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MSA Safety Inc - Quarter Report: 2012 September (Form 10-Q)

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 September 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, PA

  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 October 19, 2012 there were 36,962,737 shares of common stock outstanding, not including 810,466 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
September 30,
    Nine Months Ended
September 30,
 

(In thousands, except per share amounts)

   2012     2011     2012     2011  

Net sales

   $ 286,567      $ 298,241      $ 874,790      $ 869,473   

Other income, net

     169        2,398        8,433        4,353   
  

 

 

   

 

 

   

 

 

   

 

 

 
     286,736        300,639        883,223        873,826   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses

        

Cost of products sold

     164,313        177,353        502,419        519,179   

Selling, general and administrative

     81,606        78,621        236,591        227,382   

Research and development

     10,073        9,663        29,707        29,646   

Restructuring and other charges

            1,004               6,118   

Interest expense

     2,797        3,198        8,860        10,423   

Currency exchange losses, net

     617        431        1,845        986   
  

 

 

   

 

 

   

 

 

   

 

 

 
     259,406        270,270        779,422        793,734   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     27,330        30,369        103,801        80,092   

Provision for income taxes

     7,680        10,188        31,550        26,934   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     19,650        20,181        72,251        53,158   

Net income attributable to noncontrolling interests

     (417     (209     (1,101     (285
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Mine Safety Appliances Company

     19,233        19,972        71,150        52,873   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to Mine Safety Appliances Company common shareholders

        

Basic

   $ 0.52      $ 0.54      $ 1.93      $ 1.44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.51      $ 0.54      $ 1.90      $ 1.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share

   $ 0.28      $ 0.26      $ 0.82      $ 0.77   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

2


MINE SAFETY APPLIANCES COMPANY

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Unaudited

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(In thousands)

   2012     2011     2012     2011  

Net income

   $ 19,650      $ 20,181      $ 72,251      $ 53,158   

Foreign currency translation gain (loss)

     4,814        (24,303     1,315        (10,707
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     24,464        (4,122     73,566        42,451   

Comprehensive (income) loss attributable to noncontrolling interests

     (322     1,064        (918     1,115   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Mine Safety Appliances Company

     24,142        (3,058     72,648        43,566   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

3


MINE SAFETY APPLIANCES COMPANY

CONDENSED CONSOLIDATED BALANCE SHEET

Unaudited

 

(In thousands, except share amounts)

  September 30,
2012
    December 31,
2011
 

Assets

   

Current assets

   

Cash and cash equivalents

  $ 74,456      $ 59,938   

Trade receivables, less allowance for doubtful accounts of $7,439 and $7,043

    214,930        192,627   

Inventories

    142,825        141,475   

Deferred tax assets

    23,894        21,744   

Income taxes receivable

    8,272        13,769   

Prepaid expenses and other current assets

    20,617        29,296   
 

 

 

   

 

 

 

Total current assets

    484,994        458,849   
 

 

 

   

 

 

 

Property, less accumulated depreciation of $305,243 and $311,272

    146,835        145,763   

Prepaid pension cost

    60,398        58,075   

Deferred tax assets

    12,395        12,065   

Goodwill

    257,087        259,084   

Other noncurrent assets

    185,879        181,216   
 

 

 

   

 

 

 

Total assets

    1,147,588        1,115,052   
 

 

 

   

 

 

 

Liabilities

   

Current liabilities

   

Notes payable and current portion of long-term debt

  $ 726      $ 8,263   

Accounts payable

    61,233        50,208   

Employees’ compensation

    43,665        38,400   

Insurance and product liability

    13,666        15,738   

Taxes on income

    5,555        3,051   

Other current liabilities

    57,360        56,110   
 

 

 

   

 

 

 

Total current liabilities

    182,205        171,770   
 

 

 

   

 

 

 

Long-term debt

    304,000        334,046   

Pensions and other employee benefits

    125,899        124,310   

Deferred tax liabilities

    30,398        30,458   

Other noncurrent liabilities

    14,465        15,057   
 

 

 

   

 

 

 

Total liabilities

    656,967        675,641   
 

 

 

   

 

 

 

Commitments and contingencies (Note 15)

   

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 36,962,737 and 36,692,590 shares

