MSA Safety Incorporated (MSA) Earnings Call Transcript & Summary

Okay. Welcome, everybody, and thank you for joining us for this fireside chat with MSA Safety. We, here at Baird, currently have the stock rated at neutral. We've been kind of picky around entry points. We think of ratings as entry points. And we're, obviously, a big supporter of MSA, their execution around their plan, their strategy for growth. And again, currently, we're neutral, but we're really happy to have CFO, Ken Krause, here to present MSA's story. Also with us is Elyse Lorenzato, Director of Investor Relations. Just 2 things before we kick this off. One is, it is important that you look at our published research for disclosures. And then secondly, if you do have questions, you can e-mail those to me at [email protected]. Or you'll see on your screen, there is a box here where you can submit questions, then myself or Rob Mason will relay those to management, and we will make sure to fit those in. So feel free to send questions along as well. So with that, I think we'll open this up. I'm going to turn it over to Ken Krause, who is going to take a few minutes here, give us an overview and update. And then we'll have time for Q&A. Ken?

Well, thank you, Rick. Elyse, I'll let you go through the introductory slides, and then I can jump in and talk about the business update.

Sure. Sounds good, Ken. So good morning, everybody. Just a quick introduction of MSA before we get into the business update. And as always, as we page through our slides this morning, be mindful of the safe harbor. For those of you that don't know MSA, we are a $1.35 billion company that designs and manufactures safety products and solutions across a very diverse range of end markets and geographies. So we have about 55% of our business here in the U.S. and 45% outside of the U.S. in areas like Latin America, Middle East, China and Europe. Our single largest end market is firefighter safety, and we play in a number of industrial-oriented end markets such as oil and gas, construction, utilities and general industrial applications. We've been executing on our mission of protecting workers around the world for more than 105 years. And each and every day, our products protect tens of millions of workers. And as you can see here on the stock chart, we've created a lot of value while executing on our socially responsible mission. Ken?

