MSA Safety Inc. (Mine Safety Appliances Company) — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results. Unless otherwise stated, amounts below are in U.S. dollars.
Business context
MSA develops and sells safety equipment, including breathing apparatus, gas detection instruments, helmets, respirators, thermal imaging cameras and fall-protection products. It reports three geographic segments: North America, Europe and International. The 2010 acquisition of General Monitors expanded its flame- and gas-detection business, particularly in oil and gas markets.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $1,173.2 million | $976.6 million |
| Gross profit / gross margin | $470.2 million / 40.1% | $370.1 million / 37.9% |
| Net income attributable to MSA | $69.9 million | $38.1 million |
| Basic / diluted EPS | $1.91 / $1.87 | $1.06 / $1.05 |
| Operating cash flow | $85.3 million | $31.6 million |
| Capital expenditures | $30.4 million | $25.0 million |
| Cash and cash equivalents at year-end | $59.9 million | $59.8 million |
| Long-term debt at year-end | $334.0 million | $367.1 million |
Sales grew 20%, while attributable net income increased 83%. Gross margin improved to 40.1% from 37.9%, which management attributed principally to pricing, manufacturing-cost control and General Monitors. Interest expense rose to $14.1 million from $8.7 million, mainly reflecting acquisition-related borrowings. The effective tax rate was 33.2%, versus 31.9%.
Operating cash flow improved substantially, primarily with higher net income. Investing activities used $11.7 million, compared with $281.6 million in 2010, which included the General Monitors acquisition. Financing activities used $71.3 million; MSA paid down $34.9 million of debt and paid $37.7 million in dividends. The annual dividend was $1.03 per common share.
The company amended its unsecured revolving credit facility in November 2011, increasing it to $300 million and extending maturity to November 2016. At year-end, $130 million was unused. Debt maturities include approximately $176.7 million in 2016; MSA said it expected operating cash flow to fund near-term debt service and anticipated refinancing any remaining revolving-credit balance at maturity. It was in compliance with debt covenants at year-end.
Segments and fourth-quarter results
- North America sales were $561.1 million, up 21%; Europe sales were $286.8 million, up 14%; International sales were $325.3 million, up 24%. Growth included General Monitors, stronger industrial and oil-and-gas demand, and higher International-market shipments. Currency translation also lifted reported European and International sales.
- Fourth-quarter 2011 sales were $303.8 million, versus $285.0 million in fourth-quarter 2010. Gross profit was $119.9 million versus $106.7 million; attributable net income was $17.0 million versus $11.8 million. Diluted EPS was $0.46 versus $0.32.
- 2011 restructuring and other charges were $8.6 million, compared with $14.1 million in 2010. The 2011 charges related mainly to staff reductions, production transfers and relocations.
Outlook, risks and contingencies
- No specific numerical earnings or revenue guidance is provided. Management described global economic conditions as challenging, noted dependence on government funding for certain markets, and said it planned to continue reducing revolving-credit borrowings over the next several years.
- Foreign operations generated approximately half of sales. Currency movements affect reported results; MSA estimated that a hypothetical 10% strengthening or weakening of the U.S. dollar would change 2011 reported sales by about $61.2 million and net income by about $3.4 million.
- MSA was named in 2,321 cumulative-trauma product-liability lawsuits at year-end, up from 1,900 a year earlier. The company could not estimate the total damages or a range of possible losses and generally records such losses only when probable and reasonably estimable.
- Insurance receivables related to cumulative-trauma claims were $112.1 million, up from $89.0 million. Recovery timing and amounts remain subject to insurer disputes and litigation, including ongoing coverage cases. MSA stated that it believed pending claims would not materially adversely affect future results, financial condition or liquidity, but acknowledged unfavorable outcomes could materially affect quarterly results.
- Other principal risks include competition, product development and liability, regulatory standards, supply availability and cost, international operations, pension assumptions, debt service and covenants, and acquisition integration. Pension and postretirement actuarial adjustments contributed to a substantial increase in accumulated other comprehensive loss during 2011.
Most important facts for investors to verify
- Whether sales and margin gains persist after separating General Monitors’ contribution, currency effects and changes in product mix.
- Cash generation, debt reduction, variable-rate exposure and the plan for the approximately $176.7 million of scheduled 2016 debt obligations.
- Collectability and timing of the $112.1 million insurance receivable, and developments in North River and other coverage litigation.
- Changes in cumulative-trauma claims, including the rise in open cases to 2,321, and any material revisions to loss estimates or insurance assumptions.
- Pension funding and actuarial assumptions: the filing reports a $36.3 million pension-plan funded deficit at year-end and expects $4.1 million of net pension contributions in 2012.
The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2011.