Mine Safety Appliances Company Q1 2009 Earnings Call Transcript

May. 1.09 | About: MSA Safety (MSA)

Mine Safety Appliances Company (NYSE:MSA)

Q1 2009 Earnings Call Transcript

April 30, 2009 10:00 am ET

Executives

Mark Deasy – Director, Global Public Relations

Bill Lambert – President and CEO

Dennis Zeitler – SVP and CFO

Joe Bigler – VP and President, MSA North America

Rob Cañizares – EVP and President, MSA International

Analysts

Edward Marshall – Sidoti & Company

Keith Kostek [ph] – Morgan, Keegan

Richard Eastman – Robert W. Baird

Greg Halter – Great Lakes Review

Walt Liptak – Barrington Research

Dick Ryan – Dougherty & Company

Operator

Good morning, ladies and gentlemen. And welcome to the MSA first quarter earnings conference call. At this time, all the participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Mark Deasy. Mr. Deasy, you may begin.

Mark Deasy

Thank you, Kim [ph], and good morning, everybody. As Kim said, I’m Mark Deasy, Communications Director. And on the call with us today are Bill Lambert, President and Chief Executive Officer; Dennis Zeitler, Senior Vice President and Chief Financial Officer; Joe Bigler, President of MSA North America; and, Rob Cañizares, Executive Vice President and President of MSA International.

Our first quarter earnings release was issued this morning at 8:30, and we hope that everybody has had an opportunity to review it. The release is posted on the home page of the MSA Web site, which is at www.msanet.com.

This morning, Bill Lambert will provide commentary on the first quarter. He will be followed by Dennis, who will review our financials. And after Dennis' comments, we will open up the call for questions and plan to adjourn by about 10:45.

Before we begin, I need to remind everyone that the matters discussed on this call, with the exception of historical information, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements, including without limitation, all projections and anticipated levels of future performance, involve risks, uncertainties and other factors that may cause our actual results to differ materially from those discussed here. These risks, uncertainties, and other factors are detailed from time to time and our filings with the SEC, including our most recent Form 10-K, which were filed on February 26, 2009.

We strongly urge you to review all such filings for a more detailed discussion of such risks and uncertainties. Our SEC filings can be easily obtained at no charge at www.sec.gov, MSA's Web site, and a number of other commercial Web sites. That concludes our forward-looking statements. So at this point, I will turn the call over to Bill Lambert for his comments on our quarter. Bill?

Bill Lambert

Thank you, Mark, and good morning, everyone. Let me begin by saying thank you for joining us today in our conference call and for your continued interest in MSA. Presumably, all of you have seen our first quarter earnings release and have our financial figures with all comparisons corresponding to the equivalent first quarter of 2008.

In our last investor’s conference call on February, I said that MSA was not immune to the effects of the global recession and that the recession was most definitely having an impact on our business, particularly in markets where you might expect to see it have an impact; markets such as construction, industrial manufacturing, mining and energy sectors, the challenges of reduced US military spending, and even a portion of our fire service market that is dependent on local municipal funding. In these markets, we are feeling the effects of higher unemployment, reduced capital spending, and tighter municipal fiscal policies.

Our first quarter results show the impact of the ongoing economic recession and its effects on our business. Consolidated sales in the quarter were $218 million, decreasing $48 million or 18% over the same period a year ago. However, it's important to keep in mind that over half of this decrease was due to weakening foreign currencies of this quarter versus a year ago.

MSA gross profit as reported, decreased $23.4 million or a 190 basis points when expressed as a percent of sales due to the decreased sales of higher margin product lines. A greater percentage of total sales coming from Europe and international, which tend to be lower gross margin segments, and due to challenges associated with increased unabsorption on our factories due to lower volumes and through play. Reported net income therefore, was $8.8 million decreasing – excuse me, reported net income decreased $8.8 million or 55% on that 18% sales decrease.

In anticipation of a worsening economic environment, we implemented a restructuring program in North America. During the first quarter, we recognized an $8.1 million charge for restructuring, or roughly $0.15 cents per basic share. The majority of this $8.1 million is primarily attributed to the Voluntary Retirement Incentive Program announced in North America. This program resulted in an 8.6% reduction in our salaried workforce, and is expected to provide $5 million in ongoing annual savings.

Comparing quarters between years, we saw significant devaluations of major global currencies in which we do business. On a currency adjusted basis, consolidated sales decreased $24 million over first quarter a year ago or about 10%. Sales decreased most significantly in North America which was down about 24% from a year ago.

Total international sales – that is, total sales outside of North America represented 49% of consolidated sales during the quarter versus only about 40% of consolidated sales a year ago. The decrease in North American sales was offset by strong invoicing against existing back log in Europe where local currencies sales increased 15% versus a year ago. International sales as measured in local currencies were also up 6% from a year ago.

Over all, consolidated gross margins decreased to 45.5% from 48% last year, a 250 basis point decrease. One cause for this is the significant declines we've seen on sales of higher margin product areas in North America. Sales of SCBA and Air Purifying Respirators are off 14% and 25% respectively from a year ago. Head, eye, and face protection products are off 33% from a year ago in North America, as sales in these product areas tend to be more closely correlated with industrial employment.

