Mine Safety Hits a Ditch

When hazmat equipment manufacturer and former Motley Fool Hidden Gems recommendation Mine Safety (NYSE: MSA  ) reported earnings last week, it told a tale of pluses and minuses.

Pluses included a reversal in its trend of declining net margins, as sales were down 1% year over year, but profits were up 2%, and also continued improvement in sales in the firm's international and North American industrial markets.

Minuses predominated, however. Most of these originated with the U.S. government, which continues to drag its heels on the release of funds under the U.S. Federal Government Assistance to Firefighters Grant (AFG) program, and whose mandate that contracts for advanced combat helmet (ACH) production be divvied up among three suppliers continued to siphon sales away from Mine Safety to its competitors. (One corollary plus: Mine Safety's entering the body armor market with its recent purchase of Paraclete mostly offset the loss of ACH revenues, as the firm made about $3 million in body armor revenues during the quarter. These sales aren't on the scale of DHB, Armor Holdings (NYSE: AH  ) , and Ceradyne (Nasdaq: CRDN  ) -- but they're something.)

Also depressing fire safety sales was a recently published National Fire Protection Association (NFPA) standard for self-contained breathing equipment. According to management, whenever new standards like these are published, fire departments tend to suspend their buying to evaluate whether the equipment they want to purchase will meet the new standards. Based on past experience, CEO John Ryan predicted that the new NFPA standard will yield "good" sales sometime between January 2007 and June 2008, but he couldn't say exactly when. (That said, four months past January 2007, and having seen last week's sales numbers, I think it's safe to say that any potential "good" sales remain in the future.)

Further minuses included:

• Declining operating profitability that belied the bottom-line boost, as operating margins dropped 30 basis points to 10.9% (the net, by the way, inched up 20 basis points to 7.1% thanks to a significant decline in tax liability).
• Inventories and accounts receivable that both continued to grow (up 11% and 6% year over year, respectively) even as sales stagnated and fell.
• Free cash flow that ran into a ditch, dropping 26% in comparison with last year's Q1, with just $12.5 million in cash profits generated last quarter.

My assessment? At the risk of making a bad pun, Mine Safety's not out of the hole yet.

What did we expect out of Mine Safety last quarter, and what did it produce? Find out in:

• Foolish Forecast: Plumbing Mine Safety
• Mine Safety Shines: Fool by Numbers
• Mine Safety Saves the Year

Interested in outstanding small-cap stocks flying under the market's radar? Join Tom Gardner and other investors like you on the Hidden Gems discussion boards -- available for 30 days with a free trial.

Fool contributor Rich Smith does not own shares of any company named above.