Earnings Call Transcript - MSA Q4 2020

Operator, Operator

Good day, and welcome to the MSA Fourth Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Once again, we apologize for the technical difficulty on our end. Again, anyone listening on the webcast can dial 412-902-6599 or 844-854-4415. Please note, this event is being recorded. I would now like to turn the conference over to Elyse Lorenzato, Director of Investor Relations. Please go ahead.

Elyse Lorenzato, Director of Investor Relations

Thank you, Drew. Good morning, everyone, and welcome to MSA’s fourth quarter earnings conference call for 2020. Joining me on the call today are Nish Vartanian, Chairman, President, and CEO; and Ken Krause, Senior Vice President, CFO, and Treasurer. Before we begin, I’d like to remind everyone that the matters discussed on this call, excluding historical information, are 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 risks, uncertainties, and other factors that may cause our actual results to differ materially from those discussed here. These risks, uncertainties, and other factors are detailed in our Form 10-K filings with the SEC. MSA undertakes no duty to publicly update any forward-looking statements made on this call, except as required by law. We’ve included certain non-GAAP financial measures as part of our discussion this morning and the non-GAAP reconciliations as well as our Q4 press release are available on our Investor Relations website at investors.msasafety.com. With that, I’ll turn the call over to Nish Vartanian, Chairman, President, and CEO.

Nish Vartanian, Chairman, President, and CEO

Thanks, Elyse. And good morning, everyone. I appreciate your interest in MSA. I want to start today by thanking the MSA team for their resiliency as COVID changed the way business is done. I'm tremendously proud of the efforts of our team, who focused on our mission, our people, our customers, and communities. I've often said our greatest asset is our employee engagement and commitment to our mission of protecting workers’ lives. I've never had greater appreciation for what our company contributes to society each and every day. We finished a challenging year with a very strong fourth quarter, realizing record high revenue of $388 million and double-digit improvements in free cash flow. From a full-year perspective, our revenue declined 3%, with strength in our fire service market and air purifying respirators offset by weakness in industrial products. But there's no question that diversification of our product provided support through the downturn. Despite the revenue challenges in certain areas, our annual adjusted operating margin reached 18%. That's up 10 basis points from a year ago. We’ve talked about our long-term aspiration to get our operating margins into the 20% range over the coming years. Our performance in this challenging environment provides me with a great deal of optimism for the future. With that in mind, there are three key areas I'd like to discuss today that support my confidence. First, MSA’s innovation engine is stronger than ever. We're launching safety technologies that solve our customers’ toughest safety challenges. Second, our continuous improvement culture across all areas of our businesses is yielding strong results, especially in the International segment. Third, we're committed to using our balance sheet to make strategic acquisitions that strengthen our leadership positions in key markets. Starting with the first area, MSA's innovation engine and R&D pipeline. The accomplishments of our founders back in 1914 reflect what happens every day in MSA's product development labs around the world. At the turn of the century, they partnered with Thomas Edison to develop a battery-powered miners’ cap lamp. This electric lamp helped reduce mining fatalities by 75% over the next 25 years. That same passion for innovation exists throughout MSA today, as we continue to invest in new product development to drive organic growth. We do this to provide our customers with leading safety technologies that solve complex challenges. In 2020, we invested nearly $70 million in R&D to bring the most advanced safety solutions to our global customer base. One example is our new Advantage 290 reusable respirator. The Advantage 290 is the first government-approved reusable respirator designed without an exhalation valve. It