Combined Europe and international gross margins were 43.5%, 200 basis points lower than North America and as indicated earlier, these sales outside of North America accounted for 49% of total sales during the quarter versus 39% a year ago. European gross margins are experiencing downward pressure caused by two major factors. First, it relates to currency devaluations in the UK and Eastern Europe, where we've seen a 25% to 30% weakening of those currencies versus the euro in comparable quarters. The second factor relates to intensifying price competition. All regions in Europe report broadly that all markets are becoming more price sensitive and competition more aggressive in their pricing.

Our cost containment initiatives were directionally in sync with the reduced sales volumes we are seeing. SG&A expenses were $9.3 million below a year ago, showing a 14% reduction.

And the first quarter did not see the full benefit of some of our cost reduction activities, as some had implementation dates in February and March. North American operations showed exceptional cost control this quarter coming in $5.4 million lower than a year ago, which is a 16% reduction.

Europe also showed good cost control coming in 3% less than a year ago on a local currency basis. We continued to implement additional cost reduction initiatives in Europe, and are framing various scenarios for further cost reduction and restructuring alternatives there. International also showed decent cost control in certain affiliate companies initiating strong actions to end the quarter to aggressively decrease costs, especially in Latin America and in Australia, two areas hit hard by the recession and where we saw sharp decreases in mining activity. These cost reduction activities will show greater benefit in coming quarters as they are only partially in effect during first quarter.

Let's discuss each of the segments in a little bit more detail. As I stated earlier, North American sales showed a 24% decrease versus last year. Our North American commercial industrial business is off most significantly due to rising unemployment in the industrial sectors where product demands for hard hats, respirators, and fall protection is closely tied to employment and activity levels.

Lower invoicing in North America was the result of the following key factors. We saw $16 million less in our core commercial industrial business, reflecting a 21% decline in that area due to the effects of the economic recession and resulting employment. The slowdown has reduced end-user demands across most markets, but specifically the construction, and oil and gas industries. North American fire service sales were down nearly 35% from the first quarter a year ago.

However, in the first quarter a year ago, we saw very strong shipments against pent up demands in early 2008 for SCBA that met the new requirements of the NFTA in 2007. North American military sales, which includes the US and Canada military, were off $3.2 million or 13% from a year ago. Last year saw a strong first quarter invoicing to Canadian Defense forces on contracts that did not repeat this year.

North American gross margins were actually slightly ahead of the year ago driven by implementation of stricter pricing policies. And operating expenses in North America were well below a year ago, showing a 16% reduction versus Q1 2008. This reflects excellent results from the focused expense reduction efforts on the – of the North American management team, some of it which I will detail a little bit later.

Shifting my focus now to Europe, and despite a challenging global economic environment, European performance was quite satisfactory with sales and operating profit nicely above last year. Supported by a high beginning backlog, local currency sales in the first quarter were 15% over a year ago, as shipments were generally in balance with incoming orders during the quarter. The ending backlog at the end of first quarter ‘09 has not really diminished.

I mentioned earlier that we are framing various cost reduction and restructuring initiatives for Europe. And I say Europe had a terrific first quarter, where activity was high and was certainly a bright spot for MSA. European gross margins were down 6.3 points – percentage points below a year ago.

Half of this was due to a higher proportion of military business, which was up 25% in the quarter, but is historically at low margins. The other half of the margin decrease in Europe caused by the weaker British pound and weaker eastern European currencies, which saw as much as a 25% weakening against the euro over the comparable quarters. We’ve had a focus on expense control in Europe just as we have had in North America. And the higher volume in sales and lower spending there has resulted in operating income 33% better than 2008.

With an improved income tax profile versus last year, net income for Europe was nearly three times what it was a year ago, improving $1.4 million during the quarter. European performance really was a bright spot for MSA in the first quarter. Generally, European government segments, the military, police, and fire service, were strong. And funding for projects in this area has remained in place so far this year. European back log is healthy for the second quarter, but we remain cautious about the second half of the year.

A continuing slide of industrial order activity is starting to be seen as industries across Europe adjust to the global recession and distributors cut back their purchases to draw down and re-balance their inventory levels. We continue to closely monitor the changes and frequency in size of orders from our European distributors. And additionally, all regions in Europe are reporting broadly that all markets are becoming more price sensitive, and competition more aggressive in pricing.

Shifting my focus to international, those areas outside of North America and Europe, we reported an overall reduction in sales of $8.8 million or 15% from a year ago. However, when stated in local currency sales, these segments saw sales increase $2.9 million or 6% during the first quarter.

We saw strong improvements in China, where we increased sales over $5 million due in part to strong shipments of SCBA to the Hong Kong fire bureau. We also saw improvements in South African sales and operations, where local currency sales were up to $2.6million or 22% during the quarter as mining activity for precious metals was on the rise

These areas of growth and improvement however, were offset in international by sharp decreases in sales in Australia and Latin America, which were down $3 million and $1.9 million respectively in the quarter. Both areas felt a rapid reaction to the global recession with cut backs in mineral mining, and were affected by the stocking initiatives by distributors seeking to preserve cash flow. Gross margins internationally suffered from the large devaluations of Australian, South African, and Latin Americans currencies, compared to the first quarter of 2008. However, operating expenses throughout international operations were held in check and adjusted downward in line with reduced sales.