    106,656        97,276   

Stock compensation trust—810,466 and 1,162,784 shares

    (4,231     (6,070

Treasury shares, at cost, preferred—52,878 and 52,878 shares, common—24,308,188 and 24,226,017 shares

    (269,179 )     (266,231 )

Accumulated other comprehensive loss

    (102,052     (103,184

Retained earnings

    749,195        708,306   
 

 

 

   

 

 

 

Total Mine Safety Appliances Company shareholders’ equity

    483,958        433,666   

Noncontrolling interests

    6,663        5,745   
 

 

 

   

 

 

 

Total shareholders’ equity

    490,621        439,411   
 

 

 

   

 

 

 

Total liabilities and shareholders’ equity

    1,147,588        1,115,052   
 

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

4


MINE SAFETY APPLIANCES COMPANY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

Unaudited

 

     Nine Months Ended
September 30,
 

(In thousands)

   2012     2011  

Operating Activities

    

Net income

   $ 72,251      $ 53,158   

Depreciation and amortization

     24,057        24,886   

Pensions

     2,029        (3,782

Net gain from investing activities – disposal of assets

     (7,812     (2,299

Stock-based compensation

     6,898        6,256   

Deferred income tax provision (benefit)

     999        (1,325

Other noncurrent assets and liabilities

     (10,556     (24,270

Currency exchange losses, net

     1,845        986   

Excess tax (benefit) provision related to stock plans

     (1,305     251   

Other, net

     (2,135     (7
  

 

 

   

 

 

 

Operating cash flow before changes in working capital

     86,271        53,854   
  

 

 

   

 

 

 

Trade receivables

     (22,072     (11,139

Inventories

     (4,646     (13,095

Accounts payable and accrued liabilities

     14,371        1,144   

Income taxes receivable, prepaid expenses and other current assets

     15,110        7,642   
  

 

 

   

 

 

 

Decrease (increase) in working capital

     2,763        (15,448
  

 

 

   

 

 

 

Cash flow from operating activities

     89,034        38,406   
  

 

 

   

 

 

 

Investing Activities

    

Capital expenditures

     (24,949     (21,330

Property disposals

     16,801        3,145   

Other investing

            333   
  

 

 

   

 

 

 

Cash flow from investing activities

     (8,148     (17,852
  

 

 

   

 

 

 

Financing Activities

    

Proceeds from short-term debt, net

     449        385   

Proceeds from long-term debt

     137,500        93,500   

Payments on long-term debt

     (175,500     (85,500

Cash dividends paid

     (30,261     (28,210

Company stock purchases

     (2,948     (626

Exercise of stock options

     3,016        752   

Excess tax benefit (provision) related to stock plans

     1,305        (251
  

 

 

   

 

 

 

Cash flow from financing activities

     (66,439     (19,950
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     71        (1,542
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     14,518        (938

Beginning cash and cash equivalents

     59,938        59,760   
  

 

 

   

 

 

 

Ending cash and cash equivalents

     74,456        58,822   
  

 

 

   

 

 

 

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 nine months ended September 30, 2012.

During the three and nine months ended September 30, 2011, we recorded charges of $1.0 million ($0.7 million after tax) and $6.1 million ($4.0 million after tax), respectively. European segment charges for the nine months ended September 30, 2011 of $3.6 million related primarily to staff reductions in Germany, France and Spain and the transfer of certain production activities to China. North American segment charges for the nine months ended September 30, 2011 of $1.5 million included costs associated with the relocation of certain administrative and production activities. International segment charges for the nine months ended September 30, 2011 of $1.0 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)

   September 30,
2012
    December 31,
2011
 

Cumulative translation adjustments

   $ 1,961      $ 829   

Pension and post-retirement plan adjustments

     (104,013     (104,013
  

 

 

   

 

 

 

Accumulated other comprehensive loss

     (102,052     (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
September 30,
    Nine Months Ended
September 30,
 

(In thousands, except per share amounts)

   2012     2011     2012     2011  

Net income attributable to Mine Safety Appliances Company

   $ 19,233      $ 19,972      $ 71,150      $ 52,873   

Preferred stock dividends

     (10     (10     (30     (30
  

 

 

   

 

 

   

 

 

   

 

 

 

Income available to common equity

     19,223        19,962        71,120        52,843   

Dividends and undistributed earnings allocated to participating securities

     (172     (217     (691     (572
  

 

