase primarily due to M&C, 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&C, 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. Now 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 points 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&C 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 in 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&C, productivity and favorable transactional foreign exchange, partially offset by inflation. Adjusted incremental operating margin was 62%. Now 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 expenditure. First half free cash flow conversion was 94%. In the second quarter of last year, we made the strategic investment to strengthen our manufacturing footprint at our Detection Center of Excellence in Cranberry Township. Our weighted average interest rate for the quarter was 3.8%. We returned $47 million to shareholders via $26 million of share repurchases and $21 million of dividends. First half capital returns to shareholders totaled $118 million, 45% above first half 2025 levels, driven by increased share repurchases. Now that the Autronica acquisition has closed and consistent with prior messaging, we expect to continue to repurchase shares in the second half, but at a lower rate as we prioritize debt repayment. Liquidity at quarter end was $1.2 billion, and our pro forma liquidity post Autronica is a healthy $600 million. Our M&A pipeline remains robust. Net debt decreased by $33 million sequentially, and our adjusted net leverage at quarter end was 0.8x. Including the debt for the acquisition of Autronica, which was financed using a combination of cash on hand and our revolver, pro forma net leverage as of June 30, 2026, is 1.8x, 0.2x lower than we discussed for post-acquisition leverage in our last earnings call. Let's turn to our 2026 outlook on Slide 11. Our outlook reflects low double-digit total revenue growth in 2026, supported by our expectations of mid-single-digit organic growth, a mid-single-digit contribution from acquisitions and 1 points to 2 points of favorable translational foreign exchange based on current rates. We maintain our mid-single-digit organic growth outlook, which is supported by our second quarter performance and the overall health of our order book. We have a solid pipeline of opportunities in the U.S. fire business and the global detection market for the second half of the year. We continue to monitor and strategically manage the challenges presented by the geopolitical and macroeconomic environment, most notably in the Middle East. As a reminder, sales in the Middle East represent a mid-single-digit percentage of overall sales. We expect a moderate tempering in gross margin in the second half, which reflects the delayed impact of inflation caused by the Middle East conflict as this higher cost inventory is reflected in our income statement. Excluding the impact of any new tariffs, we expect full year adjusted gross margin to be in the 47.5% to 48.5% range. For modeling purposes, our interest expense range has increased to $40 million to $43 million. Full year tax rate and pension income remain unchanged. Starting in May and moving forward, our sales growth contributions from M&C will be included in our organic sales number. As we look ahead, we remain focused on executing our Accelerate strategy and are confident in our ability to deliver mid-single-digit organic sales growth in 2026. With that, I'd like to pass it back to Steve.
Thank you, Julie. I am on Slide 13. Before I close, I do want to take a moment and recognize Dave Howells, who retired on July 1st after nearly 45 years with MSA. His career is a testament to the connection so many of our employees feel to our mission and the important work we do every day. Throughout his career, he played an important role in strengthening customer and channel partner relationships around the world. In his role as President, MSA International and throughout his years of service, Dave has made a lasting impact on our company. So on behalf of all of us at MSA, I want to thank Dave for his leadership, partnership, friendship and many contributions over the course of his career. We're also excited to officially welcome the Autronica team to the MSA family following the completion of the previously announced transaction in early July. It's been great to see the energy and excitement across both organizations, and we're thrilled to have them join the MSA team. I look forward to working together as we begin this next phase of growth. Finally, I'm proud of our team's performance and continued progression of our Accelerate strategy in the second quarter. Thank you to all of our associates for their continued commitment to serving our customers. With that, I'll turn the call back over to the operator for Q&A.
Questions and answers
Our first question comes from Tomo Sano from JPMorgan.
This is Ethan on for Tomo. If I recall correctly, you said last quarter that roughly two-thirds of the AFG-related orders were still outstanding and expected to come. Do you expect the bulk of these to kind of come into the second half? And then when looking at more 4Q, do you expect funding to kind of go back to normalcy? Or will you anticipate a little bit of slippage into 2027?
Yes. Thanks for the question. So if we look at the fire service, certainly, as we parse out the AFG orders from the 2025 grants, they've come slower than we anticipated. Our pipelines got the orders in there, but they really just haven't come through as fast as we thought. I would say as you look at June and July, and I talked about this in the prepared remarks, we did see a really nice uptick and acceleration of the order pace in June, and we've seen the same thing in July. So that's a good indicator for us that should continue. And as far as 2026, the signals on AFG are very positive. FEMA is indicating a strong desire to accelerate the deliveries versus last year. They've done a nice job working with the fire departments on the application process, even though it started later because the government was shut down through mid-May. So the indicators are really strong for them to action on the 2026 grants at a better pace, which I think enables the firefighters and fire departments to do that. So when we look at the demand signals and think about the pipeline for the second half, we're pretty optimistic about where the fire service is going to go. Now it might lean a little further into the second half. But anybody that's followed us for a while understands how this business is lumpy, but we have good confidence there.
And then now that ALTAIR io has been in the field, what has been the initial customer feedback that you've seen? Have you seen any early upticks tracking against your expectations? And it's good to see MSA+ adoption rate of 14% of sales. Do you see this trend continuing in the second half and in the future?
We do. The MSA+ platform, which includes the io 4 and the recently launched io 6, continues to be very well received by the customer base as well as our other solutions within the portable gas detection market. We still saw growth in the legacy portable gas detection business, but as I noted, we're at 14% of total portables with the MSA+ platform. The io 6 early indicator performance is really good, and I expect that to continue to accelerate. This is the first year for this longer-cycle product, so it takes a little bit of time for it to build into orders, but the order pace has been better than we expected so far. So overall, it's going very well. Customer feedback continues to be very positive, and I think this is going to be a growing piece of our business going forward.
