Form 10-Q

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

June 30, 2011 For the quarter ended June 30, 2011

Commission File No. 1-15579

 

 

LOGO

MINE SAFETY APPLIANCES COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   25-0668780

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

1000 Cranberry Woods Drive

Cranberry Township, Pennsylvania

  16066-5296
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (724) 776-8600

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes   x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x   Accelerated filer   ¨     Non-accelerated filer  ¨   Smaller reporting company  ¨
    

(Do not check if a smaller
reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

On July 25, 2011 there were 36,626,172 shares of common stock outstanding, not including 1,235,559 shares held by the Mine Safety Appliances Company Stock Compensation Trust.

 

 

 


PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

MINE SAFETY APPLIANCES COMPANY

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(In thousands, except per share amounts)

Unaudited

 

     Three Months Ended
June 30
    Six Months Ended
June 30
 
     2011     2010     2011     2010  

Net sales

   $ 294,733      $ 237,173      $ 571,232      $ 449,607   

Other income, net

     1,159        15        1,955        1,320   
                                
     295,892        237,188        573,187        450,927   
                                

Costs and expenses

        

Cost of products sold

     175,724        146,947        341,826        276,928   

Selling, general and administrative

     75,716        60,912        148,761        122,820   

Research and development

     9,440        8,282        19,983        16,018   

Restructuring and other charges

     2,027        2,618        5,114        9,427   

Interest

     3,788        1,685        7,225        3,225   

Currency exchange (gains) losses

     (111     (1,477     555        (3,635
                                
     266,584        218,967        523,464        424,783   
                                

Income before income taxes

     29,308        18,221        49,723        26,144   

Provision for income taxes

     9,827        6,287        16,746        9,090   
                                

Net income

     19,481        11,934        32,977        17,054   

Net loss (income) attributable to noncontrolling interests

     111        (107     (76     (321
                                

Net income attributable to Mine Safety Appliances Company

     19,592        11,827        32,901        16,733   
                                

Earnings per share attributable to Mine Safety Appliances Company common shareholders

        

Basic

   $ 0.53      $ 0.33      $ 0.90      $ 0.47   
                                

Diluted

   $ 0.53      $ 0.32      $ 0.88      $ 0.46   
                                

Dividends per common share

   $ 0.26      $ 0.25      $ 0.51      $ 0.49   
                                

See notes to condensed consolidated financial statements.

 

-2-


MINE SAFETY APPLIANCES COMPANY

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except share amounts)

Unaudited

 

     June 30
2011
    December 31
2010
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 63,776      $ 59,760   

Trade receivables, less allowance for doubtful accounts of $8,319 and $9,391

     215,227        198,551   

Inventories

     165,979        150,581   

Deferred tax assets

     26,660        25,714   

Income taxes receivable

     3,659        12,936   

Prepaid expenses and other current assets

     31,923        29,847   
  

 

 

   

 

 

 

Total current assets

     507,224        477,389   
  

 

 

   

 

 

 

Property, less accumulated depreciation of $328,081 and $316,288

     159,382        156,789   

Prepaid pension cost

     127,069        121,631   

Deferred tax assets

     8,633        8,285   

Goodwill

     267,803        263,089   

Other noncurrent assets

     181,684        170,005   
  

 

 

   

 

 

 

Total assets

     1,251,795        1,197,188   
  

 

 

   

 

 

 

Liabilities

    

Current liabilities

    

Notes payable and current portion of long-term debt

   $ 10,203      $ 10,163   

Accounts payable

     58,533        58,460   

Employees’ compensation

     37,531        36,845   

Insurance and product liability

     20,690        18,401   

Taxes on income

     2,622        1,253   

Other current liabilities

     52,707        56,619   
  

 

 

   

 

 

 

Total current liabilities

     182,286        181,741   
  

 

 

   

 

 

 

Long-term debt

     382,076        367,094   

Pensions and other employee benefits

     134,024        126,479   

Deferred tax liabilities

     48,682        49,177   

Other noncurrent liabilities

     16,874        16,647   
  

 

 

   

 

 

 

Total liabilities

     763,942        741,138   
  

 

 

   

 

 

 

Shareholders’ Equity

    

Mine Safety Appliances Company shareholders’ equity:

    

Preferred stock, 4 1/2% cumulative — authorized 100,000 shares of $50 par value; issued 71,373 and 71,373 shares, callable at $52.50 per share

     3,569        3,569   

Second cumulative preferred voting stock — authorized 1,000,000 shares of $10 par value; none issued

              

Common stock — authorized 180,000,000 shares of no par value; issued 62,081,391 and 62,081,391 shares (outstanding 36,626,172 and 36,519,726 shares)

     92,634        88,629   

Stock compensation trust — 1,235,559 and 1,360,714 shares

     (6,450     (7,103

Treasury shares, at cost:

    

Preferred — 52,878 and 52,878 shares

     (1,753     (1,753

Common — 24,219,660 and 24,200,951 shares

     (264,479     (263,853

Accumulated other comprehensive loss

     (30,720     (44,316

Retained earnings

     690,421        676,195   
  

 

 

   

 

 

 

Total Mine Safety Appliances Company shareholders’ equity

     483,222        451,368   

Noncontrolling interests

     4,631        4,682   
  

 

 

   

 

 

 

Total shareholders’ equity

     487,853        456,050   
  

 

 

   

 

 

 

Total liabilities and equity

     1,251,795        1,197,188   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

-3-


MINE SAFETY APPLIANCES COMPANY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

Unaudited

 

     Six Months Ended
June 30
 
     2011     2010  

Operating Activities

    

Net income

   $ 32,977      $ 17,054   

Depreciation and amortization

     16,728        13,726   

Pensions

     (2,448     (2,065

Net gain from investing activities

     (254     (707

Stock-based compensation

     4,643        4,404   

Deferred income tax benefit

     (1,657     (1,644

Other noncurrent assets and liabilities

     (15,747     (24,155

Currency exchange losses (gains)

     555        (3,635

Other, net

     636        (3,948
                

Operating cash flow before changes in working capital

     35,433        (970
                

Trade receivables

     (11,794     (15,976

Inventories

     (9,857     (15,846

Accounts payable and accrued liabilities

     (3,347     11,523   

Income taxes receivable, prepaid expenses and other current assets

     8,245        9,270   
                

Increase in working capital

     (16,753     (11,029
                

Cash flow from operating activities

     18,680        (11,999
                

Investing Activities

    

Property additions

     (14,027     (8,777

Property disposals

     889        138   

Other investing

     333        1,250   
                

Cash flow from investing activities

     (12,805     (7,389
                

Financing Activities

    

Proceeds from short-term debt, net

     24        38,364   

Proceeds from long-term debt

     42,500          

Payments on long-term debt

     (27,500       

Cash dividends paid

     (18,675     (17,722

Company stock purchases

     (624     (1,766

Exercise of stock options

     268        1,835   

Excess tax provision related to stock plans

     (253     (230
                

Cash flow from financing activities

     (4,260     20,481   
                

Effect of exchange rate changes on cash

     2,401        (2,935
                

Increase (decrease) in cash and cash equivalents

     4,016        (1,842

Beginning cash and cash equivalents

     59,760        61,983   
                

Ending cash and cash equivalents

     63,776        60,141   
                

See notes to condensed consolidated financial statements.

 

-4-


MINE SAFETY APPLIANCES COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

(1) Basis of Presentation

We have prepared the condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include certain information and disclosures required for comprehensive financial statements.

The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The other information in these financial statements is unaudited; however, we believe that all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of these interim periods have been included. The results for interim periods are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated financial statements include the accounts of the company and all subsidiaries. Intercompany accounts and transactions have been eliminated.

Certain prior year amounts have been reclassified to conform with the current year presentation.

Management’s Discussion and Analysis of Financial Condition and Results of Operations that is included elsewhere in this report contains additional information about our results of operations and financial position and should be read in conjunction with these notes.

(2) Restructuring and Other Charges

During the three and six months ended June 30, 2011, we recorded charges of $2.0 million ($1.3 million after tax) and $5.1 million ($3.3 million after tax), respectively. European segment charges for the six months ended June 30, 2011 of $3.1 million related primarily to staff reductions in Germany, France and Spain and the transfer of certain production activities to China and the U.S. North American segment charges for the six months ended June 30, 2011 of $1.1 million included costs associated with the collocation of certain administrative and production activities. International segment charges for the six months ended June 30, 2011 of $0.9 million were related to severance costs associated with the relocation of our Wuxi, China operations to Suzhou.

During the three and six months ended June 30, 2010, we recorded charges of $2.6 million ($1.7 million after tax) and $9.4 million ($6.4 million after tax), respectively. European segment charges for the six months ended June 30, 2010 of $6.8 million related primarily to a focused voluntary retirement incentive program in Germany. North American segment charges for the six months ended June 30, 2010 of $1.8 million included stay bonuses and other costs associated with the transfer of certain production activities to lower cost factories. International segment charges for the six months ended June 30, 2010 of $0.8 million were primarily for severance costs associated with staff reductions in South Africa and China.