 

   

 

 

   

 

 

   

 

 

 

Income available to common shareholders

     19,051        19,745        70,429        52,271   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.52      $ 0.54      $ 1.93      $ 1.44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.51      $ 0.54      $ 1.90      $ 1.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic shares outstanding

     36,633        36,236        36,535        36,206   

Stock options and other stock compensation

     422        563        474        611   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted shares outstanding

     37,055        36,799        37,009        36,817   
  

 

 

   

 

 

   

 

 

   

 

 

 

Antidilutive stock options

     943        896        943        896   
  

 

 

   

 

 

   

 

 

   

 

 

 

(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 September 30, 2012

         

Sales to external customers

  $ 133,944      $ 67,660      $ 84,963      $      $ 286,567   

Intercompany sales

    30,829        23,735        4,902        (59,466       

Net income (loss) attributable to Mine Safety Appliances Company

    15,100        2,039        6,016        (3,922     19,233   

Nine Months Ended September 30, 2012

         

Sales to external customers

  $ 416,728      $ 207,450      $ 250,612      $      $ 874,790   

Intercompany sales

    88,720        74,377        14,770        (177,867       

Net income (loss) attributable to Mine Safety Appliances Company

    51,636        9,794        17,900        (8,180     71,150   

Three Months Ended September 30, 2011

         

Sales to external customers

  $ 143,547      $ 71,696      $ 82,998      $      $ 298,241   

Intercompany sales

    26,077        27,515        5,703        (59,295       

Net income (loss) attributable to Mine Safety Appliances Company

    18,839        1,859        6,666        (7,392     19,972   

Nine Months Ended September 30, 2011

         

Sales to external customers

  $ 412,154      $ 211,403      $ 245,916      $      $ 869,473   

Intercompany sales

    76,537        86,213        13,720        (176,470       

Net income (loss) attributable to Mine Safety Appliances Company

    44,773        5,540        20,509        (17,949     52,873   

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

 

7


(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 September 30

        

Service cost

   $ 2,437      $ 2,162      $ 174      $ 218   

Interest cost

     4,793        4,876        316        436   

Expected return on plan assets

     (8,099     (8,507              

Amortization of transition amounts

            1                 

Amortization of prior service cost

     73        26        (114     (114

Recognized net actuarial losses

     1,473        108        132        213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (credit)

     677        (1,334     508        753   
  

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended September 30

        

Service cost

   $ 7,309      $ 6,491      $ 522      $ 654   

Interest cost

     14,371        14,627        948        1,306   

Expected return on plan assets

     (24,301     (25,575              

Amortization of transition amounts

     2        3                 

Amortization of prior service cost

     225        78        (342     (341

Recognized net actuarial losses

     4,423        594        396        639   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (credit)

     2,029        (3,782     1,524        2,258   
  

 

 

   

 

 

   

 

 

   

 

 

 

We made contributions of $3.0 million to our pension plans during the nine months ended September 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 nine months ended September 30, 2012 were as follows:

 

(In thousands)

   Goodwill  

Net balance at January 1

   $ 259,084   

Disposals

     (1,800

Currency translation

     (197
  

 

 

 

Net balance at September 30

     257,087   
  

 

 

 

At September 30, 2012, goodwill of $196.5 million, $57.8 million, and $2.8 million related to the North American, European, and International reportable segments, respectively.

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

 

(In thousands)

   Intangibles  

Net balance at January 1

   $ 47,119   

Amortization expense

     (3,324

Currency translation

     (54
  

 

 

 

Net balance at September 30

     43,741   
  

 

 

 

 

8


(8) Inventories

 

(In thousands)

   September 30,
2012
     December 31,
2011
 

Finished products

   $ 72,266       $ 65,687   

Work in process

     16,016         17,000   

Raw materials and supplies

     54,543         58,788   
  

 

 

    

 

 

 

Total inventories

     142,825         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
September 30,
     Nine Months Ended
September 30,
 

(In thousands)

     2012            2011            2012            2011     

Stock compensation expense

  $ 1,603       $ 1,613       $ 6,898       $ 6,256   

Income tax benefit

    589         595         2,522         2,129   
 

 

 

    

 

 

    

 

 

    

 

 

 

