When we last checked in with Motley Fool Hidden Gems selection Mine Safety Appliances (NYSE:MSA), the company was exhibiting signs of softening sales growth, particularly in its North American segment. Back in August, management at Mine Safety -- a company that engineers, manufactures, and markets safety equipment -- had two specific explanations for the second quarter's lackluster performance (link opens a PDF file) in North America:
- Delayed federal funding to firefighters, which resulted in decreased sales in the firefighter market and particularly affected sales of self-contained breathing apparatus units (SCBAs).
- A heavy backlog of orders for thermal imaging cameras (TICs), caused by a supplier bottleneck.
Now Mine Safety has reported third-quarter results that investors will probably find somewhat disconcerting. Although year-to-date sales and earnings rose slightly over the same period in 2004, third-quarter sales and earnings are down compared with the third quarter of 2004.
So what exactly is to blame for this bothersome dip in the company's performance?
Once again, management has pointed to the delay in federal funding to firefighters. For fiscal 2005, Congress appropriated $650 million for the U.S. Assistance to Firefighters Grants Program (AFGP), but the money was not disbursed until Aug. 19, which was weeks later than it was distributed the previous year. Mine Safety's management says that SCBA sales to firefighters have reached expected levels since distribution of the AFGP monies, and with the AFGP funding delay now resolved, investors in Mine Safety will have high expectations for the company's fourth quarter, especially with regard to its North American operations. Fulfilling these fourth-quarter expectations will be a strong indicator of management's effectiveness.
Problems like delays in federal funding can hinder short-term performance, but investors shouldn't take their eyes off the larger issues concerning Mine Safety's business. Currently, management's most formidable challenge is to maintain North American sales as the homeland security boom dwindles and military contracts for gas masks and combat helmets become scarcer.
A continued decline of sales in North America would signify a problem that runs far deeper than delays in federal funding. Since North American operations currently account for 60% of the company's total revenues, a critical challenge for Mine Safety's management is to become less dependent on North America, primarily by expanding the company's European and other international operations. So far, the company appears to be moving in the right direction, growing year-to-date sales in its European and International segments by 13% and 36%, respectively.
Management is attempting to protect against North America sales decay in several incremental but crucial ways. First, Mine Safety's recent entry into the market for ballistic body armor and its acquisition of chemical detection technology are both indications that management is focused on expanding the company's product line. Furthermore, implementation of measures to reduce North American sales, general, and administrative costs by 5% demonstrates that cost-cutting is also on management's agenda. Shareholders should be pleased with these management efforts.
There were also several positive aspects to Mine Safety's third-quarter results. The TIC bottleneck has been eliminated, a solution that showcases management's ability to deal with problems in a timely fashion. Meanwhile, total inventories, although still up for the year, are flat compared with the second quarter -- a signal that inventory management may be improving. And for the year to date, dividends are up 40% while the number of shares outstanding has decreased 1.4%.
Interestingly, the company also announced that its board of directors has authorized up to $100 million in share repurchases for the next several years. Although buybacks can boost earnings per share and be an indication of an underpriced stock, I'd prefer to see management pay down its $54 million in long-term debt.
Overall, Mine Safety's third-quarter results exemplify the challenges this company faces as the North American market matures. The company's performance over the next year should reveal whether management is up to the challenge.
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Fool contributor Jason Mac Gurn owns shares of Mine Safety. The Motley Fool has a disclosure policy.
