Mine Safety Appliances Q1 2010 Earnings Call Transcript

May. 2.10 | About: MSA Safety (MSA)

Mine Safety Appliances (NYSE:MSA)

Q1 2010 Earnings Call

April 29, 2010 10:00 a.m. ET

Executives

Mark Deasy - Director, Global Public Relations

Bill Lambert - President & CEO

Dennis Zeitler - SVP & CFO

Joe Bigler - President, MSA North America

Rob Cañizares - EVP & President, MSA International

Analysts

Edward Marshall - Sidoti & Company

Brian Ruttenbur - Morgan Keegan

Richard Eastman - Robert W. Baird

Dick Ryan - Dougherty

Doug Thomas - JET Investment Research

Operator

Welcome to the MSA First Quarter Earnings Conference Call. My name is John and I'll be your operator for today's call. At this time all 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 John and Good morning everybody. Welcome to our first quarter earnings conference call for 2010. With us on the call this morning are Bill Lambert, President and Chief Executive Officer; Dennis Zeitler, our 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 earnings release was issued this morning at 8:30 and we hope everyone has had an opportunity to review it. If you need a copy it is available on the homepage of our own website, www.msanet.com. This morning Bill will provide commentary on our quarterly results. He will be followed by Dennis, who will review our financials and after Dennis' comments, we'll open up the call for you questions.

As always before we begin, I need to remind everybody 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 in our filings with the SEC, including our most recent Form 10-K, which was filed on February 26, 2010.

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

Bill Lambert

Thank you Mark and good morning everyone. Let me begin by saying thank you for joining us today on this 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 of first quarter of 2009.

Indicators of global industrial and manufacturing output improved in the quarter, even though global unemployment levels remain high by historical measures. We continue to see signs of economic stabilization and even solid signs of growth in the U.S. economy and in many parts of the world in which we operate.

Our incoming orders book strengthened late in the first quarter and continues to provide us with cautious optimism that the core industrial markets we serve, which makes up two thirds of our sales are now working their way out of this global economic recession. I'm pleased to report we are very clearly seeing a positive trend in our incoming orders, most notably in the industrial portions of our business.

More specifically orders began to show significant strength in March and we're seeing this trend continue in April. The emphasis we're placing on driving core industrial business in North America appears to be paying off as our industrial sales in this segment were up 17%, when compared to the first quarter of 2009.

Much of this improvement in incoming commercial orders came late in the quarter and our ability to get it all out was somewhat time constrained. As you saw in our press release, our consolidated sales in the quarter were $212 million, representing a decrease of $5.8 million or 3% over the same period a year ago. In our North American sales, sales were down 10% from a year ago, while European segment sales declined 6%.

Conversely, sales in our international segment increased almost 20% from a year ago, primarily due to currency translation. Comparing quarters between years, we did see in our most recent quarter a strengthening of major global currencies where MSA conducts business. MSA gross profit as reported $1.5 million on a consolidated sales declined I just noted but reflects an improvement of 80 basis points when expressed as a percent of sales. This improvement reflects both a change in product and the results of our continued efforts to improve operational efficiencies around the globe under project Magellan.

Overall our reported net income decreased $2.3 million or 32% on the previously stated 3% sales decline. During the quarter it's important to note that we recognized a $6.8 million pretax charge for restructuring or roughly $0.13 per basic share after tax. As I noted in our last earnings call back in February, we have moved into a new phase of activity in our efforts to transform MSA Europe.

This multi year project will reduce our operating costs in that segment, improve and streamline decision making and ultimately improve the profitability and effectiveness of our European organization. Of the $6.8 million charge in the current quarter, $5.3 million is associated with our restructuring efforts underway in Germany.

To give you a bit more insight into the results of our three geographic segments I'll start with North America. As I stated earlier, North American sales showed a $12 million or 10% decrease versus the same period last year. Lower invoicing in North America was a result of the following key factors.

First and most significantly, our North American military sales which include the U.S. and Canada were off $60 million or down 75% from the year ago. This was primarily due to lower SCBA sales to the Air Force but also due to our continuing delay in receiving first article approval on the next generation advanced combat helmet or what we more commonly refer to as the ACH-3.

I am therefore very pleased to report that approval for the ACH-3 was granted to us last week and we are now in production and will begin shipping against delivery requirements in May. We expect production leads to increase throughout the second quarter and third quarter as we ship ACH Helmets to the U.S. Army under our most recent $45 million contract. Achieving first article approval was a long time in coming but I am pleased that we have cleared that hurdle and that shipments against our current contract can finally begin. We are in the process of setting up a second production line in a second factory and expect to have that online sometime in the third quarter, further increasing our capability to meet the U.S. military's demand for ACH-3 helmets.

Looking at the fire service within North America, fire service sales were down $6 million or 21% reflecting the ongoing delay in the release of 2009 AFG funding to the fire service market. That's last years funding. The good news is that beginning January 29th of this year, the 2009 AFG funds started to be granted to local municipalities.

However, because of the lateness of this release to municipalities and the lag time between federal funds being announced, matching fund requirements being met, purchasing decisions being made and ultimately SCBA being shipped by MSA, we did not see any real effect of AFG funding during the first quarter.

Although matching fund requirements from fire departments are extremely low, generally less than 20% of the award for most fire departments, we are seeing some departments struggle with their municipal budgets to secure matching funds which doesn't eliminate the funds but it does further slow decision making. All of that not withstanding, we do anticipate that our fire service business will see significant benefits from the AFG releases in the second quarter of 2010 and throughout the year.

It is especially encouraging to note the growing strength in the industrial market where we saw an increase of $11 million or a 17% increase in North America versus the same period last year. Overall we are definitely seeing a broad based increase in end user demand in the North American industrial market and an improvement in our distribution channels willingness to restock safety equipment.

