MSA Safety Inc. (Mine Safety Appliances Company) — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Unless noted otherwise, financial figures are in millions of dollars. Comparisons are with the corresponding 2009 periods.
Business context and results
MSA develops, manufactures and supplies safety products, including respiratory protection, instruments, head protection and fire-service equipment. It reports three geographic segments: North America, Europe and International. The filing describes improving demand in several core industrial markets, alongside weakness in some fire-service, government and other product markets.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $242.0 | $228.5 | $691.6 | $673.9 |
| Gross profit | $90.7 | $83.1 | $263.4 | $251.4 |
| Gross margin | 37.5% | 36.4% | 38.1% | 37.3% |
| Income before taxes | $15.3 | $16.3 | $41.4 | $46.5 |
| Net income attributable to MSA | $9.6 | $11.0 | $26.3 | $30.6 |
| Diluted EPS | $0.26 | $0.30 | $0.72 | $0.85 |
Q3 sales increased 6%; nine-month sales rose 3%. Gross margin improved in both periods, primarily from sales mix. Earnings attributable to MSA declined in both periods: Q3 results were affected by currency losses and General Monitors acquisition costs; nine-month results also reflected lower European and North American earnings and restructuring charges. Dividends per common share were $0.25 in Q3 and $0.74 year to date, versus $0.24 and $0.72, respectively, in 2009.
Segment performance
- Q3: North America sales rose 5% to $111.9; Europe fell 5% to $61.5, including a $5.5 unfavorable currency-translation effect; International rose 21% to $68.6, supported by mining-related demand and favorable currency translation. Europe reported a $0.3 segment loss.
- Nine months: North America sales fell 1% to $327.8, Europe fell 6% to $174.6, and International rose 20% to $189.3. International growth included $17.0 of favorable currency translation. Europe reported a $7.2 segment loss, compared with $2.2 of income in 2009; International income increased to $10.3.
North American industrial-market demand supported instruments, head protection and respirators, but was offset by lower SCBA, ballistic helmet and gas-mask sales. European results were pressured by weaker demand in parts of Eastern Europe, lower disposable-respirator sales after elevated 2009 swine-flu-related demand, and adverse currency translation.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $1.6, down from $87.1 in 2009. The filing attributes the decline to an unfavorable $71.7 working-capital change and lower cash flow before working-capital changes. Receivables and inventories increased by $12.7 and $18.7, respectively, from year-end 2009.
- Investing activities used $15.2, including $16.6 of property additions. Financing activities used $1.8; the company borrowed $35.1 net on short-term debt, repaid $10.0 of long-term debt and paid $26.8 of dividends.
- Cash declined to $47.4 from $62.0 at December 31, 2009. Current assets were $438.6 and current liabilities $206.1, a current ratio of approximately 2.1.
- Current and long-term debt totaled $123.6 at September 30, compared with $98.4 at year-end 2009. Fixed-rate long-term debt had a carrying amount of $76.0 and disclosed fair value of $85.0.
Charges, acquisition and outlook
- Restructuring and other charges were $2.1 in Q3 and $11.5 for nine months (after-tax amounts of $1.4 and $7.5). The nine-month charges principally included Germany’s voluntary retirement program and European reorganization, North American production-transfer costs, and staff reductions in South Africa and China.
- On October 13, 2010, after the reporting date, MSA acquired General Monitors for $280.0 cash plus assumption of certain liabilities; the purchase price is subject to a working-capital adjustment. Purchase accounting was not complete when the filing was issued. MSA expected approximately $4.5 of additional Q4 transaction and integration costs, after-tax $2.9. General Monitors’ results are included from the acquisition date.
- Also on October 13, MSA established a $250.0 unsecured revolving credit facility maturing in 2015 and issued $100.0 of 4.00% unsecured senior notes due 2021, repayable in five annual $20.0 installments beginning in 2017.
- The filing gives no general earnings or revenue guidance. Management cites risks including government spending patterns, competition, product liability and insurance recoveries, new-product execution, foreign-exchange movements, acquisition integration and foreign-market exposure.
Risks, contingencies and unusual items
- MSA was named in approximately 1,900 product-liability lawsuits involving about 8,900 plaintiffs, mostly alleging silicosis. The company said it could not determine maximum potential liability, but did not expect pending matters to materially adversely affect results or financial condition based on information then available.
- Insurance receivables were $78.0 at September 30, all in other noncurrent assets, down from $91.7 at year-end. MSA considered the recorded balance fully recoverable, while noting collection timing and amount depend on insurer negotiations, litigation and insurer solvency.
- Coverage disputes with North River remained unresolved, including a case proceeding to trial and a separate insurer declaratory-judgment action. MSA also filed a broader coverage action against excess insurers. Settlements with Century Indemnity and Columbia Casualty did not affect operating results.
- Q3 included $3.5 of currency-exchange losses, largely unrealized and related to the stronger euro on intercompany balances. Open foreign-exchange forwards had a $40.3 notional amount and $0.7 unrealized gain, and were due to mature in Q4.
- Gross unrecognized tax benefits were $9.1, with $7.4 of associated tax benefits recognized; accrued interest and penalties related to uncertain tax positions were $0.7.
Important facts for investors to verify
- Whether operating cash flow and working-capital use improve, particularly given higher receivables and inventory.
- General Monitors’ final purchase accounting, integration progress, realized performance and total acquisition-related costs and financing.
- Progress and potential cash effects of product-liability claims, insurance coverage litigation and recovery of the $78.0 insurance receivable.
- Whether International growth persists and Europe’s segment losses narrow, separating local-currency performance from currency translation.
- Debt levels, interest costs and liquidity following the acquisition and the subsequent borrowing arrangements.