 

-5-


(3) Comprehensive Income (Loss)

Components of comprehensive income (loss) are as follows:

 

     Three Months Ended
June 30
    Six Months Ended
June 30
 

(In thousands)

   2011      2010     2011      2010  

Net income

   $ 19,481       $ 11,934      $ 32,977       $ 17,054   

Foreign currency translation gain (loss)

     5,005         (14,213     13,596         (20,217
                                  

Comprehensive income (loss)

     24,486         (2,279     46,573         (3,163

Comprehensive loss (income) attributable to noncontrolling interests

     50         205        51         (129
                                  

Comprehensive income (loss) attributable to Mine Safety Appliances Company

     24,536         (2,074     46,624         (3,292
                                  

Components of accumulated other comprehensive loss as follows:

 

(In thousands)

   June 30
2011
    December 31
2010
 

Cumulative translation adjustments

   $ 29,075      $ 15,479   

Pension and post-retirement plan adjustments

     (59,795     (59,795
                

Accumulated other comprehensive loss

     (30,720     (44,316
                

(4) Earnings per Share

Basic earnings per share is computed on the weighted average number of common shares outstanding during the period. Diluted earnings per share assumes the exercise of stock options and the vesting of restricted stock and performance stock, provided in each case that the effect is dilutive. Participating securities are defined as unvested stock-based payment awards that contain nonforfeitable rights to dividends.

 

     Three Months Ended
June 30
    Six Months Ended
June 30
 

(In thousands, except per share amounts)

   2011     2010     2011     2010  

Net income attributable to Mine Safety Appliances Company

   $ 19,592      $ 11,827      $ 32,901      $ 16,733   

Preferred stock dividends

     (10     (10     (20     (20
                                

Income available to common equity

     19,582        11,817        32,881        16,713   

Dividends and undistributed earnings allocated to participating securities

     (213     (118     (355     (162
                                

Income available to common shareholders

     19,369        11,699        32,526        16,551   

Basic earnings per common share

   $ 0.53      $ 0.33      $ 0.90      $ 0.47   
                                

Diluted earnings per common share

   $ 0.53      $ 0.32      $ 0.88      $ 0.46   
                                

Basic shares outstanding

     36,217        35,839        36,191        35,768   

Stock options and other stock compensation

     637        642        634        584   
                                

Diluted shares outstanding

     36,854        36,481        36,825        36,352   
                                

Antidilutive stock options

     730        776        730        776   
                                

 

-6-


(5) Segment Information

We are organized into five geographic operating segments based on management responsibilities. The operating segments have been aggregated (based on economic similarities, the nature of their products, end-user markets and methods of distribution) into three reportable segments: North America, Europe, and International. Reportable segment information is presented in the following table:

 

(In thousands)

  North
America
    Europe     International     Reconciling
Items
    Consolidated
Totals
 

Three Months Ended June 30, 2011

         

Sales to external customers

  $ 137,691      $ 74,868      $ 82,174      $      $ 294,733   

Intercompany sales

    25,917        30,311        4,359        (60,587       

Net income attributable to Mine Safety Appliances Company

    16,111        2,094        6,466        (5,079     19,592   

Six Months Ended June 30, 2011

         

Sales to external customers

  $ 268,607      $ 139,707      $ 162,918      $      $ 571,232   

Intercompany sales

    50,460        58,698        8,017        (117,175       

Net income attributable to Mine Safety Appliances Company

    25,934        3,681        13,843        (10,557     32,901   

Three Months Ended June 30, 2010

         

Sales to external customers

  $ 116,774      $ 56,406      $ 63,993      $      $ 237,173   

Intercompany sales

    20,767        20,890        4,122        (45,779       

Net income (loss) attributable to Mine Safety Appliances Company

    12,928        (2,498     3,549        (2,152     11,827   

Six Months Ended June 30, 2010

         

Sales to external customers

  $ 215,888      $ 113,030      $ 120,689      $      $ 449,607   

Intercompany sales

    38,672        43,666        7,470        (89,808       

Net income (loss) attributable to Mine Safety Appliances Company

    18,512        (5,763     7,927        (3,943     16,733   

Reconciling items consist primarily of intercompany eliminations and items reported at the corporate level.

In 2011, we changed our segment reporting to include corporate overhead and interest expense in reconciling items. Previously, these expenses were reported in the North American, European, and International segments. Comparative 2010 amounts have been revised to conform with the current year presentation. The effect of the revisions for the three months ended June 30, 2010 improved North American, European, and International segment results by $2.1 million, $0.6 million, and $0.5 million, respectively, and reduced the results reported in Reconciling Items by corresponding amounts. The effect of the revisions for the six months ended June 30, 2010 improved North American, European, and International segment results by $4.2 million, $1.2 million, and $1.0 million, respectively, and reduced the results reported in Reconciling Items by corresponding amounts.

 

-7-


(6) Pensions and Other Postretirement Benefits

Components of net periodic benefit (credit) cost consisted of the following:

 

     Pension Benefits     Other Benefits  

(In thousands)

   2011     2010     2011     2010  

Three months ended June 30

      

Service cost

   $ 2,165      $ 1,936      $ 218      $ 190   

Interest cost

     4,876        4,683        435        433   

Expected return on plan assets

     (8,542     (8,644              

Amortization of transition amounts

     1        1                 

Amortization of prior service cost

     26        26        (113     (139

Recognized net actuarial losses

     288        137        213        210   
                                

Net periodic benefit (credit) cost

     (1,186     (1,861     753        694   
                                

Six months ended June 30

      

Service cost

   $ 4,329      $ 3,873      $ 436      $ 381   

Interest cost

     9,751        9,366        870        865   

Expected return on plan assets

     (17,068     (17,288              

Amortization of transition amounts

     2        2                 

Amortization of prior service cost

     52        52        (227     (278

Recognized net actuarial losses

     486        273        426        420   

Settlement loss

            285                 

Termination benefits

            1,372                 
                                

Net periodic benefit (credit) cost

     (2,448     (2,065     1,505        1,388   
                                

We made contributions of $2.3 million to our pension plans during the six months ended June 30, 2011. We expect to make total contributions of approximately $4.6 million to our pension plans in 2011.

(7) Goodwill and Intangible Assets

Changes in goodwill during the six months ended June 30, 2011 were as follows:

 

(In thousands)

   Goodwill  

Net balance at January 1, 2011

   $ 263,089   

Currency translation

     4,714   
        

Net balance at June 30, 2011

     267,803   
        

At June 30, 2011, goodwill of approximately $200.1 million, $63.7 million, and $4.0 million related to the North American, European, and International reporting units, respectively.

Changes in intangible assets, net of accumulated amortization, during the six months ended June 30, 2011 were as follows:

 

(In thousands)

   Intangibles  

Net balance at January 1, 2011

   $ 53,880   

Amortization expense

     (3,047

Currency translation

     197   
        

Net balance at June 30, 2011

     51,030   
        

 

-8-


(8) Inventories

 

(In thousands)

   June 30
2011
     December 31
2010
 

Finished products

   $ 81,371       $ 71,743   

Work in process

     18,867         16,494   

Raw materials and supplies

     65,741         62,344   
  

 

 

    

 

 

 

Total inventories

     165,979         150,581   
  

 

 

    

 

 

 

(9) Stock Plans

The 2008 Management Equity Incentive Plan provides for various forms of stock-based compensation for eligible employees through May 2018. Management stock-based compensation includes stock options, restricted stock, and performance stock units. The 2008 Non-Employee Directors’ Equity Incentive Plan provides for grants of stock options and restricted stock to non-employee directors through May 2018. Stock options are granted at market value option prices and expire after ten years. Stock options are exercisable beginning three years after the grant date. Restricted stock is granted without payment to the company and generally vests three years after the grant date. Certain restricted stock for management retention vests in three equal tranches four, five, and six years after the grant date. Unvested restricted stock for management retention is forfeited if the grantee’s employment with the company terminates for any reason other than death or disability. Restricted stock and performance stock units are valued at the market value of the stock on the grant date. The final number of shares to be issued for performance stock units may range from zero to 200% of the target award based on achieving a targeted return on net assets or total shareholder return over a three year performance period relative to a pre-determined peer group of companies. We issue Stock Compensation Trust shares or new shares for stock option exercises, restricted stock grants, and performance stock unit grants.