Well, thank you, Elyse, and great job introducing the company, as always. Just starting here on the fourth slide with exposure to some of our key global trends. As you very well know by now, MSA, the safety company's focus is safety. And safety has never been more relevant than it is today. Through the pandemic and in a post-COVID world, organizations of all sizes are investing resources into their safety programs and protocols. And there are unique secular trends throughout our end markets from fire service to fall protection, to the connected worker and our product development portfolio, teams are really leaning in to many of these global trends. And one mega trend that has meaning to both MSA and our -- and from an internal and external standpoint is ESG. We help our customers achieve their ESG goals with many of our safety solutions. And transitioning here to Slide 5, you can see many of our safety solutions. And what we benefit from in many of these safety solutions are leading market positions. That leadership position has been enabled through a combination of organic investment where we've consistently invested R&D resources at around 4% to 4.5% of sales, and as part of that, have introduced a number of leading innovations and game-changing technologies in our portfolio. In addition to the R&D area, we've invested heavily in M&A. I wouldn't classify us as a serial acquirer, we're more a strategic acquirer where we go after and source opportunities that allow us to become more meaningful safety providers for our customer set. And so M&A has been a part of our growth algorithm, we expect it to continue to remain a part of our growth algorithm as we move forward as we continue to benefit from a very strong balance sheet. Looking at the financial performance over the last several years, you can see here we've really had some disciplined execution. Starting, first and foremost, at the top line, we've seen a 4% revenue growth over the last 5 years. We -- as we've talked sometime, our focus is leveraging that revenue growth into improved margin profile and earnings growth. And we've been pacing our earnings growth at roughly 3x the level of revenue growth, with incremental margins of about 45%. And going back over the last 5 years, we finished 2020 with an operating margin of about 18%. And I'll tell you, when we started to execute in the pandemic early last year, our focus was, how do we preserve our strong margin profile and how do we continue to partner with our customers to provide innovative safety solutions that will allow them to continue to go to work in their essential workplaces as we all navigated the pandemic. We have a strong balance sheet, as I spoke earlier. Our balance sheet currently has leverage at below 1x on a net debt basis. We've generated over about $1 billion of cash flow over the last 5 years, and we've been able to deploy that cash flow through acquisitions like Globe and Latchways, Sierra Monitors and more recently, our Bristol acquisition. CapEx has been a use of cash flow as well, not a significant or capital-intensive business, but we have used about 2% to 3% of sales in CapEx. And dividends have been important to our shareholder base, and we've continued to share in our cash flow through the use of an increasing dividend. Moving into our business update on 2021. We finished 2020 very strongly. It was a really challenging year, but the team did an exceptional job at executing in a very challenging environment. Despite delivering revenue contraction of 3%, margins were up and cash flow was up considerably as well. We finished the year with a 25% increase in cash flow on a year-over-year basis. Looking at how the first quarter of 2021 is shaping up, and it's looking and feeling very similar to 2020 and that it was a challenging year and those challenges persist into the start of 2021. Q1 is typically our lowest quarter due to seasonality. And and on top of that, we've indicated that Q1 would reflect very difficult comps in 3 areas: first and foremost, our fixed gas and flame detection area, which is really related to how it performs or lags the cycle going in as well as coming out. And due to the energy market headwinds of 2020, we expect the beginning of 2021 to be a challenge when it comes to FGFD. If you remember, the first quarter of last year was one of our best quarters when it came into the FGFD area, and we expect some challenges here to start the year. APR, air-purifying respirators, is the second area. Due to the pandemic surge that we saw starting in the first quarter of 2020, that sets up for about a $10 million challenge on a comparable basis year-over-year. Last, but certainly not least, our industrial PPE products. Due to the fact that we weren't in a recession yet, when we look back at the first quarter of last year, we started to see the slowdown in these markets are hard hats, fall protection, portable gas, more notably in the second quarter of 2020. And so it sets up -- those 3 areas really set up for a really tough comparable period. Furthermore, we've talked about assumptions going into this year. We do expect a stronger second half, but the first half is expected to be a pretty challenging area at times for us. When we look at the business in the first quarter, we've seen impacts in the current quarter or current year as the COVID situation has gotten a little bit worse in our European organization. And we've had labor constraints related to contract -- contact tracing and social distancing in a number of our factories out of abundance of caution. That said, I'm really confident in our ability to navigate through these short-term challenges. Although we do expect a double-digit decline in the first quarter on the top line, it's probably not unreasonable to expect due to some of the challenges I just spoke about. Our market positions are stronger than ever, so we're very well positioned for the economic recovery, which is picking up here in the U.S. as vaccine deployment starts to improve. We've started to see some improvements here in March. The recent order trends have provided cautious optimism, and we're seeing hard hat orders gain momentum, a little bit of momentum, here in March. The environment continues to be difficult in Europe due to the lockdowns. But overall, we continue to plan for, as I said earlier, stronger second half compared to the first half. And we're on track to deliver the cost savings we've communicated on the February call into last year's calls. As we close out the prepared comments here, there's clearly uncertainty in the near term based on the macro environment, but we're confident in MSA's long-term outlook and algorithm for several reasons: first, the secular trend of safety has only improved, and we're investing in R&D and strategic acquisitions to grow our position; second, we have a number of programs in place to drive productivity and continuous improvement in our cost structure; and third, we continue to execute a balanced capital allocation strategy, and our balance sheet is in great shape, so we remain very active on the M&A front. Quite simply, we have a great business, and I'm confident that the strategic programs we're deploying through this pandemic have and will position us to emerge as an even stronger company as the economy improves. Rick, I'll hand it back over to you for any Q&A that you might have or the audience might have as we go through the rest of the session.