filters both inhaled and exhaled breath. It gives healthcare workers increased flexibility, adding yet another option to the available supply of respiratory protection, and it can be stored for long periods. The work we're doing in the fire service is another great example. The MSA’s Connected Firefighter platform includes the breakthrough G1 or M1 SCBA as well as our soon-to-be-launched LUNAR system. LUNAR is a handheld device that uses cloud technology to deliver breakthrough fire scene management capabilities for incident commanders. It also uses real-time direction in distance data to help search and rescue teams locate a separated firefighter. And it's a personal thermal imaging camera. While system-oriented products like LUNAR can have a longer adoption period, we continue to be very excited about the future possibilities that this technology has to offer on a global scale. Quite simply, our goal is to protect firefighters from head to toe. The same passion for innovation that led to the G1, the M1 and our LUNAR system is being applied to firefighter software solutions, helmets, turnout gear, and boots. At the end of the day, it comes down to this: We understand our customers at a deep level. We listen, watch, and learn from them. With this knowledge, we use the latest technology to keep them safe, solve their problems, and simplify their day. Looking beyond the fire service, I'm also encouraged by the trends associated with our safety mission, a mission I believe is more relevant than ever. As an example, in one of his first acts in office, President Biden signed an executive order calling on OSHA to issue guidelines related to COVID-19 in the workplace. This is reflective of where COVID is bringing safety to the forefront of the national discussion. The second area I want to highlight this morning is our continuous improvement culture and how it's yielding strong results across our business. An example is our International segment. Our entire international team continues to execute a playbook focused on three areas: driving growth in select markets, optimizing our channels approach, and delivering efficiencies. We've been executing on this international playbook for three years now, and it's encouraging to see the continued margin improvement. As an example, our long-term goal was to improve operating margin in the International segment by 500 basis points over 2017. In 2020, the International segment’s operating margin rose to 15%. This is a 270 basis point improvement compared to 2019 despite the 3% revenue decline. And to date, we've achieved 400 basis points of segment margin expansion. With the pipeline of programs we have in place, we're very confident in our ability to surpass our original goal over time. And that leads me to the third area I want to discuss today, which is our balance sheet to make strategic acquisitions that strengthen our leadership position in key markets. In January this year, we closed the acquisition of Bristol Uniforms. Bristol is the UK leader for firefighter turnout gear, and so Bristol enhances our position as a global leader in fire service PPE. This acquisition builds on our 2017 acquisition of North American turnout gear leader Globe. So it's a great fit strategically and culturally. It also expands our footprint in a defensive area of our portfolio. Our fire service business increased 10% in the fourth quarter of 2020, even in the face of the pandemic. So we're very excited to welcome Bristol to the MSA family and look forward to serving our European and international customers with an even greater range of head-to-toe solutions. To summarize, there are three key areas that give me confidence in MSA's future. First, MSA's innovation engine is stronger than ever. Second, our continuous improvement culture across all areas of our business is yielding strong results, especially in the International segment. And third, we're effectively using our balance sheet to make strategic acquisitions that strengthen our leadership positions in key markets. Our integration plan for Bristol is well underway, and we continue to move forward with an M&A pipeline focused on evaluating assets that align with our safety mission. With that, I'll now turn the call over to Ken to take you through our financial results, and he'll also give more texture on the trends and assumptions we're making for 2021. Ken?