Overall, we had some good successes during the quarter which I think are worth noting. During the quarter we announced our successful bid to win the $45 million advance combat helmet contract, a two-year contract that ensures production at our Newport plant until April 2011. Our sales teams also closed a notable $2 million custom permanent instrument order with the US Navy and $1.5 million SCBA order for the Tallahassee Fire Department.

Ballistics body protection sales were well above our expectations and well above a year ago. And as you know several large military ballistic vest contracts are still pending and we won’t know the outcome of those until probably the third quarter. But we remain diligent and our efforts to win a portion of those opportunities.

The National Institute for Justice announced a new performance criteria for law enforcement ballistic body protection late last year. And then in this quarter, MSA was the first to receive product approval under this new standard.

In general, I remain very optimistic over the opportunities in ballistic body protection and soft body armor, and expect to see more in the coming quarters. Notable progress has been made with implementing demand flow technology at all North American plants during the quarter, increasing our manufacturing capabilities in (inaudible) and transferring select operations from higher to lower cost plants.

North American inventories have been reduced by $10 million since the end of the year. Day sales outstanding have improved slightly from 74 days to 71 days year-over-year, and we’ve seen a slight improvement in our turns. These are meaningful accomplishments in an economic period as challenging as this one.

Improved delivery performance from Berlin has enabled more timely shipping of backlog and improved customer confidence despite some of the disruptions in plant deliveries caused by credit limitations of distributors. And we begin production in our newest factory and technology center in Suzhou, China, and we’re making good progress in ramping up this plant to meet the needs of the Asian market as well as being a low cost source for select components to MSA distribution points around the world.

As our operating expenses in the first quarter indicate, we have implemented more significant cost control measures on a global basis to reduce expenses across MSA, and we’ve taken actions to reduce staff and better align our factory work force with the lower customer demand we are seeing. I can assure you that we have intensified our efforts to manage and reduced cost in all areas in the company, while we continue to implement long term strategy to enhance efficiency, and improve operating margins on a global basis.

There have been several cost cutting measures that we have been implemented going this challenging times. As mentioned earlier, during the first quarter we completed our voluntary retirement incentive program and sent that program in North America, which resulted in an 8.6% decrease in our US salaried work force. This became effective February the 1st. The cost of this program for North America was $6.6 million, but is expected to provide MSA with an estimated on-going $5 million in annual savings.

We’ve implemented a pay freeze for all salaried US and Canadian based employees, saving an estimated $1.9 million in expense this year. Additionally, we have implemented salary restrictions globally. In our factories we’ve eliminated overtime and we have responded quickly to demand changes by adjusting our hourly work force to temporary lay-offs.

In some areas of the world like Australia and Latin America which are being particularly hard hit by cutbacks in the mining industry, we have reduced head counts through restructuring activities and have implemented short work week programs the further reduced costs.

CapEx restrictions went into effect late last year and only those programs most urgent to our future are being funded at the present time. If CapEx programs – if the CapEx program was important but not urgent, it’s implementation is being delayed into the future years. Tight discretionary spending restrictions are in effect on a global basis.

We’ve implanted tighter cash management process this season and have a very focused working capital improvement program in place, of which we are seeing some early indications of success. And Dennis will speak to those in his comments.

Yesterday we announced the suspension to the company match portion of our defined contribution retirement savings plan or our 401-K, which is expected to save $1.7 million this year. And also yesterday, we announced a management salary reduction plan which cuts pay in a graduated way from 5% at the manager level, up to 20% for the CEO and our Board of Directors, and is expected to save approximately $1 million this year.

I want to assure our investors that management has focused efforts on the pace of implementation of our cost reduction initiatives around the world. I am thankful and grateful to the MSA team around the world for the way they have responded to this economic downturn in order to maintain and enhance the long term strength and profitability of MSA and in the way they have continued to serve our customers.

As I’ve said before, what we will not cut during this recession is our passion and our drive to grow the MSA brand throughout the world, nor the key elements of our strategic plan for growth. I believed MSA is well positioned for long time growth and earnings and sales once the global economy rebounds. We have a strong, balanced, and diversified portfolio of leading safety products and a strategic plan that we continue to implement to strengthen the long-term performance of our company for the benefit of our customers and our share holders.

Certainly, there are challenges in the upcoming quarters, and by most estimates a sustained recovery of the global economy is at least two, maybe three quarters away. Recovery maybe accelerated by favorable effects of the economic stimulus plans which are being implemented by governments around the world where government funding for construction progress – projects and stimulus plans to increase consumer spending will eventually reverse the declines we see in the industrial employment. And ultimately, the stimulus plans will increase demand for our safety and instrument products.

I feel the management at MSA has responded in an appropriate ways to the economic downturns and we continue to be responsive and flexible to the challenges before us. And we’re prepared to do more if we need to. I firmly believe the future of MSA is solid and secure. In this I remain very confident.