Stock compensation expense was as follows:

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 

(In thousands)

       2011          2010      2011      2010  

Stock compensation expense

   $ 1,957       $ 1,902       $ 4,643       $ 4,404   

Income tax benefit

     664         706         1,534         1,579   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock compensation expense, net of income tax benefit

     1,293         1,196         3,109         2,825   
  

 

 

    

 

 

    

 

 

    

 

 

 

A summary of stock option activity for the six months ended June 30, 2011 follows:

 

     Shares     Weighted
Average
Exercise Price
 

Outstanding at January 1, 2011

     1,749,003      $ 29.74   

Granted

     166,247        34.09   

Exercised

     (21,840     12.29   
  

 

 

   

 

 

 

Outstanding at June 30, 2011

     1,893,410        30.33   
  

 

 

   

 

 

 

Exercisable at June 30, 2011

     982,368        36.63   
  

 

 

   

 

 

 

 

-9-


A summary of restricted stock activity for the six months ended June 30, 2011 follows:

 

     Shares     Weighted
Average
Grant Date
Fair Value
 

Unvested at January 1, 2011

     473,637      $ 26.56   

Granted

     124,491        33.61   

Vested

     (76,105     44.43   

Forfeited

     (7,658     34.26   
  

 

 

   

 

 

 

Unvested at June 30, 2011

     514,365        25.50   
  

 

 

   

 

 

 

A summary of performance stock unit activity for the six months ended June 30, 2011 follows:

 

     Shares      Weighted
Average
Grant Date
Fair Value
 

Unvested at January 1, 2011

     85,629       $ 20.53   

Granted

     41,320         33.55   
  

 

 

    

 

 

 

Unvested at June 30, 2011

     126,949         24.77   
  

 

 

    

 

 

 

(10) Derivative Financial Instruments

As part of our currency exchange rate risk management strategy, we may enter into certain derivative foreign currency forward contracts that do not meet the GAAP criteria for hedge accounting, but which have the impact of partially offsetting certain foreign currency exposures. We account for these forward contracts at fair value and report the related gains or losses in currency exchange gains or losses. The notional amount of open forward contracts at June 30, 2011 was $3.7 million. The unrealized loss on these contracts was immaterial.

The following table presents the balance sheet location and fair value of assets and liabilities associated with derivative financial instruments:

Derivatives not designated as hedging instruments:

 

(In thousands)

   June 30
2011
     December 31
2010
 

Foreign exchange contracts:

     

Prepaid expenses and other current assets

   $       $ 4   

Other current liabilities

     15           

The following table presents the income statement location and impact of derivative financial instruments:

 

          (Gain) Loss
Recognized in Income
 
          Six Months Ended
June 30
 

(In thousands)

   Income Statement
Location
   2011     2010  

Derivatives not designated as hedging instruments:

       

Foreign exchange contracts

   Currency exchange
(gains) losses
   $ (225)      $ 748   

 

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(11) Income Taxes

At June 30, 2011, we had a gross liability for unrecognized tax benefits of $11.8 million. We have recognized tax benefits associated with these liabilities of $10.5 million at June 30, 2011. These balances are unchanged since December 31, 2010. We do not expect that the total amount of the unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.

We recognize interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. Our liability for accrued interest and penalties related to uncertain tax positions was $0.9 million at June 30, 2011.

(12) Fair Value Measurements

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:

 

   

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

 

   

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

   

Level 3 - Inputs that are both significant to the fair value measurement and unobservable.

The valuation methodologies we used to measure financial assets and liabilities were limited to the derivative financial instruments described in Note 10. We estimate the fair value of these financial instruments, consisting of foreign currency forward contracts, based upon valuation models with inputs that generally can be verified by observable market conditions and do not involve significant management judgment. Accordingly, the fair values of these financial instruments are classified within Level 2 of the fair value hierarchy.

(13) Fair Value of Financial Instruments

With the exception of fixed rate long-term debt, we believe that the reported carrying amounts of our financial assets and liabilities approximate their fair values. At June 30, 2011, the reported carrying amount of our fixed rate long-term debt (including the current portion) was $176.0 million and the fair value was $178.7 million. The fair value of our long-term debt was determined using cash flow valuation models to estimate the market value of similar transactions as of June 30, 2011.

 

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(14) Acquisitions

On October 13, 2010, we acquired General Monitors, Inc. (GMI) and its affiliated companies, General Monitors Ireland Limited (GMIL) and General Monitors Transnational, LLC (GMT), collectively referred to as General Monitors, for $278.2 million. There is no contingent consideration. At the same time, we entered into an escrow agreement with the sellers, pursuant to which approximately $38.0 million of the purchase price was placed into escrow to be used, if necessary, to satisfy certain indemnification obligations of the sellers. The escrow agreement expires two years after the closing date.

Approximately $264.0 million of the acquisition price was funded through the issuance of $100.0 million in 4.00% Series A Senior Notes and borrowings on a $250.0 million unsecured senior revolving credit facility. The Series A Senior Notes will mature on October 13, 2021 and are payable in five annual installments of $20.0 million, commencing October 13, 2017. Interest is payable quarterly. The Series A Senior Notes are unsecured. Borrowings made under the unsecured senior revolving credit facility bear interest at a variable annual rate and may be used for general corporate purposes, including working capital, permitted acquisitions, capital expenditures, and repayment of existing debt.

GMI, GMIL and GMT are now our wholly-owned subsidiaries. General Monitors is a leading innovator and developer of advanced flame and gas detection systems that are used in a broad range of oil and gas exploration and refining applications and in diverse industrial plant settings. In addition to providing us with greater access to the global oil and gas market, we believe that the acquisition significantly enhances our long-term corporate strategy in fixed gas detection by providing us with world-class research and development talent and an industry-leading product line.

The following table summarizes the fair values of the General Monitors assets acquired and liabilities assumed at the date of acquisition:

 

(In millions)

   October 13
2010
 

Current assets (including cash of $18.6 million)

   $ 46.8   

Property

     14.0   

Trade name

     6.0   

Acquired technology

     11.0   

Customer-related intangibles

     27.0   

Goodwill

     179.9   

Other noncurrent assets

     3.5   
  

 

 

 

Total assets acquired

     288.2   

Total liabilities assumed

     10.0   
  

 

 

 

Net assets acquired

     278.2   
  

 

 

 

Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values. Fair values were determined by management based, in part, on an independent valuation performed by a third party valuation specialist. Identifiable intangible assets with finite lives are subject to amortization over their estimated useful lives. The identifiable intangible assets acquired in the General Monitors transaction are being amortized over an estimated weighted-average amortization period of 16 years. Estimated future amortization expense related to these identifiable intangible assets is approximately $3.3 million in each of the next five years.

Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired and represents the future economic benefits arising from acquired assets that could not be individually identified and separately recognized. Among the factors that contributed to a purchase

 

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price in excess of the fair value of the net tangible and intangible assets acquired were the acquisition of an assembled workforce, the expected synergies and other benefits that we believe will result from combining the operations of General Monitors with our operations, and the going concern element of General Monitors’ existing business. Goodwill related to the General Monitors acquisition was recorded in our reportable segments as follows: $136.7 million in North American segment and $43.2 million in the European segment. North American segment goodwill is expected to be tax deductible. The step up to fair value of acquired inventory as part of the purchase price allocation totaled $4.8 million.

The operating results of General Monitors have been included in our consolidated financial statements since the acquisition date. Our results for the three months ended June 30, 2011 include General Monitors sales and net income of $21.5 million and $4.1 million, respectively. Our results for the six months ended June 30, 2011 include General Monitors sales and net income of $41.3 million and $6.4 million, respectively. General Monitors net income for the six months ended June 30, 2011 includes a one-time increase in cost of sales of $2.3 million ($1.5 million after tax) related to the fair value step-up of inventories acquired from General Monitors.

The following unaudited pro forma information presents our combined results as if the acquisition had occurred at the beginning of 2010. The unaudited pro forma financial information was prepared to give effect to events that are directly attributable to the acquisition, factually supportable, and expected to have a continuing impact on the combined company’s results. There were no transactions between us and GMI, GMIL, or GMT during the six months ended June 30, 2010 that are required to be eliminated. Transactions between GMI, GMIL, and GMT during the six months ended June 30, 2010 have been eliminated in the unaudited pro forma condensed combined financial information. Pro forma adjustments have been made to the 2010 information to reflect the incremental impact on earnings of interest expense on the borrowings that we made to acquire the General Monitors companies, amortization expense related to acquired intangible assets, and income tax expense, net of benefits, associated with the previously-discussed adjustments. Pro forma adjustments were made to the 2011 information to eliminate incremental one-time costs and related tax benefits associated with purchase accounting adjustments. The unaudited pro forma financial information does not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the acquisitions or the costs to integrate the operations or the costs necessary to achieve cost savings, operating synergies or revenue enhancements.

Pro forma financial information (Unaudited)

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 

(In millions, except per share amounts)

   2011      2010      2011      2010  

Net sales

   $ 294.7       $ 256.3       $ 571.2       $ 487.9   

Net income

     19.5         14.1         34.5         21.2   

Basic earnings per share

     0.53         0.39         0.94         0.59   

Diluted earnings per share

     0.53         0.38         0.93         0.58   

The unaudited pro forma condensed combined financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations or financial position that we would have reported had the acquisitions been completed as of the date and for the periods presented, and should not be taken as representative of our consolidated results of operations or financial condition following the acquisitions. In addition, the unaudited pro forma condensed combined financial information is not intended to project the future financial position or results of operations of the combined company.

The unaudited pro forma financial information was prepared using the acquisition method of accounting under existing GAAP.