Shifting gears to our margin performance, our gross margins in North America were up 270 basis points in the current quarter when compared to the first quarter of 2009. This is primarily related to the more favorable product mix resulting from the lower levels of military business. This improvement was partially offset by increased costs associated with lower throughput in our factories and an unfortunate one time supplier related expense that we took during the quarter.

Shifting our focus to Europe, sales were down 6% from a year ago, where we saw lower fire service and military order activity in Europe. Firs service sales were down 8% in the quarter versus the same period last year while military shipments were off 27%. Sales were also up though in our core industrial markets in Europe, about 5%.

While we definitely saw an incoming orders pickup in North American Q1, its been quite a bit more uneven in Europe with orders in Western Europe showing some modest signs of improvement but Southern and Eastern Europe still suppressed by the great recession.

Our gross margins in Europe however were 400 basis points above a year ago; reflecting a mix more heavily weighted towards the industrial market and the initial effects of our European cost reduction initiatives which we implemented last year. In the first quarter, we also made good strides in our efforts to better manage operating expenses as local currency, SG&A expenses in Europe were kept essentially unchanged from a year ago.

Lastly, looking at our international segment, we're seeing some excellent progress there. MSA international reported an overall sales increase of $9.6 million or up 20% from a year ago. Incoming orders are slightly up year-over-year and in certain regions like Latin America we're starting to see significant improvements where local currency sales improved $5.6 million or 45% from the first quarter of 2009.

Broadly across MSA's international segment, core industrial sales were up 37% from the first quarter a year ago. About two thirds of this is due to the strengthening of foreign currencies but it also shows a strong rebound in core industrial markets internationally. On a local currency basis, international gross margins were a very strong 670 basis points, reflecting more effective pricing discipline and a favorable product mix in several regions of the world while operating expenses were kept essentially flat from a year ago.

This reflects cost reduction initiatives implemented last year that are proving ongoing benefits this year. Strengthening sales, strengthening gross margins and good cost containment resulted in a dramatic improvement in our international segment net income over the same period a year ago.

Overall, we had some very noteworthy successes during the quarter. As indicated early on, we are clearly seeing a positive trend in our incoming orders, notably in the industrial portions of our business, both domestically and internationally. Additionally our intense focus on strengthening our position within select industrial channels in North America appears to be paying off and our industrial sales in this segment were up 17% when compared to the first quarter of 2009.

Likewise, we have been successful in effectively negotiating selective price increases with key channels of distribution throughout North America with many of these increases going into effect just this month. Our business in Latin America is starting to rebound with significant local currency sales growth when compared to the first quarter of 209 and were benefiting from our strength in this region and the general economic recovery that's underway there.

Although I am encouraged by the recent strength we're seeing in our incoming orders book of business, I also realize it's still early in the recovery. Yes, there are positive trends emerging in many of our core industrial markets around the world and yet distributor restocking initiatives and federal stimulus program activity is having a positive impact on our business and yes, we have finally cleared a major approval hurdle in our military product line, which enables helmet shipments to begin in May and yes, AFG funding releases started 90 days ago and will soon have an impact.

There is a lot to be encouraged by certainly. But it is early in the recovery. Last year we adopted defensive postures with a focus on cost management activities to offset the effects of the recession but at the same time, MSA management maintained a focus on multi year strategic efforts such as project Magellan, innovative new product developments, programs to build customer satisfaction and royalty and efforts directed at growth in emerging markets of international.

As I said in our last conference call, 2010 is a transition year for MSA when we move from playing defense to playing offence as the economy improves. With an economic recovery now beginning to surface and solidify, we are further emphasizing an investment focus in those areas mentioned above that will help us accelerate growth, build market share and provide a foundation for the company's long term success.

We are making investments in R&D and marketing and selling prudent targeted investments because it appears that a meaningful recovery is now underway, albeit at an uneven rate with a somewhat slow improvement in employment levels expected over the rest of this year. But the encouraging signs are emerging and my cautious optimism, which I mentioned early on in the conference call provides confidence that the recovery is underway and that prudent investment in people, programs and technology is the right course for us to take at this time.

Now I would like to turn the conference call over to Dennis Zeitler, our CFO, who will provide you with more insight 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 at the Securities and Exchange Commission.

As Bill mentioned, sales in the first quarter of 2010 were $212 million. Compared to the first quarter of 2009 sales are down 3%, with decreases in North America and Europe more than offsetting a 20% in our international segments. However, when you adjust our sales for the comparative weakness of the U.S. dollar compared to the first quarter of 2009, our sales are down 9% in total, which is a combination of North American sales down 11%, Europe down 13% and International sales are unchanged.

By markets, the fire service is down 17%, military is down 55% and industrial up 21%. Adjusted for currency rate changes, fire service is down 20%, military is down 57% and industrial is up 11%. As I mentioned, North American sales are down 11%, composed of a 21% decrease in the fire service, a 75% decrease in military and an 18% increase in industrial sales. Our North American fire service sales are increasingly impacted by the much delayed release of AFG grants as the first grants were not announced until January 29th of this year.

However, now that these federal funds are being released, this bodes well for fire service sales for the remainder of this year. We produced no ballistic helmets for the U.S. military in this quarter. However we recently received first article approval and we have begun production of ACH helmets for the U.S army under our most recent $45 million contracts. Again this bodes well for the remainder of the year.

Our international sales were up 20% this quarter. Although fire service sales were down 26% and military was down 15%, our industrial sales were up 37%. However without the change in currency rates, our international sales are unchanged from a year ago with fire service down 32%, military down 24% and industrial up 11%.

