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

For the quarter ended June 30, 2012

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

  16066-5207
(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 20, 2012 there were 36,965,939 shares of common stock outstanding, not including 810,566 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

Unaudited

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(In thousands, except per share amounts)

   2012     2011     2012     2011  

Net sales

   $ 294,738      $ 294,733      $ 588,223      $ 571,232   

Other income, net

     8,259        1,159        8,264        1,955   
  

 

 

   

 

 

   

 

 

   

 

 

 
     302,997        295,892        596,487        573,187   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses

        

Cost of products sold

     171,612        175,724        338,106        341,826   

Selling, general and administrative

     77,922        75,716        154,985        148,761   

Research and development

     10,342        9,440        19,634        19,983   

Restructuring and other charges

     —          2,027        —          5,114   

Interest expense

     2,914        3,788        6,063        7,225   

Currency exchange (gains) losses

     (1,192     (111     1,228        555   
  

 

 

   

 

 

   

 

 

   

 

 

 
     261,598        266,584        520,016        523,464   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     41,399        29,308        76,471        49,723   

Provision for income taxes

     13,120        9,827        23,870        16,746   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     28,279        19,481        52,601        32,977   

Net (income) loss attributable to noncontrolling interests

     (284     111        (684     (76
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Mine Safety Appliances Company

     27,995        19,592        51,917        32,901   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to Mine Safety Appliances Company common shareholders

        

Basic

   $ 0.76      $ 0.53      $ 1.41      $ 0.90   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.75      $ 0.53      $ 1.39      $ 0.88   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share

   $ 0.28      $ 0.26      $ 0.54      $ 0.51   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

-2-


MINE SAFETY APPLIANCES COMPANY

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Unaudited

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(In thousands)

   2012     2011      2012     2011  

Net income

   $ 28,279      $ 19,481       $ 52,601      $ 32,977   

Foreign currency translation (loss) gain

     (12,863     5,005         (3,499     13,596   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

     15,416        24,486         49,102        46,573   

Comprehensive loss (income) attributable to noncontrolling interests

     170        50         (596     51   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Mine Safety Appliances Company

     15,586        24,536         48,506        46,624   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

-3-


MINE SAFETY APPLIANCES COMPANY

CONDENSED CONSOLIDATED BALANCE SHEET

Unaudited

 

(In thousands, except share amounts)

  June 30,
2012
    December 31,
2011
 

Assets

   

Current assets

   

Cash and cash equivalents

  $ 65,062      $ 59,938   

Trade receivables, less allowance for doubtful accounts of $7,644 and $7,043

    217,291        192,627   

Inventories

    143,668        141,475   

Deferred tax assets

    22,601        21,744   

Income taxes receivable

    13,031        13,769   

Prepaid expenses and other current assets

    21,789        29,296   
 

 

 

   

 

 

 

Total current assets

    483,442        458,849   
 

 

 

   

 

 

 

Property, less accumulated depreciation of $304,741 and $311,272

    146,660        145,763   

Prepaid pension cost

    59,581        58,075   

Deferred tax assets

    11,426        12,065   

Goodwill

    256,069        259,084   

Other noncurrent assets

    181,036        181,216   
 

 

 

   

 

 

 

Total assets

    1,138,214        1,115,052   
 

 

 

   

 

 

 

Liabilities

   

Current liabilities

   

Notes payable and current portion of long-term debt

  $ 8,548      $ 8,263   

Accounts payable

    67,665        50,208   

Employees’ compensation

    34,434        38,400   

Insurance and product liability

    21,007        15,738   

Taxes on income

    13,116        3,051   

Other current liabilities

    55,044        56,110   
 

 

 

   

 

 

 

Total current liabilities

    199,814        171,770   
 

 

 

   

 

 

 

Long-term debt

    294,011        334,046   

Pensions and other employee benefits

    124,163        124,310   

Deferred tax liabilities

    30,333        30,458   

Other noncurrent liabilities

    14,526        15,057   
 

 

 

   

 

 

 

Total liabilities

    662,847        675,641   
 

 

 

   

 

 

 

Commitments and Contingencies

   

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, no par value, issued 62,081,391 and 62,081,391 shares, outstanding 36,965,939 and 36,692,590 shares

    105,054        97,276   

Stock compensation trust, 810,566 and 1,162,784 shares

    (4,231     (6,070

Treasury shares, at cost, preferred—52,878 and 52,878 shares, common—24,304,886 and 24,226,017 shares

    (269,094     (266,231

Accumulated other comprehensive loss

    (106,595     (103,184

Retained earnings

    740,323        708,306   
 

 

 

   

 

 

 

Total Mine Safety Appliances Company shareholders’ equity

    469,026        433,666   

Noncontrolling interests

    6,341        5,745   
 

 

 

   

 

 

 

Total shareholders’ equity

    475,367        439,411   
 

 

 

   

 

 

 

Total liabilities and shareholders’ equity

    1,138,214        1,115,052   
 

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

-4-


MINE SAFETY APPLIANCES COMPANY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

Unaudited

 

     Six Months Ended
June 30,
 

(In thousands)

   2012     2011  

Operating Activities

    

Net income

   $ 52,601      $ 32,977   

Depreciation and amortization

     15,911        16,728   

Pensions

     1,352        (2,448

Net gain from investing activities – disposal of assets

     (7,891     (254

Stock-based compensation

     5,295        4,643   

Deferred income tax provision (benefit)