Ken Krause, Senior Vice President, CFO, and Treasurer

Thanks, Nish, and good morning, everyone. I'll start the discussion this morning with annual financial highlights centered on our growth, profitability, and cash flow before getting into more detail on the fourth quarter. First, looking at overall growth, I was very pleased to see the team execute well and deliver record revenue for the fourth quarter despite the challenges we all faced throughout the year. Second, our profitability was strong as adjusted operating margin expanded by 10 basis points. This equates to a 14% decremental operating margin. We delivered on our goal to manage decremental margins at a lower rate than our incremental margins, improving overall operating margins to 18% on lower revenue volume, which is another step in the right direction for reaching our long-term margin aspirations. And third, we generated more than $200 million of operating cash flow in 2020, which was 25% higher than a year ago. Through the downturn, we've continued to execute a balanced capital allocation strategy focused on growing our business and returning value to our shareholders. We invested $49 million in CapEx projects. We paid down $44 million of debt. We funded $67 million in dividends to our shareholders and deployed $20 million for share repurchases. And just last month, we deployed approximately $60 million for the acquisition of Bristol Uniforms. Our net leverage continues to track below 1 time as we enter 2021. So although 2020 was a year unlike any other, our growth, profitability, and cash flow demonstrated the resilience of our business model and the disciplined execution of our teams around the world. Now, let's take a closer look at the financial results in the quarter. Let's start with a focus on growth. Quarterly revenue was a record high of $388 million, growing over 3% from a year ago or 2% in constant currency. From a geographic perspective, revenue increased 5% in the Americas segment and decreased 2% in the International segment in constant currency. As I had indicated on the October call, we entered the third quarter with a large backlog in SCBA and air purifying respirators. We started to receive recovery in our business, especially in the fire service, in the latter part of Q3 that carried into Q4. Order activity was healthy to finish the year, and we exited the quarter with a very healthy book-to-bill ratio and an overall backlog that was consistent with the end of Q3 despite the record invoicing. The fire service market was a key driver of results in the fourth quarter on strong SCBA growth. We continue to convert competitive SCBA accounts in the U.S. and had good order flow in key geographies around the world, including Germany, China, and Latin America. While we've had production constraints at Globe due to COVID, we continue to focus on driving operational improvements, and it's great to see continued wins with key pillar cities in the United States. Firefighter safety is a resilient business and has performed well through various business cycles. We continue to extend the breadth and depth of our market position in fire service through organic and/or inorganic investments like the upcoming launch of LUNAR and the recent acquisition of Bristol. Shifting gears to the employment-based industrial PPE products, which were down 4% year-over-year after declining by 25% in the third quarter. While we are most likely not out of the woods just yet, it was good to see such sequential growth versus the third quarter. Our FGFD business was down 7% in the quarter on tough comparisons in both the Americas and International segments. For the full year, we had a 2% decline in FGFD, reflecting the support from the recurring revenue streams in the product line that we've discussed with you previously. With that said, while we have seen a recent uptick in oil prices, which could provide some support for projects going forward, we have a challenging comparison to start the first quarter of 2021. Revenues from air purifying respirator lines increased 32% from a year ago. As expected, we have largely delivered on our backlog from the pandemic surge of 2020, and we are well prepared to pursue new opportunities with healthcare and government end markets. In the near term, we are planning for a difficult comparison in the first quarter of 2021. If you recall, our Q1 results a year ago included approximately $10 million of incremental revenue from APR at the onset of the pandemic. The landscape continues to evolve as stimulus packages are allocated to enhance PPE supply for workers in a range of industries, and we stand ready to help fulfill our mission of protecting workers’ lives and health. Turning to profitability and earnings. Gross profit declined 350 basis points from a year ago as we incurred about $11 million of higher costs in the quarter. $5 million of these costs are associated with lower throughput in certain factories and $6 million is primarily associated with inventory-related charges, which we don't expect to continue into 2021. To a much lesser degree, the less favorable revenue mix was a headwind to margins. These items had the most significant impact on our Americas segment margin in the quarter and for the full year. SG&A expense of $76 million was down 10% from a year ago. We delivered $6 million to $8 million of savings from previously executed restructuring programs and discretionary cost savings in the quarter associated with reduced travel, controlled hiring, professional services, and other