It should be noted that in the first quarter of 2009 we had an unusually large order to the Hong Kong fire service for $4 million. If we exclude that one order, our international fire service sales are up 20% this quarter. European sales are down 6% compared to a strong first quarter last year and the fire service is down 8%, military down 27% and industrial up 5%.

However considering that the euro is actually stronger now than it was during the first quarter of last year, our European sales are down 13% overall, with fire service down 14%, military down 31% and industrial down 2%. The other view of our sales performance is to separate the two portions of our business, that historically have been the most volatile, U.S fire service and U.S military from everything else.

Our U.S fire service sales of $21 is a decrease of 22% and our U.S. military sales of only $5 million is a decrease of 73%. Then when we look at all of our other globally diversified sales that comprise 87% of our total sales this quarter, these sales are up 8% at current exchange rates or unchanged when you exclude the fluctuating currency rates.

We were certainly disappointed with the level of invoice sales this quarter. However when we analyze our incoming business this year week by week, there is a very positive trend. Our income and commercial orders, that is everything except large U.S military orders averaged $17 million per week in the months of January and February.

Beginning in early March, this number jumped 15% to an average of over $19 million for the past seven weeks. By geography North America is up 30%, international up 12% and Europe is slightly down. Hopefully this indicates that many of our customers are seeing significant improvement in their business and that the severe impact of the recent recession is now abating.

Our gross profit rate for this quarter was 38.8%, up 80 basis points from last year. However we had a $1.4 million one time expense in our manufacturing this quarter due to misconduct by one of our service suppliers. When we adjust our gross profit rate for this one time charge, our improvement over last year is more than 1%, even with the lower factory volume.

This reflects the effort of our operations team to reduce product cost and to control expenses. We did announce selective product pricing adjustments in April and that should also improve our gross profit rates for the remainder of this year. Selling and administrative costs in the first quarter were 29% of sales, representing an increase of $5 million over the first quarter of last year.

However in reality, when you adjust SG&A for the weaker dollar, the increase was closer to $1 million. Our R&D expenses are up 10% this quarter as we have recommitted to invest in new technology and products that will grow our organic sales in the years to come. The resulting operating income, excluding $7 million of restructuring charges, $2 million of currency gains and the $1 million supplier issue that I mentioned earlier is $17 million, a $3 million decrease from the first quarter of 2009.

Our consolidated tax rate in the first quarter was 35%, versus 33% last year. This higher rate reflects that the R&D tax credit has not yet been renewed in the United States, that most of our profit was earned in the United States this quarter where our corporate income tax rates are the highest in the world and then we had some certain one time tax benefits in the first quarter of last year.

The bottom line is net income of $5 million, $0.14 per basic share, compared to $0.20 last year. On a pro forma basis, which will exclude the $6 million of one time expenses that I mentioned earlier, net income would be $9 million, which is $0.25 per share, compared to $0.34 per share in the first quarter of 2009.

As regards to the balance sheet and cash flow statement, our cash position remained at $62 million at the end of March and working capital is unchanged from December 31st. This is a combination of lower receivables, better payables but more inventory. Many initiatives that were begun last year to better manage our working capital continue to yield benefits for us and I'm confident that we will continue to make significant progress in better managing these assets. Our most significant cash outflow this quarter was for dividends.

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 Q3 sales and earnings.

Having said that, we will now open the call to your questions.

Bill Lambert

John, would you provide some instructions for questions please.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from Edward Marshall from Sidoti & Company. Please go ahead.

Edward Marshall - Sidoti & Company

Good morning, everyone. So my first question is on your commentary on the orders. First, was that commentary based on year-over-year assumptions, or was it based off the previous quarter?

Dennis Zeitler

All the discussion we had regarding incoming orders was comparing the first nine weeks of this year to the next seven weeks of this year. So you're talking January and February, in that a certain rate and then you're talking March through last Friday. I was just trying to show you the trend of what's happened so far this year.

Edward Marshall - Sidoti & Company

Okay. And you mentioned, I think in your prepared remarks that there were constraints that you were seeing kind of trying to fill that demand?

Bill Lambert

I mentioned that Ed. This is Bill and it's really more of a timing, when the incoming orders came out and then we ended the quarter on March 31st. So it was really just, I think I mentioned that it was time constrained. It was not constrained due to pick ups in production or supply chain.

Edward Marshall - Sidoti & Company

Okay. And then the new -- there is a new standard on the fire services that are coming up, I guess in 2012. How are the funds flowing in April this year so far with the equipment in particular to the SCBA and how do you -- do you think it will be an impact this year or do you think it will be more of an impact in 2011?

Bill Lambert

Well the standard change in 2012, do we really think that would be an impact this year? Is that what you're asking?

Edward Marshall - Sidoti & Company

I'm asking, do we see the results from the SCBA kind of flow like we normally would through April thus far with incoming orders? And then do you think it will be more of an impact in 2011 than you would in 2010?

Bill Lambert

I think there's a couple of answers to that question and I'll look for Joe Bigler to add any additional color. First of all, the AFG funds that are flowing so far this year, the percentage of those funds that are going to personnel protective equipment are actually running at a higher pace and a higher percentage than they have in the past, somewhere around 35% of the total awards they are to personnel protective equipment which SCBA and helmets and thermal imaging camera are a part of versus 30% during the same period a year ago. So on the one hand you've got so far AFG funding, the releases so far this year that are running at a running at a slightly higher pace. Will that continue throughout the balance of this year, I'm really not sure and we don't have any kind of clear insight as to how that percentage is going to change.

Will it change in 2011 as we approach a standards, a (inaudible) standard in 2012, again that's really hard to say how that percentage will change. Typically it has been in the 30% to 39% for personnel protective equipment. What we are getting indications off however is that the funding for 2011 will be markedly lower than it has been in the past.

