MSA Safety Incorporated — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. MSA develops and sells safety products globally. The company completed a holding-company reorganization on March 7, 2014; its operating business continued unchanged.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales from continuing operations | $265.0 million | $269.9 million |
| Gross profit / gross margin | $121.8 million / 46.0% | $121.7 million / 45.1% |
| Income from continuing operations before tax | $20.9 million | $25.5 million |
| Income from continuing operations attributable to common shareholders | $13.5 million | $18.6 million |
| Net income attributable to MSA | $14.0 million | $19.3 million |
| Diluted EPS, continuing operations / total | $0.36 / $0.37 | $0.49 / $0.51 |
| Operating cash flow | $9.4 million | $6.1 million |
| Capital expenditures | $7.2 million | $7.5 million |
Cost of products sold declined to 54.0% of sales from 54.9%, supporting the gross-margin improvement. SG&A rose 4% to $85.2 million, or 32.2% of sales, and R&D increased 6% to $11.2 million. Q1 2014 included $1.9 million of restructuring charges. The effective tax rate rose to 36.4% from 27.2%.
Cash and equivalents were $102.2 million at quarter-end, including $88.3 million held by foreign subsidiaries and considered indefinitely reinvested. Total debt was approximately $283.5 million, including current maturities; long-term debt was $276.7 million. The company reported $167.6 million unused under its $300 million revolving facility, including letters of credit, and approximately $493 million of total access to capital. It complied with debt covenants. Cash dividends paid were $11.2 million; the quarterly dividend was $0.30 per common share.
Changes and segment results
- Reported sales fell 2%; management attributed the decline to $5.1 million of unfavorable foreign-currency translation. Excluding currency effects, sales increased $0.2 million.
- North America sales increased slightly to $129.5 million; Europe sales rose 2% to $74.9 million, aided by currency translation; International sales declined 11% to $60.6 million, largely due to weaker currencies.
- Continuing-operations income attributable to common shareholders declined to $13.5 million from $18.6 million. Management cited higher SG&A, restructuring, and the higher tax rate; Europe and International segment income declined materially.
- Operating cash flow improved year over year, reflecting favorable working-capital movements, partly offset by lower earnings. Inventory increased to $147.0 million from $136.8 million, partly for expected demand and new-product launches.
Outlook, risks and unusual items
- No quantified full-year earnings or sales guidance is provided. M7XT SCBA received certification in March and shipments began in April; the redesigned G1 SCBA was expected to be certified in the second half of 2014.
- Restructuring charges related mainly to staff reductions and reorganization in Germany, Italy, and Australia. The detector-tube asset sale closed in January; an approximately $2.9 million gain was expected to be recognized after transitional manufacturing concluded in 2014.
- South African PPE distribution and Zambian operations were classified as discontinued operations while a sale was being negotiated and considered probable within 12 months. Discontinued-operations sales were $10.1 million, down from $13.4 million.
- MSA was named in 2,901 cumulative-trauma product-liability lawsuits. It could not estimate total potential losses. Related insurance receivables were $144.8 million, up from $124.8 million at year-end; collection timing and amount depend partly on ongoing insurance disputes. Management said it believed pending claims would not materially adversely affect future results, financial condition, or liquidity based on available information and coverage.
- Currency and interest-rate exposures remain. A hypothetical 10% U.S. dollar strengthening or weakening would change reported quarterly sales by approximately $13.3 million and net income by $0.6 million, in the opposite direction of the currency movement. Foreign cash repatriation could result in additional taxes; the potential amount was not practicable to determine.
Key facts for investors to verify
- Whether the $144.8 million insurance receivable is collected as expected and how insurance-coverage litigation and product-liability claims develop.
- Whether sales and segment profitability recover, particularly in International, and how currency movements affect reported results.
- Whether inventory growth converts into sales following the SCBA product launches, and whether restructuring and higher SG&A persist.
- The effect of the expired U.S. R&D tax credit and non-deductible foreign losses on subsequent effective tax rates.
- Availability and cost of credit, covenant compliance, and any tax consequences of repatriating foreign-held cash.