Stock compensation expense, net of income tax benefit

    1,014         1,018         4,376         4,127   
 

 

 

    

 

 

    

 

 

    

 

 

 

A summary of stock option activity for the nine months ended September 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 September 30

     1,843,264        32.75   
  

 

 

   

 

 

 

Exercisable at September 30

     1,156,570        33.93   
  

 

 

   

 

 

 

 

9


A summary of restricted stock activity for the nine months ended September 30, 2012 follows:

 

     Shares     Weighted
Average
Grant Date
Fair Value
 

Unvested at January 1

     512,254      $ 25.66   

Granted

     121,719        37.45   

Vested

     (207,679     20.34   

Forfeited

     (6,954     27.23   
  

 

 

   

 

 

 

Unvested at September 30

     419,340        31.69   
  

 

 

   

 

 

 

A summary of performance stock unit activity for the nine months ended September 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 September 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 September 30, 2012 was $26.6 million. The unrealized gain on these contracts was $0.3 million.

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

 

(In thousands)

   September 30,
2012
     December 31,
2011
 

Derivatives not designated as hedging instruments

     

Foreign exchange contracts:

     

Prepaid expenses and other current assets

   $ 350       $   

Other current liabilities

             50   

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

 

          (Gain) Loss
Recognized in Income
 
          Nine Months Ended
September 30,
 

(In thousands)

   Income Statement
Location
   2012     2011  

Derivatives not designated as hedging instruments

       

Foreign exchange contracts

   Currency exchange losses, net    $ (364   $ (264

 

10


(11) Income Taxes

At September 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 September 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 $0.9 million at September 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 September 30, 2012, the reported carrying amount of our fixed rate long-term debt (including the current portion) was $160.0 million and the fair value was $173.5 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 September 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 September 30, 2012. These assets are reported in the following balance sheet lines:

 

(In millions)

   September 30, 2012  

Inventory

   $ 1.7   

Property, net of depreciation

     0.3   
  

 

 

 

Total assets

     2.0   
  

 

 

 

 

11


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

(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 $4.2 million at September 30, 2012 and $4.7 million at December 31, 2011. Single incident product liability expense was not significant during the nine months ended September 30, 2012 and 2011. 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 2,620 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.

 

12


A summary of cumulative trauma product liability claims activity follows:

 

      Nine Months Ended
September 30,

2012
    Year Ended
December 31,
2011
 

Open claims, beginning of period

     2,321        1,900   

New claims

     544        479   

Settled and dismissed claims

     (245     (58
  

 

 

   

 

 

 

Open claims, end of period

     2,620        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 September 30, 2012 totaled $122.1 million, of which $2.0 million is reported in other current assets and $120.1 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)

   Nine Months Ended

September  30,

2012
    Year Ended
December 31,
2011
 

Balance beginning of period

   $ 112.1      $ 89.0   

Additions

     21.8        35.6   

Collections and settlements

     (11.8     (12.5
  

 

 

   

 

 

 

Balance end of period

     122.1        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 during the nine months ended September 30, 2012 and 2011 were $7.3 million and $0.1 million, respectively.

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 in recent years demonstrates that we have strong legal positions concerning our rights to coverage.

 

13


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.

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. The case is currently in 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, global economic conditions, 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 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 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.

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.

 

16


RESULTS OF OPERATIONS

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

Net sales. Net sales for the three months ended September 30, 2012 were $286.6 million, a decrease of $11.6 million, or 4%, compared with $298.2 million for the three months ended September 30, 2011. Excluding the effects of weakening currencies and the divestiture of our ballistic vest and North American ballistic helmet businesses, sales increased $14.3 million, or 5%. Sales of ballistic vests and helmets were $10.5 million lower in the current quarter, reflecting the divestiture of those businesses. The unfavorable translation effects of weaker foreign currencies decreased sales, when stated in U.S. dollars, by $15.4 million.