So now that has not been yet approved by Congress and many times in the past the President has requested that AFG money be reduced but it looks as though 2011 funding will have some downward pressure on it to be less than what it has been in the past, something to the tune of I think $560 million in 2009 funding and something like $390 million in 2010 and Joe, I'll look to you to add any more color.

Joe Bigler

No, I think that's the key. I think as you go into, with the money starting to get released here, the end of January, it typically takes about 60 to 90 days for that money to start to show up in the marketplace. It might be even a little slower this year because some municipalities have to really get matching funds and as they struggle with municipal budgets to come up with some of their municipal funds as Bill mentioned, it seems to be taking a little longer. So the impact that we're going to see from AFG being released, that will show up here to some extent in the second quarter and through the third quarter.

Edward Marshall - Sidoti & Company

And, Joe, that matching funds, that's dollar for dollar from the municipalities?

Joe Bigler

No. It's dependent on the population that's being served and so municipalities that have less than 20,000 people, the matching funds requirement is only 5%. They only have to come up with 5%. For those municipalities 20,000 to 50,000 people, the matching funds is 10% and for those over 50,000 the matching funds is 20% and in no case does it exceed 20% of the requirement.

Edward Marshall - Sidoti & Company

Okay. And then looking past 2010, which I think you -- in the press release, you mentioned was a transition year. What kind of tailwinds and or headwinds do you foresee in the business in 2011 and if you can focus on it from a core industrial business, as a global business, the military and the fire services.

Bill Lambert

Sure. I'll give that a shot and then I'll look to Joe and to Rob to provide any other color for their segments for the business. I think certainly the core industrial business which again makes up two thirds of NSA's sales revenue, the core industrial business is quite tied to the global economic conditions and so from a tailwind perspective we would expect to see continued recovery in the North American markets.

We're always seeing that recovery in Latin America as I mentioned and in South Africa and other parts of the world, emerging market parts of the world. And so the employment trends improve I think that that provides tailwind to our core industrial business certainly, the emerging market focus also providing tailwind opportunities.

The military segment is a bit more difficult to predict but there are contracts, not only those that we mentioned, the ACH-3 but also other contracts like the enhanced combat helmet, the ECH, the internal plastic helmet that we're pursing as well as very significant communication programs within the military.

Those also provide opportunity for us as we look out much further and I think that from a fire service perspective its probably going to be a bit more uneven because you've got continuing downward pressure provided by a tight municipal budgets. You've got downward pressure on AFG funding amounts and so weaning the municipalities off of the AFG funding I think will become difficult and though you do have in 2012 as you mention that a new standard to be released by the NFPA on SCBA and that could have some upside potential to this.

So those are some of my thoughts. Rob, I'll look to you from an international perspective and Joe for anything else that I might have missed.

Rob Cañizares

Thank you Bill. Just adding to what Bill said, our geographic areas have basically different drivers of their economies. Where we see a lot of recipient growth is in those areas that are related to the extraction industries, mining or forest, oil gas, which for the last year or so deferred a lot of investments and we begin to see the pickup of the activity leading to future decisions. So those are kind of encouraging and you can probably imagine which regions those are. Clearly the Middle East, parts of Latin America, parts of Africa, parts of Eastern Europe. And so are positive in the industrial segment.

In the areas that are driven by military and government spending which in our portfolio Eastern Europe is rather concentrated on governments spending, both fire service and military, we still see a lot of weakness there. As you know several of the countries in Eastern Europe have IMF funding. They have severe programs to control their economy and that is likely to spill into some parts of Western Europe.

You of course are reading your head lines about Greece, about the recent downgrading of the debt of Portugal and Spain and so those are rather complicated factors that affect some of the government driven spending. And those take shape, then -- and we don't really know which way it's going to go. It might have a positive or negative impact on the industrial side because the economic policy of the Eastern European regions and some of the Mediterranean countries is going to affect the whole euro economy. So we sort of have this sort of big event about what happens in a financial situation, Europe but other than that the industrial foundation is really beginning to recover and we see that fairly well all throughout the regions.

Joe Bigler

As far as North America and I think Bill summarized it very well. I think as you look ahead over the next year to two years, obviously the military business in North America we think has some legs with the ACH, ECH and some possibilities on contracts on communication. I think the fire service will be very lumpy as the AFG 2010 dollars will most likely be less to the tune of $175 million and municipal budgets will be under tight constraint. So I think the fire service will be a challenge.

And the industrial core business, if this recovery is sustainable, certainly what we have seen in March and what we have seen thus far in April, in North America, the industrial core business seems to be driven largely by end user demand, broad end user demand with some distributor stocking and if that continues and is sustainable, the industrial core business will have some strength to it obviously in 2011.

Operator

Our next question comes from Brian Ruttenbur from Morgan Keegan. Please go ahead.

Brian Ruttenbur - Morgan Keegan

Hey, thank you very much. A couple questions. I'm trying to dig at your revenue growth from a couple of different angles. I know you don't give guidance but let me take a couple shots here, if you guys don't mind. First of all, on the fire services side, I know you've talked a bunch about this. How is the state and local spending impacting you guys? Is that impacting you by 5%, 10%? How much of the weakness in fire service is due to the state and local spending versus the U.S., the federal grant?

Bill Lambert

Well it's a tough question Brian. This is Bill. I'm not sure that I've got a good solid answer in that regard. I think that as Dennis mentioned the fire service in the U.S. and I'm concentrating our efforts there because I think that's where you question is. So fire service in the first quarter was off about 22% from a year ago. As we look at this current quarter to the quarter a year it's off about 22% total in fire service.

How much of that is related to the AFG funding being non existent essentially -- 2009 funding being non existent in the fourth quarter of last year and realty not beginning to flow until January 29th of this year is really difficult to say. And then how much of that downturn is related to municipal funding being tight. I really don't know. Joe, I look to you I guess. Is it half and half related to the releases, the delays and AFG funding?

