Business context and reporting period
Mine Safety Appliances Company (now MSA Safety Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The company develops and sells safety products globally through North America, Europe, and International segments. Comparisons below are against the corresponding 2010 periods unless otherwise stated.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $298.2 million | $242.0 million | $869.5 million | $691.6 million |
| Gross profit | $120.9 million | $90.7 million | $350.3 million | $263.4 million |
| Gross margin | 40.5% | 37.5% | 40.3% | 38.1% |
| Net income attributable to MSA | $20.0 million | $9.6 million | $52.9 million | $26.3 million |
| Diluted EPS | $0.54 | $0.26 | $1.42 | $0.72 |
| Interest expense | $3.2 million | $1.7 million | $10.4 million | $4.9 million |
Sales rose 23% in Q3 and 26% for the nine-month period. Gross margin improved in both periods; management attributed the improvement to pricing, manufacturing-cost control, and General Monitors. The effective tax rate was 33.5% in Q3 and 33.6% year to date, versus 34.7% in both 2010 comparison periods.
For the nine months, operating cash flow was $38.4 million, versus $1.6 million in 2010. Investing activities used $17.9 million, including $21.3 million of property additions; financing activities used $20.0 million. Cash decreased $0.9 million to $58.8 million. Cash from operations less property additions was approximately $17.1 million; this is a simple derived measure, not a company-reported cash-flow subtotal.
At September 30, 2011, total assets were $1.223 billion, current assets $481.1 million, and current liabilities $177.4 million. Notes payable and current debt were $8.5 million, with long-term debt of $377.1 million; total reported debt was therefore approximately $385.6 million. Cash less reported debt was approximately negative $326.8 million. About half of long-term debt was fixed-rate; the balance included variable-rate revolving-credit and industrial-development debt. The $250 million unsecured revolving facility was due in 2015; fixed-rate debt maturities extended through 2021.
Material changes and management commentary
- Q3 segment sales were $143.5 million in North America, $71.7 million in Europe, and $83.0 million International. Growth reflected industrial demand, General Monitors, military helmet shipments, and favorable currency translation. Europe had weaker SCBA and fire-helmet sales, partly offset by industrial-market growth.
- General Monitors, acquired in October 2010, contributed $22.2 million of Q3 sales and $63.5 million for the nine months. Its nine-month net income included a $2.3 million pretax inventory fair-value step-up charge.
- Interest expense increased mainly because of acquisition-related borrowing. Nine-month restructuring charges fell to $6.1 million from $11.5 million, relating to staff reductions and production or administrative relocations.
- Currency translation reduced accumulated other comprehensive income by $10.7 million during the first nine months. Q3 comprehensive income attributable to MSA was a loss of $3.1 million despite positive net income, primarily reflecting a $24.3 million foreign-currency translation loss.
Outlook, risks, contingencies, and unusual items
The filing provides no formal earnings or sales guidance. Management described continued demand in oil and gas, core industrial, mining, Latin American, and Asian markets, while noting weakness in some European fire-service and military markets. It cited government spending, competition, product-liability claims and insurance recoveries, new-product execution, foreign exchange, acquisition integration, and international operations as risks. A hypothetical 10% U.S. dollar strengthening or weakening would change reported nine-month sales and net income by approximately $45.7 million and $2.6 million, respectively.
MSA was named in 2,000 cumulative-trauma product-liability suits at quarter-end and said it could not estimate the possible loss range. The related insurance receivable was $117.0 million, up from $89.0 million at year-end; timing and collectability depend in part on insurer disputes and litigation. The company stated that, based on current information and available coverage, pending claims were not expected to materially adversely affect future results, financial condition, or liquidity, but acknowledged unfavorable resolutions could materially affect quarterly results. Single-incident product-liability reserves were $4.7 million.
Other subsequent events included an October sale of Paraclete ballistic-vest assets, described as immaterial; sale of the former headquarters, expected to produce a pretax gain of about $1.0 million in Q4; and formation of Safety Works, an approximately 73%-owned joint venture to be consolidated from October 2011. The company also resolved coverage litigation with Allianz in October; the settlement was not expected to materially affect operating results. Pension contributions were $3.5 million through September, with approximately $4.6 million expected for full-year 2011.
Important facts for investors to verify
- Whether sales and margin gains persist after separating General Monitors’ contribution, currency effects, and temporary military or industrial demand.
- Debt levels, variable-rate exposure, borrowing capacity, and the effect of acquisition financing on interest expense and cash generation.
- Recoverability and timing of the $117.0 million insurance receivable, and developments in the North River and other coverage disputes.
- Changes in the 2,000 pending cumulative-trauma claims, related defense costs, and any new information that could make losses estimable.
- Actual Q4 impact of the headquarters sale, integration of General Monitors, and consolidation of Safety Works.