MSA Safety, Inc. (Mine Safety Appliances Company) — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts are in millions. MSA develops, manufactures, and supplies safety products for industrial, fire service, mining, military, and other markets, with reportable segments in North America, Europe, and International.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $278.2 | $286.6 | $861.2 | $874.8 |
| Gross profit | $118.2 | $122.3 | $375.9 | $372.4 |
| Gross margin | 42.5% | 42.7% | 43.6% | 42.6% |
| Income before taxes | $27.2 | $27.3 | $88.8 | $103.8 |
| Net income attributable to MSA | $19.5 | $19.2 | $62.8 | $71.2 |
| Diluted EPS | $0.52 | $0.51 | $1.66 | $1.90 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $64.7 | $89.0 |
Q3 sales fell 3% year over year; management attributed $5.7 million of the decline to unfavorable currency translation, with sales down 1% excluding currency effects. Nine-month sales fell 2%; excluding currency and the 2012 ballistic-helmet divestiture, sales increased $10.6 million, or 1%.
Q3 gross margin declined 0.2 percentage points, reflecting factory volume variances and one-time product-recall costs, partly offset by product mix and lower manufacturing costs. Nine-month gross margin improved 1.0 point, which management attributed to favorable product mix, lower manufacturing costs, and improved pricing. Nine-month net income fell 12%; 2012 included after-tax gains from asset sales of $5.1 million. Q3 net income was nearly flat.
Segments and material changes
- North America: Q3 external sales rose 1% to $134.9 million; nine-month sales rose 2% to $423.3 million. Nine-month growth excluding the ballistic-helmet divestiture was 4%, supported by fire-service and industrial products.
- Europe: Q3 sales declined 1% to $67.1 million; nine-month sales declined 1% to $204.7 million. Management cited weaker industrial and military markets, partly offset by favorable euro translation.
- International: Q3 sales declined 10% to $76.3 million and nine-month sales declined 7% to $233.1 million, principally due to unfavorable currency translation. Local-currency sales were nearly flat in both periods.
- Q3 SG&A declined 10% to $73.3 million, including lower bonus and stock compensation and lower product-liability-related expenses. Nine-month SG&A increased 1% to $237.9 million; R&D increased 15% to $34.3 million.
- Restructuring charges were $1.5 million in Q3 and $3.9 million for nine months, primarily for staff reductions in Europe and Australia. No such charges were recorded in the comparable 2012 periods.
- Other income for nine months was $1.0 million versus $8.4 million in 2012, which included gains on land and ballistic-helmet business sales. Currency-exchange losses increased to $3.8 million for nine months from $1.8 million, mostly unrealized.
Cash, liquidity, and debt
- Cash and equivalents were $96.0 million at September 30, 2013, up from $82.7 million at year-end; $77.3 million was held by foreign subsidiaries and could incur additional tax if repatriated.
- Nine-month operating cash flow was $64.7 million, down from $89.0 million, reflecting working-capital changes, higher insurance receivables, and lower net income. Investing activities used $24.9 million, including $26.2 million of capital expenditures. Financing activities used $23.6 million.
- Total debt was $289.4 million, comprising $7.1 million of current debt and $282.3 million of long-term debt, compared with $279.2 million at December 31, 2012. The company reported $160.0 million of fixed-rate debt, with maturities through 2021; the remainder of long-term debt was primarily variable-rate borrowing under a revolving facility due in 2016.
- Management said domestic cash, operating cash flows, repatriation of some current foreign earnings, and available domestic credit were sufficient for domestic liquidity needs. Cash dividends paid were $32.7 million for the first nine months of 2013.
Outlook, risks, and unusual items
The filing provides no quantified earnings or sales guidance. Management described ongoing new-product development and expected the inventory increase to be temporary, associated with anticipated product launches and North American distribution-center consolidation. It expected approximately $4.5 million of pension contributions for 2013; $3.4 million had been contributed through September.
In September, MSA agreed to sell detector-tube manufacturing assets, with closing expected in Q4 2013. MSA planned to manufacture and sell the products for the buyer through mid-2014; the expected gain was to be recognized in 2014 and was not expected to be material to net income or EPS.
Key risks include currency fluctuations, economic and market conditions, government spending, competition, new-product execution, international operations, and product-liability claims and collection of related insurance. MSA was named in 2,775 cumulative-trauma lawsuits at September 30 and could not estimate a loss range. It reported $152.1 million of related insurance receivables, up from $130.0 million at year-end, and noted disputes and litigation with insurers that could affect the timing and amount of collections. Management stated that pending claims were not expected to materially adversely affect future results, financial condition, or liquidity based on available information and insurance coverage, while acknowledging that unfavorable outcomes could materially affect quarterly results.
Most important facts for investors to verify
- Whether operating cash flow recovers and whether the inventory build unwinds as planned.
- Collectability and timing of the $152.1 million insurance receivable, and developments in cumulative-trauma and insurance-coverage litigation.
- Whether foreign-currency weakness, particularly in International markets, persists and affects reported sales and earnings.
- Progress and costs associated with restructuring, product launches, the distribution-center consolidation, and the detector-tube asset sale.
- Debt levels, revolver availability, and the potential tax cost of repatriating foreign-held cash.