 

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(15) Contingencies

We categorize the product liability losses that we experience into two main categories, single incident and cumulative trauma. Single incident product liability claims are discrete incidents that are typically known to us when they occur and involve observable injuries and, therefore, more quantifiable damages. Therefore, we maintain a reserve for single incident product liability claims based on expected settlement costs for pending claims and an estimate of costs for unreported claims derived from experience, sales volumes, and other relevant information. The reserve for single incident product liability claims was $5.5 million and $5.2 million at June 30, 2011 and December 31, 2010, respectively. Single incident product liability expense during the six months ended June 30, 2011 and 2010 was $0.7 million and $0.8 million, respectively. We evaluate our single incident product liability exposures on an ongoing basis and make adjustments to the reserve as new information becomes available.

Cumulative trauma product liability claims involve exposures to harmful substances (e.g., silica, asbestos, and coal dust) that occurred many years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, or coal worker’s pneumoconiosis. We are presently named as a defendant in 1,965 suits in which plaintiffs allege to have contracted certain cumulative trauma diseases related to exposure to silica, asbestos, and/or coal dust. These lawsuits mainly involve respiratory protection products allegedly manufactured and sold by us. We are unable to estimate total damages sought in these lawsuits as they generally do not specify the injuries alleged, the amount of damages sought, and potentially involve multiple defendants.

Cumulative trauma product liability litigation is difficult to predict. In our experience, until late in a lawsuit, we cannot reasonably determine whether it is probable that any given cumulative trauma lawsuit will ultimately result in a liability. This uncertainty is caused by many factors, including the following: cumulative trauma complaints generally do not provide information sufficient to determine if a loss is probable; cumulative trauma litigation is inherently unpredictable and information is often insufficient to determine if a lawsuit will develop into an actively litigated case; and even when a case is actively litigated, it is often difficult to determine if the lawsuit will be dismissed or otherwise resolved until late in the lawsuit. Moreover, even once it is probable that such a lawsuit will result in a loss, it is difficult to reasonably estimate the amount of actual loss that will be incurred. These amounts are highly variable and turn on a case-by-case analysis of the relevant facts, which are often not learned until late in the lawsuit.

Because of these factors, we cannot reliably determine our potential liability for such claims until late in the lawsuit. We, therefore, do not record cumulative trauma product liability losses when a lawsuit is filed, but rather, when we learn sufficient information to determine that it is probable that we will incur a loss and the amount of loss can be reasonably estimated. We record expenses for defense costs associated with open cumulative trauma product liability lawsuits as incurred.

We cannot estimate any amount or range of possible losses related to resolving pending and future cumulative trauma product liability claims that we may face because of the factors described above. As new information about cumulative trauma product liability cases and future developments becomes available, we reassess our potential exposures.

A summary of cumulative trauma product liability claims activity follows:

 

     Six Months Ended
June 30

2011
    Year Ended
December 31
2010
 

Open claims, beginning of period

     1,900        2,480   

New claims

     141        260   

Settled and dismissed claims

     (76     (840
                

Open claims, end of period

     1,965        1,900   
                

 

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With some common contract exclusions, we maintain insurance for cumulative trauma product liability claims. We have purchased insurance policies from over 20 different insurance carriers that provide coverage for cumulative trauma product liability losses and related defense costs. In the normal course of business, we make payments to settle product liability claims and for related defense costs. We record receivables for the amounts that are covered by insurance. The available limits of these policies are many times our recorded insurance receivable balance.

Various factors could affect the timing and amount of recovery of our insurance receivables, including the outcome of negotiations with insurers, legal proceedings with respect to product liability insurance coverage, and the extent to which insurers may become insolvent in the future.

Our insurance receivables totaled $106.8 million at June 30, 2011, all of which was reported in other non-current assets. Our insurance receivables totaled $89.0 million December 31, 2010, all of which is reported in other non-current assets.

A summary of insurance receivable balances and activity related to cumulative trauma product liability losses follows:

 

     Six Months Ended
June 30

2011
     Year Ended
December 31
2010
 

(In millions)

     

Balance beginning of period

   $ 89.0       $ 91.7   

Additions

     17.8         30.9   

Collections and settlements

             (33.6
                 

Balance end of period

     106.8         89.0   
                 

Additions to insurance receivables in the above table represent insured cumulative trauma product liability settlements and related defense costs. There were no uninsured cumulative trauma product liability losses during the six month periods ended June 30, 2011 and 2010.

Our aggregate cumulative trauma product liability settlement, administrative and defense costs for the years ended December 31, 2010, 2009, and 2008 totaled approximately $90.3 million, substantially all of which was insured.

We believe that the increase in the insurance receivable balance that we have experienced since 2005 is primarily due to disagreements among our insurance carriers, and consequently with us, as to when their individual obligations to pay us are triggered and the amount of each insurer’s obligation, as compared to other insurers. We believe that our insurers do not contest that they have issued policies to us or that these policies cover cumulative trauma product liability claims. Our ability to successfully resolve our insurance litigations with Century Indemnity Company and Columbia Casualty Company during 2010 demonstrates that we had strong legal positions concerning our rights to coverage.

We regularly evaluate the collectability of insurance receivables and record the amounts that we conclude are probable of collection. Our conclusion is based on our analysis of the terms of the underlying insurance policies, our experience in successfully recovering cumulative trauma product liability claims from our insurers under other policies, the financial ability of our insurance carriers to pay the claims, our understanding and interpretation of the relevant facts and applicable law, and the advice of legal counsel, who believe that our insurers are required to provide coverage based on the terms of the policies.

Although the outcome of cumulative trauma product liability matters cannot be predicted with certainty and unfavorable resolutions could materially affect our results of operations on a

 

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quarter-to-quarter basis, based on information currently available and the amounts of insurance coverage available to us, we believe that the disposition of cumulative trauma product liability lawsuits that are pending against us will not have a materially adverse effect on our future results of operations, financial condition, or liquidity.

We are currently involved in coverage litigation with The North River Insurance Company (North River). We have sued North River in the United States District Court for the Western District of Pennsylvania, alleging that North River breached one insurance policy by failing to pay amounts owing to us and that its refusal to pay constitutes bad faith. The case was assigned to the Court’s mandatory Alternative Dispute Resolution program, in an attempt to resolve the dispute. The mediation was unsuccessful and the case will proceed to trial. We believe that North River’s refusal to indemnify us under the policy for settlements and legal fees paid by us is wholly contrary to Pennsylvania law and we are pursuing the legal actions necessary to collect all amounts.

In April 2010, North River filed a complaint against us and two excess insurance carriers in the Court of Common Pleas of Allegheny County, Pennsylvania seeking a declaratory judgment concerning their responsibilities under three additional policies shared with Northbrook Insurance Company. We filed a motion to dismiss the declaratory judgment claim and a counter claim for breach of contract against North River and the two excess carriers. The court stayed the declaratory judgment claim and the breach of contract claim is now in discovery. We believe that Pennsylvania law supports our position that North River has insurance responsibilities to indemnify us against various product liability claims to the full limits of these policies.

During May 2010, we resolved coverage litigation with Century Indemnity Company through a negotiated settlement. As part of this settlement, both parties dismissed all claims against one another under the previously-filed coverage litigation. The settlement did not have an impact on our operating results.

During July 2010, we resolved coverage litigation with Columbia Casualty Company through a negotiated settlement. As part of this settlement, both parties dismissed all claims against one another under the previously-filed coverage litigation. The settlement did not have an impact on our operating results.

In July 2010, we filed a complaint in the Superior Court of the State of Delaware seeking declaratory and other relief from the majority of our excess insurance carriers concerning the future rights and obligations of MSA and our excess insurance carriers under various insurance policies. The reason for this insurance coverage action is to secure a comprehensive resolution of our rights under the insurance policies issued by our insurers.

In December 2010, North River filed a motion to dismiss or stay the Delaware action asserting that the previously-discussed cases in the United States District Court for the Western District of Pennsylvania and the Court of Common Pleas of Allegheny County, Pennsylvania were capable of resolving the claims presented in the Superior Court of the State of Delaware action. In January 2011, the Superior Court of the State of Delaware granted North River’s motion to stay the Delaware insurance coverage action, pending resolution of the ongoing actions in the United States District Court for the Western District of Pennsylvania and the Court of Common Please of Allegheny County, Pennsylvania. We appealed the trial court’s decision to stay this case and our appeal was denied. There will be no further activity in the Delaware action until the two Pennsylvania actions are resolved.

 

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(16) Recently Adopted and Recently Issued Accounting Standards

In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements. This ASU changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scopes these products out of current software revenue guidance. The new guidance includes factors to help companies determine what software elements are considered “essential to the functionality.” The amendments will subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The adoption of this ASU on January 1, 2011 did not have a material effect on our consolidated financial statements.

