Before we begin, I'm reminded to inform you that for a full list of research disclosures and potential conflicts of interest, you can visit our website at williamblair.com. Today from MSA, we have Julie Beck, the CFO, and Larry De Maria, Executive Director, Investor Relations. As a brief background, MSA is a leading manufacturer of safety products across the firefighter, gas detection, and broader industrials globally. With that, I'll turn it over to Julie for some opening remarks before moving to Q&A. Thank you.
Okay. Thanks, everyone. Good morning. Thanks for your interest in MSA Safety. I'm privileged to be here on the behalf of all of the MSA employees and team members. Really excited. It's an honor to be the CFO of MSA. I started there in August of last year. I've been here about 9-10 months, so it's very exciting. We start off with our legal language, disclaimer language, and please become familiar with that. Now I'm going to go forward and with me today is Larry De Maria. He is our Vice President of Investor Relations. It's really important to talk about MSA. The really important thing is the mission. The mission is incredibly important. It's been in existence since 1914 that men and women can go home safely to their communities and live productive lives and good lives in their communities.
We are dedicated to that mission, and you feel it when you come to our offices. Everyone takes this responsibility extremely personally, and it's our privilege to do this. It started in 1914 with two founders that were at a mining accident and dedicated their lives to making that better. They partnered with Thomas Edison, and they came up with the first lighted safety helmet, mining helmet, and deaths went down over 70% in the next 15 years. Thomas Edison would go on to say it was the most meaningful invention of his career because it impacted and saved the most lives. We're dedicated to that. Our mission we take seriously, and we protect over 40 million workers out in the workforce.
We have driven this company from a safety equipment company to a safety technology company, and that's a really important feature. Innovation is how we started the company. Innovation and the voice of the customer continues to be the strength of our company. We invest over 4.6% of our sales in R&D, and our innovation, it results in a higher price point and higher margins. It saves our customers, and that's what's really important. Overall, we're about $1.9 billion in revenues in 2025. About 5,300 associates that work with me at MSA, with Larry and I. We have gross margins of 46.8%, operating margins adjusted of 22.3%. We generate lots of free cash flow. It was 106% of free cash flow last year generation. It's a really terrific story. Our segments are two.
Our Americas segment consists of North America, Latin America, Mexico, and South America. The rest of the world is international. About 67% of our sales go through the Americas. About a third outside. We have three main product categories that we're going to talk to you about today. Our detection business represent about 41%. Our fire service business is 34%. Industrial PPE is roughly 25%. That's MSA at a glance. We are building and we're industrial compounders, is what we are. We're compounding. We're compounding from a sales perspective, from an earnings perspective, from an M&A flywheel as well. If you look at our sales, you'll see that over the 10-year period, we had about a 6.6% CAGR over the last 10 years. We've had a 700 basis point, over 700 basis point improvement in margins. That's due to many things.
It's due to new innovations. It's due to productivity and lots of initiatives in our factories and in our SG&A. Continuous improvement is part of our DNA. We have an MSA Business System. That's absolutely critical to how we operate. At any one point in time, we have hundreds plus projects that we're tracking in our MSA Business System in order to improve margins. It's been a really nice, successful story. We've migrated our sales over time, where detection, which is our highest margin products, becomes a larger portion of the pie over time. That's helped us as well. We also have a really nice adjusted return on invested capital, where we have over 20%. We're really proud of the returns that we've been able to generate.
We have targets out there where we want to improve our margins 30 to 50 basis points every year. We want to have cash flow generation of 90%-100% every year. We have an incremental margin target between 30% and 40%. It's a really fantastic story financially. One of the things that attracted me to MSA Safety was the strong balance sheet. It's an incredibly strong balance sheet with plenty of liquidity, low leverage, which gives us optionality, and we can choose to do what we want to invest in over time. We have an Accelerate strategy. In 2024, the management team had an investor day, and we talked about our Accelerate strategy. We want to continue to be the leader in premium safety solutions.
Okay, we're getting more and more into systems and solutions, again, moving away from just being products, but going into a technology marketplace. We want to implement target growth accelerators. You talk about us talking about a connected worker or a connected fire service and in technology advancements and all of that, which accelerates our growth. We've also redesigned our fall protection product line, which has allowed us to become larger and larger, and that's been a fast-growing marketplace for us. We also announced a Type II head protection, which instead of just providing protection at the top, like our traditional V-Gard, which is the market industry leader, it also allows for protection of the side. Those types of things that are part of our Accelerate strategy that's going to allow us to outgrow the market over time.
