MSA Safety Inc - FORM 10-Q

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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 March 31, 2013

Commission File No. 1-15579

LOGO

MINE SAFETY APPLIANCES COMPANY

(Exact name of registrant as specified in its charter)


Pennsylvania		25-0668780
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1000 Cranberry Woods Drive Cranberry Township, Pennsylvania		16066-5207
(Address of principal executive offices)		(Zip Code)

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

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

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

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


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 April 15, 2013 there were 37,141,855 shares of common stock outstanding, not including 519,456 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 March 31,
(In thousands, except per share amounts)	2013			2012
Net sales	$	283,239		$	293,485
Other (expense) income, net		(120	)		5

		283,119			293,490

Costs and expenses
Cost of products sold		158,457			166,494
Selling, general and administrative		83,587			77,063
Research and development		10,584			9,292
Interest expense		2,660			3,149
Currency exchange losses, net		1,119			2,420

		256,407			258,418

Income before income taxes		26,712			35,072
Provision for income taxes		7,317			10,750

Net income		19,395			24,322
Net income attributable to noncontrolling interests		(109	)		(400	)

Net income attributable to Mine Safety Appliances Company		19,286			23,922

Earnings per share attributable to Mine Safety Appliances Company common shareholders
Basic	$	0.52		$	0.65

Diluted	$	0.51		$	0.64

Dividends per common share	$	0.28		$	0.26

See notes to condensed consolidated financial statements.

MINE SAFETY APPLIANCES COMPANY

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Unaudited


	Three Months Ended March 31,
(In thousands)	2013			2012
Net income	$	19,395		$	24,322
Foreign currency translation adjustments		(5,588	)		9,364
Pension and post-retirement plan adjustments, net of tax		2,107			—

Comprehensive income		15,914			33,686
Comprehensive loss (income) attributable to noncontrolling interests		439			(766	)

Comprehensive income attributable to Mine Safety Appliances Company		16,353			32,920

See notes to condensed consolidated financial statements.

MINE SAFETY APPLIANCES COMPANY

CONDENSED CONSOLIDATED BALANCE SHEET

Unaudited


(In thousands, except share amounts)	March 31, 2013			December 31, 2012
Assets
Current assets
Cash and cash equivalents	$	76,793		$	82,718
Trade receivables, less allowance for doubtful accounts of $7,568 and $7,402		206,954			191,289
Inventories		135,614			136,300
Deferred tax assets		16,408			17,727
Income taxes receivable		7,715			6,342
Prepaid expenses and other current assets		25,647			29,172

Total current assets		469,131			463,548

Property, less accumulated depreciation of $315,145 and $310,279		146,296			147,465
Prepaid pension cost		44,495			42,818
Deferred tax assets		16,109			17,018
Goodwill		256,726			258,400
Other noncurrent assets		200,905			182,497

Total assets		1,133,662			1,111,746

Liabilities
Current liabilities
Notes payable and current portion of long-term debt	$	7,986		$	6,823
Accounts payable		66,311			59,519
Employees’ compensation		36,278			41,602
Insurance and product liability		32,312			15,025
Taxes on income		3,657			4,389
Other current liabilities		50,646			61,442

Total current liabilities		197,190			188,800

Long-term debt		278,333			272,333
Pensions and other employee benefits		149,307			151,536
Deferred tax liabilities		17,094			17,249
Other noncurrent liabilities		11,018			11,124

Total liabilities		652,942			641,042

Commitments and contingencies (Note 15)
Shareholders’ Equity
Mine Safety Appliances Company shareholders’ equity:
Preferred stock, 4¹/₂% 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 37,140,521 and 37,007,799 shares		119,738			112,135
Stock compensation trust—523,516 and 745,430 shares		(2,733	)		(3,891	)
Treasury shares, at cost, preferred—52,878 and 52,878 shares, common—24,417,354 and 24,328,162 shares		(273,772	)		(269,739	)
Accumulated other comprehensive loss		(130,005	)		(127,072	)
Retained earnings		756,867			747,953

Total Mine Safety Appliances Company shareholders’ equity		473,664			462,955
Noncontrolling interests		7,056			7,749

Total shareholders’ equity		480,720			470,704

Total liabilities and shareholders’ equity		1,133,662			1,111,746

See notes to condensed consolidated financial statements.