In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition—Milestone Method. This ASU allows entities to make a policy election to use the milestone method of revenue recognition and provides guidance on defining a milestone and the criteria that should be met for applying the milestone method. The scope of this ASU is limited to the transactions involving milestones relating to research and development deliverables. The guidance includes enhanced disclosure requirements about each arrangement, individual milestones and related contingent consideration, substantive milestones and factors considered in that determination. The adoption of this ASU on January 1, 2011 did not have a material effect on our consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04,Fair Value Measurement—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU updated measurement guidance to improve the comparability of fair value measurements between U.S.GAAP and International Financial Reporting Standards and enhanced disclosure requirements. The most significant change in disclosures is an expansion of information related to fair value measurements categorized within Level 3 of the fair value hierarchy. The ASU will be effective beginning in 2012. The adoption of this ASU will not have a material effect on our consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income—Presentation of Comprehensive Income. This ASU requires net income and comprehensive income to be presented in either a single continuous statement or in two separate, but consecutive, statements. The ASU eliminates the option of presenting other comprehensive income in the statement of shareholders’ equity. The ASU will be effective beginning in 2012. The adoption of this ASU will not have a material effect on our results of operations or financial position, but will change the format of the presentation of comprehensive income.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the historical financial statements and other financial information included elsewhere in this report on Form 10-Q. This discussion may contain forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions, and projections about our industry, business, and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors. These factors include, but are not limited to, spending patterns of government agencies, competitive pressures, product liability claims and our ability to collect related insurance receivables, the success of new product introductions, currency exchange rate fluctuations, the identification and successful integration of acquisitions, and the risks of doing business in foreign countries. For a discussion of risk factors affecting our business, see Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010.

BUSINESS OVERVIEW

We are a global leader in the development, manufacture, and supply of products that protect people’s health and safety. Our safety products typically integrate any combination of electronics, mechanical systems, and advanced materials to protect users against hazardous or life threatening situations. Our comprehensive lines of safety products are used by workers around the world in the fire service, homeland security, construction, and other industries, as well as the military.

We are committed to providing our customers with service unmatched in the safety industry and, in the process, enhancing our ability to provide a growing line of safety solutions for customers in key global markets. Four strategic imperatives drive us toward our goal of building customer loyalty by delivering exceptional levels of protection, quality, and value:

 

   

Achieve sustainable growth through product leadership;

 

   

Expand market penetration through exceptional customer focus;

 

   

Control costs and increase efficiency in asset utilization; and

 

   

Build the depth, breadth, and diversity of our global team.

We tailor our product offerings and distribution strategy to satisfy distinct customer preferences that vary across geographic regions. We believe that we best serve these customer preferences by organizing our business into three geographic segments: North America, Europe, and International. Each segment includes a number of operating companies. In 2010, approximately 48%, 26%, and 26% of our net sales were made by our North American, European, and International segments, respectively.

North America. Our largest manufacturing and research and development facilities are located in the United States. We serve our North American markets with sales and distribution functions in the U.S., Canada, and Mexico.

Europe. Our European segment includes companies in most Western European countries and a number of Eastern European and Middle Eastern locations. Our largest European companies, based in Germany and France, develop, manufacture, and sell a wide variety of products. Operations in other European segment countries focus primarily on sales and distribution in their respective home country markets. While some of these companies may perform limited production, most of their sales are of products that are manufactured in our plants in Germany, France, the U.S., and China, or are purchased from third party vendors.

 

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International. Our International segment includes companies in South America, Africa, and the Asia Pacific region, some of which are in developing regions of the world. Principal manufacturing operations are located in Australia, Brazil, China, and South Africa. These companies develop and manufacture products that are sold primarily in each company’s home country and regional markets. The other companies in the International segment focus primarily on sales and distribution in their respective home country markets. While some of these companies may perform limited production, most of their sales are of products that are manufactured in our plants in the China, Germany, France, and the U.S.; or are purchased from third party vendors.

ACQUISITIONS

In October 2010, we strengthened our presence in oil, gas, and petrochemical markets by acquiring General Monitors, Inc. (GMI) of Lake Forest, California and its affiliated companies, General Monitors Ireland Limited (GMIL) and General Monitors Transnational, LLC (GMT), collectively referred to as General Monitors. General Monitors is a leading innovator and developer of advanced flame and gas detection systems that are used in a broad range of oil and gas exploration and refining applications and in diverse industrial plant settings. In addition to providing us with greater access to the global oil and gas market, we believe the acquisition significantly enhances our long-term corporate strategy in fixed gas detection by providing us with world-class research and development talent and an industry leading product line. We have assembled a joint cross functional integration team to ensure the successful integration of our operations.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Net sales. Net sales for the three months ended June 30, 2011 were $294.7 million, an increase of $57.5 million, or 24%, compared with $237.2 million for the three months ended June 30, 2010.

 

     Three Months Ended
June 30
     Dollar
Increase
     Percent
Increase
 

(In millions)

       2011          2010        

North America

   $ 137.7       $ 116.8       $ 20.9         18

Europe

     74.9         56.4         18.5         33   

International

     82.2         64.0         18.2         28   

Net sales by the North American segment were $137.7 million for the second quarter of 2011, an increase of $20.9 million, or 18%, compared to $116.8 million for the second quarter of 2010. North American sales for the second quarter of 2011 included $13.9 million of General Monitors sales. During the current quarter, we continued to see growing demand in the oil and gas market, as well as other core industrial markets. The improved demand in core industrial markets resulted in higher shipments of instruments (excluding General Monitors) and fall protection, up $2.2 million and $1.7 million, respectively. Shipments of Advanced Combat Helmets (ACH) to the U.S. military were $5.7 million higher in the second quarter of 2011, as we continued shipping on our current contract. These improvements were partially offset by a decrease of $3.0 million in sales of SCBA to fire service markets.

Net sales for the European segment were $74.9 million for the second quarter of 2011, an increase of $18.5 million, or 33%, compared to $56.4 million for the second quarter of 2010. Net sales in the second quarter of 2011 in the European Segment included $7.6 million of General Monitors sales. Excluding General Monitor sales, local currency sales in Europe increased $3.5 million primarily related to a $4.6 million increase in instrument sales (excluding General Monitors) to core industrial

 

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markets, partially offset by weakness in fire service markets and lower shipments of ballistic helmets to military markets. The favorable translation effects of a stronger euro in the current quarter increased European segment sales, when stated in U.S. dollars, by approximately $7.5 million.

Net sales for the International segment were $82.2 million in the second quarter of 2011, an increase of $18.2 million, or 28%, compared to $64.0 million for the second quarter of 2010. Local currency sales in the International segment increased $11.1 million for the quarter due to strong demand in mining and core industrial markets. Local currency sales increased in most product lines, with the strongest improvements in SCBAs, instruments, and eye and face protection, up $2.3 million, $3.4 million, and $2.2 million, respectively. Currency translation effects increased International segment sales, when stated in U.S. dollars, by $7.1 million, primarily related to a strengthening of the Australian dollar, Brazilian real, and South African rand.

Cost of products sold. Cost of products sold was $175.7 million in the second quarter of 2011, compared to $146.9 million in the second quarter of 2010. The increase was driven by higher sales. Cost of products sold as a percentage of sales was 59.6% in the second quarter of 2011 compared to 62.0% in the second quarter of 2010. Cost of products sold includes net periodic pension credits during the second quarters of 2011 and 2010 of $1.1 million and $1.0 million, respectively.

Gross profit. Gross profit for the second quarter of 2011 was $119.0 million, which was $28.8 million, or 32%, higher than gross profit of $90.2 million in the second quarter of 2010. The ratio of gross profit to net sales was 40.4% in the second quarter of 2011 compared to 38.0% in the same quarter last year. The improved gross profit ratio in the current quarter was primarily related to improved pricing, and product mix.

Selling, general and administrative expenses. Selling, general and administrative expenses were $75.7 million during the second quarter of 2011, an increase of $14.8 million, or 24%, compared to $60.9 million in the second quarter of 2010. Selling, general and administrative expenses were 25.7% of net sales in the second quarter of 2011 and 2010. Higher selling, general and administrative expenses in the current quarter included $5.5 million at General Monitors. The remainder of the increase occurred in the North American and International segments, primarily to support the higher sales volumes. Currency exchange increased second quarter 2011 selling, general and administrative expenses, when stated in U.S. dollars, by $4.3 million, primarily related to a strengthening of the euro, Australian dollar, Brazilian real, and South African rand.

Research and development expense. Research and development expense was $9.4 million during the second quarter of 2011, an increase of $1.1 million, or 13%, compared to $8.3 million during the second quarter of 2010. The increase reflects additional expense of $0.9 million related to research and development activities at General Monitors.

Restructuring and other charges. During the second quarter of 2011, we recorded charges of $2.0 million ($1.3 million after tax). European segment charges of $1.4 million related primarily to staff reductions in Germany, France, and Spain and the transfer certain production activities to China and the U.S. North American segment charges of $0.6 million included costs associated with the relocation of certain administrative and production activities.

During the second quarter of 2010, we recorded charges of $2.6 million ($1.7 million after tax). European segment charges of $1.5 million related primarily to ongoing efforts to reorganize our European operations. North American segment charges of $0.8 million included stay bonuses and other costs associated with the transfer certain production activities. International segment charges of $0.3 million were primarily for severance costs associated with staff reductions in China.

 

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Interest expense. Interest expense was $3.8 million during the second quarter of 2011, an increase of $2.1 million, or 124%, compared to $1.7 million in the same quarter last year. The increase in interest expense was due to higher borrowings associated with the General Monitors acquisition.

Currency exchange. We reported currency exchange gains of $0.1 million in the second quarter of 2011, compared to gains of $1.5 million in the second quarter of 2010. Currency exchange gains in both quarters were mostly unrealized and related primarily to the effect of euro exchange rate fluctuations on euro-denominated inter-company balances.