This recession will not last forever. And the measures we have taken will enable us to not only weather this current storm, but help us remain focused to emerge stronger in a way that increases shareholder value over the long-term.

My confidence is bolstered because of what I have seen in my recent visit s to MSA plants around the world. We are addressing the challenges of the current recession together with a spirit of team work that no recession can diminish. I have seen the spirit in our team’s dedication to customer service, in the long hours they put forth to complete a project, and in their unwavering focus on quality.

I thank each MSA associate around the world for the efforts that they’re putting forth everyday to serve our customers and to keep our company strong and vibrant. I commend their dedication, and I’m most grateful for during this challenging times.

Now, I would like to turn the conference call over to Dennis Zeitler, our CFO who will provide you with insights into our financial results, Dennis.

Dennis Zeitler

Thank you, Bill. Good morning, everyone. I would like to give you some further insight into our first quarter performance and comments on the balance sheet and cash flow statements. Additional information will be available later today when we file our Form 10-Q with the Securities and Exchange Commission.

As Bill mentioned, sales in the first quarter of 2009 were $218 million. Compared to the first quarter of 2008, sales are down 18% with decreases in each of our three geographic segments. However, when you adjust our sales to the relative strength of the US dollar compared to the first quarter of 2008, our sales are down 10% in total; which is a combination of North American sales down 24%, Europe up 15%, and international up 6%. By markets, the fire service was down 17%, military down 1%, and industrial down 23%. Adjusted for currency rate changes, fire service was down 14%, military is up 2%, and industrial is down 11%.

As I’ve mentioned, North American sales are down 24%, composed of a 35% decrease in the fire service, a 13% decrease in military, and a 21% decrease in industrial sales. This is a particularly tough quarter for comparing fire service sales, as the first quarter of 2008 was very strong with the implementation of the new NFPA standard.

Our international sales were down 15% this quarter. Although fire service sales are up 62% and military was up 28%, our industrial sales were down 27%. Without the changing currency rates, our international sales are up 6% in total; 84% for the fire service, 45% from military, but down 8% for industrial.

European sales are down 6%, compared to the same quarter last year, being down 5% in the fire service, up 25% in the military, but down 17% in industrial. Without the currency changes, sales are up 15%; being 5% for fire service, 38% for military, and 15% for industrial. Our European sales have been a welcome success in the current economic environment.

The other view of our sales performance is to separate the two portions of our business that historically have been the most volatile, US fire service and US military from everything else. Our US fire service sales of $27 million is a decrease of 31% and our US military sales of $19 million is up 7%. Then, when we look at all of our other globally diversified sales that comprise 79% of our total sales this quarter, these sales are down18% at current exchange rates or down 7% when you exclude currency rate changes.

Our gross profit rate for this quarter is 38%, down from 40% last year. Our continuing efforts to reduce manufacturing cost, more than offset by a decreased sales of higher margin products and the overall reduction in factory throughput.

Selling in administrative cost in the first quarter was 26% of sales, up 1% from last year. But in terms of absolute dollars, we have decreased SG&A by 14%, which is a reduction of $9 million. The actual savings this quarter without the impact of exchange rates is $4 million. Our R&D expenses are down only 5% this quarter as we continue to invest in new technology and products that will grow our organic sales in years to come.

The resulting operating income, excluding restructuring charges and the currency gains, is $20 million, a 41% decrease from the first quarter of 2008. As a percent of sales, this is 9% this quarter versus 13% in the first quarter of last year, and 12% for the full year 2008.

Our consolidated tax rate in the first quarter was 33% versus 38% last year. We are benefiting from the use of tax laws carried forward in several countries, as well as the favorable impact of the R&D tax credit on the lower amount of taxable income. The first quarter of last year also include a one time tax charge in Germany.

The bottom line is net income of $7 million or $0.20 per basic share compared to $0.45 last year. On a pro-forma basis, which would exclude the $8 million of restructuring charges and the $1 million currency gain, our net income will be $12 million, which is $0.34 per share.

Some good news on the balance sheet and cash flow statement, our cash position remains at $50 million at the end of March, and we decreased our short-term debt by $5 million. We have reduced our receivables and inventories by a total of $30 million, as sales have decreased and we have been able to maintain both our day sales outstanding and our inventory turns at last year's levels. We have significant efforts underway to further reduce inventories and to improve our accounts payable performance. Our most significant cash outflows this quarter were for dividends and capital equipment.

In order to assure our access to bank credit, we have extended our credit facilities here in the United States from a $90 million committed credit line to a $110 million revolving credit agreement that runs until mid-2011. At March 31st, we were borrowing $46 million under this facility.

Those are my comments. At this point, Bill, Rob Cañizares, Joe Bigler, and I will be more than glad to answer whatever questions you may have. Please remember that MSA does not give what is referred to as guidance. And that precludes most discussions related to our expectations for future sales and earnings. Having said that, we will now open the call to your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions) Our first question comes from Edward Marshall from Sidoti & Company. Please go ahead.

Edward Marshall – Sidoti & Company

Good morning, guys.

Bill Lambert

Hi, Ed.