Brian Ruttenbur - Morgan Keegan

I guess the angle I'm looking at is if we can see an economic recovery with state and local spending and funds coming back. Should we then, even without the AFG funding do we see half of your revenue coming back in that area or -- I don't know if that's the right way to look at this. I'm just trying to figure out a way to call when revenue is going to be coming back or stay?

Bill Lambert

Well I think that it's definitely tied to the economic recession. So as the recovery occurs and as municipal tax revenues begin to increase and reverse themselves, then that bodes well and I think that's exactly -- what we begin to see kind of our restoration in the fire business. But you do have this effect that will need some time to take it -- to work itself out and that effect is that the municipalities will need to wean themselves from this AFG funding. So if the AFG funding does get severely cut as it feels like there is downward pressure from the governments to do that, the municipalities are going to have to pick up that ball up and run with so that they can work it bask into their where perhaps before they hadn't because they could count on the federal government to provide that kind of funding for the fire departments.

But you also have a product life cycle issue here because of a lot of this funding, back in the 2001, 2002, 2003 time period, now those SCBA's that were purchased back then start to get a little long in the tooth and so they need, they go through a replacement cycle and that begins to time itself with the 2012 issuance of a new standard by the NFPA on SCBA.

So there are a lot of complex factors here that we're trying to think our way through as well but I don't see it -- I don't see the municipal tax revenue situation reversing itself quite so quickly that we would see a spring back, quickly on the municipal side, the fire service side as we've seen a spring back lets say in the core industrial side of the business.

Brian Ruttenbur - Morgan Keegan

Okay. My next question is about gross margins. Do you anticipate your gross margins at these levels? I think that we calculated that you're near highs here. Do you anticipate gross margin to be level going forward from the first quarter?

Bill Lambert

There might be some downward pressure on margins as we begin to ship more military product which typically has a lower GM as we've commented to you in the past. But I would say that it might be in this range.

Joe Bigler

I think Bill is right. I think we ought to at least hold our gross margins. We'll have some downward pressure because of the product mix but we'll have some upward benefits from our price improvement and we have two U.S factories that will closed this year. So as those go down, that will also improve our gross margin rates. So we ought to at least be able to hold to levels we're at now.

Brian Ruttenbur - Morgan Keegan

Okay. And then other cost factors, the SG&A, you were up year-over-year and sequentially. Where do you see SG&A going forward, at these levels or lower?

Joe Bigler

SG&A is traditionally or historically highest in the first quarter. So I think with any luck at all, they will not go up from this level. I'm not going to give you a forecast if they're going to go down from the first quarter level.

Brian Ruttenbur - Morgan Keegan

Okay. And then R&D, I know that you're investing more there. In the first quarter, should we expect kind of flattish from this level going forward?

Bill Lambert

Yes, I think that what you've seen historically from us is in that $7 million to $ 8 million per quarter and I don't see -- anticipate anything that's outside that range Brian. So I would expect it to be in that $7 million to $8 million.

Brian Ruttenbur - Morgan Keegan

Okay. Because you were closer to the high end of that, was there anything extraordinary in the first quarter that had you spend more?

Bill Lambert

Not off the top of my mind.

Brian Ruttenbur - Morgan Keegan

Okay. And then restructuring charges, you had a higher restructuring charge in this first quarter. If I compare you guys to last year, you had a big restructuring charge and then you had very little going forward in 2009. Can you talk a little bit about what you anticipate going forward in terms of restructuring? You said you were going to close two factories. Can you maybe talk about how much more restructuring you're going to be doing?

Bill Lambert

Sure. I'll address it and then Dennis, if there is more to add. In the first quarter of last year, primarily that restructuring charge which was related to North America, that was a $6.7 million charge that we took for North America and it was tied into the voluntary retirement center program we had for North America and also an additional $2.9 million charge associated with some of these factory closures that Dennis had mentioned and alluded to.

That's where that $8 million plus total restructuring charge came from last year first quarter. This year, it's more related to MSA Europe and the transformation of Europe and I mentioned we took $5.3 million. Of the total restructuring charge in Q1 this year, $5.3 million pretax is related to the German voluntary retirements and program as we now address Europe. I don't see any quarter looking out to this year to be anywhere near what we've got so far in the first quarter of this year.

It's probably going to be more typically what we saw last year. As we looked quarter-by-quarter last year in of the restructuring charges, we do have more restructuring to do in Europe but the majority of it, the bulk of it really was reflected in the first quarter and some of these factory closures that Dennis talked about, the Evans City, Pennsylvania factory and the Englewood, Colorado factory, those being relocated. Most of that structural or restructuring charges have already been taken in previous quarters. So there really is nothing that's looming out there related to those two factories that Dennis mentioned.

Dennis Zeitler

I can't add anything to that. He's covered it all.

Brian Ruttenbur - Morgan Keegan

So just to state it, you did about a $1 million a quarter last year, X that one big first quarter. So probably around that mark, give or take a $1 million is….

Dennis Zeitler

We would take $1 million is a fair statement, okay.

Brian Ruttenbur - Morgan Keegan

Okay. I'll give you guys plenty of rope there. And tax rate, just getting down to details, it was a little bit higher, 35.5%. And is that where we should be looking going forward? I figured it would be a little bit lower with lower North American sales.

Dennis Zeitler

Yes but it's not the sales that we get taxed on. It's the net income and pretty much all of our net income as you'll see in the press release is made in North America. Going forward, it should be less than 35. First of at some point everybody expects that the U.S. R&D tax credit will be renewed. So that's where its 0.5 for selling our tax rate and then as we make more money outside the U.S. that will lower the average effective tax rate. So the first quarter is a couple of hundred basis points higher than we would expect to finish the year.

