Business context and reporting period
Mine Safety Appliances Company (MSA Safety) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. MSA develops, manufactures, and supplies safety products for markets including fire service, oil and gas, mining, construction, industry, and the military. Its reportable segments are North America, Europe, and International.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $299.7 million | $294.7 million | $582.9 million | $588.2 million |
| Gross profit | $132.9 million | $123.1 million | $257.7 million | $250.1 million |
| Gross margin | 44.3% | 41.8% | 44.2% | 42.5% |
| Income before taxes | $34.8 million | $41.4 million | $61.6 million | $76.5 million |
| Net income attributable to MSA | $24.0 million | $28.0 million | $43.3 million | $51.9 million |
| Diluted EPS | $0.64 | $0.75 | $1.15 | $1.39 |
- Q2 cost of products sold was $166.8 million, or 55.7% of sales, versus $171.6 million, or 58.2%, a year earlier. The company attributed improved gross margin to product mix, lower manufacturing costs, and pricing.
- First-half operating cash flow was $21.8 million, down from $65.0 million. Capital expenditures were $17.0 million; operating cash flow less capital expenditures was approximately $4.8 million. Management cited working-capital changes, higher insurance receivables, and lower net income as drivers of lower cash flow.
- Cash and cash equivalents were $82.4 million at June 30, 2013, nearly unchanged from year-end. Of this amount, $68.1 million was held by foreign subsidiaries and could incur additional U.S. income taxes if repatriated.
- Total debt was approximately $300.4 million, including $7.0 million current and $293.3 million long-term, compared with approximately $279.2 million at December 31, 2012. First-half financing included $21.0 million of net borrowings on the long-term line of credit. About half of long-term debt was fixed rate; the revolving facility was due in 2016.
- Current assets were $472.2 million and current liabilities $177.5 million at June 30. Dividends paid in the first half were $21.5 million; dividends declared per common share were $0.30 for Q2 and $0.58 for the first half.
Material changes versus comparable periods
- Reported Q2 sales rose 2%; excluding the 2012 divestiture of the North American ballistic helmet business, management said sales increased 3%. First-half reported sales fell 1%, but increased 1% excluding that divestiture.
- North America delivered Q2 sales growth of 5% and first-half growth of 2%. Europe sales declined 1% in Q2 and 2% in the first half. International sales declined 2% in Q2 and 5% in the first half, with currency translation a significant drag; local-currency International sales increased in both periods.
- Q2 net income attributable to MSA declined 14%, while first-half net income declined 17%. However, the 2012 comparison included approximately $5.1 million after-tax of one-time gains from land and ballistic helmet asset sales; excluding those gains, MSA reported Q2 net income up $1.1 million, or 5%, and first-half net income lower.
- SG&A increased 4% in Q2 and 6% in the first half; R&D increased 10% and 12%, respectively. First-half interest expense fell 11% to $5.4 million. The effective tax rate was 30.0% in Q2 and 28.9% for the first half, lower than the respective 2012 periods, primarily due to R&D tax credits and manufacturing deductions.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantitative revenue or earnings guidance. Management described continued product development and reported restructuring actions but did not provide a specific forward outlook.
- MSA recorded $2.4 million of restructuring charges in the first half, after tax $1.7 million, related to staff reductions in Germany, Spain, and Australia. The company expected approximately $4.5 million of pension contributions in 2013.
- MSA was named in 2,716 cumulative-trauma product-liability lawsuits involving alleged silica, asbestos, or coal-dust exposure. The company said it cannot estimate the possible loss or range of losses and records such losses only when probable and reasonably estimable.
- Insurance receivables related to cumulative-trauma claims were $152.9 million, up from $130.0 million at year-end. MSA is pursuing coverage litigation with insurers; timing and collection depend on insurer disputes, litigation outcomes, and insurer ability to pay. The company stated that unfavorable resolutions could materially affect quarterly results, while expressing its view that pending claims would not materially adversely affect future results, financial condition, or liquidity based on available coverage.
- Other notable items include $2.0 million of detector-tube assets held for sale, with sale impact not expected to be material to net income or EPS; $9.5 million of gross unrecognized tax benefits; and $0.8 million of accrued interest and penalties related to uncertain tax positions.
- Currency remains a material exposure. MSA estimated that a hypothetical 10% U.S. dollar strengthening or weakening would change first-half reported sales by approximately $29.5 million and net income by approximately $1.7 million. Open foreign-exchange forwards had a $54.1 million notional amount.
Important facts for investors to verify
- Whether sales and margin improvement persist, particularly given the contrasting regional trends and currency effects.
- Whether cash conversion improves after the first-half working-capital outflow and whether the rise in trade receivables is collected as expected.
- The collectability and timing of the $152.9 million insurance receivable, and developments in cumulative-trauma claims and insurer litigation.
- Debt levels, refinancing and interest-rate exposure, and the tax implications of repatriating foreign-held cash.
- Whether restructuring, pension costs, and increased SG&A and R&D spending affect future profitability.