MSA Safety Inc. (Mine Safety Appliances Company) — 2010 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. The company develops and sells safety products globally through North America, Europe, and International segments. Dollar amounts are in millions unless otherwise stated.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $237.2 | $227.2 | $449.6 | $445.4 |
| Gross profit | $90.2 | $85.3 | $172.7 | $168.3 |
| Gross margin | 38.0% | 37.5% | 38.4% | 37.8% |
| Net income attributable to MSA | $11.8 | $12.5 | $16.7 | $19.7 |
| Diluted EPS | $0.32 | $0.35 | $0.46 | $0.55 |
| Operating cash flow | Not separately provided | Not separately provided | $(12.0) | $54.8 |
- Q2 sales rose 4%, but attributable net income fell 5%; six-month sales rose 1%, while attributable net income fell 15%.
- Q2 cost of products sold was $146.9 million; SG&A was $60.9 million, or 25.5% of sales, versus $56.0 million and 24.7% a year earlier. Six-month SG&A rose 9% to $122.8 million, or 27.3% of sales. R&D increased 14% in Q2 and 12% for the half-year.
- Restructuring and other charges were $2.6 million in Q2 and $9.4 million for the half-year, versus $1.0 million and $9.1 million in the respective 2009 periods. Six-month 2010 charges included a $5.0 million German voluntary retirement program expense.
- Cash and equivalents were $60.1 million at June 30, compared with $62.0 million at year-end 2009. Current assets were $432.6 million and current liabilities $207.3 million. Notes payable and current debt were $54.7 million; long-term debt was $82.1 million. The company reported about $42 million of unused short-term bank lines.
- Six-month investing cash use was $7.4 million, including $8.8 million of property additions. Financing provided $20.5 million, including $38.4 million of net short-term borrowing; dividends paid were $17.7 million. Cash declined $1.8 million over the period.
Segment and period comparisons
- Q2 North America sales increased 4% to $116.8 million, supported by industrial head protection and instruments; military ballistic helmet and vest sales declined. Six-month sales fell 3% to $215.9 million, partly due to lower SCBA and military helmet shipments, including prior-year contract shipments and delays in federal grant funding.
- Q2 Europe sales fell 8% to $56.4 million, reflecting recession-related weakness and an approximately $3.2 million unfavorable currency translation effect. Six-month sales fell 7% to $113.0 million. Europe reported a Q2 net loss of $3.1 million and a six-month net loss of $6.9 million, compared with profits in 2009.
- Q2 International sales increased 19% to $64.0 million and six-month sales increased 20% to $120.7 million, supported by mining, industrial, and Latin American demand and favorable currency translation. Six-month segment income increased to $6.9 million from $1.4 million.
- Currency exchange gains were $1.5 million in Q2 and $3.6 million for the half-year, mostly unrealized. Six-month interest expense declined 14% to $3.2 million. The effective tax rate was 34.5% in Q2 and 34.8% for the half-year.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management said increased inventory levels were primarily in anticipation of higher customer demand and cited its focus on new product development, cost control, and efficiency.
- Operating cash flow weakened sharply from the prior year, reflecting unfavorable working-capital movements and lower cash flow before working-capital changes. Receivables and inventory increased from year-end.
- Foreign currency movements materially affected reported results: a hypothetical 10% strengthening or weakening of the U.S. dollar would change six-month reported sales by approximately $23.4 million. The company had $7.6 million of currency forwards outstanding at June 30.
- MSA was named in approximately 2,500 product-liability lawsuits involving about 11,800 plaintiffs, primarily alleging silicosis-related injuries associated with respiratory protection products. The company said it could not determine maximum potential liability, but did not expect pending matters to materially adversely affect results or financial condition.
- Insurance receivables related to product-liability claims were $73.6 million, down from $91.7 million at year-end; management considered the balance fully recoverable. Coverage disputes included litigation with North River, which was expected to proceed to trial. Settlements with Century Indemnity and, after quarter-end, Columbia Casualty did not affect operating results. A July 26, 2010 filing sought declaratory relief from most excess insurers.
- Management expected approximately $4.6 million of pension contributions in 2010. The company reported $84.0 million of fixed-rate debt with maturities through 2021; its fair value was $89.5 million at June 30.
Key facts for investors to verify
- Whether operating cash flow recovers as receivables and inventory normalize, and how much additional short-term borrowing is needed.
- Whether European sales and profitability improve after restructuring, and whether International growth persists excluding favorable currency effects.
- The development of product-liability claims, insurance coverage litigation, and collection of the recorded insurance receivables.
- Whether restructuring delivers savings sufficient to offset higher SG&A and R&D expenses.
- Potential effects of currency exchange movements, federal grant funding delays, and military contract timing on sales and earnings.