Brian Ruttenbur - Morgan Keegan

Okay. And last question, and going back to revenue, I'm just going to hit it from a different angle. Do you expect that this quarter is reflective of what you think the year will be, down 3% year over year?

Dennis Zeitler

Absolutely not.

Brian Ruttenbur - Morgan Keegan

Okay. You want to elaborate?

Dennis Zeitler

I think, was giving you some indication that the current incoming orders have really improved. ACH helmets are going to start being shipped. Due to the risk, particularly on the AFG funding, $550 million in total and 35% goes to safety products and 30% of it goes to our stuff, $60 million plus the matching funds. There's a lot of good things happening but we don't give guidance. I don't have a forecast of what next quarter sales are really going to be but we're cautiously optimistic is what the boss says.

Operator

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

Richard Eastman - Robert W. Baird

Hey, I did want to follow up a second on the restructuring. I think as we exited calendar '09, I thought there was a forecast for maybe $13 million of pretax restructuring for calendar '10. Is that no longer the case?

Dennis Zeitler

That's a fair number because we did $7 million or $8 million in the first quarter and what Brian said was there would be a $1 million a quarter, give or take $1 million. Give or take $1 million. Give or take $1 million is [2 million times. Three, six and seven is 13].

Richard Eastman - Robert W. Baird

Okay. So we'll give like a million a quarter. So $13 million is still a good estimate. So that's all right and the rest will flow in ratably over the balance of the year. A question for Bill. When I look at the P&L here in the first quarter, and I look at the gross margin, there's kind of a nice benefit there or kind of a nice improvement there. Operating expenses are up, partially compliments of FX. But where in the P&L should I be looking for the cost savings that flow from the '09 restructuring effort? Where is that going to show up?

Bill Lambert

That will show primarily in the gross profit line Rick. As we begin to close down these factories, as we begin to see more production coming out of factories that have higher utilization, that's when you'll begin you -- that's where you'll see it principally, is in that area.

Richard Eastman - Robert W. Baird

I'm having a hard time kind of seeing the benefit and at the same time later in the text here in the press release and from your comments, were talking about added growth investments from this level. And I'm just trying to get a sense of how our margins here are going to trend, exclusive of a product mix benefit.

Bill Lambert

Well without giving too much of guidance and just trying to point you in the right direction here is that what we expect to see is improving gross margin performance, gross profit performance out of more effective factories, more efficient factories, greater throughput through those smaller number of factories and the improvements that we in GM based on the new products that we've introduced and that's where we would expect to see it offset somewhat just as you're indicating and as I've indicated but I have a prudent investment that we've making in adding the sales coverage that we need to add, the marketing programs that we need to add and the technology investments we need to make as we exit this economic downturn and look towards a recovery.

Richard Eastman - Robert W. Baird

Okay. Have we backed off from a few years ago, -- your targeted operating margin? There's been a lot of movement in the business and the mix and the facilities. But do we still have kind of this aspirational goal of mid teens operating profit?

Bill Lambert

Absolutely.

Richard Eastman - Robert W. Baird

Okay. Okay. So we're still tracking in that direction, but we need some volume to help us, right?

Bill Lambert

Right. I think you'll see a nice bounce back in that number this year. We're at a very depressed level last year and this year.

Richard Eastman - Robert W. Baird

Yes.

Bill Lambert

We had years when we were at 14% on a global basis and we have not backed off a 15% number.

Richard Eastman - Robert W. Baird

And, Dennis is there an error in the press release? When we talk about the after tax charges by Europe and North America, they sum to much greater than $4.7 million. Is that partially a result of North America going against the balance sheet and the pension?

Dennis Zeitler

I'm not sure I follow that question Rick.

Richard Eastman - Robert W. Baird

Well, in North America, in the net income commentary, you've got $4.4 million after tax charge related to voluntary retirement. And then in Europe, you've got a $3.7 million after tax charge related to severance costs. You sum the two, and we're at $8.1 million.

Dennis Zeitler

Yes but the North American one was last year. We're trying to….

Richard Eastman - Robert W. Baird

Oh, I see, of '09. Okay, my mistake. I just misread that. And then, okay. So….

Dennis Zeitler

It makes more sense?

Richard Eastman - Robert W. Baird

Is the other million dollars, we've got a $4.7 million after tax restructuring.

Dennis Zeitler

Some of it was in the U.S on those factories we talked about. We did $0.5 million in South Africa and we're back on that factory.

Richard Eastman - Robert W. Baird

I understand, okay, all right. And then what would be maybe the timing of the ACH-3 shipments? We're going to be working off this $45 million contract that we have in the backlog. We're going to add a second line in I think you said, Q3. Does this $45 million get shipped this calendar year, or does it dribble into next year?

Joe Bigler

It does into next. This is Joe Bigler. This goes into next.

Richard Eastman - Robert W. Baird

Okay. Okay. So should we just think 10 m to 12 months, just roughly?

Joe Bigler

That's fair.

Richard Eastman - Robert W. Baird

And then would there be a follow-on contract for ACH-3, or is the expectation that we transition over to the ECH?

Dennis Zeitler

We anticipate the issuance of another contract for the ACH-3 and with the ECH we're in phase 2 right now as you know and would hope that there could be a contract that would be awarded on ECH at the very end of this year that would an effect in 2011.

Richard Eastman - Robert W. Baird

Right and that would be for production volumes?

Dennis Zeitler

Yes.

Richard Eastman - Robert W. Baird

Okay. And then just one last thought. On the pricing, we get some select increases. It sounds like they went into place in April. Do you think, when you roll that all up for the full year, do we get a half a point maybe of price or any sense of how much we may capture out of our price actions?