MINE SAFETY APPLIANCES COMPANY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

Unaudited


	Three Months Ended March 31,
(In thousands)	2013			2012
Operating Activities
Net income	$	19,395		$	24,322
Depreciation and amortization		7,845			7,986
Pensions		2,880			675
Net loss from investing activities—disposal of assets		32			39
Stock-based compensation		5,195			2,918
Deferred income tax provision		24			531
Other noncurrent assets and liabilities		(20,870	)		(2,307	)
Currency exchange losses, net		1,119			2,420
Excess tax benefit related to stock plans		(650	)		(1,136	)
Other, net		(1,061	)		(1,146	)

Operating cash flow before changes in certain working capital items		13,909			34,302

Trade receivables		(17,895	)		(14,719	)
Inventories		(1,873	)		(5,492	)
Accounts payable and accrued liabilities		10,061			12,805
Income taxes receivable, prepaid expenses and other current assets		1,854			6,536

Increase in certain working capital items		(7,853	)		(870	)

Cash flow from operating activities		6,056			33,432

Investing Activities
Capital expenditures		(7,452	)		(8,044	)
Property disposals and other investing		47			95

Cash flow from investing activities		(7,405	)		(7,949	)

Financing Activities
Proceeds from short-term debt, net		1,182			984
Proceeds from long-term debt		104,100			35,500
Payments on long-term debt		(98,100	)		(57,500	)
Cash dividends paid		(10,372	)		(9,550	)
Distributions to noncontrolling interests		(275	)		—
Company stock purchases		(4,033	)		(2,308	)
Exercise of stock options		2,916			1,389
Excess tax benefit related to stock plans		650			1,136

Cash flow from financing activities		(3,932	)		(30,349	)

Effect of exchange rate changes on cash and cash equivalents		(644	)		1,576

Decrease in cash and cash equivalents		(5,925	)		(3,290	)
Beginning cash and cash equivalents		82,718			59,938

Ending cash and cash equivalents		76,793			56,648

See notes to condensed consolidated financial statements.

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) Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss are as follows:


(In thousands)	March 31, 2013			December 31, 2012
Cumulative translation adjustments	$	(81	)	$	4,959
Pension and post-retirement plan adjustments		(129,924	)		(132,031	)

Accumulated other comprehensive loss		(130,005	)		(127,072	)

(3) Reclassifications Out of Accumulated Other Comprehensive Loss

Pension and post-retirement benefit plan items reclassified out of accumulated other comprehensive loss during the three months ended March 31, 2013 are as follows:


Amortization of prior service cost	$	(80	)
Recognized net actuarial losses		3,465

Total reclassifications		3,385
Tax benefit		1,278

Total reclassifications, net of tax		2,107

The reclassifications out of accumulated other comprehensive loss are included in the computation of net periodic pension and other post-retirement benefit costs (see Note 6—Pensions and Other Post-Retirement Benefits).

(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.


	Three Months Ended March 31,
(In thousands, except per share amounts)	2013			2012
Net income attributable to Mine Safety Appliances Company	$	19,286		$	23,922
Preferred stock dividends		(10	)		(10	)

Income available to common equity		19,276			23,912
Dividends and undistributed earnings allocated to participating securities		(171	)		(261	)

Income available to Mine Safety Appliances Company common shareholders		19,105			23,651

Basic earnings per common share	$	0.52		$	0.65

Diluted earnings per common share	$	0.51		$	0.64

Basic shares outstanding		36,734			36,369
Stock options and other stock compensation		635			509

Diluted shares outstanding		37,369			36,878

Antidilutive stock options		173			924

(5) Segment Information

We are organized into eleven 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 March 31, 2013
Sales to external customers	$	136,115	$	70,999	$	76,125	$	—		$	283,239
Intercompany sales		28,825		25,236		4,609		(58,670	)		—
Net income (loss) attributable to Mine Safety Appliances Company		16,155		3,629		6,669		(7,167	)		19,286
Three Months Ended March 31, 2012
Sales to external customers	$	137,484	$	72,466	$	83,535	$	—		$	293,485
Intercompany sales		26,618		24,909		4,546		(56,073	)		—
Net income (loss) attributable to Mine Safety Appliances Company		16,257		5,621		8,265		(6,221	)		23,922

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

(6) Pensions and Other Post-Retirement Benefits

Components of net periodic benefit cost consisted of the following:


	Pension Benefits						Other Benefits
(In thousands)	2013			2012			2013			2012
Three months ended March 31
Service cost	$	2,784		$	2,436		$	172		$	174
Interest cost		4,468			4,789			262			316
Expected return on plan assets		(7,725	)		(8,101	)		—			—
Amortization of prior service cost		26			77			(106	)		(114	)
Recognized net actuarial losses		3,327			1,474			138			132

Net periodic benefit cost		2,880			675			466			508

We made contributions of $1.1 million to our pension plans during the three months ended March 31, 2013. We expect to make total contributions of approximately $4.5 million to our pension plans in 2013.