Income taxes. The effective tax rate for the second quarter of 2011 was 33.5% compared to 34.5% for the same quarter last year. The lower effective tax rate in the second quarter of 2011 was primarily related to the recognition of the research and development tax credit in the U.S. Second quarter 2010 income tax expense did not reflect this credit due to its expiration at the end of 2009. The credit was reinstated during the fourth quarter of 2010.

Net income attributable to Mine Safety Appliances Company. Net income attributable to Mine Safety Appliances Company for the second quarter of 2011 was $19.6 million, or $0.53 per basic share, an increase of $7.8 million, or 66%, compared to $11.8 million, or $0.33 per basic share, for the same quarter last year.

North American segment net income for the second quarter of 2011 was $16.1 million, an increase of $3.2 million, or 25%, compared to $12.9 million in the second quarter of 2010. The increase in North American segment net income for the second quarter of 2011 included General Monitors results and reflects improved sales and gross profits, partially offset by the previously discussed increase in selling, general and administrative expenses.

The European segment reported net income for the second quarter of 2011 of $2.1 million, an improvement of $4.6 million, compared to a net loss of $2.5 million during the second quarter of 2010. The improvement in European net income included General Monitors results and reflects higher sales, controlled operating costs, and lower restructuring charges.

International segment net income for the second quarter of 2011 was $6.5 million, an increase of $3.0 million, or 82%, compared to $3.5 million in the same quarter last year. Higher local currency net income of $2.3 million was primarily related to higher sales volumes, partially offset by higher selling expenses. Currency translation effects increased current quarter International segment net income, when stated in U.S. dollars by approximately $0.7 million, primarily reflecting a strong Australian dollar and Brazilian real.

The net loss reported in reconciling items for the second quarter of 2011 was $5.1 million compared to a net loss of $2.2 million in the second quarter of 2010. The higher loss in the second quarter of 2011 was primarily related to higher interest expense associated with borrowings made in October 2010 to finance the General Monitors acquisition and lower currency exchange gains.

 

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Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Net sales. Net sales for the six months ended June 30, 2011 were $571.2 million, an increase of $121.6 million, or 27%, compared with $449.6 million for the six months ended June 30, 2010.

 

     Six Months Ended
June 30
     Dollar
Increase
     Percent
Increase
 

(In millions)

   2011      2010        

North America

   $ 268.6       $ 215.9       $ 52.7         24

Europe

     139.7         113.0         26.7         24   

International

     162.9         120.7         42.2         35   

Net sales by the North American segment were $268.6 million for the six months ended June 30, 2011, an increase of $52.7 million, or 24%, compared to $215.9 million for the same period in 2010. North American sales for the six months ended June 30, 2011 included $28.0 million of General Monitors sales. Shipments of Advanced Combat Helmets to the U.S. military were $12.5 million higher as we continued shipping on our current contract. Strong demand in industrial markets resulted in higher shipments of instruments (excluding General Monitors), fall protection, and head protection, up $5.0 million, $3.2 million, and $2.5 million, respectively.

Net sales for the European segment were $139.7 million for the six months ended June 30, 2011, an increase of $26.7 million, or 24%, compared to $113.0 million for the same period in 2010. European segment sales for the six months ended June 30, 2011 included $13.3 million of General Monitors sales. Excluding General Monitors sales, local currency sales in Europe increased $5.3 million for the six months ended June 30, 2011, reflecting higher shipments of instruments, up $6.8 million, on strength in industrial core markets. This increase was partially offset by lower sales of gas masks and ballistic helmets on weakness in military markets. The favorable translation effects of stronger Euro currencies in the first half of 2011 increased European segment sales, when stated in U.S. dollars, by approximately $8.1 million.

Net sales for the International segment were $162.9 million for the six months ended June 30, 2011, an increase of $42.2 million, or 35%, compared to $120.7 million for the same period in 2010. Local currency sales of the International segment increased $30.3 million during the six months ended June 30, 2011. Local currency sales in Latin America, China and Southeast Asia were up $16.1 million, $6.6 million, and $2.1 million, respectively, reflecting higher sales of instruments and head, eye and face protection, primarily in industrial and mining markets. Currency translation effects increased International segment sales, when stated in U.S. dollars, by $11.9 million, primarily related to a strengthening of the Australian dollar, South African rand, and Brazilian real.

Cost of products sold. Cost of products sold was $341.8 million for the six months ended June 30, 2011, compared to $276.9 million for the same period in 2010. The increase was driven by higher sales. Cost of products sold as a percentage of sales was 59.8% in the six months ended June 30, 2011 and 61.6% for the same period last year. Cost of products sold includes net periodic pension credits during the six month periods ended June 30, 2011 and 2010 of $2.0 million and $2.2 million, respectively.

Gross profit. Gross profit for the six months ended June 30, 2011 was $229.4 million, which was $56.7 million, or 33%, higher than gross profit of $172.7 million for the same period in 2010. The ratio of gross profit to net sales was 40.2% in the six months ended June 30, 2011, compared to 38.4% for the same period last year. The higher gross profit ratio during the six months ended June 30, 2011 was primarily related to improved pricing, control over manufacturing costs, and product mix.

Selling, general and administrative expenses. Selling, general and administrative expenses were $148.8 million during the six months ended June 30, 2011, an increase of $26.0 million, or 21%,

 

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compared to $122.8 million during the same period in 2010. Selling, general and administrative expenses were 26.0% of net sales for the six months ended June 30, 2011, compared to 27.3% of net sales for the same period in 2010. Higher selling, general and administrative expenses in the first half of the year included $10.6 million at General Monitors. The remainder of the increase occurred in the North American and International segments, primarily to support the higher sales volumes. Currency exchange increased selling, general and administrative expenses for the six months ended June 30, 2011, when stated in U.S. dollars, by $5.5 million, primarily related to the strengthening of the euro, Australian dollar, Brazilian real, and South African rand.

Research and development expense. Research and development expense was $20.0 million for the six months ended June 30, 2011, an increase of $4.0 million, or 25%, compared to $16.0 million during the same period in 2010. The increase includes $1.9 million of research and development expense at General Monitors. The remainder of the increase reflects our ongoing focus on developing innovative new products.

Restructuring and other charges. During the six months ended June 30, 2011, we recorded charges of $5.1 million ($3.3 million after tax). European segment charges of $3.1 million for the six months ended June 30, 2011 related primarily to staff reductions in Germany, France, and Spain and the transfer of certain production activities to China and the U.S. North American segment charges for the six months ended June 30, 2011 of $1.1 million included costs associated with the relocation of certain administrative and production activities. International segment charges for the six months ended June 30, 2011 of $0.9 million were related to costs associated with the relocation of our Wuxi, China operations to Suzhou.

During the six months ended June 30, 2010, we recorded charges of $9.4 million ($6.4 million after tax). European segment charges of $6.8 million for the six months ended June 30, 2010 related primarily to a focused voluntary retirement incentive program in Germany. North American segment charges for the six months ended June 30, 2010 of $1.8 million included stay bonuses and other costs associated with our ongoing initiative to transfer certain production activities to lower cost factories. International segment charges for the six months ended June 30, 2010 of $0.8 million were primarily for severance costs associated with staff reductions in South Africa and China.

Interest expense. Interest expense was $7.2 million during the six months ended June 30, 2011, an increase of $4.0 million, or 124%, compared to $3.2 million during the same period last year. The increase in interest expense was primarily due to higher borrowings associated with the General Monitors acquisition.

Currency exchange. We reported currency exchange losses of $0.6 million during the six months ended June 30, 2011, compared to gains of $3.6 million during the same period in 2010. Currency exchange losses and gains in both periods were mostly unrealized and related primarily to the effect of euro exchange rate fluctuations on euro-denominated inter-company balances.

Income taxes. The effective tax rate for the six months ended June 30, 2011 was 33.7% compared to 34.8% for the same period last year. The lower effective tax rate during the six months ended June 30, 2011 was primarily related to the recognition of the research and development tax credit in the U.S. Income tax expense, during the same period in 2010, did not reflect this credit due to its expiration at the end of 2009. The credit was reinstated during the fourth quarter of 2010.

Net income attributable to Mine Safety Appliances Company. Net income attributable to Mine Safety Appliances Company for the six months ended June 30, 2011 was $32.9 million, or $0.90 per basic share, an increase of $16.2 million, or 97%, compared to $16.7 million, or $0.47 per basic share, for the same period last year.

 

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North American segment net income for the six months ended June 30, 2011 was $25.9 million, an increase of $7.4 million, or 40%, compared to $18.5 million for the same period last year. North American segment net income for the six months ended June 30, 2011 included General Monitors net income of $3.7 million. The remaining improvement is due to higher sales and gross profits, partially offset by higher operating expenses required to support sales growth.

The European segment reported net income for the six months ended June 30, 2011 of $3.7 million, an improvement of $9.5 million, compared to a loss of $5.8 million during the same period in 2010. European segment income for the current period includes General Monitors net income of $2.6 million. The remaining improvement in local currency European segment net income is related to higher sales and gross profits, reduced operating expenses, and lower restructuring costs. Higher gross profits reflect a more favorable product mix, including sales of General Monitors products, and improved pricing and control over manufacturing costs.