Okay. Very good. Let me get back to my screens here. Yes. So Ken, and again, maybe just to remind anybody listening here, again, you can certainly send your questions in through the chat box, so to speak, on your screen. Or also, you can send them into [email protected]. And I can pick those off of my e-mail, and then we -- Rob or I will relay them to management. So please feel free, it's your conversation as well as mine. So Ken, thanks for the update. I wanted to circle back, and you touched upon a little bit of this here in your remarks. But obviously, what's topical in a lot of people's minds here is just the industrial piece of the business. And if I take that and split it apart, I just want to speak to maybe the energy exposure that MSA has, both on the fixed gas and flame side as well as some of the industrial PPE. But obviously, with all the weather issues down in the Gulf, very significant supply base for the world around plastics, oil and gas, lots of shutdowns there, maybe just kind of speak to that from, one, the demand side for your products into that customer base. And then two, the supply side as it might impact your COGS here going forward. Touch on both sides of that, please.

Yes, definitely, there's 2 sides to the question. From a demand-side perspective, it's been a challenge. When we think about the first quarter, January and February were challenging. March is starting to show some improvements. Our order pace has started to pick up a bit. But we're challenged. When we look at the business in the first quarter thus far, we've built a little bit of backlog. We're dealing with the force majeure challenges that many are seeing in Texas due to the shutdown associated with weather. And so we've built a little bit of backlog here in the first quarter associated with our business. But we're starting to see a little bit of pickup in our business here in March, a little bit of improvement, which is good to see as we think about several -- the next couple of quarters to come and continues to reinforce our confidence level and our ability to grow this business as we get into the second half of the year. And so we continue to look at that. But as many others are dealing with, we continue to evaluate the supply chain, the constraints many of us are seeing on the supply chain, the shipping challenges and the freight challenges, inflationary pressures that we're evaluating. But we feel like our business is positioned to perform. We feel like we've got the market positions that remain intact. We feel like the pricing leverage is still in our portfolio. If you remember a few years back when we were dealing with the tariff situation, we were able to pass along multiple price increases throughout the year. So we're continuing to evaluate that and evaluate the pace at which we pull that lever on the pricing mechanism. And so we continue to evaluate that. But we feel like we're positioned well. It definitely is, however, a very challenging environment.

And just on the back side of this, in history, does history suggest that there's a pent-up demand, not just for capital investment around fixed gas and flame, but also around just the scramble to restart? I don't know if that's a headcount issue, but the PP&E side of industrial, as it applies to the energy industry, is that ultimately a positive for kind of a restart and pent-up demand or...

Yes. Pent-up demand is something we always look at. And actually, when I was commenting on inflation, part of the analysis that we're composing is around how much of the inflation is associated with just the pent-up demand that might be in our economies associated with the pandemic that we've been dealing with for the last year versus how much of it is sustainable economic improvements, and so we continue to look at that. But yes, sure, like any other business that has a short-cycle component on it, there's always a pent-up demand associated with it. So as employees come back to work, as projects come back online, as things start to improve, we start to see hard hat sales increase. We start to see fall protection improve. And we start to see portable gas. So those are 3 areas that we are continuing to keep an eye on and take a look at. And I can tell you, the fall protection, portable gas areas and hard hat have shown some improvement here as we get into March. We're seeing a little bit of improvement coming through those markets. I'm not ready to call it that we've moved on from the pandemic by any stretch, but we are starting to see some improvements in those businesses, which, again, reinforces our confidence in our ability to deliver on our growth expectations later in the year.

Yes. Okay. All right. And still, I would think, looking back, third quarter for you, again, somewhat delayed, but the third quarter in 2020 clearly seems like an inflection point or at least a bottom. But it's really -- this becomes a matter of pace of recovery globally for all of your industrial products.

Yes, that's fair. It does. It does. But it's hard to say whether or not the third quarter of last year was a bottom or not. The one thing that you have going against you in the first quarter here is it's always seasonally the weakest quarter. And so when you look at the business and consider the fact that the first quarter is always generally a weak quarter, putting last year aside when you were kind of finishing the cycle and you were at the same time delivering on respirators, this first quarter has been a challenge. And when we look at what we're seeing more recently in the trends, we look at our backlog position, we look at our opportunities to continue to grow this business and use our balance sheet, we have a sense of optimism for the remainder of the year. And so this first quarter, I'll say, has been a challenge for us.