Dennis Zeitler

Good morning, Ed.

Edward Marshall – Sidoti & Company

The voluntary retirement incentive program that you announced in the press release of $5 million annual savings, what is the expected savings this year?

Bill Lambert

That will be $400,000 a month, Ed. So you saw about $400,000 of it in the first quarter.

Edward Marshall – Sidoti & Company

Okay.

Bill Lambert

And you are going to see $1 million – these are pre-tax numbers, $1.2 million each quarter thereafter.

Edward Marshall – Sidoti & Company

Okay. And then we talked about Europe and you talked about the fact that you feel that sales are going to be pressured in going forward. You said Eastern Europe. Now can you remind me whether it's Eastern Europe or Western Europe that has seen these sale declines?

Bill Lambert

I think we're seeing it in both areas, Ed. France where we're seeing a definite slowing of orders in Western Europe coming out of France. We're seeing Eastern Europe – we’re seeing a lot of opportunities in Eastern Europe. They remain, but what we're affected by in Eastern Europe is the weakening of those currencies versus the euro, intensifying price competition in those particular markets, and some delays in some of the purchases, either by distributors or by governments in some of the major projects, delays in those decisions being made.

Edward Marshall – Sidoti & Company

Is the margins that you see in both Eastern and Western Europe, are they even? Or is there one that's favored and a little bit higher or a little bit lower from margin perspective?

Rob Cañizares

This is Rob Cañizares. Margins in Eastern Europe are slightly lower than in Western Europe. And because of the exchange rate impact of the Eastern European currencies, of course, that’s a lot of price pressure that we're feeling.

Edward Marshall – Sidoti & Company

I see. And then can you talk about the trends that you saw in the first quarter from January to March in both North America and a little bit of international as well? You can touch on both, and did they improve? And if you would also discuss kind of April and the sales trends that you see there so far this year?

Bill Lambert

Well I don't think we'll talk much about April or the second quarter, Ed.

Edward Marshall – Sidoti & Company

Fair enough.

Bill Lambert

I could certainly tell you a little bit about what we saw happening in the first quarter. Late last year, we saw a fairly rapid reaction to the economic downturn as distributors initiated de-stocking initiatives within their own companies to improve or maintain their cash flow aspects. We saw that happen fairly quickly in November and December of last year and get to a point with that respect that sort of leveled off in January and February.

However, what we started to also seen in January and February though, is a worsening employment picture. And we have continued to see employment decreased, unemployment increased in many of the markets that we served. So, I think that as – I do not see things accelerating any longer, but I certainly, and as I indicated in my comments, don't see things turning around in any kind of a hockey stick fashion and would expect that we would continue to see this in the second and third quarter of this year.

Edward Marshall – Sidoti & Company

You have mentioned distributors and there's an awful lot in de-stocking and there's been an awful lot of discussion across the board about the anticipation of a re-stocking in distributors. With the conversations with the distributors that you worked with, what's your feel there? What's your sense?

Bill Lambert

Joe, I'll let you answer that from a North American perspective.

Joe Bigler

On our North American perspective, I think most of the de-stocking activity with major distributors in North America has fairly well been completed. And what we're seeing is, as activity fix up at the unusual level, that does translate very quick into manufacturers' orders.

Bill Lambert

Hence, our supply chains are lot tighter now than they were, say five years ago or in any previous recession. I think what we've noticed different about this recession is just how tight the supply chains are. And so as end user demand, i.e. unemployment, increases or end user demand decreases. That goes through the distributor quickly and it affects us very quickly.

Conversely, as some of these stimulus plans begin to have an impact later this year, and knock on wood that will happen by the fourth quarter of this year, we would anticipate or hope to see some requests coming from our distributors to ramp up in that needed way.

Edward Marshall – Sidoti & Company

So it's fair to say that if there's not enough turning or recovery in the order rates, you know those still run relatively lean and look to a managed working capital at adjusted time order?

Bill Lambert

I believe that's exactly correct.

Edward Marshall – Sidoti & Company

Okay. And in my final question on the ACH where we discussed the ID/IQ of the two-year program here, the second quarter, is there a lapse in production here? I feel like I remember the June CA – a lapse from where the ACH contract that you had rolled off and the new one starts, and then what the costs would be associated with that?

Bill Lambert

Let me answer quickly now and I'll look to Joe to add a little bit more color to that answer. But yes, there will be a lapse. We will finish the order contract in May. I'm sorry, I looked to this month already and saying it's May, but we will end that contract. The deliveries on that contract in May and we will not begin to produce under the new contract – that $45 million two-year ID/IQ contract until sometime in July. Joe is there anything you like to add?

Joe Bigler

No. I think that's the key. We'll probably look at a 45 or 60 day delay in terms of shipments between the ending of the initial contract at the end of May and the beginning of the new contract by some time in July. That's our plan.

Edward Marshall – Sidoti & Company

I understand that you don't give guidance there. Any idea what kind of cost would run through the system and what kind of impact that will have to the bottom line?

Bill Lambert

I don't think we want to comment on that.

Edward Marshall – Sidoti & Company

Okay. Fair enough. Thank you, guys.