costs, and $3 million of savings from variable compensation on a year-over-year basis. Similar to past cycles, we invested in restructuring programs throughout 2020 to improve our margin profile in the downturn and to position MSA for strong incremental margins during the recovery. We incurred $9 million of quarterly restructuring expense to accrue for cost reduction programs related to footprint rationalization and business model optimization, primarily in the International segment, where operating margin is up 270 basis points for the year. Together with the programs we've discussed throughout 2020, we expect to deliver approximately $15 million of savings across the income statement in 2021 and annual savings of $20 million thereafter. These savings will partially offset the impact of variable compensation resets and other discretionary costs coming back into the P&L in 2021. Quarterly adjusted operating margin was flat with the prior year at 17.3% as the cost discipline in SG&A was offset by the gross profit headwinds. International margins were up 320 basis points and were 17.5% in the quarter, which very much reflects the results the teams are driving in pricing and cost reduction initiatives. Americas’ margins were down 260 basis points and were 20.8%. The $11 million of higher cost in gross profit that I mentioned a moment ago was incurred primarily in the Americas segment. Pricing is holding up well, and we expect improvements in this segment margin going forward. Just stepping back and looking at margins over the long term, it is good to see improvements each and every year in operating margins since 2015, despite some challenging economic cycles along the way. From a cash flow and capital allocation perspective, quarterly free cash flow conversion was well north of 100%. We saw strong performance across working capital, which declined 320 basis points as a percentage of sales. As I had indicated on the October call, we were planning for improvement in the inventory balance through year-end. Our strong balance sheet and inventory position at the end of the third quarter enabled us to deliver record high revenue in the fourth quarter. We continue to focus on improving our performance in AR and AP and are seeing very strong results on that front as well. Consistent with past years, we completed our annual cumulative trauma evaluation in the fourth quarter. As part of that review, we reflected changes in underlying assumptions in our model that increased our product liability reserve and resulted in a pre-tax charge of $34 million, net of insurance recoveries on the income statement. While the timing of cash flows for product liability and insurance receivable varies from quarter-to-quarter in MSA LLC, we've been successful in establishing cash flow streams that have allowed us to fund these liabilities without a material impact on our capital allocation priorities. For example, over the past five years, our average cash conversion has exceeded 100% of net income, both with and without the impact of product liability and insurance receivables. We continue to focus on growth as our primary capital allocation priority, most recently completing the acquisition of Bristol Uniforms in January. We're excited about the opportunity to build our position in turnout gear and expand MSA's addressable market globally. We're also well-positioned to realize a range of synergies from the transaction over the coming years. From a financial standpoint, the acquisition provides attractive returns and aligns with the criteria we've shared in the past. While we are in the midst of finalizing our purchase accounting for the acquisition, we expect earnings accretion in the first year of ownership, excluding acquisition-related amortization of about $0.03 to $0.05 per share. With a closing date of January 25, we'll recognize just over two months of Bristol results in our first quarter 2021 financial statements within our International business segment. The acquisition does not have a material impact on our leverage. So we remain very active in pursuing opportunities as well as funding organic R&D and CapEx projects that drive long-term growth for MSA. As we turn the page to 2021, we're operating in a very dynamic environment. There are a number of evolving macro-level factors that will have an impact on our revenue outlook in 2021. These factors include, amongst other things, the effectiveness of the vaccine rollout, risk of additional COVID lockdowns, the pace of economic recovery, as well as the potential for government stimulus. While the outcome is certainly hard to predict, the steps we are taking to improve our business model position us to emerge as a much stronger company as macro conditions improve. Our investments in organic and inorganic growth programs are driving an improved market position, and that will be beneficial in helping us return to growth as we see conditions improve. Again, our ability to deliver revenue growth in 2021 is very much influenced by a range of external factors. As a result, we are approaching the first half cautiously and are positioned for a stronger second half of 2021 compared to the first half. With that said, we remain committed to executing our strategy and advancing our mission, which has never been more important. We remain confident in our ability to maintain and grow our market share positions, improve our margin profile, and drive strong cash flow performance. With that, I'll turn the call back over to Nish for some concluding commentary. Nish?