Okay. Fair enough. And Ken, I want to just maybe flip to the fire service business here. Obviously, really carried us in the second half of last year, ticked up very nicely in the fourth quarter sequentially. And maybe we could just speak to some of the funding items that have materialized here over the last 6 months. American Rescue Act here makes the money available, obvious state and local. But can we just walk through maybe some of the dynamics and some of the positives here in terms of cash flowing either at the federal level, state and local level?

Sure. Our fire service business is positioned well. It was a great business for us last year. And it's great to partner with the firefighter and the fire service community to provide them the most innovative products out there. And it's good to see the funding also coming through, as you mentioned. First half of 2020, of course, had the CARES Act. It was about $100 million of incremental AFG funding for COVID-related PPE. December 2020, you saw some additional funding come through, part of the regular annual funding cycle, and it wasn't really incremental, but it was more a part of the annual funding cycle. The first half of 2021 here with this more recent bill, we've seen $100 million of AFG funding includes about $200 million of safer funding, which leads to better firefighter staffing, which really indirectly may support PPE purchases. Our understanding is that it is incremental, and so we're seeing continued support for the firefighter community through this most recent bill. Not only are you seeing the support for the firefighter community, but there are 2 other areas that are top of mind with us. One is the support for state and local municipalities. And I think there's over $300 billion of funding going into those areas. And that indirectly helps provide support for our firefighters because some of the funding that they are receiving to secure MSA product is from state and local municipalities. And so that's really important to us. The other area that we're keeping a close eye on is infrastructure bills and infrastructure opportunities. Our business will benefit. It's our hard hat, our fall protection business. When people are out there working on highways and bridges, they're oftentimes wearing MSA products. And so that's something that we're keeping an eye on as well, Rick.

Yes, yes. Fair enough. Fair enough. And then maybe one thought, and this is kind of a pull from the K here. But I'm just curious, LUNAR is finally in this handheld format. It's going to come to market here. It's one of the areas you've been investing in. Kind of this connected firefighter platform is kind of where the industry is migrating. But maybe talk a little bit about how that product gets to market, maybe the channel and maybe the prospects for that as a platform.

Yes. That's -- it's a good question. It's -- when you look at what we're doing at MSA across the portfolio, it's about how do we introduce game-changing technologies to our customers? How do we provide them the most innovative solutions to keep them safe each and every day? And LUNAR is a great example of it. That business, the firefighter business, as I said earlier, has been a really good business for us. It continues to perform well. And we've made significant investments, both organically and inorganically, most recently with the LUNAR business here and the LUNAR product. We feel like it's a great opportunity to really introduce new technologies that will help firefighters go to work and return safely each and every day. And it's a combination of push and pull through the channel. We've been very active with customers, introducing the LUNAR product. We've been demoing it virtually. We've been demoing it with not only existing customers, but potential new customers. And so we're excited about what can happen with that product. I'll tell you, we're measured. I don't expect a G1 phenomenon, so to speak, in 2021, but it's just another way of getting that touch point and leverage with the customer. And that's what it's about. And it's helped us, even before being on the market, has helped us introduce G1s into competitive accounts. It's allowed us to get access into a competitor's account, which we wouldn't otherwise enjoy. And so having that LUNAR, having that additional tool in the toolbox, has really been beneficial for us getting access into customers which we didn't enjoy previously. And we're looking forward to what that has to offer.

Yes. And does that -- does LUNAR go to market as a network? I mean is it multiple units? Is it going as 1 unit? I mean how does that product actually scale when you think about the ultimate objective for it, meaning outside...