(7) Goodwill and Intangible Assets

Changes in goodwill during the three months ended March 31, 2013 were as follows:


(In thousands)	Goodwill
Net balance at January 1	$	258,400
Currency translation		(1,674	)

Net balance at March 31		256,726

At March 31, 2013, goodwill of $196.5 million, $57.7 million, and $2.5 million related to the North American, European, and International reporting units, respectively.

Changes in intangible assets, net of accumulated amortization (reported in other noncurrent assets) during the three months ended March 31, 2013 were as follows:


(In thousands)	Intangible Assets
Net balance at January 1	$	38,648
Amortization expense		(945	)
Currency translation		(166	)

Net balance at March 31		37,537

(8) Inventories


(In thousands)	March 31, 2013		December 31, 2012
Finished products	$	74,502	$	72,658
Work in process		12,728		13,473
Raw materials and supplies		48,384		50,169

Total inventories		135,614		136,300

(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. Stock options are valued at an estimated fair value using the Black Scholes option pricing model. 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 is valued at the market value of the stock on the grant date. Performance stock units with a performance condition are valued at the market value of the stock on the grant date. Performance stock units with a market condition are valued at an estimated fair value using a Monte Carlo model. 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, total shareholder return or other specific performance condition over the performance period. 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 March 31,
(In thousands)	2013		2012
Stock compensation expense	$	5,195	$	2,918
Income tax benefit		1,922		1,048

Stock compensation expense, net of income tax benefit		3,273		1,870

A summary of stock option activity for the three months ended March 31, 2013 follows:


	Shares			Weighted Average Exercise Price
Outstanding at January 1		1,784,660		$	33.05
Granted		173,154			48.95
Exercised		(85,263	)		34.20

Outstanding at March 31		1,872,551			34.46

Exercisable at March 31		1,313,051			32.29

A summary of restricted stock activity for the three months ended March 31, 2013 follows:


	Shares			Weighted Average Grant Date Fair Value
Unvested at January 1		417,843		$	31.92
Granted		63,508			48.89
Vested		(134,042	)		24.77
Forfeited		(6,938	)		40.02

Unvested at March 31		340,371			37.74

A summary of performance stock unit activity for the three months ended March 31, 2013 follows:


	Shares			Weighted Average Grant Date Fair Value
Unvested at January 1		137,672		$	35.85
Granted		53,357			57.58
Performance adjustments		3,317			24.63
Vested		(42,413	)		24.84

Unvested at March 31		151,933			46.31

(10) Derivative Financial Instruments

As part of our currency exchange rate risk management strategy, we 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 on a full mark-to-market basis and report the related gains or losses in currency exchange gains or losses. At March 31, 2013, the notional amount of open forward contracts was $46.7 million and the unrealized loss on these contracts was $0.7 million.

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


(In thousands)	March 31, 2012		December 31, 2012
Derivatives not designated as hedging instruments
Foreign exchange contracts:
Prepaid expenses and other current assets	$	—	$	801
Other current liabilities		713		—

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


		Loss (Gain) Recognized in Income
		Three Months Ended March 31,
(In thousands)	Income Statement Location	2013		2012
Derivatives not designated as hedging instruments
Foreign exchange contracts	Currency exchange losses, net	$	1,257	$	92

(11) Income Taxes

At March 31, 2013, we had a gross liability for unrecognized tax benefits of $9.5 million. We have recognized tax benefits associated with these liabilities of $8.6 million at March 31, 2013. These balances are unchanged since December 31, 2012. 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 $0.7 million at March 31, 2013.

(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 March 31, 2013, the reported carrying amount of our fixed rate long-term debt was $160.0 million and the fair value was $170.4 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 March 31, 2013.

(14) Assets Held for Sale

Certain assets related to detector tube manufacturing are classified as held for sale at March 31, 2013. These assets are reported in the following balance sheet lines:


(In millions)	March 31, 2013
Inventory	$	1.4
Property, net of depreciation		0.3

Total assets		1.7

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

Our $3.5 million equity investment in a joint venture company is classified as held for sale at March 31, 2013 and reported in other current assets. The potential impact of the sale of this investment is not expected to be material to net income or earnings per share.