Dennis Zeitler

The price increase that we mentioned was in the U.S. which is only about low 40% of our business. In the rest of the world you've got economies that have 5% and 6% inflation rates. We have an ongoing price adjustment process. So to try to roll all of our price adjustments together and come up with that calculation would be….

Operator

Our next question comes from Dick Ryan from Dougherty. Please go ahead.

Dick Ryan - Dougherty

Thanks guys. Hey Dennis, just a definition (inaudible) on the sales trends, first nine versus the next seven, did you say that excluded U.S. military but was everything else?

Dennis Zeitler

I excluded any large military contract that wouldn't be shipped in the next few months, yes. Not only U.S. but European and I tried to balance all the numbers.

Dick Ryan - Dougherty

Okay. How about on the cash flow? Do you have that number for the quarter and D&A as well?

Dennis Zeitler

Yes, the cash flow from operations for the quarter was a minus $6 million. What was the other question Dick?

Dick Ryan - Dougherty

Depreciation, amortization and….

Dennis Zeitler

$7 million.

Dick Ryan - Dougherty

Okay. Say, Bill, on the R&D efforts focus on new technology, is there anything that we should be trying to pay attention to? Is there some new products to be introduced this year or next year that this spending is going towards?

Bill Lambert

Well I think we've talked in the past about some of the efforts that we have going on and we've released some of that information in the Q and in previous Ks. One area that you'll see is new sensors for our instrumentation product line, sensors that we've put a lot of money into and R&D activities and launching those products this year, portable instruments as well as moving into some of our permanent instrument gas detection line as well. And as we've talked about in the past we're very interest in fire fighter location technology. We continue to advance that technology as well.

Dick Ryan - Dougherty

When could that get introduced?

Bill Lambert

Probably a 2012 product. I really don't anticipate firefighter location moving, coming in much earlier than 2012 and the last area Dick, it was talked about also in the past is the Enhanced Combat Helmet, the Thermal Plastic Helmet for the military and the R&D efforts that we've put into that project.

Operator

We have a question from Edward Marshall from Sidoti & Company. Please go ahead.

Edward Marshall - Sidoti & Company

Just a couple of quick follow-up questions, if I may. One on the pricing increases that you said were, I think, taking effect in April. In particular I think you just said mostly in the U.S. Is it possible the timing of the order flow that you've seen in March and kind of early in April may have had something to do with customers buying ahead of time, ahead of those price increases? Is there any way you can quantify that? Or how does that work?

Bill Lambert

Oh, I think that some of it -- it would be hard to quantify that. Some of the -- plenty of increases we've seen from our large national distributors. Those are contracts where the pricing would phase in over time in 2010 and would necessarily take effect in April. So I think in our commentary we said on some of the product lines, and very selectively have we seen that. And I wouldn't -- first of all, it would be quite difficult to really quantifiably say that or address your question. I think that it's unlikely that that increase is related to the pricing impact. It's probably much more related to as I think Joe Bigler has indicated in the past, a broad based improvement in end user demand for safety equipment. That's really where we're seeing it.

Dennis Zeitler

And just for the arithmetic Ed, if you look at the month of March on a weekly basis and you look at the month of April on a weekly basis, they're both about the same.

Edward Marshall - Sidoti & Company

Okay. And then finally my last question. Rob, if you could. Europe in particular, that situation, what impact could it play on the business? I think you probably have a good pulse of what's going on there. If you can spread any comments, that'd be great.

Rob Cañizares

Sure Ed. Let me sort of take it up in two pieces, Western Europe and Eastern Europe. The Eastern European part of our business is mostly related to government funding, fire service and military and as a consequence of the recession and the fact that some of these counties have had IMF bailouts et cetera and the big devaluations of their currencies. That demand is quite suppressed. So Eastern Europe has been really weak and has sort of driven the whole picture down.

In Western Europe we have sort of a combination of the traditional segments and as Dennis and Bill indicated, our military activity is down, partially because a large five year contract that we have with Germany expired pretty much this year and according to the rules of engagement in Germany, the new contract cannot be negotiated until after the elections.

That means that the normal business that would happen in the first half of the year in Germany won't happen in the first half of 2010. We have a similar situation in Austria and so we are seeing some short term weakness in that government funded activity which is very difficult to sort of forecast for the long term because of all that economic turmoil that I mentioned before that. everybody is reeling about with the euro weakening and the Greek debt situation.

If we go back now and sort of take a look at industry, we actually have a good growth in industry which is to many people surprising but it has to do a lot with our continuing expansion of our customer coverage and the activities that we are doing to restructure and improve our presence in Europe.

Some of the economies are not doing that well. As you know Spain is in deep trouble. The UK has had a big real estate driven recession. But despite that we managed to stay afloat and stay ahead of last year in orders in those countries. So our internal actions are actually protecting us a little bit against the external economic turmoil and we are putting a lot of effort as you heard, as you read and as Bill and Dennis have said, it's a huge effort on making sure that our European business gets into share.

We're cleaning up. We're simplifying. We're changing processes. We've got a lot of work going on that we're very confident will make significant changes in the total performance level of our business. So clearly we have, we need some time. Some of those implementations take a while but we've begun to see some of those improvements and the expense control that is there in place is also trying to get us back to the positive side of the bottom line.

Edward Marshall - Sidoti & Company

Okay. Thank you very much for that comment.

Operator

Our next question comes from Doug Thomas from JET Investment Research. Please go ahead.

Doug Thomas - JET Investment Research

I guess for Bill or Rob, just a follow-up on that -- most of my questions have been answered. But to follow up on the last question, I suppose that while -- it's more of a forward looking question in a sense that what you want your European footprint, your manufacturing footprint to really look like a couple years out and how do you balance that with, not just the current economic conditions, but what you see as your view of where MSA as a company is going to be in terms of your end market geographies in, say, two to three years from now?