We talk about our MSA Business System, an MBS, we call it, the MSA Business System. Really important. It's how we do business. It's how our cadence goes with our meeting cadence, how we monitor things, the KPIs that we track, the continuous improvement, and all of the initiatives that we have going on in the business, which enables that. We can deploy capital effectively. I talked about our nice balance sheet. We have an organic target of $2.1 billion-$2.3 billion in 2028, as well as operating margins approaching 25%, continued EPS compounding, which we've seen. Our capital deployment gives us lots of optionality, $1.5 billion of liquidity at the end of the year. Or $1.5 billion of cash generated over that time. It's a great story and we reconfirm our 2028 targets.
We're going to meet or beat those targets at this point. We want a capital allocation, an important part of our strategy. We're very disciplined. When we think about our capital allocation strategy, we prioritize growth. Again, we invest in new product development and innovation, which is absolutely critical. We'll invest in high growth capital expenditures that allow us to grow. We also have an M&A pipeline. That pipeline is really strong. We continue to monitor it. We talk about it as a managed team on a monthly basis. We have lots of things in the pipeline. We've been very disciplined in our M&A.
That M&A story, if you look at our MSA recently, three of the last four acquisitions, including the one that we just announced with our earnings call in May, have been in the detection space, where we have some of the highest margins and think that we can grow faster and accelerate our growth. We have financial strength, even with the acquisition, when we close on that, which we have not closed on yet. We expect to close in Q3. Our pro forma leverage would be about 2x . We talk about being comfortable in a leverage target of 1.5-2.5x . We have capacity to do more. In addition, we want to return capital to our shareholders. We have the privilege of increasing our dividend every year for 56 years. It's a really fantastic story.
We also buy back shares. In 2025, we bought back $80 million worth of shares. In the first quarter, we bought back $50 million shares, and we launched a new share buyback of $500 million. Really a tremendous capacity in our balance sheet, which is a great strength for us and provides us optionality. We announced an acquisition at our earnings call. This is Autronica. This is a company we've had our eye on for quite some time, so we were really pleased that it became available. It's in an adjacent marketplace. We are in the flame detection business and fixed detection business, and this opens up a new total addressable market for us of about $3 billion. It is in the fire detection business, and it also has the control systems that bring all of this fire detection together.
It's a really important addressable market that's just adjacent to us. We're going to be able to use our current sales channels to increase the sales. If you look at their markets, I'll show you in a minute. It's a great mix for us because they are really strong in the European markets. They have a presence in North America and the Middle East, but we have a stronger presence there. We're going to be able to use our existing channels to sell this product. We're in a regulatory approval period right now. We expect to be able to close on this transaction in the third quarter. We're going to fund this transaction with existing cash on hand in the balance sheet as well as the revolver, which is terrific.
We have identified about 6% of the purchase price in synergies, and those are just the cost synergies. We didn't underwrite any of the sales synergies. Any sales synergies that we expect to get are above and beyond that. When we think about the synergies, we think about the traditional, whether it's operational, whether it's supply chain synergies, whether it's certain offices, back office kinds of things. That's the 6%. Really important as well, as I talked about our mission, is their mission as well. Their culture fits really nicely. That's an important criteria for us when we're evaluating an M&A candidate. They have a zero harm, zero safety incident culture as well. That was really important to us. They're a leading manufacturer. They've been in business since the 1950s.
They're based in Trondheim, Norway, which has an outstanding university in terms of technology and the leading technology in that part of the world. They are very big in the Nordic countries, and as I mentioned before, and a little bit smaller in the U.S. and North America, Latin America, South America, and the Middle East. We're really excited. Our salespeople are really excited about this. What it does is it allows us for some of these big project works. It allows us to be able to get earlier in the EPC bidding process because fire detection starts earlier than some of our other fixed gas detection. If we can get in some of these projects earlier, we can pull in other MSA products as we go through in some of these bids, which is really important.
The business also operates in the marine segment, and that is one where MSA is not as strong as well. That opens up another new marketplace for us. We expect these margins to be accretive with the synergies, and we expect that that's going to improve our international margins significantly as we go forward as well. Really excited about this ecosystem and this fire protection and really excited to welcome the Autronica family to MSA going forward. We had a great first quarter and a big thanks to my MSA associates for that. It's a privilege. We were able to bring in sales up about 10%. Part of that was an M&C acquisition that we did. We did an acquisition in detection just about a year ago at this time in May of 2025. That was a new market for us as well.
