MSA Safety Incorporated — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. MSA develops and sells safety products serving industries including fire service, oil and gas, mining, and construction. Results are unaudited; 2014 segment information was recast for changes in segment reporting and expense allocations.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $287.0M | $282.5M | $543.7M | $547.5M |
| Gross profit | $130.5M | $129.7M | $247.3M | $251.5M |
| Gross margin | 45.5% | 45.9% | 45.5% | 45.9% |
| Continuing-operations income attributable to common shareholders | $23.7M | $22.1M | $33.0M | $35.7M |
| Diluted EPS from continuing operations | $0.62 | $0.58 | $0.87 | $0.94 |
| Operating cash flow | Not provided separately | Not provided separately | $7.7M | $15.3M |
Q2 net income attributable to MSA was $24.3M, including $0.6M from discontinued operations; first-half attributable net income was $34.0M, including $0.9M from discontinued operations. First-half diluted EPS including discontinued operations was $0.90. Dividends were $0.32 per common share in Q2 and $0.63 in the first half.
Liquidity, debt, and cash flow
- At June 30, cash and equivalents were $88.1M, down $17.9M from year-end; $76.9M was held by foreign subsidiaries and considered indefinitely reinvested.
- Total debt was $269.7M, including $263.0M long-term debt. Debt increased $18.0M from December 31, 2014. The $300M revolving facility had $173.7M unused, including letters of credit; the company reported compliance with debt covenants.
- First-half operating cash flow was $7.7M, versus $15.3M a year earlier, reflecting lower earnings and working-capital needs. Inventory increased to $150.4M from $123.0M at year-end; trade receivables rose to $218.8M from $211.4M.
- First-half capital expenditures were $16.0M. Investing activities used $8.0M, including proceeds associated with an Australian property disposal. Financing activities used $12.9M, including $23.5M of dividends and $10.0M of company stock purchases; net borrowings were $18.0M.
Material changes and management commentary
- Q2 sales rose 2% reported and 11% excluding unfavorable currency translation, which reduced reported sales by 9%. First-half sales declined 1% reported but increased 7% excluding currency effects.
- North America led growth: Q2 sales increased 13%, with SCBA shipments up 90%, supported by demand for the G1 product. Europe and International sales declined 5% and 14% reported, respectively, largely due to currency translation. International local-currency sales fell 3%, with challenging conditions in Brazil.
- First-half continuing-operations income fell 8% year over year. A $7.6M first-quarter charge for exit taxes related to the European reorganization contributed to a reported 46.0% effective tax rate; excluding that charge, the rate was 33.4%, versus 32.9% in 2014.
- Management cited product mix and higher inventory charges, including product phaseouts, as factors in lower gross margin. SG&A declined in reported dollars, while R&D increased as the company continued development of the G1 platform and other core products.
- The company was negotiating the sale of substantially all assets and liabilities of its South African PPE distribution business and Zambian operations; management considered closing in 2015 probable. These businesses were reported as discontinued operations.
- No quantified earnings or revenue guidance was provided in the filing. The company said domestic liquidity was supported by cash, operating cash flow, repatriation of some current foreign earnings, and available credit.
Risks, contingencies, and unusual items
- MSA LLC had 2,047 open cumulative-trauma product-liability lawsuits at June 30. The filing states that the company cannot estimate its overall cumulative-trauma exposure. A $72.3M reserve, mostly relating to prior settlements, was classified as current and was expected to be paid over four quarters beginning in Q3 2015.
- Related insurance receivables totaled $219.0M, mostly noncurrent. Recovery timing and amount depend on insurer negotiations, litigation, and insurer financial condition. Several coverage disputes remained pending; a Delaware trial was scheduled for Q2 2016. Management did not expect resolution of claims to materially adversely affect future financial condition or liquidity, based on information then available.
- Currency movements affected reported sales and equity translation; first-half foreign-currency translation adjustments reduced equity by $20.2M. The company also reported Q2 currency-exchange losses of $1.6M, mostly unrealized.
- Other notable items included a $0.7M impairment of intangible assets after the decision to wind down sales efforts for certain non-core products, and $1.0M of first-half restructuring charges for operational right-sizing.
- Gross unrecognized tax benefits were $14.8M, with $1.1M of accrued interest and penalties. The filing also notes that repatriating foreign cash could result in additional tax, which it could not practicably quantify.
Investor facts to verify
- Whether G1 SCBA demand and North American growth continued, and whether the increased inventory converted to sales without further margin pressure.
- Progress and final terms of the South African and Zambian divestiture.
- Cash generation, debt levels, revolver availability, and the schedule for paying the product-liability settlement reserve.
- Collections of the $219.0M insurance receivable and developments in the pending insurance-coverage litigation.
- Future tax rates and any additional costs or benefits related to the European reorganization and foreign-cash repatriation.