MSA Safety Inc. (Mine Safety Appliances Company) — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also reports fourth-quarter results. The company develops and sells personal safety equipment, including breathing apparatus, gas detection, head protection and fall protection products. Sales are reported across North America, Europe and International.
Financial performance
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $1,112.1 million | $1,110.4 million |
| Gross profit / gross margin | $496.8 million / 44.7% | $489.5 million / 44.1% |
| Income from continuing operations attributable to MSA common shareholders | $85.9 million; $2.31 basic EPS | $87.6 million; $2.37 basic EPS |
| Net income attributable to MSA | $88.2 million; $2.37 basic EPS | $90.6 million; $2.45 basic EPS |
| Cash flow from operating activities | $110.8 million | $150.5 million |
| Capital expenditures | $36.5 million | $32.2 million |
| Cash and cash equivalents at year-end | $96.3 million | $82.7 million |
| Long-term debt at year-end | $260.7 million | $272.3 million |
| Total assets / shareholders’ equity | $1,234.3 million / $566.5 million | $1,111.7 million / $463.0 million |
Fourth-quarter 2013 continuing-operations sales were $291.4 million, gross profit was $130.1 million, and income attributable to MSA was $24.9 million ($0.67 basic EPS). Fourth-quarter 2012 comparable amounts were $282.3 million, $128.2 million and $19.2 million ($0.52 basic EPS).
Cash flow from operating activities less capital expenditures was $74.3 million in 2013, versus $118.3 million in 2012. Cash increased $13.5 million during 2013. The $300 million revolving credit facility had $184 million unused at year-end. The filing reports $191.6 million of current liabilities. Approximately $87.2 million of cash was held by foreign subsidiaries and considered indefinitely reinvested.
Material changes versus 2012
- Reported sales were nearly flat. Local-currency core product sales grew 6%, and core products represented 73% of sales, versus 70% in 2012. Excluding currency effects and the North American ballistic-helmet divestiture, continuing-operations sales rose $20.8 million, or 2%.
- Gross margin improved 0.6 percentage points, reflecting product mix, lower manufacturing costs, improved pricing and a $2.1 million benefit from LIFO liquidations.
- Continuing-operations income attributable to common shareholders declined about 2%; lower other income versus 2012 gains on property sales and an acquisition-related escrow settlement, increased R&D and higher currency losses weighed on results. R&D spending increased 12% to $45.9 million.
- Operating cash flow fell by $39.7 million, primarily due to working-capital changes, higher insurance-related notes receivable and lower net income. Capital spending increased $4.3 million.
- North American sales grew 1%; Europe was approximately flat in reported dollars; International sales declined 2% in reported dollars but increased in local currency. Foreign-exchange translation reduced total sales by $9.5 million.
Outlook, risks and unusual items
- The filing provides no specific financial guidance. Management describes global economic conditions as challenging and identifies exposure to oil and gas markets, government spending, competition, foreign exchange, supply availability and regulatory approvals.
- NIOSH invalidated certain CBRN respirator approval testing. MSA said its equipment in use did not require retesting, but retesting delays were expected to push the M7XT launch to at least the second quarter of 2014 and could also delay the G1 SCBA launch.
- In January 2014, the company identified a technical covenant violation that triggered cross-defaults under two other agreements. Lender waivers were fully executed February 12, 2014, related covenants were amended, and the company reported it was then in compliance with all debt covenants.
- MSA was named in 2,840 cumulative-trauma product-liability lawsuits at year-end and could not estimate the range of possible losses. It recorded $124.8 million of insurance receivables, down from $130.0 million, and disclosed ongoing coverage litigation; recoverability and timing remain subject to insurer, legal and credit risks.
- A European transformation project aims to centralize operations and improve efficiency, but management cautions that implementation may cost more, take longer or disrupt operations. 2013 restructuring charges were $5.3 million.
- The company agreed to sell detector-tube assets; the transaction closed in January 2014, with the gain expected to be immaterial. It was also negotiating the sale of substantially all assets and liabilities of its South African distribution business and Zambian operations.
- After year-end, the Safety Works joint venture was informed of a significant unfavorable change to its largest-customer contract; the future impact was not estimable as of February 24, 2014.
Key investor verification points
- Reconcile the filing’s reported continuing-operations income figures: the selected-data/MD&A presentation and consolidated income statement show differing totals; confirm the appropriate measure and attribution.
- Track collection of the $124.8 million insurance receivable and developments in cumulative-trauma claims and insurer litigation.
- Verify that debt covenant waivers and amended terms remain effective, and assess the 2016 revolving-credit maturity and refinancing needs.
- Monitor SCBA approval and product-launch timing, the European transformation’s costs and benefits, and the Safety Works customer-contract impact.
- Assess the effect of foreign exchange, core-product demand and the planned South African/Zambian divestiture on future sales and cash generation.