(15) Contingencies

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 $4.7 million at March 31, 2013 and $4.4 million at December 31, 2012. Single incident product liability expense during the three months ended March 31, 2013 and 2012 was $0.3 million and $0.3 million, respectively. We evaluate our single incident product liability exposures on an ongoing basis and make adjustments to the reserve as new information becomes available.

Cumulative trauma product liability claims involve exposures to harmful substances (e.g., silica, asbestos and coal dust) that occurred many years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis or coal worker’s pneumoconiosis. We are presently named as a defendant in 2,658 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:


	Three Months Ended March 31, 2013			Year Ended December 31, 2012
Open claims, beginning of period		2,609			2,321
New claims		134			750
Settled and dismissed claims		(85	)		(462	)

Open claims, end of period		2,658			2,609

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 March 31, 2013 totaled $150.1 million, of which $2.0 million is reported in other current assets and $148.1 million in other non-current assets. Our insurance receivables at December 31, 2012 totaled $130.0 million.

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


(In millions)	Three Months Ended March 31, 2013		Year Ended December 31, 2012
Balance beginning of period	$	130.0	$	112.1
Additions		20.1		29.7
Collections and settlements		—		(11.8	)

Balance end of period		150.1		130.0

Additions to insurance receivables in the above table represent insured cumulative trauma product liability losses and related defense costs. Uninsured cumulative trauma product liability losses were $0.2 million during the three months ended March 31, 2013. There were no uninsured cumulative trauma product liability losses during the three months ended March 31, 2012.

Our aggregate cumulative trauma product liability losses and administrative and defense costs for the three years ended December 31, 2012, totaled approximately $99.7 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.

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. Discovery has concluded and motions for summary judgment on certain issues have been submitted to the court. A trial date has not yet been scheduled.

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. Discovery has concluded and motions for summary judgment on certain issues have been submitted to the court. A trial date has not yet been scheduled.

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 a settlement is reached, we dismiss the settling carrier from this action in Delaware.

(16) Recently Adopted and Recently Issued Accounting Standards

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income-Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires additional information about the amounts reclassified out of accumulated other comprehensive income by component. The adoption of this ASU on January 1, 2013 did not have a material effect on our consolidated financial statements.

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, economic and market 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 Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012.

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 oil and gas, fire service, mining, construction and other industries, as well as the military. We are committed to providing our customers with service unmatched in the safety industry and, in the process, enhancing our ability to provide a growing line of safety solutions for customers in key global markets.

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 segments. In 2012, 47%, 25% 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 March 31, 2013 Compared to Three Months Ended March 31, 2012

Net sales. Net sales for the three months ended March 31, 2013 were $283.2 million, a decrease of $10.3 million, or 3%, compared with $293.5 million for the three months ended March 31, 2012. Excluding the effects of the divestiture of the North American ballistic helmet business in the second quarter of 2012, net sales decreased $5.2 million, or 2%, when compared to the same quarter last year.


	Three Months Ended March 31,				Dollar Decrease			Percent Decrease
(In millions)	2013		2012		Dollar Decrease			Percent Decrease
North America	$	136.1	$	137.5	$	(1.4	)		(1	)%
Europe		71.0		72.5		(1.5	)		(2	)
International		76.1		83.5		(7.4	)		(9	)

Net sales by the North American segment were $136.1 million for the first quarter of 2013, a decrease of $1.4 million, or 1%, compared to $137.5 million for the first quarter of 2012. The decrease in the current quarter reflects the divestiture of our North American ballistic helmet business during second quarter of 2012. North American segment sales of ballistic helmets totaled $5.1 million in the first quarter of 2012. Excluding the effects of this divestiture, North America segment sales increased $3.7 million, or 3%, when compared to the first quarter of 2012. We continued to see growth in the fire service and industrial markets, evidenced by increased shipments of self-contained breathing apparatus (SCBA) and portable gas detection instruments, up $4.5 million and $1.3 million, respectively. These increases were partially offset by lower sales in most other product lines, including a $0.8 million decrease in gas mask shipments to the military market, a $0.4 million decrease in fixed gas and flame detection shipments and a $0.4 million decrease in thermal imaging camera shipments.

Net sales for the European segment were $71.0 million for the first quarter of 2013, a decrease of $1.5 million, or 2%, compared to $72.5 million for the first quarter of 2012. The decrease reflects lower shipments of fixed gas and flame detection instruments, down $3.0 million on lower large order activity to the oil and gas market, and ballistic helmets, down $0.7 million on lower shipments to the military market. These decreases were partially offset by a $1.3 million increase in shipments of self-contained breathing apparatus (SCBA) to the fire service market and a $1.2 million increase in shipments of portable gas detection instruments to industrial markets.