They're based in Germany, and they're a process detection business, our first entree into process. It's adjacent to us, but something that we didn't have before in the detection business. We are really pleased. They're ahead in the first year of ownership. They're ahead of our business model that we created at the time of the acquisition, and they're performing extremely well. We had organic growth as well in the first quarter. It complies of all of those. Adjusted operating income up nicely. We're in margin expansion. We've recovered from all of the tariffs and all of those things, and we're in margin expansion, which is what we expect. We had nice, strong adjusted operating margins. EPS, earnings per share, was up 18%, and our free cash flow conversion was terrific in the first quarter and was significantly higher as well.
We also had a 32% incremental margin, so we made that target as well. All of those things that we talked about for our 2028 targets, we did really well in the first quarter, so it was a nice start. We were able to maintain our mid-single digits. Again, we want to be that industrial compounder. We want to bring in increased sales, and every year, we want to increase our margins by 30 or 50 basis points, have 30%-40% incremental margins, and we're well on our way, as well as some nice free cash flow conversion in that 90%-100% range. Here we are. Just to end up, we're really a mission-driven innovation company. We always listen to our customers. We don't innovate for the sake of innovation sake. We innovate because our customer wants it and needs something.
We take our responsibility to society to keep our workers safe very seriously. We have lots of stories of safe stories where customers will write into our team members and tell us about how our equipment performed, which is very well, and that motivates all of us. It's a strong motivation to keep continuing. It's a great story. Our Accelerate strategy is working, and we're showing that growth and on our way to meeting those financial targets. Our innovation is also making us a safety technology company, moving from an equipment manufacture r to a safety technology company. We have leading positions in our market share. We're number one and number two in all of our major markets except for probably one, which is fall protection, and that's a really fast-growing market for us and was one of our accelerators in our Accelerate strategy and growing nicely for us.
We have the MSA Business System, which promotes that continuous improvement mindset. One of the great things that I love about the culture is that we perform well, but we all know we can do better, and people are open to doing things differently and making it better, which is terrific. A great place to be. We have a nice, disciplined capital allocation strategy and the capital to make sure that we have choices. We can choose what we want to do, whether we want to buy back shares, whether we want to do M&A. Now, with our leverage going up to about two, we purchased $50 million in the first quarter. We'll continue to buy shares, but we will also concentrate on paying down debt, which we can do with our free cash flow generation. It's a great story, and I'm happy to be here.
With that, I guess I'll go back to Ross.
Thank you, Julie. Maybe kicking off with the Autronica acquisition. This is your second acquisition in two years, and you guys are clearly making progress on executing towards the M&A component of your 2028 targets. Can you maybe just help us think through how your understanding has evolved of the broader white space opportunity for M&A? As we think about your ability to build that pipeline and that M&A working muscle.
Sure. We have an outstanding individual in corporate development who knows our business extremely well, and he has a pipeline, and he monitors it on an ongoing basis. Our sales force brings in ideas of things for M&A, as well as our engineering groups and watching technology. There's a deliberate process and effort. It's another process that's part of our MB S System, which is evaluating M&A alternatives. I would say that the pipeline is really big and active. Not everything, of course, is actionable. As you know, we all know that you have to look at various different things to make sure things fit. Our CEO, Steve, has been vocal about one that we looked at where the culture just didn't work. We take all that seriously. We're disciplined.
When we think about an M&A target, we think we want a well-running business. We don't particularly like to do fixer-uppers. We wanted to have a nice management team. We wanted to either expand us into a product line that's important to us, whether it's a geography that's important to us, the technology that's important to us. We want to make sure that it's accretiv e from an EPS perspective and an EBITDA margin perspective, and that it out-earns its cost of capital in a relatively short time. A three, four-year period or so is the criteria. There are things out there, and we'll continue to monitor them, and we want to be known as a compounder in M&A as well in doing things more systematically than sporadically and like may have been in the past.
Okay. Well, it's still pending, so you haven't had time under the hood, but can you maybe just help us think through the synergy targets on the cost side, some of those buckets, and also R&D and cross-selling opportunities? I think just high level, it feels like they're pretty conservative targets.
Sure. From a synergies perspective, we identified 6% of sales as being a cost synergy. Those cost synergies include everything from supply chain savings to maybe some operational improvements, some back-office consolidation. Maybe there might be a sales office or a service office that might be in the same markets where we can share those types of things. That 's the 6%. That 6% doesn't include any revenue synergies. The revenue synergies are very exciting, and I love it because when we announced this acquisition, our sales folks from all over the world saying, "Hey, when can we sell it? When can we get together?" Well, of course, we can't yet, but the enthusiasm for this acquisition is incredibly strong internally, and that's really important for a successful acquisition as well.