Bill Lambert

Thanks, Ed.

Operator

Our next question comes from Keith Kostek [ph] from Morgan, Keegan. Please go ahead.

Keith Kostek – Morgan, Keegan

Hi. Thank you for taking my question. Your tax rate was better than it's been. Do you think you can sustain about this level for the rest of the year? How do you see that?

Bill Lambert

Let me explain a little bit Keith, as to why it's as different as it was – as it is. First quarter last year there was no warranty tax credit, so we couldn't take – took pretty good any benefit from that. We had a special one time charge in Germany because the Germans imposed a tax on retained earnings last year. And we had certain affiliates that were losing money and we could not take the tax benefits from those losses for accounting reasons. So we had a lot of thing going against us.

All three of those are gone in the first quarter of this year. And in fact, some of the companies that have historically have lost money, are now making money. And therefore, we can account for that without having the effective – to have an effective tax rate on it.

That's why we come out of 33% this quarter. We talked about this a lot yesterday and I guess it’s fair to say that the rest of the year ought to be somewhere in the maybe the 34% to 35% range. I don't want to be as optimistic as the first quarter, but it will not be a tie that it was last year.

Keith Kostek – Morgan, Keegan

Okay. That helps. And then also, I guess you have the $900,000 currency gain. For second quarter do you see another gain or any outlook on that?

Joe Bigler

I'll give you an exact answer to that as soon as you tell me what exchange rates are in June 30th.

Keith Kostek – Morgan, Keegan

All right. Fair enough. But would you just – a general trend from what's happening or–

Joe Bigler

At this point we continue to share gains on that line.

Keith Kostek – Morgan, Keegan

Okay. Thank you.

Joe Bigler

You're welcome.

Bill Lambert

Thank you.

Operator

Our next question comes from Richard Eastman from Robert W. Baird. Please go ahead.

Richard Eastman – Robert W. Baird

Good morning.

Joe Bigler

Good morning.

Bill Lambert

Hey, Rick.

Richard Eastman – Robert W. Baird & Company, Inc.

I just like to ask a couple of things, maybe some clarifications. Dennis, when you gave the sales change by end market in reported dollars, fire service, military, industrial, could you just repeat that?

Dennis Zeitler

For the total business, the fire service – oh, in reported dollars.

Richard Eastman – Robert W. Baird

Yes. I get the LC number.

Dennis Zeitler

Okay. I just want to make sure that I get the–

Richard Eastman – Robert W. Baird

And then, I was also just going to ask you under gross margin, Europe, international versus North America. I think you separated those two.

Dennis Zeitler

Let me give you the answer to your first question. Fire services are down 17%, military is down 1%, industrial down 23%.

Richard Eastman – Robert W. Baird

Okay.

Dennis Zeitler

In reported dollars.

Richard Eastman – Robert W. Baird

Yes. I get it.

Dennis Zeitler

And now the second question was gross margin between North America and the rest of the world?

Richard Eastman – Robert W. Baird

Yes. Against the 38% consolidated.

Dennis Zeitler

Actually, gross margins were – and your question is?

Richard Eastman – Robert W. Baird

I thought you said margin in North America was 40 – whatever you said. I don't know.

Dennis Zeitler

40%. That was the global number. Operating – gross cost was 38% this year, 40% last year. But that's the global number.

Richard Eastman – Robert W. Baird

Okay. I didn't catch that. I thought you distinguished gross margin by region. Okay, all right. And then Bill, given all the cost actions you've taken here in the quarter, and you know fourth quarter into the first quarter, excluding the charge, do you see that the operating expense number, kind of SG&A, let me put it at SG&A, how does that look for the balance of the year in dollars? Does that come down more, or will there be some inflationary items in there?

Bill Lambert

Yes. I’ll do that one, Rick. I did some doodling on that. There’s no inflationary effect. They are all practical purposes. No salary employee in North America is getting a raise this year.

There will be raises outside the US but the pay cuts that are being impacted plus very little inflation that we have to worry about. And for example, the voluntary retirement program wasn’t really effective until March 1st, so we only have one month of that in the first quarter, whilst three months over in the second.

Effective February 1, we had another month of expense. We only have one month of benefit in the first quarter. We’ll get three months of benefit every quarter thereafter. The salary cut program will only get one month of benefit in the second quarter, and then three months of benefit in the second half. Same thing with the 4 – we suspended our 401-K match. That was only one month of benefit again in the second quarter, and then the full benefit in the second half.

Richard Eastman – Robert W. Baird

Okay.

Bill Lambert

So what it comes down to, we will continue to see decreases on absolute SG&A expense, second quarter to first quarter. And then by third quarter, we’ll have the full benefit of the reduction. Third quarter and fourth quarter all look about the same and they both should be less than the second quarter.

Richard Eastman – Robert W. Baird

Okay. All right. That’s really helpful. Thanks. That seemed to be the trend. And then one just last thing. Bill, if I look at the first quarter and I look at the segments whether is geographically or I look by end market, and I’m thinking of your revenue line being called at $219 million. Are there any end markets here that you would anticipate, should improve sequentially?

