MSA Safety Inc. (Mine Safety Appliances Company) — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless noted. The company develops and supplies safety products globally, reporting North America, Europe, and International segments. Amounts below are in millions of U.S. dollars except per-share data.
Financial results
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $276.5 | $212.4 |
| Gross profit / gross margin | $110.4 / 39.9% | $82.5 / 38.8% |
| Income before taxes | $20.4 | $7.9 |
| Net income attributable to MSA | $13.3 | $4.9 |
| Diluted EPS | $0.36 | $0.14 |
| Operating cash flow | $10.6 | $(6.4) |
| Property additions | $(7.4) | $(3.6) |
- Sales increased 30.2%; gross profit rose 34%. SG&A was $73.0 million (26.4% of sales versus 29.1%); R&D was $10.5 million. The effective tax rate was 33.9%, versus 35.4%.
- Operating cash flow less property additions was approximately $3.3 million, versus approximately $(10.0) million in Q1 2010. Working capital used $4.2 million of cash.
- Cash was $67.0 million at March 31, 2011. Total debt, including current maturities, was $389.7 million, up from $377.3 million at year-end 2010. Current assets were $496.8 million and current liabilities $183.7 million.
- Dividends were $0.25 per common share, compared with $0.24 in Q1 2010.
Changes, drivers, and management commentary
- Sales grew in each segment: North America $130.9 million (+32%), Europe $64.8 million (+14%), and International $80.7 million (+42%). Management cited stronger industrial, oil and gas, mining, fire-service, and military demand, along with favorable currency translation in Europe and International.
- General Monitors, acquired in October 2010 for $278.2 million, contributed $19.8 million of Q1 sales and $2.3 million of net income. Its results included a one-time $2.3 million inventory fair-value charge. Acquisition-related borrowing contributed to higher interest expense, which rose to $3.4 million from $1.5 million.
- Restructuring charges were $3.1 million, down from $6.8 million. The 2011 charges primarily involved European staff reductions and production transfers, North American facility consolidation, and relocation of Wuxi operations to Suzhou.
- Cash increased $7.2 million during the quarter. The company attributed improved operating cash flow primarily to higher net income; property additions increased, including production equipment and building improvements.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management described strategic priorities including product-led growth, customer focus, cost control, and efficient asset use, and said it had formed a cross-functional team to integrate General Monitors.
- MSA was named in approximately 1,900 cumulative-trauma lawsuits involving alleged exposure to silica, asbestos, and/or coal dust. The company said it cannot estimate total damages or a possible loss range. It records losses when probable and reasonably estimable; defense costs are expensed as incurred.
- Insurance receivables related to these claims were $97.1 million, all noncurrent, versus $89.0 million at year-end. Recovery timing and amounts depend on insurer negotiations and litigation, including ongoing coverage cases with North River and other carriers. Management believed pending claims would not materially adversely affect future results, financial condition, or liquidity, based on available information and coverage; outcomes remain uncertain.
- Other risks identified include government spending patterns, competition, product liability and insurance recoveries, new-product success, foreign exchange, acquisition integration, and international operations. A hypothetical 10% U.S. dollar strengthening or weakening was estimated to change quarterly reported sales by about $14.6 million and net income by about $0.9 million.
- Unrecognized tax benefits were $11.8 million gross, with $10.5 million of associated recognized tax benefits; management did not expect a significant change within 12 months. Pension contributions were $1.1 million in Q1; approximately $4.3 million of total 2011 contributions were expected.
Most important facts for investors to verify
- Whether sales growth and improved gross margin persist, and how much reflects underlying demand, currency, and the General Monitors acquisition.
- Debt levels, interest costs, and cash generation following the acquisition; the filing states revolving-facility borrowings were variable-rate and due in 2015.
- Collectability and timing of the $97.1 million insurance receivable, and developments in product-liability coverage litigation and cumulative-trauma claims.
- Integration progress and the performance of General Monitors, including the effect of purchase-accounting charges and expected acquired-intangible amortization.