We're well on our way, but remember, there's only so much we can do right now. We haven't closed on the transaction. There are regulatory approvals that we need, and as we go through that, we'll be talking about those more later.
All right.
There was some disruption on the fire side last year, and we're starting to move past that, but just any updates on if you're seeing this government funding start to flow on SCBAs and?
The SCBA is, we think that our MSA brand means something and it means quality and we have a really leading market position in SCBAs, and we think we have the best product and probably the best distribution network. It's really im portant to say that. After September 11, the government created a fund for firefighters to make sure that our firefighters were protected after September 11. The value of that funding is roughly $300 million per year from the federal government. Of that $300 million, about $100 million relates to PPE for a fire department. That would include the SCBA. Remember, we are one of the only product, I think we are the only fire provider that services our firefighters head to toe, the SCBA, the hat, the turnout gear, the boots, the whole thing.
This funding goes primarily to more rural departments for funding of theirs, and about $100 million of it relates to that PPE for the firefighter. We would estimate that that means $30 million-$40 million of revenue per year to MSA if you just take our relative market share in SCBA. What happened is that the government was late to announce who got AFG funding last year in fiscal 2025. They announced on the last day of the fiscal year which departments got the funding. These fire departments apply, and they announced who got it. The fire, if you rememb er correctly, that the government shut down for six weeks or so. Normally, they would announce who gets these awards in the summertime, the early fall, and then we would ship a lot of things in the fourth quarter.
In the fourth quarter, we weren't able to ship because people weren't able to access their funds. What happens is when a fire department gets notified that they've received a fund, they need to cut a purchase order with their supplier, and then they need to submit it to get the funding. They weren't able to do that process with the government being shut down. That does not impact demand for our product at all. It just impacted the timing of when we receive it, because we didn't receive as much in Q3 and Q4 as we would have anticipated, and that has pushed into 2026. We think we got about a third of that in the first quarter of this year, and we would expect to get the rest of the two-thirds of it in the second and third quarter.
I think, Ross, we've seen is a little bit more c hoppiness than we've seen historically in the fire service, but that's been mostly driven by the government shutdown, AFG grant situation, and things beyond our control. The message we've seen, we want to get across, though, is it's a very healthy business with a good pipeline.
Mm-hmm. Yep.
There can be short-term timi ng challenges and things like this, but it's a very healthy business. Now the DHS is open, and now for the next grant year, fire departments are putting in their applications for grants now. Things are operating a little bit more normally going forward, which tends to lead towards, obviously, a second half sales cycle.
Yeah. Maybe just speaking to the visibility there, not impacted. You think two-thirds is going to catch up. We do have a replacement cycle coming just based off the last standard changes. Maybe just speak to that go to market and what provides that confidence on remote.
We announced a really industry-leading product called the G1 in 2014 and 2015. We gained some nice market share at that point, and when you think about an SCBA, it has a useful life of somewhere between 12 and 15 years. It's important also to know that fire departments don't want to be more than two standards behind, and so a new standard comes out about every five years. That puts you in that replacement cycle, and the cylinders last about that useful life as well. If you look at the volumes that we got in a three or four-year period after that announcement, those units would be coming up for renewal. We would think that that would happen in 2027, 2028, 2029, and that we would see a nice bump in our fire service sales just for replacement cycle alone.
Yeah. I think our expectation is maintain a relatively lower expectation on 2027 bump, but it should accelerate into the latter part of the decade.
As we replace those aging units at obviously a higher price point.
Yeah. There's been some competitive developments in the market in North America with some of your larger competitors, and then also, we're hearing that there's a recent push from your large European c ompetitor as well. Can you maybe just speak to how you see-
Sure
the landscape evolving there?
When we think about the North America fire department, U.S. and Canada, you would think about three major players. It would be MSA and Scott, which would lead in market share. Scott, a very good competitor. Scott has been owned by 3M recently, and they're going to be spun out in part of Bain Capital with Madison Fire & Rescue. You think about Dräger, and Dräger is a German competitor that we see in Europe. Dräger has not historically been strong in the U.S., primarily because they haven't had as strong a distribution channel as Scott or MSA has had. They have announced a new product. They've added some technology, and they displayed a new product in April. We still think ours is superior. We understand that they have increased their selling price on that to be closer to ours.
They also signed a distribution agreement with MES, and MES also distributes Scott. MES will be selling both and servicing both Scott and Dräger. Our distributors are all exclusive to us, and we think that that's a great advantage.
All right. We're about out of time here. Thank you again for joini ng us, and we'll be holding a breakout session in Ginny A beginning at 10:40.
Thank you so much for your interest, everyone. Appr eciate you being here.