MSA Safety Incorporated — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. MSA develops and sells safety equipment used in industries including fire service, oil and gas, mining, and construction. Results are unaudited; the company cautions that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $273.7 million | $275.2 million | $817.5 million | $822.7 million |
| Gross profit margin | 43.8% | 45.0% | 44.9% | 45.6% |
| Income from continuing operations attributable to common shareholders | $15.7 million | $18.7 million | $48.8 million | $54.3 million |
| Diluted continuing-operations EPS | $0.41 | $0.49 | $1.29 | $1.43 |
| Operating cash flow | Not separately provided | Not separately provided | $9.8 million | $50.8 million |
Q3 net income attributable to MSA, including discontinued operations, was $16.0 million versus $19.3 million; diluted EPS was $0.42 versus $0.51. Nine-month net income attributable to MSA was $50.0 million versus $55.8 million; diluted EPS was $1.32 versus $1.47. Dividends were $0.32 per share for Q3 and $0.95 for the nine-month period.
At September 30, cash and equivalents were $189.3 million, including $178.3 million held by foreign subsidiaries and considered indefinitely reinvested. Total debt was approximately $394.8 million, including $6.8 million current and $388.0 million long-term, versus $251.7 million at year-end 2014. The company reported $48.5 million unused on its existing $300 million revolver, including letters of credit, and cited access to approximately $598.5 million of capital. It was in compliance with debt covenants.
Changes and operating trends
- Reported sales declined about 1% in Q3 and year to date, but management said sales increased 8% in both comparisons excluding unfavorable currency translation. Currency effects reduced reported sales by 9%.
- North America grew strongly, led by self-contained breathing apparatus (SCBA): Q3 segment sales rose 18%, including a 163% increase in SCBA shipments. Europe and International sales each fell 18% in Q3, with currency and weaker local demand contributing.
- Gross margin declined due to higher inventory costs, product mix, and lower margins on large orders. Management also cited product phaseouts as a year-to-date pressure.
- Q3 currency-exchange losses were $4.3 million versus $0.3 million, mostly unrealized and primarily related to unsettled intercompany balances. Nine-month losses were $3.3 million versus $0.4 million.
- Operating cash flow fell to $9.8 million, primarily from unfavorable working-capital changes and lower net income. Inventory rose to $150.1 million from $123.0 million at year-end, reflecting demand planning for G1 SCBA.
- Increased borrowing ahead of the Latchways acquisition contributed to the $83.3 million increase in cash during the first nine months. Investing activities used $17.2 million; financing activities provided $100.2 million.
Outlook, risks, and notable items
- Management was evaluating a headcount-focused cost-reduction program in response to lower oil and gas demand and slower growth in key emerging markets. It expected $4.0–$6.0 million of restructuring expense in Q4 2015.
- On October 21, 2015, after quarter-end, MSA acquired Latchways plc for $190.9 million in cash, with no contingent consideration. The company said the deal would double its fall-protection business. It expected about $5.6 million of additional Q4 transaction and integration costs; purchase accounting and pro forma results were not yet available.
- The nine-month effective tax rate was 43.5%, including $7.6 million of European reorganization exit-tax charges; excluding those charges, the rate was 34.5%. Q3’s effective rate was 37.1%.
- MSA LLC had 2,003 cumulative-trauma product-liability lawsuits outstanding. The company said it could not estimate its ultimate cumulative-trauma exposure; the reserve was $55.2 million at September 30, largely current and scheduled to be paid over the following three quarters. Insurance receivables were $220.5 million, and recovery timing and amounts depend on insurer negotiations and litigation.
- Discontinued operations comprised the South African PPE distribution business and Zambian operations, whose sale was being negotiated. They generated $11.6 million of Q3 sales and $0.5 million of Q3 net income; management considered a sale probable in the coming months.
- Foreign currency, exposure to weaker energy and emerging-market demand, pension costs, product-liability claims and insurance recoveries, and acquisition integration are key areas of uncertainty. No formal full-year earnings or revenue guidance is provided in the filing.
Important facts for investors to verify
- Whether SCBA growth and North American strength can offset softer demand in Europe, International markets, and energy-related products.
- Whether margins and operating cash flow recover as inventory levels, product mix, and working capital evolve.
- Post-acquisition debt, cash, financing availability, purchase accounting, integration costs, and Latchways contribution to results.
- Progress and cash payments related to cumulative-trauma claims, and the collectability and timing of the $220.5 million insurance receivable.
- Whether the expected Q4 restructuring charges and planned cost actions deliver durable savings.