Yes, it's a combination. Maybe, Elyse, do you want to add anything with respect to LUNAR? I know you've spent a lot of time with our strategic groups and steering teams and Safety io and the connected worker, and LUNAR is one of those areas. So maybe, Elyse, maybe why don't you offer a little bit in terms of color and how we're introducing that in the marketplace?

Sure, absolutely. So the goal with LUNAR is really to build this ecosystem of products in firefighter safety. And so LUNAR can be used with the G1 or without the G1, so it can be used on its own. As Ken mentioned, it's an advantage for competitive accounts or it can be used with all the other MSA products to build this ecosystem. And so the way it goes to market is that you would have a fire department purchase multiple LUNAR devices so that each firefighter can use the LUNAR device as a search-and-rescue technology. And so that's kind of the benefit of having the network of LUNAR devices. On its own, LUNAR can, of course, also be a thermal imaging camera, but the benefit is really to have this network of devices to drive greater accountability in the fire ground.

Okay. And is this cloud based? So again, I can go in with 3 units or do I have to have a whole on-site network with a base station and -- no?

It's cloud based and uses cellular technology.

I see. So it's -- okay. So it's scaling. Okay. So it's...

Definitely.

Okay. Okay. And just to maybe close that loop for a second, this connected worker strategy that's kind of moving through the industry, quite frankly. This is kind of the fire service product platform here or platform, but then on the gas detection side, maybe just update us a little bit around this connected worker strategy around the gas detection side of the business.

Yes, sure. I'll add a little bit of color there. And Elyse, you can comment on it as well. But I mean, we've got programs that are aimed at both the portable and the fixed gas and flame detection areas of our business. And notably, we've been talking a lot about Safety io. We've been talking about our new ALTAIR products as well. And so when we look at our product set and the things we're doing to introduce technologies, remote monitoring and connectivity is a really big part of what we're doing. And I don't know that we've seen a big uptick yet in our business in terms of what the impact has been on our revenue line today. But we feel like, as we think about the future, that this is where the puck is going. And we're trying to get ahead of where the puck is actually going. We've enjoyed a strong leadership position that's been enabled through our sensors that we've proprietarily innovated around and developed. And we feel like as we think about the future, how do we remotely monitor, how do we leverage the technologies that we've put in place over the years? It's a really big important part of the direction we're headed with gas detection. And so I don't know, Elyse, do you have anything additional you want to add on that?

Sure. I think, Ken, you bring up a really good point on leveraging the technology, and the connected worker is a great example of how we're able to leverage similar technology across our end markets. So the backbone of Safety io and the remote monitoring system, it's a similar technology that's used for LUNAR and the fire grid. So you really see that safety expertise and that cloud technology being leveraged across different end markets.

Okay. Yes, good point. Excellent.

Ken and Rick, maybe this is a good point to jump in with a question from the audience around the technology. But the question was, Ken, if you could just discuss the vitality index in MSA? And how does it affect your ability to implement price increases on new technologies being introduced versus how you treat price increases on legacy products or products that don't have a -- have not had a technological change?

Sure. When we look at -- there's a number of things that we look at with respect to that. But starting, first and foremost, with the sales vitality index. I want to say 35% of product sales are from products we developed and launched over the last 5 years. So of course, new innovations oftentimes lead to price opportunities and pricing opportunities in our business, and we've seen that with the SCBA, with fall protection, for the whole host of new products that we continue to launch in the marketplace. And so we certainly have that benefit. But we also have the benefit of the existing portfolio in the market. And when we think about our opportunity to introduce pricing, it has to be based upon the value that we're providing the customer. And we feel like those products that we have in the marketplace, whether it be some of our gas detection products that might be -- have been in the market for a couple of years or other products, they offer lowest total cost of ownership. They -- we respond in -- with -- on hard hats, we respond with some of the smallest slot sizes, the widest amount of colors, logos, most comfortable ratchet system. And so we have all these other things that we regularly compete upon. And even though it may not be a brand-new product, it has an innovative aspect to it that we can price appropriately for the customer base, and so we're able to then leverage that through the value chain.

