MSA Safety Incorporated — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. MSA develops and sells personal safety equipment globally. Results exclude South African and Zambian operations classified as discontinued operations; the company said their sale was probable in 2015. Comparative 2014 segment results were recast for changes to expense allocation and segment reporting.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $256.7 million | $265.0 million |
| Gross profit / gross margin | $116.8 million / 45.5% | $121.8 million / 46.0% |
| Income from continuing operations attributable to common shareholders | $9.3 million | $13.5 million |
| Diluted EPS from continuing operations | $0.25 | $0.36 |
| Net income attributable to MSA | $9.7 million | $14.0 million |
| Cash flow from operating activities | $(16.7) million | $9.4 million |
| Capital expenditures | $7.5 million | $7.2 million |
Sales fell 3% reported, but increased 4% excluding unfavorable currency translation, which reduced reported sales by 7%. Gross margin declined 0.5 percentage point; management cited product-phaseout inventory charges and higher carrying costs, partly offset by stronger product margins. SG&A was $81.4 million, or 31.7% of sales, versus $85.2 million, or 32.2%. The filing does not provide a directly labeled operating-margin figure.
The reported effective tax rate was 62.7%, including $7.6 million of exit-tax charges related to the European reorganization. Excluding those charges, the rate was 31.7%, compared with 36.4% in Q1 2014. Discontinued operations contributed $0.3 million of income, versus $0.6 million.
Segments and material changes
- North America: Sales rose 3% to $133.6 million. Breathing apparatus shipments increased 62%, notably with G1 SCBA deliveries; fixed gas and flame detection sales rose 9%. Energy-market weakness reduced portable instrument and industrial head-protection shipments.
- Europe: Sales declined 12% reported to $66.0 million, but rose 4% in local currency; currency translation reduced sales by 16%. Segment results shifted from $3.5 million income to a $4.4 million loss, with translation and the European reorganization among the factors discussed.
- International: Sales declined 6% reported to $57.1 million, but rose 2% in local currency. Management cited challenging conditions in Brazil and weaker shipments in some product lines.
- Foreign-currency exchange gains were $2.5 million, compared with losses of $0.4 million a year earlier. A $23.8 million currency translation loss was recorded in other comprehensive income, primarily due to the stronger U.S. dollar against the euro.
Cash, debt and liquidity
Cash and equivalents were $86.3 million at March 31, down $19.7 million during the quarter; $77.7 million was held by foreign subsidiaries whose earnings were considered indefinitely reinvested. Operating cash use reflected lower earnings and unfavorable working-capital movements, including a $22.2 million local-currency inventory increase associated with restocking and G1 SCBA production ramp-up.
Total debt was $273.2 million, including $266.0 million long term. The $300.0 million revolving facility had $171.1 million unused, including letters of credit; MSA reported compliance with all debt covenants. The company stated it had access to approximately $596.0 million of capital. Q1 dividends paid were $11.6 million; dividends declared per common share were $0.31, versus $0.30 a year earlier.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management described continued focus on core products and cost control and noted recent G1 SCBA and F1XF Fire Helmet launches. It expected approximately $4.1 million of pension contributions for 2015.
- Restructuring charges were $0.7 million, primarily severance related to efforts to right-size operations in Brazil and China, versus $1.9 million a year earlier.
- Cumulative-trauma product-liability reserves were $72.3 million. MSA could not estimate its broader cumulative-trauma exposure; adverse developments could exceed recorded liabilities. It reported 2,237 open lawsuits.
- Related insurance receivables were $222.1 million. Recovery timing and amount depend in part on insurer negotiations and litigation; MSA considered the receivables probable of collection. Insurance coverage lawsuits remain ongoing, including a Delaware trial scheduled for Q2 2016.
- At March 31, the company reported $15.0 million in gross unrecognized tax benefits and $1.0 million of accrued interest and penalties related to uncertain tax positions.
- A hypothetical 10% U.S. dollar strengthening or weakening would change reported quarterly sales and net income by approximately $12.0 million and $0.4 million, respectively, in the opposite direction of the currency movement.
Important facts for investors to verify
- Whether the proposed South African and Zambian operations sale closes in 2015 and on what terms.
- Whether inventory buildup converts to sales and cash generation, particularly as G1 SCBA production ramps up.
- Actual cash recovery and timing for the $222.1 million insurance receivable, and developments in insurer litigation and cumulative-trauma claims.
- The ongoing effect of foreign-exchange movements, European restructuring and exit taxes on reported results.
- Debt levels, revolver availability and continued compliance with financial covenants.