International segment net income for the six months ended June 30, 2011 was $13.8 million, an increase of $5.9 million, or 75%, compared to $7.9 million in the same period last year. Higher local currency net income was primarily related to improved sales and gross profits. The gross profit improvements reflect a more favorable product and geographic sales mix. These increases were partially offset by higher selling, general and administrative expenses. Currency translation effects increased current period International segment net income, when stated in U.S. dollars by approximately $0.9 million, primarily due to the Brazilian real, Australian dollar and South African rand.

The net loss reported in reconciling items for the six months ended June 30, 2011 was $10.6 million compared to a net loss of $3.9 million for the same period last year. The higher loss in the six months ended June 30, 2011 reflects higher interest expense associated with borrowings made in October 2010 to finance the General Monitors acquisition. Additionally, the first half of 2010 benefited from currency exchange gains that did not repeat in the current period.

LIQUIDITY AND CAPITAL RESOURCES

Our main source of liquidity is operating cash flows, supplemented by borrowings to fund significant transactions. Our principal liquidity requirements are for working capital, capital expenditures, principal and interest payments on debt, and acquisitions. Approximately half of our long-term debt is at fixed interest rates with repayment schedules through 2021. The remainder of our long-term debt is at variable rates on an unsecured revolving credit facility that is due in 2015. Substantially all of our borrowings originate in the U.S., which has limited our exposure to non-U.S. credit markets and to currency exchange rate fluctuations.

Cash and cash equivalents increased $4.0 million during the six months ended June 30, 2011, compared to decreasing $1.8 million during the same period in 2010.

Operating activities provided cash of $18.7 million during the six months ended June 30, 2011, compared to using $12.0 million during the same period in 2010. Cash provided by operations during the current period included $11.2 million at General Monitors. Significantly improved operating cash flow in 2011 is primarily related to higher net income and lower use of cash to fund other non-current assets and liabilities when compared with 2010. These improvements were partially offset by a higher use of cash to fund increases in working capital items. Trade receivables were $215.2 million at June 30, 2011, compared to $198.6 million at December 31, 2010. LIFO inventories were $166.0 million at June 30, 2011, compared to $150.6 million at December 31, 2010. The $16.6 million increase in trade receivables reflects an $11.8 million increase in local currency balances, primarily in the European and International segments, and a $4.8 million increase due to currency translation effects. The $15.4 million increase in inventories reflects a $9.9 million increase in local currency

 

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inventories, primarily in North America and Europe, and a $5.5 million increase due to currency translation effects. Higher local currency trade receivables and inventories reflect increased sales and anticipated growth in customer demand.

Investing activities used cash of $12.8 million during the six months ended June 30, 2011, compared to using $7.4 million in the same period last year. The increase related primarily to higher property additions. During the six months ended June 30, 2011 and 2010, we used cash of $14.0 million and $8.8 million, respectively, for property additions. Higher property additions in the first half of 2011 were related primarily to machinery and equipment additions.

Financing activities used cash of $4.3 million during the six months ended June 30, 2011, compared to providing $20.5 million during the same period in 2010. The change was primarily related to lower borrowing in the current period and reflects improved operating cash flow. During the first half of 2011, we borrowed $15.0 million compared to borrowing of $38.4 million in the first half of 2010. We paid cash dividends of $18.7 million in the first half of 2011 compared to $17.7 million in the first half of 2010.

CUMULATIVE TRANSLATION ADJUSTMENTS

The position of the U.S. dollar relative to international currencies at June 30, 2011 resulted in a translation gain of $13.6 million being credited to the cumulative translation adjustments shareholders’ equity account during the six months ended June 30, 2011, compared to a loss of $20.2 million during the same period in 2010. The translation gain during the first half of 2011 was primarily related to the strengthening of the euro. The translation loss during the first half of 2010 was primarily related to a weakening of the euro.

COMMITMENTS AND CONTINGENCIES

We made contributions of $2.3 million to our pension plans during the six months ended June 30, 2011. We expect to make total contributions of approximately $4.6 million to our pension plans in 2011.

We have purchase commitments for materials, supplies, services, and property, plant and equipment as part of our ordinary conduct of business.

In September 2006, we acquired Paraclete Armor and Equipment, Inc. Under the terms of the asset purchase agreement, we issued a $10.0 million note payable to the former owners of Paraclete. The note is non-interest bearing and is payable in five annual installments of $2.0 million beginning September 1, 2007. We recorded the note at a fair value of $8.5 million at the time of issuance. The discount of $1.5 million is being amortized over the term of the note.

We categorize the product liability losses that we experience into two main categories, single incident and cumulative trauma. Single incident product liability claims are discrete incidents that are typically known to us when they occur and involve observable injuries and, therefore, more quantifiable damages. Therefore, we maintain a reserve for single incident product liability claims based on expected settlement costs for pending claims and an estimate of costs for unreported claims derived from experience, sales volumes, and other relevant information. The reserve for single incident product liability claims was $5.5 million and $5.2 million at June 30, 2011 and December 31, 2010, respectively. Single incident product liability expense during the six months ended June 30, 2011 and 2010 was $0.7 million and $0.8 million, respectively. We evaluate our single incident product liability exposures on an ongoing basis and make adjustments to the reserve as new information becomes available.

 

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Cumulative trauma product liability claims involve exposures to harmful substances (e.g., silica, asbestos, and coal dust) that occurred many years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, or coal worker’s pneumoconiosis. We are presently named as a defendant in 1,965 suits in which plaintiffs allege to have contracted certain cumulative trauma diseases related to exposure to silica, asbestos, and/or coal dust. These lawsuits mainly involve respiratory protection products allegedly manufactured and sold by us. We are unable to estimate total damages sought in these lawsuits as they generally do not specify the injuries alleged, the amount of damages sought, and potentially involve multiple defendants.

Cumulative trauma product liability litigation is difficult to predict. In our experience, until late in a lawsuit, we cannot reasonably determine whether it is probable that any given cumulative trauma lawsuit will ultimately result in a liability. This uncertainty is caused by many factors, including the following: cumulative trauma complaints generally do not provide information sufficient to determine if a loss is probable; cumulative trauma litigation is inherently unpredictable and information is often insufficient to determine if a lawsuit will develop into an actively litigated case; and even when a case is actively litigated, it is often difficult to determine if the lawsuit will be dismissed or otherwise resolved until late in the lawsuit. Moreover, even once it is probable that such a lawsuit will result in a loss, it is difficult to reasonably estimate the amount of actual loss that will be incurred. These amounts are highly variable and turn on a case-by-case analysis of the relevant facts, which are often not learned until late in the lawsuit.

Because of these factors, we cannot reliably determine our potential liability for such claims until late in the lawsuit. We, therefore, do not record cumulative trauma product liability losses when a lawsuit is filed, but rather, when we learn sufficient information to determine that it is probable that we will incur a loss and the amount of loss can be reasonably estimated. We record expenses for defense costs associated with open cumulative trauma product liability lawsuits as incurred.

We cannot estimate any amount or range of possible losses related to resolving pending and future cumulative trauma product liability claims that we may face because of the factors described above. As new information about cumulative trauma product liability cases and future developments becomes available, we reassess our potential exposures.

A summary of cumulative trauma product liability claims activity follows:

 

     Six Months Ended
June 30
2011
    Year Ended
December 31
2010
 

Open claims, beginning of period

     1,900        2,480   

New claims

     141        260   

Settled and dismissed claims

     (76     (840
                

Open claims, end of period

     1,965        1,900   
                

With some common contract exclusions, we maintain insurance for cumulative trauma product liability claims. We have purchased insurance policies from over 20 different insurance carriers that provide coverage for cumulative trauma product liability losses and related defense costs. In the normal course of business, we make payments to settle product liability claims and for related defense costs. We record receivables for the amounts that are covered by insurance. The available limits of these policies are many times our recorded insurance receivable balance.

Various factors could affect the timing and amount of recovery of our insurance receivables, including the outcome of negotiations with insurers, legal proceedings with respect to product liability insurance coverage, and the extent to which insurers may become insolvent in the future.

 

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Our insurance receivables totaled $106.8 million at June 30, 2011, all of which was reported in other non-current assets. Our insurance receivables totaled $89.0 million December 31, 2010, all of which is reported in other non-current assets.

A summary of insurance receivable balances and activity related to cumulative trauma product liability losses follows:

 

      Six Months Ended
June 30
2011
     Year Ended
December 31
2010
 

(In millions)

     

Balance beginning of period

   $ 89.0       $ 91.7   

Additions

     17.8         30.9   

Collections and settlements

             (33.6
                 

Balance end of period

     106.8         89.0   
                 

Additions to insurance receivables in the above table represent insured cumulative trauma product liability settlements and related defense costs. There were no uninsured cumulative trauma product liability losses during the six month periods ended June 30, 2011 and 2010.

