MSA Safety Incorporated — Q3 2014 Form 10-Q
Business context and reporting period. Global manufacturer and supplier of safety products, with reportable segments in North America, Europe and International. This unaudited filing covers the quarter and nine months ended September 30, 2014. The company completed a holding-company reorganization in March 2014; operations continued under the new parent. 2013 segment sales were restated for a revised General Monitors sales-allocation method.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $275.2 million | $264.9 million | $822.7 million | $820.6 million |
| Gross margin | 45.0% | 43.6% | 45.6% | 44.7% |
| Income from continuing operations attributable to common shareholders | $18.7 million | $19.0 million | $54.3 million | $60.9 million |
| Diluted EPS from continuing operations | $0.49 | $0.51 | $1.43 | $1.61 |
| Net income attributable to MSA | $19.3 million | $19.5 million | $55.8 million | $62.8 million |
| Diluted EPS | $0.51 | $0.52 | $1.47 | $1.66 |
- Cash flow and investment: Nine-month operating cash flow was $50.8 million, versus $64.7 million; capital expenditures were $24.2 million. Cash increased $1.1 million to $97.4 million.
- Liquidity and debt: Current assets were $501.3 million and current liabilities $194.3 million. Total debt was $277.3 million, including $124.0 million drawn on the revolving facility; $173.3 million of its $300 million capacity was unused, including letters of credit. The company reported compliance with all debt covenants.
- Dividends: Nine-month dividends paid were $34.0 million; dividends declared per common share were $0.31 for Q3 and $0.92 year to date.
- Comprehensive income: Q3 foreign-currency translation losses were $20.6 million; nine-month losses were $21.5 million, reducing reported comprehensive income.
Material changes and management commentary
- Q3 sales grew 4%, with Europe up 14%, North America up 1% and International essentially flat. Excluding currency effects, consolidated sales increased $11.9 million. Nine-month sales were nearly unchanged; currency translation reduced sales by $8.2 million.
- Gross margin improved on better sales mix, pricing and lower manufacturing costs in Q3, and on improved mix and cost management year to date. Higher SG&A and restructuring costs weighed on results.
- Nine-month continuing-operations income attributable to common shareholders fell 11%. International segment income declined 56%, reflecting weaker sales, higher expenses and adverse currency translation. Management cited weakening economic conditions in Brazil and South Africa.
- North American breathing-apparatus shipments were affected by approval delays for the next-generation G1 SCBA; management said the product had passed required testing and was in the final approval stages.
- Management reported no quantitative earnings or sales guidance in this filing. It described access to approximately $598 million of capital, including cash and available facilities, and expected approximately $4.5 million in 2014 pension contributions.
Risks, contingencies and unusual items
- Cumulative-trauma product liability: MSA LLC was named in 3,096 open lawsuits concerning alleged silica, asbestos or coal-dust exposure. The company cannot estimate total potential losses and records liabilities when probable and reasonably estimable. A third-party-assisted review of claims was expected to finish in late 2014 or early 2015; estimated costs, net of insurance, could be material when recorded.
- Insurance recovery: Related insurance receivables were $147.7 million, up from $124.8 million at year-end. Recoveries depend partly on insurer negotiations and litigation; the company stated that recorded receivables were probable of collection. Coverage disputes with insurers remain ongoing.
- Currency and international exposure: A hypothetical 10% U.S. dollar move would change reported nine-month sales and net income by approximately $41.8 million and $1.8 million, respectively. Foreign-exchange forwards had a $60.9 million notional value.
- Tax and restructuring: The effective tax rate rose to 32.1% in Q3 and 32.6% year to date, partly because the U.S. R&D tax credit had lapsed and was not extended for 2014. Restructuring charges were $3.6 million in Q3 and $6.4 million year to date, mainly for workforce reductions and European reorganization.
- The company was negotiating sales of its South African PPE distribution business and Zambian operations, classified as discontinued operations; management considered a sale within twelve months probable. Detector-tube asset-sale gain of approximately $2.3 million was expected to be recognized in 2014 when the buyer assumed ownership.
- $87.9 million of cash was held by foreign subsidiaries and considered indefinitely reinvested; repatriation could incur additional taxes. Standby letters of credit and bank guarantees totaled $6.3 million, and a separate German voluntary-retirement guarantee was $4.1 million.
Important facts for investors to verify
- Progress and timing of G1 SCBA approval and the effect on breathing-apparatus sales.
- Outcome of the cumulative-trauma claims review, potential liability estimates and insurer recoveries or litigation developments.
- Whether International markets and foreign-currency pressures improve or continue to affect sales and earnings.
- Completion and accounting treatment of the South African and Zambian business sale and detector-tube transaction.
- Cash availability for U.S. needs, potential tax costs of foreign-cash repatriation, and continued compliance with debt covenants.