Yes. There was an extension to that question as well, just around pricing. Can you confirm you have not taken price increases in response to the, I guess, supply challenges or force majeure specifically?

Yes. It's something we're looking at, Rob. We did introduce a price increase, our regular price increase, and we have regular price increases throughout the year that will -- we will be introducing from time to time. But we're evaluating right now the inflation and what the impact is of inflation, of force majeure, of supply chain constraints all throughout our business. And so we're very active in evaluating and determining how in the most appropriate way to introduce those price increases.

And is that across the board, Ken? Is that more of an Americas dynamic right now? Or is that kind of across the board? Because you have a separate pricing strategy that you're working your way into in Europe. And is this -- how does this complicate that process?

Yes. No, it's interesting. It doesn't complicate it all that much.

Okay.

When we look at pricing, it's always a strategic program for us. Whether we're in an inflationary cycle or not, we're always looking at pricing as a really important way of managing our margin profile and ensuring that we're receiving the right returns on all the innovations that we're providing the marketplace. And so I wouldn't say that it's complicating the matter. I would say the things that we've done over the last several years have built up our competency and our DNA when it comes to pricing. And so we're able to respond and change things in a very agile manner to respond to changes in the inflationary or the supply chain. And so I don't know that's complicating things all that matter. We are certainly looking at this on a global scale because it has a global implication. I mean electronics coming out of China, freight restrictions around the world, resin prices, that all has some global aspect to it. When we think about commodity prices and commodity, the input costs associated with the commodities, it's all -- it's very much a global phenomenon and something we're continuing to evaluate on a global standpoint.

Okay. And let me just dovetail into, maybe first, just the International margins here, just great progress on your goal there, your multiyear goal for international. And maybe one of the questions that I have there is, give us a sense of the 2 or 3 big pieces with which you've been able to move the needle around Europe margins. And maybe let's just start there for a second.

Yes. We've made great progress. The team is doing an exceptional job when it comes to improving our margins in the International segment and most notably, in our European operating segment. The team is executing around a number of different initiatives in that segment of our business. Starting, first and foremost, on the pricing side, as I spoke earlier, pricing channels optimization has been a really big important part of what we do in Europe and how we've improved our margin. The second area that we continue to look at and evaluate is our shared service functions and our back-office functions. I would say we're very early on in that endeavor with centralizing our back-office functions in a shared service model. And so we have a tremendous amount of leverage and opportunity going forward. And so it's really all throughout the P&L, and that's what you saw last year. When you look at the financial performance in international, you saw a good lift in margins. And that lift was really spread pretty evenly throughout gross profit as well as SG&A despite having a really challenging top line and revenue performance. And so we feel like -- we feel well positioned to continue to improve margins. You're not going to see several hundred basis points of margin each and every year, but you're going to see our spirit of continuous improvement really come to light in that area of the business as we move forward. We feel like there's more room to go. It was great to see 17% or so margins that finished last year in the fourth quarter to finish the full year at 15%. We feel like it was a successful year, but we're not done yet. We've got a lot of good programs that we're still executing around that should drive even more margin improvement in the years to come.

Yes, yes. Is there a number that you could hang on that? I mean, is that -- again, given that you pull some corporate out, you have kind of the Americas in the mid-20s. You've got International at 15% with room to go. Is International just ultimately, without putting a timeline on this, but is it a 20% kind of margin business? Is there that kind of runway?

I'm a little reluctant to put a 20% target out there for International at this point. But what I can tell you is that when we look at our overall business, we finished the year last year at 18% operating margins. And as we think about how we started the year last year with the pandemic, our focus was preserving our margin profile. And we successfully did that in 2020 and reported an 19% operating margin despite having a 3% decline in revenues. And so as we think about the future, we feel like that sets a really nice floor for us and allows us to then reach our longer-term, more aspirational margins, makes it more realistic in our expectations to achieve those margins in the next several years. So as we think about the business, getting this business to a 20% operating margin over the next several years, it's something we, quite frankly, talk about often at MSA and is something we're looking at how we can enable and do in the years to come.

