Business context and reporting period
Mine Safety Appliances Company, now MSA Safety Inc., filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company develops and sells safety products globally through North America, Europe, and International segments. Results include General Monitors, acquired in October 2010; reported year-over-year growth therefore includes acquisition contributions and currency translation.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $294.7 million | $237.2 million | $571.2 million | $449.6 million |
| Gross profit | $119.0 million | $90.2 million | $229.4 million | $172.7 million |
| Gross margin | 40.4% | 38.0% | 40.2% | 38.4% |
| Net income attributable to MSA | $19.6 million | $11.8 million | $32.9 million | $16.7 million |
| Diluted EPS | $0.53 | $0.32 | $0.88 | $0.46 |
- Sales rose 24% in Q2 and 27% in the first half; attributable net income rose 66% and 97%, respectively. Management cited pricing, product mix, manufacturing cost control, and improved demand.
- Q2 sales growth by segment: North America 18%, Europe 33%, International 28%. First-half growth: 24%, 24%, and 35%, respectively. European and International reported sales also benefited from favorable currency translation.
- Cost of products sold was 59.6% of sales in Q2 versus 62.0%; first-half was 59.8% versus 61.6%. SG&A was 25.7% of sales in Q2 in both years, and 26.0% versus 27.3% for the first half. First-half R&D rose 25% to $20.0 million.
- Interest expense increased 124% to $3.8 million in Q2 and $7.2 million for the first half, primarily due to acquisition-related borrowing. First-half currency results shifted from a $3.6 million gain in 2010 to a $0.6 million loss in 2011. Effective tax rates were 33.5% for Q2 and 33.7% for the first half, lower than the respective 2010 periods, partly due to the U.S. R&D tax credit.
Cash flow, liquidity, and debt
- First-half operating cash flow was $18.7 million, versus cash used of $12.0 million in 2010. The improvement reflected higher earnings and lower cash use in other noncurrent assets and liabilities, partly offset by working-capital investment.
- Investing activities used $12.8 million, including $14.0 million of property additions. Financing activities used $4.3 million; the company paid $18.7 million in dividends. Cash increased $4.0 million to $63.8 million.
- At June 30, current assets were $507.2 million and current liabilities $182.3 million (current ratio approximately 2.8). Total debt, including current maturities, was $392.3 million, versus $377.3 million at year-end 2010; cash less total debt was approximately $328.5 million. The company reported $382.1 million of long-term debt. About half of long-term debt was fixed-rate, with fixed-rate maturities through 2021; variable-rate revolving credit is due in 2015.
- Receivables were $215.2 million and inventories $166.0 million, up from year-end as sales increased and the company anticipated customer demand. Management reported a $250 million unsecured revolving credit facility.
Material changes, outlook, and risks
- General Monitors contributed $21.5 million of Q2 sales and $4.1 million of Q2 net income; first-half contributions were $41.3 million and $6.4 million. Acquisition-related debt increased interest expense. First-half General Monitors earnings included a $2.3 million pretax inventory fair-value step-up charge.
- Restructuring charges were $2.0 million in Q2 and $5.1 million in the first half, primarily for European staff reductions and production transfers, North American consolidation, and relocation of Wuxi operations to Suzhou. Charges were below the comparable 2010 first-half amount of $9.4 million.
- The filing provides no specific financial guidance. Management discussed continued demand in industrial, mining, and oil and gas markets, while noting weakness in some fire-service and military product markets. Forward-looking results depend on government spending, competition, new products, acquisition integration, foreign exchange, international operations, and product-liability exposures.
- There were 1,965 pending cumulative-trauma product-liability suits, primarily involving respiratory products and alleged silica, asbestos, or coal-dust exposure. The company says potential losses cannot be reliably estimated. Related insurance receivables were $106.8 million, and recovery timing and amount depend on insurer collectability and coverage disputes. North River coverage litigation remained pending; the Delaware coverage action was stayed.
- Other disclosed exposures include $11.8 million of gross unrecognized tax benefits, partially offset by $10.5 million of recognized tax benefits, and $0.9 million of accrued interest and penalties. Management expected no significant change in unrecognized tax benefits within 12 months.
Important facts for investors to verify
- How much of sales and earnings growth reflects organic demand versus General Monitors, currency effects, and product mix.
- Whether the acquisition delivers expected integration benefits and whether higher debt and interest costs remain manageable.
- The collectability and timing of the $106.8 million insurance receivable, and developments in product-liability and insurance-coverage litigation.
- Whether operating cash generation improves as receivables and inventories grow, while supporting capital spending and dividends.
- Exposure to government and military procurement, industrial and mining demand, foreign exchange, and restructuring execution.