Our aggregate cumulative trauma product liability settlement, administrative and defense costs for the years ended December 31, 2010, 2009, and 2008 totaled approximately $90.3 million, substantially all of which was insured.

We believe that the increase in the insurance receivable balance that we have experienced since 2005 is primarily due to disagreements among our insurance carriers, and consequently with us, as to when their individual obligations to pay us are triggered and the amount of each insurer’s obligation, as compared to other insurers. We believe that our insurers do not contest that they have issued policies to us or that these policies cover cumulative trauma product liability claims. Our ability to successfully resolve our insurance litigations with Century Indemnity Company and Columbia Casualty Company during 2010 demonstrates that we had strong legal positions concerning our rights to coverage.

We regularly evaluate the collectability of insurance receivables and record the amounts that we conclude are probable of collection. Our conclusion is based on our analysis of the terms of the underlying insurance policies, our experience in successfully recovering cumulative trauma product liability claims from our insurers under other policies, the financial ability of our insurance carriers to pay the claims, our understanding and interpretation of the relevant facts and applicable law, and the advice of legal counsel, who believe that our insurers are required to provide coverage based on the terms of the policies.

Although the outcome of cumulative trauma product liability matters cannot be predicted with certainty and unfavorable resolutions could materially affect our results of operations on a quarter-to-quarter basis, based on information currently available and the amounts of insurance coverage available to us, we believe that the disposition of cumulative trauma product liability lawsuits that are pending against us will not have a materially adverse effect on our future results of operations, financial condition, or liquidity.

We are currently involved in coverage litigation with The North River Insurance Company (North River). We have sued North River in the United States District Court for the Western District of Pennsylvania, alleging that North River breached one insurance policy by failing to pay amounts owing to us and that its refusal to pay constitutes bad faith. The case was assigned to the Court’s mandatory Alternative Dispute Resolution program, in an attempt to resolve the dispute. The mediation was unsuccessful and the case will proceed to trial. We believe that North River’s refusal to indemnify us under the policy for settlements and legal fees paid by us is wholly contrary to Pennsylvania law and we are pursuing the legal actions necessary to collect all amounts.

 

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In April 2010, North River filed a complaint against us and two excess insurance carriers in the Court of Common Pleas of Allegheny County, Pennsylvania seeking a declaratory judgment concerning their responsibilities under three additional policies shared with Northbrook Insurance Company. We filed a motion to dismiss the declaratory judgment claim and a counter claim for breach of contract against North River and the two excess carriers. The court stayed the declaratory judgment claim and the breach of contract claim is now in discovery. We believe that Pennsylvania law supports our position that North River has insurance responsibilities to indemnify us against various product liability claims to the full limits of these policies.

During May 2010, we resolved coverage litigation with Century Indemnity Company through a negotiated settlement. As part of this settlement, both parties dismissed all claims against one another under the previously-filed coverage litigation. The settlement did not have an impact on our operating results.

During July 2010, we resolved coverage litigation with Columbia Casualty Company through a negotiated settlement. As part of this settlement, both parties dismissed all claims against one another under the previously-filed coverage litigation. The settlement did not have an impact on our operating results.

In July 2010, we filed a complaint in the Superior Court of the State of Delaware seeking declaratory and other relief from the majority of our excess insurance carriers concerning the future rights and obligations of MSA and our excess insurance carriers under various insurance policies. The reason for this insurance coverage action is to secure a comprehensive resolution of our rights under the insurance policies issued by our insurers.

In December 2010, North River filed a motion to dismiss or stay the Delaware action asserting that the previously-discussed cases in the United States District Court for the Western District of Pennsylvania and the Court of Common Pleas of Allegheny County, Pennsylvania were capable of resolving the claims presented in the Superior Court of the State of Delaware action. In January 2011, the Superior Court of the State of Delaware granted North River’s motion to stay the Delaware insurance coverage action, pending resolution of the ongoing actions in the United States District Court for the Western District of Pennsylvania and the Court of Common Please of Allegheny County, Pennsylvania. We appealed the trial court’s decision to stay this case and our appeal was denied. There will be no further activity in the Delaware action until the two Pennsylvania actions are resolved.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. We evaluate these estimates and judgments on an on-going basis based on historical experience and various assumptions that we believe to be reasonable under the circumstances. However, different amounts could be reported if we had used different assumptions and in light of different facts and circumstances. Actual amounts could differ from the estimates and judgments reflected in our financial statements.

The more critical judgments and estimates used in the preparation of our financial statements are discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

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RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements. This ASU changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scopes these products out of current software revenue guidance. The new guidance includes factors to help companies determine what software elements are considered “essential to the functionality.” The amendments will subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The adoption of this ASU on January 1, 2011 did not have a material effect on our consolidated financial statements.

In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition—Milestone Method. This ASU allows entities to make a policy election to use the milestone method of revenue recognition and provides guidance on defining a milestone and the criteria that should be met for applying the milestone method. The scope of this ASU is limited to the transactions involving milestones relating to research and development deliverables. The guidance includes enhanced disclosure requirements about each arrangement, individual milestones and related contingent consideration, substantive milestones and factors considered in that determination. The adoption of this ASU on January 1, 2011 did not have a material effect on our consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04,Fair Value Measurement – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU updated measurement guidance to improve the comparability of fair value measurements between U.S.GAAP and International Financial Reporting Standards and enhanced disclosure requirements. The most significant change in disclosures is an expansion of information related to fair value measurements categorized within Level 3 of the fair value hierarchy. The ASU will be effective beginning in 2012. The adoption of this ASU will not have a material effect on our consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income—Presentation of Comprehensive Income. This ASU requires net income and comprehensive income to be presented in either a single continuous statement or in two separate, but consecutive, statements. The ASU eliminates the option of presenting other comprehensive income in the statement of shareholders’ equity. The ASU will be effective beginning in 2012. The adoption of this ASU will not have a material effect on our results of operations or financial position, but will change the format of the presentation of comprehensive income.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of adverse changes in the value of a financial instrument caused by changes in currency exchange rates, interest rates, and equity prices. We are exposed to market risks related to currency exchange rates and interest rates.

Currency exchange rate sensitivity. We are subject to the effects of fluctuations in currency exchange rates on various transactions and on the translation of the reported financial position and operating results of our non-U.S. companies from local currencies to U.S. dollars. A hypothetical 10% strengthening or weakening of the U.S. dollar would decrease or increase our reported sales and net income for the six months ended June 30, 2011 by approximately $30.3 million and $1.8 million, respectively.

When appropriate, we may attempt to limit our transactional exposure to changes in currency exchange rates through contracts or other actions intended to reduce existing exposures by creating offsetting currency exposures. At June 30, 2011, we had open foreign currency forward contracts with a U.S. dollar notional value of $3.7 million. A hypothetical 10% increase in June 30, 2011 forward exchange rates would result in a $0.4 million increase in the fair value of these contracts.

Interest rate sensitivity. We are exposed to changes in interest rates primarily as a result of borrowing and investing activities used to maintain liquidity and fund business operations. Because of the relatively short maturities of temporary investments and the variable rate nature of industrial development debt, these financial instruments are reported at carrying values that approximate fair values.

We have $176.0 million of fixed rate debt which matures at various dates through 2021. The incremental increase in the fair value of fixed rate long term debt resulting from a hypothetical 10% decrease in interest rates would be approximately $3.4 million. However, our sensitivity to interest rate declines and the corresponding increase in the fair value of our debt portfolio would unfavorably affect earnings and cash flows only to the extent that we elected to repurchase or retire all or a portion of our fixed rate debt portfolio at prices above carrying values.

 

Item 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures. Based on their evaluation as of the end of the period covered by this Form 10-Q, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.

 

(b) Changes in internal control. There were no changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(c) Issuer Purchases of Equity Securities

 

Period

   Total Number of
Shares
Purchased
     Average Price Paid
Per Share
     Total Number of
Shares Purchased
As Part of Publicly
Announced Plans or
Programs
     Maximum Number
of Shares
That May Yet Be
Purchased Under
the Plans or
Programs
 

April 1 – April 30, 2011

           $                 1,227,324   

May 1 – May 31, 2011

     389         39.68                 1,295,908   

June 1 – June 30, 2011

     2,538         35.85                 1,304,237   

In November 2005, the Board of Directors authorized the purchase of up to $100 million of common stock from time-to-time in private transactions and on the open market. The share purchase program has no expiration date. The maximum shares that may yet be purchased is calculated based on the dollars remaining under the program and the respective month-end closing share price.

We do not have any other share repurchase programs.

Shares purchased during May and June 2011 related to stock compensation transactions.

 

Item 6. EXHIBITS

(a) Exhibits

 

10.1*   2008 Management Equity Incentive Plan, amended and restated through February 25, 2011
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
32   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. (S)1350
101.INS**   XBRL Instance Document
101.SCH**   XBRL Taxonomy Extension Schema Document
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Management contract or compensatory plan or arrangement
** In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.”

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    MINE SAFETY APPLIANCES COMPANY

July 28, 2011

 

/s/ Dennis L. Zeitler

  Dennis L. Zeitler
 

Senior Vice President — Finance;

Duly Authorized Officer and Principal Financial Officer

 

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