With three quarters down, and less than one still to go in fiscal 2006, Motley Fool Hidden Gems recommendation Mine Safety (NYSE:MSA) finally admitted the hard truth last week: It's going to be "difficult" to hit its goals for this year.

The safety and defense products maker's third-quarter 2006 numbers made this conclusion pretty much inevitable:

  • Sales were down 4% year over year to $210 million.
  • Profits per diluted share collapsed -- down 26% to $0.35 per share.
  • Percentage-wise, both results were worse than what Mine Safety has accomplished year to date (meaning that things appear to be getting worse rather than better).

So I guess the good news here is that, as bad as the bad news was, the stock hasn't moved much since all the news came out. Does this mean, perhaps, that there was some mitigating good news buried amid the bad? Let's take a look.

Look a little farther
Close to home, it's hard to see much good news at all. North American sales trends continue to point down, downer, and downest. Although construction and industrial sales showed some improvement this quarter, the $18.4 million year-over-year decline in Advanced Combat Helmets business meant that overall, North American sales declined 13%.

To find the good news at Mine Safety, you have to look farther abroad, to "Europe" and "International," in fact, where sales grew 12% and 8%, respectively. Sadly, these two segments of the business combined still don't add up the size of its North American base business, and they failed to even keep year-over-year sales flat. What's more, the North American business being lost appears to be much more lucrative than the foreign business gained. The 13% in local sales that evaporated last quarter took with them nearly half of the profits that Mine Safety earned here last year.

And we're not just talking GAAP profits here, either. Real, cash-money profits are drying up even faster. Whereas the business had generated $41.8 million in free cash flow through the third quarter of last year, this year the tally stands at just $6.8 million -- a decrease of 84%.

There's hope that things will rebound next quarter. As CEO John Ryan pointed out, federal "AFG" funds used by fire departments to purchase Mine Safety equipment have been being released later and later in recent years, and this trend seems to have legs. If so, then perhaps Q4 will show some improvement in cash generation as the federal funds are released. But for now, things look bleak indeed -- so bleak that I'd suggest the stock's firmness in the face of last quarter's weak results presents more of an opportunity to exit a position on strength than evidence that the stock has bottomed.

Disappointing as Mine Safety's underperformance of the S&P has been over the last year, the stock remains Tom's second-most successful pick ever at Hidden Gems, providing our members more than a double. And his best pick? It's nearly a four-bagger already. Find out about the little oven-maker that could (quadruple) when you accept your free trial subscription to Hidden Gems.

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