Again, I’m struggling a little bit. Industrial seems for the balance of this year to be pretty much locked in. We get some pricing competition in Europe. Military flattens out here in this run rate for the most part. And fire service always a bit of a wild card, but again with the AFG budget slightly reduced this year, it’s hard to see some up tic there. So how do you think that your sales line – just qualitatively as you run through the year?

Bill Lambert

Qualitatively, Rick, I would agree with you.

Richard Eastman – Robert W. Baird

Yes. All right, well that’s good. I don’t need much more color than that. Thank you.

Bill Lambert

Thanks, Rick.

Operator

Our next question comes from Greg Halter from Great Lakes Review. Please go ahead.

Greg Halter – Great Lakes Review

Good morning, guys.

Bill Lambert

Good morning.

Greg Halter – Great Lakes Review

I know in the release you mentioned the careful watch over capital spending restrictions. What is your budget for 2009 now?

Dennis Zeitler

For CapEx, it’s about $28 million. That’s the budget. We don’t expect to spend that much.

Greg Halter – Great Lakes Review

Okay.

Bill Lambert

Last year we spent a little over $40 million.

Greg Halter – Great Lakes Review

And I don’t know if you gave the cash flow from operations figure?

Dennis Zeitler

No, but I can.

Greg Halter – Great Lakes Review

That’ll be great.

Dennis Zeitler

Cash flow from operating activities at $23 million.

Greg Halter – Great Lakes Review

Okay. So that compares against a use of $6 million a year ago, correct?

Dennis Zeitler

Correct.

Greg Halter – Great Lakes Review

And anything happening with the insurance receivable? And can you comment on what the dollar amount is currently?

Dennis Zeitler

Yes, it went up $10 million since the end of December. So we’re now at $70 million versus $60 million.

Greg Halter – Great Lakes Review

And the cases still continue to move along?

Dennis Zeitler

Our next significant legal event isn’t until July when we actually have a hearing with the judge here in Pittsburgh. I don’t expect that we’ll see anything of any significance in the second quarter.

Greg Halter – Great Lakes Review

Okay. Thank you.

Operator

(Operator instructions) At this time, we have a call from Walt Liptak from Barrington Research.

Walt Liptak – Barrington Research

Hi. Thanks, guys. Walt Liptak with Barrington.

Bill Lambert

Hey, Walt.

Walt Liptak – Barrington Research

Okay, just a couple of quick ones. On the Fire Grant Program, can you talk a little bit about the money that’s flowed from last year and the timing of the new program?

Joe Bigler

Yes. This is Joe, Walt. As far as the 2008 dollars, just about all of the 2008 funding is now complete. As far as the 2009 dollars, it equates to about $565 million. And the application period was delayed. It just opened for the 2009 funding on April the 15th.

So if you take that April the 15th date and really extend that through the process, we should see money actually flowing into the municipalities and into the fire departments. So hopefully, sometime in that September, beginning of October timeframe.

Walt Liptak – Barrington Research

Okay. So we’ve got a lap from now until September for that fire grant money?

Joe Bigler

In comparison to last year, the money really started to flow right at the beginning of July. I think the first release was right around July 5th. So there’ll certainly be a 60-day delay because of some bureaucratic delays in opening up the application period not until April 15.

Dennis Zeitler

But Joe, is it safe to say what we’re hearing is that the government is viewing these kinds of competitive programs as some form of stimulus. And so they are trying to get this money out into the economy just as quickly as possible. So if there’s some optimism, we could hope that decisions would be made to release this money quicker as opposed to slower as they did in years past.

Joe Bigler

Correct.

Walt Liptak – Barrington Research

Okay. Okay, that’s good. I apologize. I got on call just a little bit late. Timing on the IOTB awards?

Bill Lambert

Yes, the IOTB is still being reviewed by the government. And at this point, we expect to hear a decision from the government during the month of July.

Walt Liptak – Barrington Research

Okay. And then last, I think a number of years ago when they had the SARS outbreak you saw a bump in some of your sales. I wonder if you’re seeing any distributor build from concern over swine flu? And then I’m just thinking what your percentage of sales is from breathing apparatus?

Bill Lambert

Well Walt, this is a situation that we, and I think everybody else, is monitoring very closely. And while there might be some opportunity for us, I really think it’s important for me to level-set some expectations relative to that question. It comes up a lot.

First of all, disposable respirators, sometimes referred to as paper masks and other masks that we see when we watch the news on the evening, these disposable respirators are not a major product line for MSA. Nor is it a particularly high-margin business for MSA. And aside from maintaining some capacity that allows us to serve our retail channels, we made this strategic decision a few years ago to, in effect, exit the industrial side of this business because primarily of the liability risks associated with this particular product line.

This is the single greatest reason I think why we see that masks could be in short supply. Our products warn that masks like the N-95 respirators that are approved by the government do not provide universal protection against flu viruses. Now they could help to control the spread of flu, but they do not provide universal protection against it. But when we balanced that against the potential for lawsuits coming from individuals who contract the flu while wearing the masks, even though they probably contracted the flu through hand-to-mouth contact or by some other means, we view that risk and the potential for lawsuits is simply too great.