     273        (1,657

Other noncurrent assets and liabilities

     (5,267     (15,747

Currency exchange losses

     1,228        555   

Excess tax (benefit) provision related to stock plans

     (1,305     253   

Other, net

     (1,317     636   
  

 

 

   

 

 

 

Operating cash flow before changes in working capital

     60,880        35,686   
  

 

 

   

 

 

 

Trade receivables

     (25,965     (11,794

Inventories

     (6,914     (9,857

Accounts payable and accrued liabilities

     28,233        (3,600

Income taxes receivable, prepaid expenses and other current assets

     8,795        8,245   
  

 

 

   

 

 

 

Decrease (increase) in working capital

     4,149        (17,006
  

 

 

   

 

 

 

Cash flow from operating activities

     65,029        18,680   
  

 

 

   

 

 

 

Investing Activities

    

Capital expenditures

     (17,814     (14,027

Property disposals

     16,721        889   

Other investing

            333   
  

 

 

   

 

 

 

Cash flow from investing activities

     (1,093     (12,805
  

 

 

   

 

 

 

Financing Activities

    

Proceeds from short-term debt, net

     286        24   

Proceeds from long-term debt

     79,500        42,500   

Payments on long-term debt

     (119,500     (27,500

Cash dividends paid

     (19,900     (18,675

Company stock purchases

     (2,863     (624

Exercise of stock options

     3,016        268   

Excess tax benefit (provision) related to stock plans

     1,305        (253
  

 

 

   

 

 

 

Cash flow from financing activities

     (58,156     (4,260
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (656     2,401   
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     5,124        4,016   

Beginning cash and cash equivalents

     59,938        59,760   
  

 

 

   

 

 

 

Ending cash and cash equivalents

     65,062        63,776   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

-5-


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.

(2) Restructuring and Other Charges

We did not incur any restructuring charges during the three and six months ended June 30, 2012.

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 United States. 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 severance costs associated with the relocation of our Wuxi, China operations to Suzhou, China.

(3) Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss are as follows:

 

(In thousands)

   June 30,
2012
    December 31,
2011
 

Cumulative translation adjustments

   $ (2,582   $ 829   

Pension and post-retirement plan adjustments

     (104,013     (104,013
  

 

 

   

 

 

 

Accumulated other comprehensive loss

     (106,595     (103,184
  

 

 

   

 

 

 

(4) Earnings per Share

Basic earnings per share is computed by dividing net income, after the deduction of preferred stock dividends and undistributed earnings allocated to participating securities, by the weighted average number of common shares outstanding during the period. Diluted earnings per share assumes the issuance of common stock for all potentially dilutive share equivalents outstanding not classified as participating securities. Participating securities are defined as unvested stock-based payment awards that contain nonforfeitable rights to dividends.

 

-6-


     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(In thousands, except per share amounts)

   2012     2011     2012     2011  

Net income attributable to Mine Safety Appliances Company

   $ 27,995      $ 19,592      $ 51,917      $ 32,901   

Preferred stock dividends

     (10     (10     (20     (20
  

 

 

   

 

 

   

 

 

   

 

 

 

Income available to common equity

     27,985        19,582        51,897        32,881   

Dividends and undistributed earnings allocated to participating securities

     (258     (213     (519     (355
  

 

 

   

 

 

   

 

 

   

 

 

 

Income available to common shareholders

     27,727        19,369        51,378        32,526   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.76      $ 0.53      $ 1.41      $ 0.90   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.75      $ 0.53      $ 1.39      $ 0.88   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic shares outstanding

     36,590        36,217        36,486        36,191   

Stock options and other stock compensation

     491        637        500        634   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted shares outstanding

     37,081        36,854        36,986        36,825   
  

 

 

   

 

 

   

 

 

   

 

 

 

Antidilutive stock options

     410        730        410        730   
  

 

 

   

 

 

   

 

 

   

 

 

 

(5) Segment Information

We are organized into 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, 2012

             

Sales to external customers

   $ 145,300       $ 67,324       $ 82,114       $      $ 294,738   

Intercompany sales

     31,273         25,733         5,322         (62,328       

Net income attributable to Mine Safety Appliances Company

     20,279         2,134         3,619         1,963        27,995   

Six Months Ended June 30, 2012

             

Sales to external customers

   $ 282,784       $ 139,790       $ 165,649       $      $ 588,223   

Intercompany sales

     57,891         50,642         9,868         (118,401       

Net income (loss) attributable to Mine Safety Appliances Company

     36,536         7,755         11,884         (4,258     51,917   

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 (loss) 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 (loss) attributable to Mine Safety Appliances Company

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

 

-7-


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

(6) Pensions and Other Postretirement Benefits

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

 

     Pension Benefits     Other Benefits  

(In thousands)

   2012     2011     2012     2011  

Three months ended June 30

        

Service cost

   $ 2,436      $ 2,165      $ 174      $ 218   

Interest cost

     4,789        4,876        316        435   

Expected return on plan assets

     (8,101     (8,542              

Amortization of transition amounts

     1        1                 

Amortization of prior service cost

     76        26        (114     (113

Recognized net actuarial losses

     1,476        288        132        213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (credit)

     677        (1,186     508        753   
  

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30

        

Service cost

   $ 4,872      $ 4,329      $ 348      $ 436   

Interest cost

     9,578        9,751        632        870   

Expected return on plan assets

     (16,202     (17,068              

Amortization of transition amounts

     2        2                 

Amortization of prior service cost

     152        52        (228     (227

Recognized net actuarial losses

     2,950        486        264        426   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (credit)

     1,352        (2,448     1,016        1,505   
  

 

 

   

 

 

   

 

 

   

 

 

 

We made contributions of $2.0 million to our pension plans during the six months ended June 30, 2012. We expect to make total contributions of approximately $4.1 million to our pension plans in 2012.