Nish Vartanian, Chairman, President, and CEO

Thanks, Ken. The team delivered a strong Q4 with record revenue and strong working capital improvement. Throughout the year, we funded the R&D portfolio and strategic CapEx projects. We also executed on restructuring programs to make sustainable improvements in our business model. And most recently, we completed an acquisition that positions us as a global leader in firefighter turnout gear. To wrap up, I'm very confident that MSA is well positioned to advance our mission and create value for all of our stakeholders. At this time, Ken and I will be glad to take any questions you may have. Please remember that MSA does not give guidance. Having said that, we'll now open up the call for your questions.

Operator, Operator

The first question comes from Stanley Elliott of Stifel.

Stanley Elliott, Analyst

Congratulations on a strong finish to the year and on the progress made internationally. I know you've been focusing on cost management. Was there any impact from the mix? I noticed that fall protection improved slightly with better flow-through. Additionally, you mentioned the potential for an extra 100 basis points in margin. Do you have everything ready to achieve that final piece beyond the initial target you set? Could you help clarify that for us?

Nish Vartanian, Chairman, President, and CEO

Sure, we have been working on this since setting our goal in 2017. Initially, we experienced a slow start because some programs take time to implement and see results reflected in the profit and loss statement. Now, we are witnessing the results of the hard work put in during 2018 and 2019, which continued into 2020. We believe we are well positioned to achieve the final 100 basis points needed to reach our goal of 500 basis points. Once we accomplish this, we will establish new targets for the future. The fourth quarter of 2017, which showed an operating margin of about 17.5%, encourages us that we can exceed our initial targets. We will set those goals at a later date, but we feel confident about achieving that final 100 basis points.

Stanley Elliott, Analyst

Great. And then as we're sitting here today, I know you don't want to give specific guidance, but looking at kind of what's in the orders coming down the pipe or in the backlog, do we think mix is actually going to be a tailwind in the coming year?

Nish Vartanian, Chairman, President, and CEO

When things improve, Stanley, certainly when the economy comes back. As Ken mentioned, we're looking at the second half of the year to see that improvement, especially around the PPE products. That's when you see some strong mix coming, right, the hard hats, portable gas detection, some of the fall protection products. You get those industrial PPE products coming through the pipeline, and that mix certainly helps our margin profile. So there could certainly be some wind to our back there. We're very confident we're going to see that. Never before do I remember us having a better position in the marketplace, a better pipeline of products coming through our NPD process, our sales, our marketing teams, customer service, training, and all the customer-facing parts of the organization. We are just doing a fantastic job in executing. So when the customers get back in a position to start buying back in quantity numbers, I think we're going to be positioned real well going forward. And Ken, do you want to add to that?

Ken Krause, Senior Vice President, CFO, and Treasurer

Yes. I would like to emphasize a couple of key points regarding the first quarter and possibly the first half. Firstly, concerning our employment-related products, we've observed some improvement in the fourth quarter, but it may be premature to say we are completely past the difficulties. As a reminder, we didn't experience a recession until around the second quarter last year, allowing our business to perform relatively well in the first quarter. This creates a challenging comparison for the employment-related products and also for FGFD, as I mentioned earlier. Additionally, our respirator line is also transitioning out. On the brighter side, we have Bristol coming in. There are several factors to consider, but since we didn't face the recession until later and the pandemic had minimal impact on our business until the second quarter, the first quarter may present tougher comparisons.

Stanley Elliott, Analyst

Great. And then lastly for me, are you all seeing anything on the supply chain side that should be of concern? I mean, you've done such a nice job of adding sensors and chips, et cetera, into the products to make them more advanced. With kind of the dynamics there, should we be concerned about the availability to get those sorts of technological products?

Nish Vartanian, Chairman, President, and CEO

Good question, Stanley. We're monitoring the situation closely. There are some tight spots in the supply chain related to certain chips and components. However, this has not affected our production, and we haven't encountered any production issues as a result. We are keeping a close eye on it and have managed to navigate through these challenges. We expect to continue doing so in the future.

Operator, Operator

The next question comes from Richard Eastman of Baird.

Richard Eastman, Analyst

Yes, Nish or Ken, could you perhaps just address maybe and throw a little bit more color around your backlog comments? At the end of the fourth quarter, were you referencing the strength in the backlog around SCBA, fire service? Or just generally speaking, how does the backlog look in the fixed gas and flame business as well?

Nish Vartanian, Chairman, President, and CEO

Sure, Rick. I'll start, and Ken can provide additional insights. As you mentioned, the fire service product backlog saw a significant increase as we entered the fourth quarter. We successfully managed to get products out, and we also began January with a strong backlog of breathing apparatus. The turnout gear backlog remains strong, although we faced some production challenges related to employee safety and contact tracing, which affected our output in the fourth quarter. We aim to rectify this as we progress through 2021. In the fixed gas and flame detection area, the backlog decreased slightly, aligning with our expected natural rotation. Historically, this business lags during a recession and takes time to recover afterward, which was evident as we saw a dip in bookings entering the fourth quarter. Although we fulfilled some backlog during this period, we believe that this segment will also rebound in 2021 as more projects are booked, leading to increased business activity moving forward.