So I like -- I guess the thing that I think about, if I look at the Americas business, you see the fall-through perhaps on the Americas business, call it 35% fall-through, obviously, volume driven for the most part. I mean there's lots of things that play into that new products and pricing and all that, but you see that kind of drop-through. So I think of it, to simplify the story, I think about the Americas fall-through of being 35% volume driven. And then you've got the International earnings power where you can do some self-help there that -- as we saw in the fourth quarter, it's not all volume driven. But for that business, it would seem to hold more opportunity. In addition to volume, it would seem to hold more opportunity, that's why I was curious if that piece of the business can get to 20% over time. But...

Yes, that's a fair observation. If you look at the slide I had earlier, we had 45% incremental margins, I think, going back 5 years, and we've consistently talked about 30% to 40% incremental margins. So that delta really comes from a lot of the self-help programs. When we think about International being an area, I mean, I still think there's room in the Americas. You do have a fairly optimized business segment there. But there's things we're doing around digital marketing, being more efficient in accessing our customers. I think we've done a great job there, and the team is doing a good job, but there's more that we can do on the margin to really drive through higher margins, higher incrementals going forward.

Okay. Yes. And Ken, let me ask you a question, perhaps you can either remind us or tell us. When I think about the gross margin internationally versus domestically, I'm trying to maybe get at, what is that delta look like? I mean is a lot of the work -- if we were to go to 15% to 20% internationally, how do you look at that as a gross margin story relative to, like you said, some of the shared services? Where does the bigger opportunity reside internationally?

Yes. The opportunities are really throughout the P&L, Rick. When you look at the opportunity in gross margin as well as SG&A performance, it really is pretty evenly split across the portfolio and across the business. So we feel like there's an opportunity to pull levers up and down the P&L to improve that margin profile. But looking at gross margin, I think you're right. Not only in -- I think not only in our International business, but I think across all of our business, there's a great opportunity to do more on the gross margin front. And specifically when it comes to operational excellence, we're really ramping up a lot of effort around our manufacturing capabilities. And you heard us talk last year about relocating our plants and forming a center of excellence. And so we're doing a lot around sourcing, around manufacturing optimization and a number of other things that will allow us to improve our already strong gross margin levels at the corporate level. We've consistently had a gross margin of around 45-or-so-percent. I feel like there's an opportunity to see that lift in years to come.

Okay. Okay. Fair enough. And I just wanted to circle back to one thing, and I know there's a question from the audience here that we need to get to, too, it's kind of a random one. But just very quickly, when you're referencing around first quarter and we entered the first quarter with some of these kind of known risks, the tough comps and the slowing ramp, the COVID issue perhaps, but when you look at the first quarter, as you see it today, does it cause you to recalibrate your full year expectations? And it's not -- this isn't -- you guys don't give guide, but how does that fit into your internal plan when you say, okay, here's first quarter, here's what we got to do on the cost side? Or how are you viewing that relative to the full year at this point? It's still early, but...

Yes. I'll tell you, it's still very early on in the full year, and there are a lot of factors at play that will have an impact on the overall performance for the full year. But we still feel like we're positioned extremely well to deliver the year and improve the -- and deliver improved performance in 2021. As I said, there are a lot of factors, but we've got -- we continue to maintain a very strong market position. We've got a strong portfolio of new products. I continue to look at our March performance and things start to see -- we're starting to see a little bit of improvement here in March. I feel much better today than maybe I did back in January around the vaccine rollout, especially in the U.S., which is our largest market. And so there's a lot of things that point to reason to be confident in our ability to deliver the year. But at the same time, there are still a lot of unknowns, and things change on a daily basis. And so -- but I feel like we're positioned well to control the controllables and continue to improve this business.