(7) Goodwill and Intangible Assets

Changes in goodwill during the six months ended June 30, 2012 were as follows:

 

(In thousands)

   Goodwill  

Net balance at January 1

   $ 259,084   

Disposals

     (1,800

Currency translation

     (1,215
  

 

 

 

Net balance at June 30

     256,069   
  

 

 

 

At June 30, 2012, goodwill of approximately $196.5 million, $56.8 million, and $2.8 million related to the North American, European, and International reporting units, respectively.

Changes in intangible assets, net of accumulated amortization (which are reported in other noncurrent assets) during the six months ended June 30, 2012 were as follows:

 

(In thousands)

   Intangibles  

Net balance at January 1

   $ 47,119   

Amortization expense

     (2,219

Currency translation

     (110
  

 

 

 

Net balance at June 30

     44,790   
  

 

 

 

 

-8-


(8) Inventories

 

(In thousands)

   June 30,
2012
     December 31,
2011
 

Finished products

   $ 69,255       $ 65,687   

Work in process

     15,471         17,000   

Raw materials and supplies

     58,942         58,788   
  

 

 

    

 

 

 

Total inventories

     143,668         141,475   
  

 

 

    

 

 

 

(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)

   2012      2011      2012      2011  

Stock compensation expense

   $ 2,377       $ 1,957       $ 5,295       $ 4,643   

Income tax benefit

     886         664         1,934         1,534   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock compensation expense, net of income tax benefit

     1,491         1,293         3,361         3,109   
  

 

 

    

 

 

    

 

 

    

 

 

 

A summary of stock option activity for the six months ended June 30, 2012 follows:

 

     Shares     Weighted
Average
Exercise Price
 

Outstanding at January 1

     1,818,640      $ 30.94   

Granted

     196,469        37.33   

Exercised

     (166,752     18.09   

Expired

     (5,093     43.33   
  

 

 

   

 

 

 

Outstanding at June 30

     1,843,264        32.75   
  

 

 

   

 

 

 

Exercisable at June 30

     1,156,570        33.93   
  

 

 

   

 

 

 

 

-9-


A summary of restricted stock activity for the six months ended June 30, 2012 follows:

 

     Shares     Weighted
Average
Grant Date
Fair Value
 

Unvested at January 1

     512,254      $ 25.66   

Granted

     121,619        37.46   

Vested

     (203,874     20.16   

Forfeited

     (5,427     26.33   
  

 

 

   

 

 

 

Unvested at June 30

     424,572        31.67   
  

 

 

   

 

 

 

A summary of performance stock unit activity for the six months ended June 30, 2012 follows:

 

     Shares     Weighted
Average
Grant Date
Fair Value
 

Unvested at January 1

     125,443      $ 25.27   

Granted

     50,428        36.69   

Performance adjustments

     (1,466     17.83   

Vested

     (46,206     17.83   
  

 

 

   

 

 

 

Unvested at June 30

     128,199        32.53   
  

 

 

   

 

 

 

(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, 2012 was $16.6 million. The unrealized gain 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:

 

(In thousands)

   June 30,
2012
     December 31,
2011
 

Derivatives not designated as hedging instruments

     

Foreign exchange contracts:

     

Prepaid expenses and other current assets

   $ 212       $   

Other current liabilities

     2         50   

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

   2012     2011  

Derivatives not designated as hedging instruments

       

Foreign exchange contracts

  

Currency exchange

(gains) losses

   $ (32   $ (225

 

-10-


(11) Income Taxes

At June 30, 2012, we had a gross liability for unrecognized tax benefits of $12.8 million. We have recognized tax benefits associated with these liabilities of $11.4 million at June 30, 2012. These balances are unchanged since December 31, 2011. 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 $1.1 million at June 30, 2012.

(12) Fair Value Measurements

Fair value is defined 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. 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—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.

 

   

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

   

Level 3—Unobservable inputs for the asset or liability.

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 the derivative 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 the derivative 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, 2012, the reported carrying amount of our fixed rate long-term debt (including the current portion) was $168.0 million and the fair value was $177.2 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, 2012. Accordingly, the fair value of fixed rate long-term debt is classified within Level 2 of the fair value hierarchy.

(14) Assets Held for Sale

Certain assets related to detector tube manufacturing are classified as held for sale at June 30, 2012. These assets are reported in the following balance sheet lines:

 

(In millions)

   June 30, 2012  

Inventory

   $ 1.9   

Property, net of depreciation

     0.3   
  

 

 

 

Total assets

     2.2   
  

 

 

 

The potential impact of the sale of detector tube assets is not expected to be material to net income or earnings per share.