 

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

(In millions)

       2012              2011           

North America

   $ 133.9       $ 143.5       $ (9.6     (7 %) 

Europe

     67.7         71.7         (4.0     (6 %) 

International

     85.0         83.0         2.0        2

Net sales by the North American segment were $133.9 million for the third quarter of 2012, a decrease of $9.6 million, or 7%, compared to $143.5 million for the third quarter of 2011. The decrease in the current quarter reflects the divestiture of our ballistic vest and North American Advanced Combat Helmet (ACH) businesses during the fourth quarter of 2011 and the second quarter of 2012, respectively. North American segment sales of ballistic vests and ACHs totaled $10.7 million in the third quarter of 2011. Excluding this change, North America segment sales were flat, with a $3.8 million improvement in shipments of SCBAs to the fire service being partially offset by small decreases in other product lines.

Net sales for the European segment were $67.7 million for the third quarter of 2012, a decrease of $4.0 million, or 6%, compared to $71.7 million for the third quarter of 2011. Local currency sales in Europe increased $3.6 million primarily related to higher instrument sales to industrial markets. The unfavorable translation effects of a weaker euro in the current quarter decreased European segment sales, when stated in U.S. dollars, by $7.6 million.

Net sales for the International segment were $85.0 million in the third quarter of 2012, an increase of $2.0 million, or 2%, compared to $83.0 million for the third quarter of 2011. Local currency sales in the International segment increased $9.2 million for the quarter reflecting stronger product demand in emerging markets across Latin America and Africa. Local currency sales increased in most product lines, with the strongest improvements in SCBAs, head, eye and face protection, and safety clothing, up $4.4 million, $2.2 million and $1.2 million, respectively. Currency translation effects decreased International segment sales, when stated in U.S. dollars, by $7.2 million, primarily related to a weaker Australian dollar, Brazilian real and South African rand.

Other income. Other income for the third quarter of 2012 was $0.2 million, a decrease of $2.2 million, compared to $2.4 million of income for the third quarter of 2011. During the third quarter of 2011, we recognized a gain of $2.0 million on the sale of land in our Cranberry Woods office park.

Cost of products sold. Cost of products sold was $164.3 million in the third quarter of 2012, compared to $177.4 million in the third quarter of 2011. Cost of products sold as a percentage of sales was 57.3% in the third quarter of 2012 compared to 59.5% in the third quarter of 2011. The improvement in cost of products sold as a percentage of sales was due to improved pricing, lower manufacturing cost and a more favorable product mix.

 

17


Gross profit. Gross profit for the third quarter of 2012 was $122.3 million, which was $1.4 million, or 1%, higher than gross profit of $120.9 million in the third quarter of 2011. The ratio of gross profit to net sales was 42.7% in the third quarter of 2012 compared to 40.5% in the same quarter last year. The improved gross profit ratio in the current quarter reflects the previously discussed improvements in cost of products sold.

Selling, general and administrative expenses. Selling, general and administrative expenses were $81.6 million during the third quarter of 2012, an increase of $3.0 million, or 4%, compared to $78.6 million in the third quarter of 2011. Selling, general and administrative expenses were 28.5% of net sales in the third quarter of 2012, compared to 26.4% of net sales in the third quarter of 2011. Local currency selling, general and administrative expenses increased $6.7 million in the current quarter, primarily in North America and International, reflecting increases of $3.0 million in product liability related expenses, $1.8 million in professional services fees related to due diligence on special projects, and $2.0 million in selling expenses. Currency exchange effects decreased current quarter selling, general and administrative expenses, when stated in U.S. dollars, by $3.7 million, primarily related to the weakening of the euro, Australian dollar, Brazilian real and South African rand.

Restructuring and other charges. We did not incur any restructuring charges during the third quarter of 2012. During the third quarter of 2011, we recorded charges of $1.0 million ($0.7 million after tax). European segment charges of $0.6 million related primarily to staff reductions in Germany. North American segment charges of $0.4 million included costs associated with the relocation of certain administrative and production activities.

Interest expense. Interest expense was $2.8 million during the third quarter of 2012, a decrease of $0.4 million, or 13%, compared to $3.2 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 losses were $0.6 million in the third quarter of 2012, compared to losses of $0.4 million in the third quarter of 2011. Currency exchange losses 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 third quarter of 2012 was 28.1%, compared to 33.5% for the same quarter last year. The lower effective tax rate in the current quarter was primarily related to the higher proportion of income in lower tax jurisdictions and a tax benefit associated with a non-cash charitable contribution of land at our Cranberry Woods office park. These improvements were 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 was $19.2 million for the third quarter of 2012, or $0.52 per basic share, a decrease of $0.8 million, or 4%, compared to $20.0 million, or $0.54 per basic share, for the same quarter last year.