Ken Krause, Senior Vice President, CFO, and Treasurer

Yes. You covered the key points. The only thing I'd say is our book-to-bill remained pretty healthy in the fourth quarter at about 1 time. But as Nish had indicated, some of those orders will come out of backlog throughout 2021. It's some of the business that went in takes a little bit of time to come out.

Richard Eastman, Analyst

I was curious about the strong performance in the International portable gas business. Was that driven by a large order, or was there something else behind it? I'm unsure if that was an easy comparison, but it was a nice surprise.

Nish Vartanian, Chairman, President, and CEO

We secured a significant piece of business in International, and we shipped that product out. However, the PPE products in the fourth quarter were stronger than we had expected. Looking at our full-year performance with those PPE products in the fourth quarter, we noticed some strength, which was a bit surprising for us. As you know, those products typically enter and exit within the same quarter, so we were encouraged by that. Nonetheless, as Ken mentioned, we are facing some challenging comparisons in the first quarter.

Richard Eastman, Analyst

Sure. I have one last question. Ken, could you provide more insight on operating expenses as we progress through 2021? Are we expecting the cost savings from the realignment efforts to significantly offset the compensation and travel expenses that will reappear in the profit and loss statement? Are we considering an adjusted operating expenses figure that remains roughly the same in dollars for the year? Is that what you were trying to indicate?

Ken Krause, Senior Vice President, CFO, and Treasurer

So when you step back and look at SG&A, operating expenses, I think we did around $290 million for the full year. There's 2 or 3 major buckets there, Rick. One, there was a $15 million cost save associated with just performance-related comp, that comes back. There's really not much control over that coming back, that resets. There's $15 million of discretionary cost saves, which don't come back until we start to travel, until we start to see business conditions improve. And so that's something we're definitely keeping a tight rein on. And then there's the restructuring that I talked about, the $15 million. Now that $15 million is not all SG&A. Some of that $15 million is associated with footprint rationalization. Some of it's related to affiliate closures. And then some of it is more traditional headcount and SG&A related. And so we're looking to really offset that $15 million that comes back immediately, if that makes sense to you.

Richard Eastman, Analyst

It does seem that as the year progresses, we will see some inflation, particularly in the travel sector and some discretionary spending. There will not be a complete offset to that inflation, as I'm hearing. Additionally, could you provide a rough estimate of what the Bristol SG&A might be in dollars?

Ken Krause, Senior Vice President, CFO, and Treasurer

Yes. That's a good question. Their dollars are certainly on a percentage basis, much higher than the MSA overall average. I want to say the Bristol SG&A as a percentage of sales is something close to 30%. And so it's a much higher ratio than what you see at MSA, but there's an opportunity there to help them improve their business model through the sharing of some of our resources. And so, we're looking at that much closer and should give us some opportunity to drive accretion that I spoke about in my prepared comments.

Operator, Operator

The next question comes from Larry Lawrence De Maria of William Blair.

Lawrence De Maria, Analyst

I have a question about the firefighter market. As we know, that market, especially towards the end of the year, can be influenced by the timing of funding and possibly CARES funding. It seems there is still a significant backlog. Can you clarify if there were any unusual surprises or one-time boosts in the numbers? Does this create a challenging comparison for the future, or is this a standard figure that we can use for growth? I’m trying to break down whether there was any stimulus money involved or if there was simply an advancement in orders, considering you mentioned there is additional backlog coming into this year.

Nish Vartanian, Chairman, President, and CEO

Good morning. Yes, we anticipated the fire service number. Throughout the year, we expressed confidence that the fire service business would hold up during the pandemic. The products that firefighters are purchasing are essential for their work, not just nice to have. Therefore, we expected this outcome. We executed a bit better than we had planned in terms of delivering the breathing apparatus. Our operations and sales teams excelled in managing incoming orders and ensuring timely deliveries. Overall, I would say we concluded the period as expected and anticipate a solid backlog as we enter the first part of the year. We expect to see a similar trend as we move into 2021. Municipalities have the funds necessary to acquire these essential products, and the items we provide for the fire service are required.

Lawrence De Maria, Analyst

Can you discuss the energy markets a bit more? Are there any signs of activity beyond the usual replacements, especially with oil prices rising? Is there anything that gives you confidence or an improved outlook in the energy sector?