It’s a somewhat complicated issue, I’ll tell you that. But until Congress and the administration provide manufacturers with some sort of protection against litigation, you are not going to see MSA focusing on this part of the business. Through organizations like the ISEA, The International Safety Equipment Association, of which we are a member, and most other safety equipment companies are members, we’ve been actively attempting to get Congress and the administration to make changes and address the need. But it’s been to no avail.

Walt Liptak – Barrington Research

Okay.

Bill Lambert

So looking at our current situation, our highest priority right now with these types of masks is to use our inventory to protect our own employees in regions where the flu threat is elevated so that we’re able to better serve our customers and continue with our business in those regions. But from our perspective, shareholder value at MSA is derived from other higher margin product groups and competencies. And that’s where I’m putting our focus.

I don’t see at this point in time with the influenza breakout that product areas you mentioned, that’s TBA, where higher levels of protection might power their purifying respirators. We are not at this point in time seeing any real impact to our business because of that.

Walt Liptak – Barrington Research

Okay. All in, can you comment on just what percentage of revenue breathing apparatus represents?

Dennis Zeitler

Breathing apparatus? Walt, self-contained breathing apparatus as you can see in the annual report last year, that was 24% of our business for the year.

Walt Liptak – Barrington Research

Okay. And then how about with the–

Dennis Zeitler

A step down to just a genuine respirator that’s has a rubber fit to your face and cartridges, that was 14% of our business last year.

Walt Liptak – Barrington Research

Okay.

Dennis Zeitler

That 14% includes a very small percent that Bill said, that paper mask, which is less than 1% of our business.

Walt Liptak – Barrington Research

Okay. Okay, thanks.

Operator

Thank you. Our final question comes from Dick Ryan from Dougherty & Company. Please go ahead.

Dick RyanDougherty & Company

Good morning. Bill, you mentioned the certification on the police ballistic vesting. Can you talk about what the go to market strategy is there? What you see is getting to that market and timing?

Bill Lambert

Sorry, let me ask Joe to comment on that. He’s tracking that a lot more closely than I am. So he can prod you with the latest news.

Joe Bigler

The over all motivation here would be the passage of the NIJ standard. MSA was the first manufacturer to pass all of the testing from NIJ. And so we have really expanded our sales organization within the law enforcement market, have been very aggressive over the last nine to 12 months of setting up quite an extensive law enforcement distribution network.

So combined with this expanded distribution network that specifically serves the law enforcement market as well as some new distributors that feel that this is an opportunity that are getting involved with this, that combined with our sales and marketing efforts and being the first manufacturer to pass NIJ, we see some nice activities, significant activities certainly coming in the second half of this year and continuing on.

Dick RyanDougherty & Company

Could there be some demand with the NIJ standard that you saw at the FCBA a year or so ago?

Joe Bigler

I don’t think it would be to the extent of FCBA. But there certainly are police departments that we know, are in need of some vests. And they are waiting for only NIJ approved vests. So there is some pent up demand.

Dick RyanDougherty & Company

Can you go to a market right now or is there something else that’s needed to happen with NIJ?

Joe Bigler

We would be ready to really deliver within the next two to three weeks. We have passed all of the NIJ testing. What we are waiting for is the official letter from NIJ which we expect within the next week. And then we would be set to go.

Dick RyanDougherty & Company

Has anybody else passed the standards, to your knowledge?

Joe Bigler

To the best of our knowledge, we know that there are other manufacturers that are in the queue and there is some testing done. I don’t know the extent to where that testing stands.

Dick RyanDougherty & Company

Okay. Okay, good. Mr. Robert, I just heard briefly early on some comments – about some positive comments from China and South Africa. May you just give a quick overview of those two opportunities?

Rob Cañizares

Sure. In China, partially because of our new product lines and new capacity in the Suzhou facility, we’re actually seeing a relatively strong order pace this year compared to the first quarter of last year. And the sales have been strong. We also had a significant success that Bill highlighted in the breakthrough with the Hong Kong Fire Service, which of course was a first. We just opened our facilities in the Hong Kong about two-years ago and this was a major breakthrough. That contributed significantly to our growth in the first quarter.

In South Africa, we have sort of a mixed bag. As you can appreciate, the gold price has gone up to nearly $1,000. Some miners are looking for gold and producing gold rather strongly. On the other side, platinum which is a supplier to the catalytic converter in the auto industry is significantly down. The good news for us is in the balance, we are seeing a stronger activity in South Africa and our improvements in the operations and our improvements in our cost structure have actually improved the financial performance of our business.

Dick RyanDougherty & Company

Great. Thank you.

Rob Cañizares

You’re welcome, Dick.

Bill Lambert

Thanks, Dick.

Operator

At this time we have no further questions.

Mark Deasy

Okay. Thank you, Kim. And I would like to thank everybody again for joining us today. We do appreciate your interest as always in MSA. Also I want to remind everybody that an audio replay of today’s call will be available on the MSA Web site for the next 30 days. So if you’re taping the minutes and you need to go over it again, please feel free to visit our site. On behalf of Bill, Dennis, Joe, and Rob, we look forward to talking with you again.

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