North American segment net income for the third quarter of 2012 was $15.1 million, a decrease of $3.7 million, or 20%, compared to $18.8 million in the third quarter of 2011. The decrease in North American segment net income reflects the previously-discussed increase in selling, general and administrative expenses and reduced pension income, partially offset by improved gross profit margins.

European segment net income for the third quarter of 2012 of $2.0 million, an improvement of $0.1 million, or 10%, compared to net income of $1.9 million during the third quarter of 2011. Local currency net income in Europe increased $0.5 million in the current quarter, due primarily to lower restructuring charges. The remainder of the improvement reflects lower selling, general and

 

18


administrative expenses in Western Europe, offset by lower gross profit margins. Currency translation effects decreased current quarter European segment net income, when stated in U.S. dollars, by $0.4 million, primarily related to a weaker euro.

International segment net income for the third quarter of 2012 was $6.0 million, a decrease of $0.7 million, or 10%, compared to $6.7 million in the same quarter last year. The decrease was primarily related to currency translation effects, which reduced current quarter International segment net income, when stated in U.S. dollars, by $0.6 million, reflecting a weaker Australian dollar, Brazilian real and South African rand.

The net loss reported in reconciling items for the third quarter of 2012 was $3.9 million compared to a net loss of $7.4 million in the third quarter of 2011. The lower net loss in the third quarter of 2012 was primarily related to lower currency exchange losses and a tax benefit associated with the non-cash charitable contribution of land at our Cranberry Woods office park.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net sales. Net sales for the nine months ended September 30, 2012 were $874.8 million, an increase of $5.3 million, or 1%, compared with $869.5 million for the nine months ended September 30, 2011. Excluding the effects of weakening currencies and the divestiture of our ballistic vest and North American ballistic helmet businesses, sales increased $63.1 million, or 7%. Sales of ballistic vests and helmets were $20.8 million lower in the nine months ended September 30, 2012, reflecting the divestiture of those businesses. The unfavorable translation effects of weaker foreign currencies decreased sales, when stated in U.S. dollars, by $37.0 million.

 

     Nine Months Ended
September 30,
     Dollar
Increase

(Decrease)
    Percent
Increase

(Decrease)
 

(In millions)

       2012              2011           

North America

   $ 416.7       $ 412.2       $ 4.5        1

Europe

     207.5         211.4         (3.9     (2 %) 

International

     250.6         245.9         4.7        2

Net sales by the North American segment were $416.7 million for the nine months ended September 30, 2012, an increase of $4.5 million, or 1%, compared to $412.2 million for the same period in 2011. During the nine months ended September 30, 2012, we continued to see growth in the fire service and industrial markets. Shipments of instruments, head eye and face protection and SCBAs were up $20.6 million, $3.8 million and $3.6 million, respectively. These increases were partially offset by a $20.5 million decrease in shipments of ballistic helmets and vests to the 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 $207.5 million for the nine months ended September 30, 2012, a decrease of $3.9 million, or 2%, compared to $211.4 million for the same period in 2011. Local currency sales increased $14.0 million, reflecting higher shipments of instruments, fire helmets and respirators, up $7.2 million, $3.1 million and $3.0 million, respectively. The translation effects of a weaker euro decreased European segment sales, when stated in U.S. dollars, by $17.9 million.

Net sales for the International segment were $250.6 million for the nine months ended September 30, 2012, an increase of $4.7 million, or 2%, compared to $245.9 million in the same period in 2011. Local currency sales in the International segment increased $21.8 million during the nine months ended September 30, 2012. Growth in fire service markets in China and Latin America lead an

 

19


increase in sales of SCBAs of $8.9 million. In addition, sales of head eye and face protection and fire helmets improved by $8.1 million and $2.4 million, respectively. Currency translation effects decreased International segment sales, when stated in U.S. dollars, by $17.1 million, primarily related to a weaker Australian dollar, South African rand and Brazilian real.

Other income. Other income for the nine months ended September 30, 2012 was $8.4 million, an increase of $4.0 million, compared to $4.4 million for the same period in 2011. The increase was primarily related to gains on the sale of land in our Cranberry Woods office park. During the nine months ended September 30, 2012, gains on the sale of Cranberry Woods land were $3.7 million higher than in the same period last year.

