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MSA > SEC Filings for MSA > Form 10-Q on 24-Oct-2012All Recent SEC Filings

Show all filings for MINE SAFETY APPLIANCES CO

Form 10-Q for MINE SAFETY APPLIANCES CO


24-Oct-2012

Quarterly Report


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.


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           Dollar           Percent
                              September 30,             Increase          Increase
        (In millions)      2012            2011        (Decrease)        (Decrease)
        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.


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


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           Dollar           Percent
                              September 30,            Increase          Increase
        (In millions)      2012           2011        (Decrease)        (Decrease)
        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


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


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.


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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