 

-11-


(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. Our reserve for single incident product liability claims was $4.6 million at June 30, 2012 and $4.7 million at December 31, 2011. Single incident product liability expense during the six months ended June 30, 2012 and 2011 was $0.6 million and $0.7 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 2,567 lawsuits 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 or 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,
2012
    Year Ended
December 31,
2011
 

Open claims, beginning of period

     2,321        1,900   

New claims

     337        479   

Settled and dismissed claims

     (91     (58
  

 

 

   

 

 

 

Open claims, end of period

     2,567        2,321   
  

 

 

   

 

 

 

 

-12-


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 at June 30, 2012 totaled $116.0 million, of which $2.0 million is reported in other current assets and $114.0 million in other non-current assets. Our insurance receivables at December 31, 2011 totaled $112.1 million, 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:

 

(In millions)

   Six Months Ended
June 30,
2012
    Year Ended
December 31,
2011
 

Balance beginning of period

   $ 112.1      $ 89.0   

Additions

     13.7        35.6   

Collections and settlements

     (9.8     (12.5
  

 

 

   

 

 

 

Balance end of period

     116.0        112.1   
  

 

 

   

 

 

 

Additions to insurance receivables in the above table represent insured cumulative trauma product liability losses and related defense costs. Uninsured cumulative trauma losses were $5.9 million during the six months ended June 30, 2012. There were no uninsured cumulative trauma product liability losses during the six month periods ended June 30, 2011.

Our aggregate cumulative trauma product liability losses and administrative and defense costs for the three years ended December 31, 2011, totaled approximately $102.7 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. We believe that our ability to successfully resolve our insurance litigation with various insurance carriers during 2011 and 2010 demonstrates that we had strong legal positions concerning our rights to coverage.

We regularly evaluate the collectability of the insurance receivables and record the amounts that we conclude are probable of collection. Our conclusions are 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.

 

-13-


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 insurance coverage litigations with various of our insurance carriers.

In 2009, we sued The North River Insurance Company (North River) in the United States District Court for the Western District of Pennsylvania, alleging that North River breached one of its insurance policies by failing to pay amounts owed to us and that it engaged in bad-faith claims handling. We believe that North River’s refusal to indemnify us under the policy for product liability losses and legal fees paid by us is wholly contrary to Pennsylvania law and we are vigorously pursuing the legal actions necessary to collect all due amounts. The case is currently in discovery.

In 2010, North River sued us in the Court of Common Pleas of Allegheny County, Pennsylvania seeking a declaratory judgment concerning their responsibilities under three additional policies shared with Allstate Insurance Company (as successor in interest to policies issued by the Northbrook Excess and Surplus Insurance Company). We asserted claims against North River and Allstate for breaches of contract for failures to pay amounts owed to us. We also alleged that North River engaged in bad-faith claims handling. We believe that North River’s and Allstate’s refusals to indemnify us under these policies for product liability losses and legal fees paid by us is wholly contrary to Pennsylvania law and we are vigorously pursuing the legal actions necessary to collect all due amounts. The case is currently in discovery.

In July 2010, we filed a lawsuit 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 January 2011, the Superior Court of the State of Delaware granted a stay of the lawsuit, pending resolution of the two above-referenced actions in the United States District Court for the Western District of Pennsylvania and the Court of Common Pleas of Allegheny County, Pennsylvania. Although those lawsuits have not yet reached conclusion, in March 2012 the Court lifted the stay. The case will proceed to discovery. We have resolved our claims against certain of our insurance carriers on some of their policies through negotiated settlements. When settlement is reached, we dismiss the settling carrier from this action in Delaware.

(16) Recently Adopted and Recently Issued Accounting Standards

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 IFRS. 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 adoption of this ASU on January 1, 2012 did not have a material effect on our consolidated financial statements.

 

-14-


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. In December 2011, the FASB issued ASU 2011-12, which indefinitely deferred the ASU 2011-5 requirement related to the presentation of reclassification adjustments from accumulated other comprehensive income. The adoption of ASU 2011-05 on January 1, 2012 did not have a material effect on our results of operations or financial position, but did change the format of the presentation of comprehensive income.

In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other-Testing Goodwill for Impairment. This ASU reduces the complexity of performing an annual goodwill impairment test by permitting companies to perform an assessment of qualitative factors to determine whether additional goodwill impairment testing is necessary. The adoption of this ASU on January 1, 2012 did not have a material effect on our consolidated financial statements.

 

-15-


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, 2011.

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, oil, gas, and petrochemical, mining, construction and other industries, as well as the military and homeland security. 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.

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 reportable geographic segments: North America, Europe and International. Each segment includes a number of operating companies. In 2011, 48%, 24% and 28% 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 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.

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 International segment manufacturing operations are located in Australia, Brazil, China and South Africa. These companies 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 China, Germany, France and the U.S., or are purchased from third party vendors.

 

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RESULTS OF OPERATIONS

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Net sales. Net sales for the three months ended June 30, 2012 were steady at $294.7 million. Improvements in local currency sales were offset by the unfavorable translation effects of weaker European and International currencies when stated in U.S. dollars.

 

     Three Months Ended
June 30,
     Dollar
Increase
(Decrease)
    Percent
Increase

(Decrease)
 

(In millions)

   2012      2011       

North America

   $ 145.3       $ 137.7       $ 7.6        6

Europe

     67.3         74.9         (7.6     (10 %) 

International

     82.1         82.2         (0.1       

Net sales by the North American segment were $145.3 million for the second quarter of 2012, an increase of $7.6 million, or 6%, compared to $137.7 million for the second quarter of 2011. During the current quarter, we continued to see growing demand in the oil and gas market, as well as other core industrial markets, which resulted in higher shipments of instruments and head protection, up $10.6 million and $1.6 million, respectively. These increases were partially offset by a $5.0 million decrease in shipments of ballistic vests and Advanced Combat Helmets (ACH) to the military. We divested our ballistic vest and North American ACH businesses during the fourth quarter of 2011 and the second quarter of 2012, respectively.