Cost of products sold. Cost of products sold was $502.4 million for the nine months ended September 30, 2012, compared to $519.2 million in the same period in 2011. Cost of products sold as a percentage of sales was 57.4% in the nine months ended September 30, 2012 and 59.7% 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 a more favorable product mix.

Gross profit. Gross profit for the nine months ended September 30, 2012 was $372.4 million, which was $22.1 million, or 6%, higher than gross profit of $350.3 million in the same period in 2011. The ratio of gross profit to net sales was 42.6% during the nine months ended September 30, 2012, compared to 40.3% for the same period last year. The higher gross profit ratio during the nine months ended September 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 $236.6 million during the nine months ended September 30, 2012, an increase of $9.2 million, or 4%, compared to $227.4 million during the same period in 2011. Selling, general and administrative expenses were 27.0% of net sales for the nine months ended September 30, 2012, compared to 26.2% of net sales for the same period in 2011. Local currency selling, general and administrative expenses increased $18.2 million across all segments, reflecting higher selling costs, an increase in due diligence expense related to special projects and an increase in product liability related expenses. Currency translation effects decreased selling, general and administrative expenses for the nine months ended September 30, 2012, when stated in U.S. dollars, by $9.0 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 nine months ended September 30, 2012. During the nine months ended September 30, 2011, we recorded charges of $6.1 million ($4.0 million after tax). European segment charges of $3.6 million for the nine months ended September 30, 2011 related primarily to staff reductions in Germany, France, and Spain and the transfer of certain production activities to China. North American segment charges for the nine months ended September 30, 2011 of $1.5 million included costs associated with the relocation of certain administrative and production activities. International segment charges for the nine months ended September 30, 2011 of $1.0 million were related to severance costs associated with the relocation of our Wuxi, China operations to Suzhou, China.

Interest expense. Interest expense was $8.9 million during the nine months ended September 30, 2012, a decrease of $1.5 million, or 15%, compared to $10.4 million during the same period last year. The decrease in interest expense was due to lower borrowing on our revolving credit line and lower interest rates.

Currency exchange. Currency exchange losses were $1.8 million during the nine months ended September 30, 2012, compared to losses of $1.0 million during the same period in 2011. Currency

exchange losses for the nine months ended September 30, 2012 were related primarily to

 

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euro-denominated inter-company balances and U.S. dollar denominated transactions at our Mexican affiliate. Currency exchange losses for the nine months ended September 30, 2011 were primarily related to euro-denominated inter-company balances.

Income taxes. The effective tax rate for the nine months ended September 30, 2012 was 30.4% compared to 33.6% for the same period last year. The lower effective tax rate in the first nine months of 2012 was primarily related to a higher proportion of income in lower tax jurisdictions and a tax benefit associated with a non-cash charitable contribution of land at our Cranberry Woods office park. These improvements were 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 for the nine months ended September 30, 2012 was $71.2 million, or $1.93 per basic share, compared to $52.9 million, or $1.44 per basic share, for the same period last year.

North American segment net income for the nine months ended September 30, 2012 was $51.6 million, an increase of $6.8 million, or 15%, compared to $44.8 million for the same period last year. The increase in North American segment net income reflects higher sales and gross profits, and a gain on the sale of our North American ballistic helmet business, partially offset by higher selling, general and administrative expenses.

European segment net income for the nine months ended September 30, 2012, was $9.8 million, an improvement of $4.3 million, or 77%, compared to $5.5 million during the same period in 2011. Local currency net income increased by $4.9 million, reflecting improved gross profits and lower restructuring charges. Currency translation effects decreased European segment net income, when stated in U.S. dollars by $0.6 million, reflecting a weaker euro.

International segment net income for the nine months ended September 30, 2012 was $17.9 million, a decrease of $2.6 million, or 13%, compared to $20.5 million in the same period last year. Local currency net income decreased $0.5 million, reflecting lower gross profit margins and higher selling, general and administrative costs. Currency translation effects decreased current period International segment net income, when stated in U.S. dollars, by $2.1 million, primarily due to a weaker Australian dollar, Brazilian real and South African rand.