Okay. Okay. Fair enough. And from a cost perspective, those levers that you do have, have you maybe pulled a few of those a little bit here? With a slower start on the top line, I presume there's a little bit slower start here on some of the cost kind of factoring back into the business.

Yes. We've talked consistently on the cost side about restructuring, and we've been active restructuring to $15 million or so out this year on restructuring. We've also talked about making sure that we pace the level of costs coming back into the business with the demand outlook. And so we're certainly being mindful of that and continuing to pace that. And so yes, margins continue to maintain great importance for us, and we continue to manage our cost structure in line with the demand outlook.

Yes. Okay. All right. Rob, was there anything else you...

There was one -- actually a couple that maybe I'll try to blend these together regarding your balance sheet, cash flow. One, just simply, what's your financial capacity for M&A? So maybe speak to a leverage ratio there. And then the second one gets that -- there's the product liability charges, and I think the question is referencing the noncash aspect, the accruals, how much longer those will persist? But then relatedly, the net cash impact you see as you go forward. I know you've outlined some cash flow funding streams to take care of that, but what's an annual number to think about from a cash flow standpoint? And then I think the noncash portion of that.

A lot of questions there, Rob, but I'll try to handle all of them.

I tried to combine all those together.

First and foremost, leverage in the business. Currently, we're levered at around 1x on a net debt basis. We are positioned well to do M&A. Going back several years for Latchways and Globe, we levered up to 2.5 to 3x. Going back to General Monitors, we were north of 3.5x. And so we've got a past record and track record of using the balance sheet to grow the business, and we intend to do that, and we intend to use the balance sheet strategically to bring on acquisitions that make sense for our business model and fit with our mission of safety. And so we're continuing to keep that front and center. As far as product liability goes, we continue to manage the product liability. I'll tell you, it's hard to put a fine point on what that expense will look like in future years. We do our best to put on as comprehensive of a liability as we can, and going out to the end of the curve is really important for us when it comes to estimating our product liability associated with legacy products that we've sold. We have -- we do have assets that we've set aside, cash, marketable securities and other assets, insurance assets that we've set aside to service these liabilities for years to come. But it's really hard to put a fine point on what the cash use, what the expense will be associated with product liability in years to come. What I can tell you is that MSA LLC, which is the entity that is responsible for the trauma liability exposures, it does not have access to our credit facilities. It's set aside. It's separate from our overall capital and financial structure for MSA. And so we have set that aside. But we feel like, again, to leave this point, we feel like we're positioned well. We feel like we've -- we're managing through this. And we feel like we're positioned to continue to work our way through this. But it's hard to put a fine point and an estimate on what this will be in years to come. We've done our best and our financial statements represent what we think is what the outcome would be.

Okay. Very good. Just one last thing, Ken, and I think we'll close it down. But there was a question just referencing one of your slides. It spoke to -- you had a slide in there, if I recall, that was 5-year revenue CAGR was 4%. And this is kind of saying, "Hey, what's the probability here that over the next 5 years, your revenue with new products can be closer to a 6% number?" I mean it's going to pick up here as you look forward.

Yes. It certainly could, but it depends upon a number of factors that are external to the business. It -- I don't think any of us 5 years ago saw the pandemic that occurred last year. And so that certainly had an impact on that 4%. I think prior to last year, I think that CAGR was 5% to 6%. And so I think as we go forward, there certainly is a pathway to get to that mid-single-digit growth going forward. And we feel like not only R&D will play a part, but M&A will as well, and so that's been a part of the equation, and we expect that to be a part of the equation going forward.

Got you. Okay. All right. Well, we are out of time. Thank you, everybody, for joining us. Ken, thank you for the presentation. Elyse, thank you very much. And contact any of us at Baird, Rob or myself, if you want some research or a quality model. So with that, okay, thank you for joining.

Thank you. Have a great day.

Thanks, Rick. Thanks, Rob.