Net sales for the European segment were $67.3 million for the second quarter of 2012, a decrease of $7.6 million, or 10%, compared to $74.9 million for the second quarter of 2011. Local currency sales in Europe increased $0.2 million, reflecting modest improvements in fire helmet sales mostly offset by weakness in core industrial and military markets. The unfavorable translation effects of a weaker euro in the current quarter decreased European segment sales, when stated in U.S. dollars, by $7.8 million.

Net sales for the International segment were $82.1 million in the second quarter of 2012, a decrease of $0.1 million, compared to $82.2 million for the second quarter of 2011. Local currency sales in the International segment increased $7.4 million in the current 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, head protection, and eye and face protection, up $4.3 million, $1.5 million, and $1.5 million, respectively. Currency translation effects decreased International segment sales, when stated in U.S. dollars, by $7.5 million, primarily related to a weaker Australian dollar, Brazilian real, and South African rand.

Other income. Other income for the second quarter of 2012 was $8.3 million, an increase of $7.1 million, compared to $1.2 million for the second quarter of 2011. The increase was primarily related to a gain of $5.7 million on the sale of land in our Cranberry Woods office park during the current quarter.

Cost of products sold. Cost of products sold was $171.6 million in the second quarter of 2012, compared to $175.7 million in the second quarter of 2011. Cost of products sold as a percentage of sales was 58.2% in the second quarter of 2012 compared to 59.6% in the second quarter of 2011. The improvement in cost of products sold as a percentage of sales was primarily due to improved pricing, lower manufacturing costs, and changes in product mix.

Gross profit. Gross profit for the second quarter of 2012 was $123.1 million, which was $4.1 million, or 3%, higher than gross profit of $119.0 million in the second quarter of 2011. The ratio of gross profit to net sales was 41.8% in the second quarter of 2012 compared to 40.4% in the same quarter last year. The improved gross profit ratio in the current quarter reflects the previously discussed improvements in costs of products sold.

 

-17-


Selling, general and administrative expenses. Selling, general and administrative expenses were $77.9 million during the second quarter of 2012, an increase of $2.2 million, or 3%, compared to $75.7 million in the second quarter of 2011. Selling, general and administrative expenses were 26.4% of net sales in the second quarter of 2012 compared to 25.7% in the second quarter of 2011. Local currency selling, general and administrative expenses increased $6.2 million in the current quarter, primarily in North America to support higher sales volumes. Currency translation effects decreased current quarter selling, general and administrative expenses, when stated in U.S. dollars, by $4.0 million, primarily related to the weakening of the euro, Australian dollar, Brazilian real, and South African rand.

Research and development expense. Research and development expense was $10.3 million during the second quarter of 2012, an increase of $0.9 million, or 10%, compared to $9.4 million during the second quarter of 2011. This increase was primarily related to the timing of research and development project spending.

Restructuring and other charges. We did not incur any restructuring and other charges during the second quarter of 2012. 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 United States. North American segment charges of $0.6 million included costs associated with the relocation of certain administrative and production activities.

Interest expense. Interest expense was $2.9 million during the second quarter of 2012, a decrease of $0.9 million, or 23%, compared to $3.8 million in the same quarter last year. The decrease in interest expense was due to lower borrowing on our revolving line of credit and lower interest rates.

Currency exchange. Currency exchange gains were $1.2 million in the second quarter of 2012, compared to gains of $0.1 million in the second quarter of 2011. Currency exchange gains in the current quarter were mostly unrealized and related primarily to euro-denominated inter-company balances and the weakening of the Mexican peso.

Income taxes. The effective tax rate for the second quarter of 2012 was 31.7% compared to 33.5% for the same quarter last year. The lower effective tax rate in the second quarter of 2012 was primarily related to the higher proportion of income in lower tax jurisdictions. This benefit was partially offset by the expiration of the U.S. research and development tax credit at the end of 2011.

Net income attributable to Mine Safety Appliances Company. Net income attributable to Mine Safety Appliances Company for the second quarter of 2012 was $28.0 million, or $0.76 per basic share, an increase of $8.4 million, or 43%, compared to $19.6 million, or $0.53 per basic share, for the same quarter last year.

North American segment net income for the second quarter of 2012 was $20.3 million, an increase of $4.2 million, or 26%, compared to $16.1 million in the second quarter of 2011. The increase in North American segment net income reflects higher sales, gross profits, and a gain on the sale of our North American ballistic helmet business, partially offset by higher research and development and selling, general, and administrative expenses.

European segment net income was $2.1 million for the second quarters of 2012 and 2011. Local currency net income in Europe increased $0.2 million in the current quarter, reflecting lower restructuring charges partially offset by increased research and development and selling, general, and administrative costs. Currency translation effects decreased current quarter European segment net income, when stated in U.S. dollars, by $0.2 million.