The next question comes from Quinn Fredrickson from Baird.
Within industrial PPE and others, could you discuss maybe how much of the strength there was short cycle versus ballistic helmet orders? And maybe any color on what specific end markets are driving the strength in Americas? And any update on electronics supply and cost? I know some other companies have recently flagged that. Is that becoming more of an issue for you? And is that part of the second half moderation in gross margin that you mentioned? Or are you still able to manage through that pretty well?
Sure. If we start with international, we did see really nice strength in the protective ballistic helmet side of the business, which we expect to continue as we've seen activity increase with European government spending more in defense. But we also continue to see nice performance in fall protection. That will continue into the second half. Overall, international industrial had a strong quarter and the pipeline indicators remain solid across that platform. The protective ballistics are part of the story, but we expect the other product lines to do well as well. In the Americas, the underlying theme is strong industrial demand. You think about infrastructure and core industrial investments, including benefits from data centers, and we are seeing a nice build-out as that capital investment plays out. Coupled with the market adoption of the type 2 H2 helmet we've introduced, the outlook is pretty positive. The indicators in July show the same strength we saw in the second quarter. On electronics supply and cost, we are managing through those inputs. We have accounted for some cost increases on the electronics side and have taken additional inventory to ensure continuity of supply. Those two items are on our radar, and I think we're in a good place based on our current forecast.
The next question comes from Jeff Van Sinderen from B. Riley.
Just kind of focusing a little bit on the fire service. Can you remind us where the new NFPA standard stands? And then when do you see the replacement cycle really inflecting there? And turning to gross margin for a moment, what gross margin rate should we carry as sort of sustainable exiting 2026? How are you thinking about that? And with your pro forma net debt leverage now at about 1.8x, how are you thinking about the M&A pipeline? What size deals might you consider and how aggressive might you be?
The NFPA standard: we launched our product some time ago and received approval for the NFPA update. Competitors have also received approval, so that's largely in the rearview mirror and shouldn't be a concern going forward. It did slow some ordering late last year, but not as much as the government challenges. As for the replacement cycle, our pipeline of business is strengthening. You may start to see some of that play out in late 2026, with a clearer inflection into 2027. On M&A and leverage, the leverage range we consider our sweet spot is 1.5x to 2.5x. Being at 1.8x, we remain active in the market. We want to continue to put capital to work and our pipeline is strong. We would consider going above 2.5x for the right deal but would deleverage quickly to remain within our target range.
Jeff, regarding gross margin: we ran about 49% in the first half and are forecasting full year adjusted gross margin in the 47.5% to 48.5% range, reflecting a modest tempering in the second half. That decline reflects delayed inflationary impacts from the Middle East conflict, such as transportation, resins and metallics, sitting in our balance sheet and flowing through over the next 90 to 120 days. This outlook includes the latest tariff impacts announced. So for the year, you should model approximately that range as a run rate.
And our next question comes from Ross Sparenblek from William Blair.
Maybe just start on the fixed side. Can you help parse out the growth there and size the delay in the Middle East order? And do you get the sense that the project pipeline is expanding? If we take out the disruption, any other things you can point to demand-wise on project activity, maybe North America outside of the affected regions? And can you clarify what the tariff impact was in the quarter? And are you seeing any stabilization in resin prices or transportation? Are you making any pre-buy decisions or hedges to offset if this persists and an ability to continue to pass through price as we look into first half 2027?
The Middle East remains challenged and has affected Europe and Asia Pacific to varying degrees. For fixed instrumentation and early buildouts, the EPCs involved in those projects have been impacted, which has slowed activity. On a year-over-year basis, that has cost us north of 1.5 points of revenue in the first half. We are seeing some orders coming in for rebuild and restoration work, but until that activity normalizes, it's hard to be confident about the timing. Regarding the project pipeline outside the affected regions, the Americas are performing well. Detection order pace has accelerated, and we saw nice growth in the second quarter. We're taking care to action those orders but remain cautious until the Middle East situation stabilizes.
Okay. So you get the sense that the project pipeline is expanding. If we take out the disruption, any other things you can point to demand-wise on project activity, maybe North America outside of the affected regions?
North America is fine and order pace has increased. Our fixed monitoring and detection order pace accelerated in the second quarter. We're seeing stronger demand and are focused on executing on that order flow.
And then can you maybe clarify what the tariff impact was in the quarter? It sounds like it was about $4 million and roughly 80 to 90 basis points of margin that won't repeat?
Yes. We received a tariff refund of about $4 million, which had roughly an 80 to 100 basis point favorable impact on the quarter's margin. Any new tariffs are reflected in our margin outlook for the remainder of the year.
Okay. And just quickly on price: are you seeing any stabilization in resin prices or transportation? Are you making any pre-buy decisions on what you can hedge to offset if this persists and an ability to continue to pass through price as we look into first half 2027?
I would say we're monitoring that closely. We have seen some increases and have accounted for those in our second half guidance. Part of the impact is transportation. We're taking actions to ensure continuity of supply.
We have agreements with our customers and suppliers that help manage those costs. We also have index-based pricing in some contracts, and I've reflected those costs in our gross margin guidance based on what we know today.
This concludes our question-and-answer session. I would like to turn the conference back over to Tyler Herzing for any closing remarks.
Thank you. We appreciate you joining the call this morning and for your continued interest in MSA Safety. If you missed the portion of today's call, an audio replay will be made available later today on our Investor Relations website and will be available for the next 90 days. We look forward to updating you on our continued progress again next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.