MSA Safety (Mine Safety Appliances Company) — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. The company develops and supplies safety products for industrial, fire service, mining, military and other markets, reporting through North America, Europe and International segments. Figures below are U.S. dollars; financial-statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $286.6 | $298.2 | $874.8 | $869.5 |
| Gross profit | $122.3 | $120.9 | $372.4 | $350.3 |
| Gross margin | 42.7% | 40.5% | 42.6% | 40.3% |
| Income before income taxes | $27.3 | $30.4 | $103.8 | $80.1 |
| Net income attributable to MSA | $19.2 | $20.0 | $71.2 | $52.9 |
| Diluted EPS | $0.51 | $0.54 | $1.90 | $1.42 |
- Cash flow, nine months: Operating cash flow was $89.0 million versus $38.4 million. Investing activities used $8.1 million versus $17.9 million; financing activities used $66.4 million versus $20.0 million. Capital expenditures were $24.9 million. Cash increased $14.5 million to $74.5 million.
- Balance sheet at September 30: Current assets were $485.0 million and current liabilities $182.2 million. Long-term debt was $304.0 million, with $0.7 million current; cash was $74.5 million. Total liabilities were $657.0 million and equity $490.6 million.
- Other: Dividends were $0.28 per common share in Q3 and $0.82 for the nine-month period. Nine-month effective tax rate was 30.4%, versus 33.6%.
Changes versus comparable periods
- Q3 sales declined 4% year over year; nine-month sales rose 1%. Excluding weaker currencies and divested ballistic vest and helmet businesses, management reported growth of 5% in Q3 and 7% year to date.
- Foreign-currency translation reduced reported sales by $15.4 million in Q3 and $37.0 million year to date. Divested ballistic vest and helmet sales were $10.5 million lower in Q3 and $20.8 million lower year to date.
- Gross margin improved in both periods, which management attributed to improved pricing, lower manufacturing costs and more favorable product mix. SG&A increased 4% in both periods; as a share of sales it rose to 28.5% in Q3 and 27.0% year to date.
- Q3 attributable net income fell 4%; nine-month attributable net income rose 35%. The nine-month comparison benefited from higher gross profit, land-sale gains, lower restructuring and interest expense, and a lower tax rate.
- There were no restructuring charges in 2012, compared with $1.0 million in Q3 2011 and $6.1 million in the first nine months of 2011. Long-term debt decreased from $334.0 million at year-end 2011 to $304.0 million.
Segments, outlook and notable items
- Q3 external sales were $133.9 million in North America, $67.7 million in Europe and $85.0 million International. North America sales fell 7%, Europe fell 6%, and International rose 2% in reported dollars. Year-to-date sales increased 1% in North America and 2% International, and declined 2% in Europe.
- Management cited stronger demand in emerging markets, including Latin America and Africa, and higher European instrument sales. North American Q3 sales were affected by divestitures; excluding those, segment sales were flat.
- Other income included gains on Cranberry Woods land sales: year-to-date gains were $3.7 million higher than in the prior-year period. A non-cash charitable contribution of land also contributed to the tax benefit. The filing does not provide formal forward earnings guidance.
- Management expected 2012 pension contributions of approximately $4.1 million; $3.0 million had been contributed through September. About half of long-term debt carried fixed rates, with maturities through 2021; the variable-rate revolving facility was due in 2016.
Risks, contingencies and unusual items
- MSA was named in 2,620 cumulative-trauma product-liability lawsuits at September 30, up from 2,321 at year-end. The company said it cannot reliably estimate potential losses or a range of losses for pending and future claims, and records losses when probable and reasonably estimable.
- Insurance receivables for cumulative-trauma claims were $122.1 million, including $120.1 million noncurrent, versus $112.1 million at year-end. Collection timing and amount depend partly on insurer negotiations, litigation and insurers’ ability to pay. Insurance coverage disputes were in litigation; management stated that pending claims were not expected to materially adversely affect future results, financial condition or liquidity based on information then available.
- Uninsured cumulative-trauma losses were $7.3 million for the first nine months of 2012, versus $0.1 million in the same 2011 period. The single-incident product-liability reserve was $4.2 million.
- Other risks identified include global economic conditions, government spending, competition, product liability and insurance recoveries, new products, currency movements, acquisitions and foreign-country operations. A hypothetical 10% U.S. dollar strengthening or weakening would change reported nine-month sales by approximately $45.8 million and net income by approximately $2.8 million, in the opposite direction to the currency move.
- Detector-tube manufacturing assets totaling $2.0 million were classified as held for sale; management did not expect the sale to materially affect net income or EPS.
Investor verification checklist
- Check whether underlying sales growth excluding currency and divestitures is sustained, and whether foreign-exchange pressure continues.
- Assess the durability of gross-margin improvement and the rise in SG&A, including product-liability and project due-diligence costs.
- Review the growth and collectability of the $122.1 million insurance receivable, litigation developments, and uninsured claim costs.
- Verify the effects of business divestitures and Cranberry Woods land transactions on reported earnings and cash flows.
- Monitor debt repayment, cash generation, capital expenditures, pension funding and the company’s lack of formal earnings guidance.