 

-18-


International segment net income for the second quarter of 2012 was $3.6 million, a decrease of $2.9 million, or 44%, compared to $6.5 million in the same quarter last year. Lower local currency net income of $1.9 million was primarily related to lower gross profits and higher research and development spending. Currency translation effects decreased current quarter International segment net income, when stated in U.S. dollars, by $1.0 million, primarily reflecting a weaker Australian dollar and Brazilian real.

Net income reported in reconciling items for the second quarter of 2012 was $2.0 million compared to a net loss of $5.1 million in the second quarter of 2011. Improved net income in the second quarter of 2012 was primarily related to a gain on sale of land in our Cranberry Woods office park, higher currency exchange gains, and lower interest expense.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Net sales. Net sales for the six months ended June 30, 2012 were $588.2 million, an increase of $17.0 million, or 3%, compared with $571.2 million for the six months ended June 30, 2011.

 

     Six Months Ended
June 30,
     Dollar
Increase
     Percent
Increase
 

(In millions)

   2012      2011        

North America

   $ 282.8       $ 268.6       $ 14.2         5

Europe

     139.8         139.7         0.1           

International

     165.6         162.9         2.7         2

Net sales by the North American segment were $282.8 million for the six months ended June 30, 2012, an increase of $14.2 million, or 5%, compared to $268.6 million for the same period in 2011. During the six months ended June 30, 2012, we continued to see growth in the oil and gas markets, as well as other core industrial markets. Shipments of instruments and head protection were up $21.6 million and $3.6 million, respectively. These increases were partially offset by a $9.8 million decrease in shipments of ballistic helmets and vests to military markets. We divested our ballistic vest and North American ACH businesses during the fourth quarter of 2011 and the second quarter of 2012, respectively.

Net sales for the European segment were $139.8 million for the six months ended June 30, 2012, an increase of $0.1 million, compared to $139.7 million for the same period in 2011. Local currency sales increased $10.4 million, reflecting higher shipments of instruments, fire helmets, and respirators, up $4.1 million, $3.4 million, and $1.9 million, respectively. The translation effects of a weaker euro in the first half of 2012 decreased European segment sales, when stated in U.S. dollars, by $10.3 million.

Net sales for the International segment were $165.6 million for the six months ended June 30, 2012, an increase of $2.7 million, or 2%, compared to $162.9 million for the same period in 2011. Local currency sales in the International segment increased $12.6 million during the six months ended June 30, 2011. Growth in the fire service markets in China and Latin America lead an increase in sales of SCBAs of $4.5 million. In addition, sales of head protection and eye and face protection improved by $3.5 million and $2.4 million, respectively. Currency translation effects decreased International segment sales, when stated in U.S. dollars, by $9.9 million, primarily related to a weaker Australian dollar, South African rand, and Brazilian real.

Other income. Other income for the six months ended June 30, 2012 was $8.3 million, an increase of $6.3 million, compared to $2.0 million for the same period in 2011. The increase was primarily related to a gain of $5.7 million on the sale of land in our Cranberry Woods office park during the second quarter of 2012.

 

-19-


Cost of products sold. Cost of products sold was $338.1 million for the six months ended June 30, 2012, compared to $341.8 million for the same period in 2011. Cost of products sold as a percentage of sales was 57.5% in the six months ended June 30, 2012 and 59.8% for the same period last year. The decrease in cost of products sold in relation to sales was primarily due to improved pricing, lower manufacturing costs, and changes in product mix.

Gross profit. Gross profit for the six months ended June 30, 2012 was $250.1 million, which was $20.7 million, or 9%, higher than gross profit of $229.4 million for the same period in 2011. The ratio of gross profits to net sales was 42.5% during the six months ended June 30, 2012, compared to 40.2% for the same period last year. The higher gross profit ratio during the six months ended June 30, 2012 was primarily related to the previously discussed improvements in cost of products sold.

Selling, general and administrative expenses. Selling, general and administrative expenses were $155.0 million during the six months ended June 30, 2012, an increase of $6.2 million, or 4%, compared to $148.8 million during the same period in 2011. Selling, general and administrative expenses were 26.3% of net sales for the six months ended June 30, 2012, compared to 26.0% of net sales for the same period in 2011. Local currency selling, general and administrative expenses increased $11.5 million, with increases in all three segments, primarily to support higher sales volumes. Currency translation effects decreased selling, general and administrative expenses for the six months ended June 30, 2012, when stated in U.S. dollars, by $5.3 million, primarily related to a weaker euro, Australian dollar, Brazilian real, and South African rand.

Restructuring and other charges. We did not incur any restructuring charges during the six months ended June 30, 2012. During the six months ended June 30, 2011, we recorded charges of $5.1 million ($3.3 million after tax). 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 United States. 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, China.

Interest expense. Interest expense was $6.1 million during the six months ended June 30, 2012, a decrease of $1.1 million, or 16%, compared to $7.2 million during the same period last year. The decrease in interest expense was due to lower borrowing on our revolving line of credit and lower interest rates.

Currency exchange. Currency exchange losses were $1.2 million during the six months ended June 30, 2012, compared to losses of $0.6 million during the same period in 2011. Currency exchange losses in both periods related primarily to euro-denominated inter-company balances.

Income taxes. The effective tax rate for the six months ended June 30, 2012 was 31.2% compared to 33.7% for the same period last year. The lower effective tax rate in the first half of 2012 was primarily related to a higher proportion of income in lower tax jurisdictions. This benefit was partially offset by the expiration of the U.S. research and development tax credit at the end of 2011.