Nish Vartanian, Chairman, President, and CEO

We are observing some encouraging signs. As we assess our business pipeline and the opportunities within it, we are starting to see certain projects come back, particularly in the Middle East, where activity is starting to pick up. We anticipate that as oil and gas demand rises, employment levels will strengthen, which will drive demand for hard hats and fall protection gear. We are well-positioned to capture that business since we have a strong presence in those areas. We are hopeful that the recovery will happen sooner than expected, possibly in the latter half of 2021.

Lawrence De Maria, Analyst

I have one last question. You mentioned that you're ready to leverage the balance sheet. Can you provide some insight into the potential upside of, let's say, increasing the deal size? How significant would you go? Are there promising deals available, and how competitive is the landscape with SPACs, private equity, and other factors? I'm just trying to set some expectations on this.

Ken Krause, Senior Vice President, CFO, and Treasurer

Thank you for the question, Larry. We have been very disciplined with our balance sheet over many cycles, not just the current one. We are committed to maintaining that discipline. However, we will seize opportunities as we did with Bristol and previous acquisitions. When a good business opportunity arises, we will incorporate it and enhance our position through that investment. We are certainly looking for such opportunities. Currently, our balance sheet carries about 1 times leverage. In past cycles, we've seen that rise to 2 or 3 times, depending on the stage of the cycle. Nevertheless, we intend to remain disciplined and pursue the right opportunities. We do not feel pressured to utilize the balance sheet, but when we identify a viable opportunity, we will act on it.

Operator, Operator

The next question comes from Brendan Popson of CJS Securities.

Brendan Popson, Analyst

I just want to ask a quick question about the firefighting business. SCBAs have been really strong, and I understand the sales process for helmets and apparel is a bit different. Can you talk about that? Do you expect a strong rebound in that area as well? It doesn't seem to have bounced back yet. Obviously, Bristol will factor into that too. Could you share some insights about that space?

Nish Vartanian, Chairman, President, and CEO

Sure, Brandon. Thank you. Yes. Looking at the overall fire service business outside of SCBA, we experienced issues with helmets breaking into two pieces. We didn't observe any significant tenders or large orders for helmets throughout 2020, which impacted that aspect of the business.

Operator, Operator

Excuse me. This is the conference operator. I am sorry for the inconvenience. There has been an interruption. Please stand by. Thank you.

Elyse Lorenzato, Director of Investor Relations

We're on the line and ready to take the next question.

Operator, Operator

The next question comes from Chris McGinnis of Sidoti & Company.

Chris McGinnis, Analyst

I just have two questions. First, if I missed this, I apologize. But regarding rising raw materials, is there any impact you foresee in 2021 or any concerns about that?

Nish Vartanian, Chairman, President, and CEO

Hey. Thanks, Chris. We watch that closely. Obviously, we have our eye on the supply chain and material costs. We've done a really nice job in the past on offsetting that with price and other activities within operations. So we always look at that as somewhat of an opportunity for price increases, and we're pretty effective there. So we haven't seen it at this point, but certainly, we're watching that closely, and we'll react as that occurs.

Chris McGinnis, Analyst

Great. I have a second question that may apply to some of the businesses but not others. As you consider the different regions and the fact that economies are opening up sooner in some cases, are there any lessons you can learn from those experiences that could help you position yourself for growth in economies that are opening up later?

Nish Vartanian, Chairman, President, and CEO

That's a valid observation. We've experienced some shifts in the market. When China implemented their COVID shutdown, we noticed a rapid decline in business. However, once they returned to work, there was a significant rebound. In the U.S., we also saw a gradual recovery, but that was interrupted when COVID spread through the South and affected the oil sector, causing business to decline again, followed by a recovery. Currently, we are seeing some tightening in Europe, but we anticipate that will ease during the second half of the year. One lesson we've learned is the importance of managing our inventory. As I've mentioned, orders for PPE products are fulfilled within the same quarter. We hold a strong market share in some regions for these products, and we must ensure we have enough stock to meet customer demand. Therefore, we are closely monitoring our supply chain and maintaining oversight of the order pipeline from our sales team to prepare for an economic rebound.