The net loss reported in reconciling items for the nine months ended September 30, 2012 was $8.2 million compared to a net loss of $17.9 million for the same period last year. The improvement during the nine months ended September 30, 2012 reflects higher gains on the sale of land in our Cranberry Woods office park, lower administrative and interest expense, lower currency exchange losses, and the recognition of a tax benefit associated with the charitable contribution of Cranberry Woods land.

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 $14.5 million during the nine months ended September 30, 2012, compared to decreasing $0.9 million during the same period in 2011.

 

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Operating activities provided cash of $89.0 million during the nine months ended September 30, 2012, compared to providing $38.4 million during the same period in 2011. The improvement in operating cash flow during 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 $214.9 million at September 30, 2012, compared to $192.6 million at December 31, 2011. Inventories were $142.8 million at September 30, 2012, compared to $141.5 million at December 31, 2011. Accounts payable were $61.2 million at September 30, 2012, compared to $50.2 million at December 31, 2011. Local currency trade receivables increased $22.1 million reflecting higher sales. Local currency accounts payable increased $11.0 million, primarily in North America reflecting our ongoing initiative to improve working capital cash flow

Investing activities used cash of $8.1 million during the nine months ended September 30, 2012, compared to using $17.9 million in the same period last year. During the nine months ended September 30, 2012 and 2011, we used cash of $24.9 million and $21.3 million, respectively, for capital expenditures, 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 $66.4 million during the nine months ended September 30, 2012, compared to using $20.0 million during the same period in 2011. The change was primarily related to borrowing on our long-term line of credit. During the nine months ended September 30, 2012, we made payments on long-term debt of $38.0 million compared to borrowing of $8.0 million in the same period in 2011. We paid cash dividends of $30.3 million in the first nine months of 2012 compared to $28.2 million in the same period last year.

CUMULATIVE TRANSLATION ADJUSTMENTS

The position of the U.S. dollar relative to international currencies at September 30, 2012 resulted in a translation gain of $1.3 million during the nine months ended September 30, 2012, compared to a loss of $10.7 million during the during the same period in 2011. The translation gain during the nine months ended September 31, 2012 was primarily related to the strengthening of the Mexican peso and the Chilean peso, partially offset by the weakening of the euro and the Brazilian real. The translation loss during the nine months ended September 30, 2011 was primarily related to the weakening of the South African rand, the Mexican peso, and the Brazilian real.

COMMITMENTS AND CONTINGENCIES

We made contributions of $3.0 million to our pension plans during the nine months ended September 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 $4.2 million at September 30, 2012 and $4.7 million at December 31, 2011. Single incident product liability expense was not significant during the nine months ended September 30,

 

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2012 and 2011. 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 2,620 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:

 

     Nine Months Ended
September 30,
2012
    Year Ended
December 31,
2011
 

Open claims, beginning of period

     2,321        1,900   

New claims

     544        479   

Settled and dismissed claims

     (245     (58
  

 

 

   

 

 

 

Open claims, end of period

     2,620        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.

 

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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 September 30, 2012 totaled $122.1 million, of which $2.0 million is reported in other current assets and $120.1 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)

   Nine Months Ended
September  30,
2012
    Year Ended
December 31,
2011
 

Balance beginning of period

   $ 112.1      $ 89.0   

Additions

     21.8        35.6   

Collections and settlements

     (11.8     (12.5
  

 

 

   

 

 

 

Balance end of period

     122.1        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 during the nine months ended September 30, 2012 and 2011 were $7.3 million and $0.1 million, respectively.

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 in recent years demonstrates that we have 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.

 

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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. The case is currently in 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 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 nine months ended September 30, 2012 by approximately $45.8 million and $2.8 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 September 30, 2012, we had open foreign currency forward contracts with a U.S. dollar notional value of $26.6 million. A hypothetical 10% increase in September 30, 2012, forward exchange rates would result in a $2.7 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 $160.0 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 $3.0 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
 

July 1 – July 31, 2012

         $               1,419,004   

August 1 – August 31, 2012

    1,465        36.97               1,396,622   

September 1 – September 30, 2012

    867        34.87               1,306,687   

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 number of 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 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

October 24, 2012

 

/s/ Dennis L. Zeitler

  Dennis L. Zeitler
 

Senior Vice President—Finance;

Duly Authorized Officer and Principal Financial Officer

 

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