Net income attributable to Mine Safety Appliances Company. Net income attributable to Mine Safety Appliances Company for the six months ended June 30, 2012 was $51.9 million, or $1.41 per basic share, an increase of $19.0 million, or 58%, compared to $32.9 million, or $0.90 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, 2012 was $36.5 million, an increase of $10.6 million, or 41%, compared to $25.9 million for the same period last year. The increase in North American segment net income reflects higher sales and gross profits, lower research and development spending, and a gain on the sale of our North American ballistic helmet business, partially offset by higher selling, general, and administrative expenses.

European segment reported net income for the six months ended June 30, 2012 of $7.8 million, an improvement of $4.1 million, or 111%, compared to $3.7 million during the same period in 2011. Local currency net income increased by $4.3 million, reflecting improved gross profits and lower restructuring charges. Currency translation effects decreased European segment net income, when stated in U.S. dollars, by $0.2 million, primarily reflecting a weaker euro.

International segment net income for the six months ended June 30, 2012 was $11.9 million, a decrease of $1.9 million, or 14%, compared to $13.8 million in the same period last year. Currency translation effects decreased current period International segment net income, when stated in U.S. dollars, by approximately $1.5 million, primarily due a weaker Brazilian real and South African rand. Local currency net income decreased $0.4 million, reflecting higher operating expenses, partially offset by higher gross profits.

The net loss reported in reconciling items for the six months ended June 30, 2012 was $4.3 million compared to a net loss of $10.6 million for the same period last year. The improvement during the six months ended June 30, 2012 reflects a gain on sale of land in our Cranberry Woods office park and lower interest expense.

LIQUIDITY AND CAPITAL RESOURCES

Our main source of liquidity is operating cash flows, supplemented by borrowings to fund working capital requirements and 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, primarily on our unsecured revolving credit facility that is due in 2016. 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 $5.1 million during the six months ended June 30, 2012, compared to increasing $4.0 million during the same period in 2011.

Operating activities provided cash of $65.0 million during the six months ended June 30, 2012, compared to providing cash of $18.7 million during the same period in 2011. Significantly improved operating cash flow in 2012 is primarily related to higher net income, lower use of cash to fund other non-current assets and liabilities, and improved performance related to working capital items. Trade receivables were $217.3 million at June 30, 2012, compared to $192.6 million at December 31, 2011. Inventories were $143.7 million at June 30, 2012, compared to $141.5 million at December 31, 2011. Accounts payable were $67.7 million at June 30, 2012, compared to $50.2 million at December 31, 2011. The $24.7 million increase in trade receivables reflects a $26.0 million increase in local currency balances, and a $1.3 million decrease due to currency translation effects. The change in inventories includes a reduction of $3.4 million related to the sale of our North American ballistic helmet business. Excluding this change, local currency inventories increased $6.9 million, primarily in Europe, partially offset by a $1.3 million decrease due to currency translation effects. The $17.5 million increase in accounts payable occurred primarily in North America and reflects our ongoing initiative to improve working capital cash flow. The increases in trade receivables and inventories reflect increased sales and anticipated growth in customer demand.

 

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Investing activities used cash of $1.1 million during the six months ended June 30, 2012, compared to using $12.8 million in the same period last year. During the six months ended June 30, 2012 and 2011, we used cash of $17.8 million and $14.0 million, respectively, for property additions, primarily machinery and equipment. Higher cash provided from asset disposals in 2012 related primarily to the sale of our North American ballistic helmet business and land in our Cranberry Woods Office Park.

Financing activities used cash of $58.2 million during the six months ended June 30, 2012, compared to using $4.3 million during the same period in 2011. The change was primarily related to borrowing on our long-term line of credit. During the first half of 2012, we made payments on long-term debt of $40.0 million compared to borrowing of $15.0 million in the first half of 2011. We paid cash dividends of $19.9 million in the first half of 2012 compared to $18.7 million in the first half of 2011.

CUMULATIVE TRANSLATION ADJUSTMENTS

The position of the U.S. dollar relative to international currencies at June 30, 2012 resulted in a translation loss of $3.4 million being charged to the cumulative translation adjustments shareholders’ equity account during the six months ended June 30, 2012, compared to a gain of $13.6 million during the same period in 2011. The loss during the first half of 2012 was related to the weakening of the euro, Brazilian real, and South African rand. The translation gain during the first half of 2011 was primarily related to the strengthening of the euro.

COMMITMENTS AND CONTINGENCIES

We made contributions of $2.0 million to our pension plans during the six months ended June 30, 2012. We expect to make total contributions of approximately $4.1 million to our pension plans in 2012.

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

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. Our reserve for single incident product liability claims was $4.6 million at June 30, 2012 and $4.7 million at December 31, 2011. Single incident product liability expense during the six months ended June 30, 2012 and 2011 was $0.6 million and $0.7 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 2,567 lawsuits 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 or 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

 

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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,
2012
    Year Ended
December 31,
2011
 

Open claims, beginning of period

     2,321        1,900   

New claims

     337        479   

Settled and dismissed claims

     (91     (58
  

 

 

   

 

 

 

Open claims, end of period

     2,567        2,321   
  

 

 

   

 

 

 

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 at June 30, 2012 totaled $116.0 million, of which $2.0 million is reported in other current assets and $114.0 million in other non-current assets. Our insurance receivables at December 31, 2011 totaled $112.1 million, all of which is reported in other non-current assets.