Operator, Operator

The next question is a follow-up from Richard Eastman of Baird.

Richard Eastman, Analyst

Thanks, again. Nish, I think we're going to get this conference call service attached to LUNAR there. We got to get them in play.

Nish Vartanian, Chairman, President, and CEO

You're right. You've got it right. We're with you.

Richard Eastman, Analyst

We’d be able to look them surprised, and then we'll also be in the cloud.

Nish Vartanian, Chairman, President, and CEO

Sorry for the inconvenience.

Richard Eastman, Analyst

Hey, I just wanted to clarify some comments you made maybe a little bit earlier. Around the International adjusted op. I have that. I think for the year, it came in at about 15%. And again, maybe I'm thinking that was more at target at this point. What kind of expectation do you have for them in '21? And is somewhat revenue dependent. But is there another 50 basis points to 100 basis points in that International op for '21? And I'm curious if you're seeing any pricing traction there as you started to look at that mid-year '20.

Ken Krause, Senior Vice President, CFO, and Treasurer

Yes. So Rick, it's Ken. I'll take that one, if that's okay. The business continues to do exceptionally well in International. And the team in International is laser-focused on all aspects of the P&L. From gross margin improvements we saw this year despite revenue declines to leveraging the SG&A, the team is really doing an exceptional job. We do expect continuous improvement in our business. That's one of the key areas that we have in our strategy is operational excellence and continuous improvement. And so we certainly are looking for further improvement as we move forward. But from time to time, you do have a consolidation period where you're regrouping and you're resetting and you're making additional investments. And so, we do expect to see improvement, but it's hard to see 200 basis points to 300 basis points each and every year.

Richard Eastman, Analyst

I have a quick question before I finish. Given the weather-related issues and the shutdown of gas, oil, and energy infrastructure in Texas, it seems to be quite a disaster. There have been some discussions about potential damage to the energy infrastructure due to the severe and prolonged cold temperatures. I'm curious about your fixed gas and flame business, which has a significant consumables component. Will these events trigger any replacement demand for consumables? If so, could this lead to more than just a short-term boost in your revenue?

Nish Vartanian, Chairman, President, and CEO

Yes. Rick, there is to a degree. But what you're dealing with here is cold, extreme cold. And the fixed gas and flame detection product is designed for and holds up exceptionally well in much colder temperatures than they're faced with there. We're up in Alaska and other parts of the world that have extreme temperatures. What does drive it at times is hurricanes. And when you have some hurricanes and they don't have the opportunity to lock some things down, that will drive sensor replacement, a lot of times they'll go through and just replace all their sensors after a hurricane. I think we're going to see that from this cold snap because the product is designed to handle that without a problem.

Operator, Operator

And we have Brendan Popson to resume. Please restate any question that was not answered.

Brendan Popson, Analyst

I would like to inquire briefly about the gross margin. It appears that the mix has not been as strong in the last few quarters. Looking ahead to fiscal year 2021, how quickly can we anticipate it returning to the mid-40s range that you typically achieve, and what should we expect in terms of the timeline for that?

Ken Krause, Senior Vice President, CFO, and Treasurer

Yes, Brendan, it's Ken. That area is one we are focusing on. In my prepared comments, I mentioned the inventory charges we incurred during the quarter, which were largely due to an investment made to serve a significant customer in response to the pandemic. Initially, we received a substantial contract from a large potential customer for respiratory products. We invested in inventory anticipating a significant order, but unfortunately, the customer ultimately did not proceed with the order. As a result, we took a charge related to inventory this year that negatively impacted our results. It was about $6 million in the quarter and approximately $10 million for the year. We do not expect this to happen again as we move forward into the new year, and we believe that gross margin will likely improve going forward.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Elyse Lorenzato for any closing remarks.

Elyse Lorenzato, Director of Investor Relations

On behalf of our entire team here, we want to thank you again for joining us this morning. If you missed a portion of the conference call, an audio replay and transcript will be available on our Investor Relations website for the next 90 days. We look forward to talking with you again soon.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.