Bill Lambert

That's a good question and we've got that thought through and mapped out certainly. If you take a look at what we have in Europe, we have overtime moved some operations, quite a few operations out the expensive areas of Europe and into lower cost areas for those items and typically our high labored content and low technology type products.

However the manufacturing that we have in Europe and that we plan to have in the future in Europe would be those operations that are more technology and dependent on higher skilled labor. And so what we have been working toward is a restructuring plan over there that allows us to identify products where technology and skill level are required and to keep that in a more productive, more efficient factory.

And so not eliminating production from Europe, that's not our intention but our intention is to determine and what we're moving to court is understanding those products which really should be manufactured there and can be manufactured there and those products that don't need to be manufactured there, that tend to be higher labor content and much lower skilled labor portions and we have to move those to more efficient factories around the world.

Additionally within Europe, we've got a very seasoned, very talented R&D and technical work force which we would continue to maintain and then the other efficiencies really come not in the operations or R&D area but just in the SG&A areas of the structure that we have within Europe and so as we look at an entirely new operating model for Europe in this transformation of your program that we've got going on, there are great opportunities to save in the selling and general administrative areas of the business over there as well.

And that is, as Rob indicated, that's a multi year effort but it has our full focus and attention right now to this point in time under project Magellan and some of the other management activities we've had going on to restructure the business that focused more on North American and the number of factories that we here which was too many and to build new factories in Quererto, Mexico and Suzhou, China, and to address those activities to get out of the very expensive headquarters facility we have and to take advantage of some of the space that we have available in our Cranberry campus and so that's where our attention has been to this point in time but a lot of that is behind us now or we're in the final stages and now we have our full attention on Europe and restructuring those activities over there and its not just about factories. It's about the entire operating model that we have within Europe. Rob, anything you'd like to add?

Rob Cañizares

Yes, the only I'd like to add Bill is that all looks like a cost reduction program and clearly there is a lot of efficiency we're looking to put into the organization. But I would like to highlight that this is also about growth. There is a large part of the European, Western European market that we don't currently serve and as we release resources and improve our efficiency and et cetera, what we seek to do is to devote them to those parts of the market where we have historically not had strength. So we actually expect growth to be a big driver of our success in Europe as we become more streamlined, better focused and more efficient with the resources we do have.

Doug Thomas - JET Investment Research

Okay. Thank you. And then -- I appreciate it. That's a great point. And then with regard to the ACH, I guess it's probably asking too much, given I know how you have not -- there's really not been that much visibility in the past into what the military really intends to do. But is there any sort of way of knowing, beyond the next year or two, how far behind the combat helmet program is how much they really need and what does the competitive situation at this point look like as far as you're concerned?

Bill Lambert

Well, I'll give shot at that answer Doug and then I'll ask Joe to add anything as well. From a competitive situation it's not very clear, just exactly where competitors who are also trying to product ACH-3 helmets stand at this point in time. That really is not as clear as you might think it would be. But its not. So we can only pay close attention to what we're doing and how we're doing it to meet the delivery requirements. We do know that the U.S. army is well behind and what they were looking to have in the way of on stock availably of ACH-3s. So we can only presume from that that others in addition to us are having difficulty in passing the first article testing or inconsistently producing high quality helmets that meet the needs. But there is as I think Joe indicated earlier, an expectation that additional awards could be available and could be out there that we are actively pursuing and we certainly do know that the U.S army is behind schedule and what they need in the way of stock availability of ACH-3 helmets. Much beyond that, it's really hard to predict and there is not good visibility on that. Joe, anything else that you'd like to add?

Joe Bigler

No I think you summarized it quite well.

Doug Thomas - JET Investment Research

Okay. That's what I figured. And then the last question, sort of a bigger picture question. You know how I feel about the attractiveness of the shares at this point and I'm just wondering, from your perspective, every company who I have heard from this earnings period has talked about acquisitions. I know you guys are looking at acquisitions and so forth. But with one of the strongest balance sheets of companies that I cover and with a pretty good ability to generate some nice free cash flow as things begin to continue to improve, what's your thought at this point in terms of -- what are you seeing in the pipeline and how maybe philosophically do you look at doing deals as it becomes clear we're coming out of a recession and maybe prices are going up for these deals or, what are you seeing out there in terms of the overall environment?

Bill Lambert

Well acquisitions are a part of our strategy moving forward but it's not a large part Doug. As we've indicated in the past, we have primarily an organic based strategy that's focused on improving and growing our business by focusing on technology and markets and channels in emerging markets around the world and that is primarily organically focused. But we have looked at and continue to look at acquisitions as an opportunity to either acquire technology or acquire channels of distribution to enter certain markets and we will continue to do that. But you don't see MSA changing materially to become a growth through acquisition type of company. We feel that there is a great deal of growth in our strategic plan as we have it established right now, through the organic efforts and activities that we have going on and that's where you'll see our primary emphasis going forward.

Doug Thomas - JET Investment Research

So then what has to happen for the board to become more enthusiastic about using some of the excess cash flow to repurchase shares?

Dennis Zeitler

We discuss a share repurchase program at each board meeting and at this point we have not decided to repurchase shares Doug.

Operator

And at this time I show no questions.

Mark Deasy

Okay, well thanks John. Seeing that we have no more questions that will conclude today's call. So I want to thank everybody again for taking time to be with us today. Also if you joined us late, I want to remind everyone that an audio replay of today's call will be available on the MSA website for the next 30 days. So with that, on behalf of Bill, Dennis, Joe and Rob we look forward to talking with you again soon and hope everybody has a great day. Good bye now.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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