 

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

 

(In millions)

   Six Months Ended
June 30,
2012
    Year Ended
December 31,
2011
 

Balance beginning of period

   $ 112.1      $ 89.0   

Additions

     13.7        35.6   

Collections and settlements

     (9.8     (12.5
  

 

 

   

 

 

 

Balance end of period

     116.0        112.1   
  

 

 

   

 

 

 

Additions to insurance receivables in the above table represent insured cumulative trauma product liability losses and related defense costs. Uninsured cumulative trauma losses were $5.9 million during the six months ended June 30, 2012. There were no uninsured cumulative trauma product liability losses during the six month periods ended June 30, 2011.

Our aggregate cumulative trauma product liability losses and administrative and defense costs for the three years ended December 31, 2011, totaled approximately $102.7 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. We believe that our ability to successfully resolve our insurance litigation with various insurance carriers during 2011 and 2010 demonstrates that we had strong legal positions concerning our rights to coverage.

We regularly evaluate the collectability of the insurance receivables and record the amounts that we conclude are probable of collection. Our conclusions are 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 insurance coverage litigations with various of our insurance carriers.

In 2009, we sued The North River Insurance Company (North River) in the United States District Court for the Western District of Pennsylvania, alleging that North River breached one of its insurance policies by failing to pay amounts owed to us and that it engaged in bad-faith claims handling. We believe that North River’s refusal to indemnify us under the policy for product liability losses and legal fees paid by us is wholly contrary to Pennsylvania law and we are vigorously pursuing the legal actions necessary to collect all due amounts. The case is currently in discovery.

 

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In 2010, North River sued us in the Court of Common Pleas of Allegheny County, Pennsylvania seeking a declaratory judgment concerning their responsibilities under three additional policies shared with Allstate Insurance Company (as successor in interest to policies issued by the Northbrook Excess and Surplus Insurance Company). We asserted claims against North River and Allstate for breaches of contract for failures to pay amounts owed to us. We also alleged that North River engaged in bad-faith claims handling. We believe that North River’s and Allstate’s refusals to indemnify us under these policies for product liability losses and legal fees paid by us is wholly contrary to Pennsylvania law and we are vigorously pursuing the legal actions necessary to collect all due amounts. The case is currently in discovery.

In July 2010, we filed a lawsuit 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 January 2011, the Superior Court of the State of Delaware granted a stay of the lawsuit, pending resolution of the two above-referenced actions in the United States District Court for the Western District of Pennsylvania and the Court of Common Pleas of Allegheny County, Pennsylvania. Although those lawsuits have not yet reached conclusion, in March 2012 the Court lifted the stay. The case will proceed to discovery. We have resolved our claims against certain of our insurance carriers on some of their policies through negotiated settlements. When settlement is reached, we dismiss the settling carrier from this action in Delaware.

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, 2011.

RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

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 IFRS. 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 adoption of this ASU on January 1, 2012 did 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

 

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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. In December 2011, the FASB issued ASU 2011-12, which indefinitely deferred the ASU 2011-5 requirement related to the presentation of reclassification adjustments from accumulated other comprehensive income. The adoption of ASU 2011-05 on January 1, 2012 did not have a material effect on our results of operations or financial position, but did change the format of the presentation of comprehensive income.

In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other-Testing Goodwill for Impairment. This ASU reduces the complexity of performing an annual goodwill impairment test by permitting companies to perform an assessment of qualitative factors to determine whether additional goodwill impairment testing is necessary. The adoption of this ASU on January 1, 2012 did not have a material effect on our consolidated financial statements.

 

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 rates. 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, 2012 by approximately $30.5 million and $2.0 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, 2012, we had open foreign currency forward contracts with a U.S. dollar notional value of $16.6 million. A hypothetical 10% increase in June 30, 2012 forward exchange rates would result in a $1.7 million increase in the fair value of these contracts.

Interest rates. 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 $168.0 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 $3.1 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.

 

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Actuarial assumptions. The most significant actuarial assumptions affecting our net periodic pension cost or credit and pension obligations are discount rates, expected returns on plan assets and plan asset valuations. Discount rates and plan asset valuations are point-in-time measures. Expected returns on plan assets are based on our historical returns by asset class. The following table summarizes the impact of changes in significant actuarial assumptions on our December 31, 2011 actuarial valuations.

 

     Impact of Changes in Actuarial Assumptions  
     Change in Discount
Rate
    Change in Expected
Return
     Change in Market
Value of
Assets
 

(In thousands)

   +1%     -1%     +1%     -1%      +5%     -5%  

(Increase) decrease in net periodic pension credit

   $ (3,964   $ 4,782      $ (3,920   $ 3,920       $ (734   $ 734   

(Decrease) increase in projected benefit obligations

     (47,971     55,077                                

Increase (decrease) in funded status

     47,971        (55,077                    17,898        (17,898

 

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, 2012

           $                 1,146,967   

May 1 – May 31, 2012

     1,141         39.57                 1,185,497   

June 1 – June 30, 2012

     10,662         39.89                 1,210,244   

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 purchases during the quarter related to stock compensation transactions.

 

Item 6. Exhibits

(a) Exhibits

 

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

 

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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 25, 2012

 

/s/ Dennis L. Zeitler

  Dennis L. Zeitler
 

Senior Vice President—Finance;

Duly Authorized Officer and Principal Financial Officer

 

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