MSA Safety Incorporated — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. MSA develops and sells safety products globally. A holding-company reorganization was completed in March 2014; management says operations and consolidated assets and liabilities were unchanged.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $282.5 million | $285.9 million | $547.5 million | $555.7 million |
| Gross profit margin | 45.9% | 45.4% | 45.9% | 45.2% |
| Income from continuing operations attributable to common shareholders | $22.1 million | $23.3 million | $35.7 million | $41.9 million |
| Basic EPS from continuing operations | $0.59 | $0.63 | $0.96 | $1.13 |
| Net income attributable to MSA | $22.5 million | $24.0 million | $36.5 million | $43.3 million |
- Q2 sales declined 1%; management attributed $1.4 million of the decline to unfavorable currency translation. Europe grew 16%, while North America fell 3% and International fell 14%.
- First-half sales decreased 1%, including a $6.5 million adverse currency effect. Europe rose 9%; North America declined 1% and International declined 12%.
- Gross margin improved on sales and order mix, pricing, and cost management. However, SG&A rose 5% year over year in both Q2 and the first half, driven by strategic initiatives, legal costs, and product-launch spending. SG&A was 29.3% of Q2 sales versus 27.7% a year earlier.
- Q2 effective tax rate was 30.7% versus 29.9%; first-half rate was 32.9% versus 28.7%. The expired U.S. R&D tax credit was the main reason for the increase.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was $15.3 million, down from $21.8 million. Capital expenditures were $14.5 million. Cash was $96.2 million at June 30, 2014, essentially unchanged from year-end.
- Working capital absorbed cash, notably inventories, which increased to $151.8 million from $136.8 million, and trade receivables, which rose to $209.1 million from $200.4 million.
- Total debt was $288.3 million, including $6.7 million due within one year; long-term debt was $281.7 million. The company had $135.0 million drawn on its $300 million revolving facility and $162.4 million unused, including letters of credit. MSA reported access to approximately $587 million of capital and compliance with debt covenants.
- Of cash on hand, $85.8 million was held by foreign subsidiaries and considered indefinitely reinvested; repatriation could create additional taxes. Dividends paid in the first half totaled $22.5 million.
Outlook, notable items, and risks
- No specific company-wide financial guidance was provided. MSA expected certification of its redesigned G1 self-contained breathing apparatus in time to begin shipments in Q4 2014.
- Restructuring charges were $0.9 million in Q2 and $2.8 million for the first half, mainly related to staff reductions and reorganization in Europe, South Africa, and Australia.
- MSA was negotiating the sale of substantially all assets and liabilities of its South African PPE distribution business and Zambian operations, with a sale considered probable within 12 months. These businesses were presented as discontinued operations and contributed $0.5 million of Q2 income and $1.1 million for the first half.
- Cumulative-trauma product-liability exposure remains a significant uncertainty: 2,924 lawsuits were pending, and MSA said it could not reliably estimate potential losses. The company recorded $145.2 million of related insurance receivables, up from $124.8 million at year-end, and was litigating coverage disputes with insurers. Management believed available coverage and current information meant pending claims would not materially adversely affect the company, but recovery timing and amounts remain uncertain.
- A hypothetical 10% strengthening of the U.S. dollar would reduce reported first-half sales by approximately $27.6 million and net income by $1.3 million. MSA also cited variable-rate debt and foreign-currency exposure.
Important facts for investors to verify
- Progress on G1 certification and planned Q4 shipments, and whether product launches and strategic initiatives generate returns sufficient to offset higher SG&A.
- International segment sales and profitability trends, alongside the contrasting performance in Europe.
- Working-capital conversion and operating cash flow, particularly inventory and receivables growth.
- Collectability and timing of the $145.2 million insurance receivable, developments in insurer litigation, and cumulative-trauma claim activity.
- Completion and financial effects of the South Africa and Zambia divestiture, and the tax implications of foreign-held cash.