Net sales for the International segment were $76.1 million in the first quarter of 2013, a decrease of $7.4 million, or 9%, compared to $83.5 million for the first quarter of 2012. Local currency sales in the International segment decreased $2.2 million across a broad range of product lines primarily in regions with significant mining markets. These decreases were partially offset by higher shipments of self-contained breathing apparatus (SCBA) and portable instruments, up $1.0 and $0.5 million, respectively. Currency translation effects decreased International segment sales, when stated in U.S. dollars, by $5.2 million, primarily related to a weaker South African rand and Brazilian real.

Cost of products sold. Cost of products sold was $158.5 million in the first quarter of 2013, a decrease of $8.0 million, or 5%, compared to $166.5 million in the first quarter of 2012. Lower cost of products sold was primarily related to lower sales. Cost of products sold as a percentage of sales was 55.9% for the first quarter of 2013 compared to 56.7% in the first quarter of 2012. The decrease in cost of products sold in relation to sales was primarily due to a more favorable product mix, lower manufacturing costs and improved pricing.

Gross profit. Gross profit for the first quarter of 2013 was $124.8 million, which was $2.2 million, or 2%, lower than gross profit of $127.0 million in the first quarter of 2012. Lower gross profit was related to lower sales, partially offset by an improved ratio of gross profit to net sales. The ratio of gross profit

to net sales was 44.1% in the first quarter of 2013 compared to 43.3% in the same quarter last year. The higher gross profit ratio in 2013 was primarily related to a more favorable product mix, lower manufacturing costs and improved pricing.

Selling, general and administrative expenses. Selling, general and administrative expenses were $83.6 million during the first quarter of 2013, an increase of $6.5 million, or 8%, compared to $77.1 million in the first quarter of 2012. Selling, general and administrative expenses were 29.5% of net sales in the first quarter of 2013 compared to 26.3% of net sales in the first quarter of 2012. Local currency selling, general and administrative expenses increased $7.4 million in the quarter. The increase reflects higher stock compensation, primarily due to accelerated expense recognition for retirement eligible participants, higher pension expense, salary inflation around the world, and one-time business development costs. Currency translation effects decreased first quarter 2013 selling, general and administrative expenses, when stated in U.S. dollars, by $0.9 million.

Research and development expense. Research and development expense was $10.6 million during the first quarter of 2013, an increase of $1.3 million, or 14%, compared to $9.3 million during the first quarter of 2012. The increase was related to the timing of research and development project spending and reflects our ongoing focus on developing innovative new products.

Interest expense. Interest expense was $2.7 million during the first quarter of 2013, a decrease of $0.4 million, or 16%, compared to $3.1 million in the same quarter last year. The decrease in interest expense was primarily due to lower borrowings on our revolving line of credit.

Currency exchange losses. Currency exchange losses were $1.1 million in the first quarter of 2013, compared to losses of $2.4 million in the first quarter of 2012. The loss in the first quarter of 2013 related primarily to the strengthening of the Mexican peso. The loss in the first quarter of 2012 related primarily to euro-denominated intercompany balances and the strengthening of the Mexican peso.

Income taxes. The effective tax rate for the first quarter of 2013 was 27.4% compared to 30.7% for the same quarter last year. In January 2013, the research and development credit was reinstated retroactively to the beginning of 2012. The lower effective tax rate in the first quarter of 2013 was due to the one-time tax benefit related to recognition of the 2012 research and development tax credit.

Net income attributable to Mine Safety Appliances Company. Net income attributable to Mine Safety Appliances Company for the first quarter of 2013 was $19.3 million, or $0.52 per basic share, compared to $23.9 million, or $0.65 per basic share, for the same quarter last year.

North American segment net income for the first quarter of 2013 was $16.2 million, compared to $16.3 million in the first quarter of 2012. Income in the current quarter was flat on lower sales, higher research and development and selling, general and administrative expenses, offset by a more favorable income tax rate related to the retroactive reinstatement of the research and development tax credit for 2012.

The European segment reported net income for the first quarter of 2013 of $3.6 million, a decrease of $2.0 million, or 35%, compared to net income of $5.6 million during the first quarter of 2012. The decrease in European segment net income in the current quarter was primarily due to lower sales and higher research and development and selling, general and administrative expenses. Currency translation effects decreased European segment net income, when stated in U.S. dollars, by approximately $0.3 million.

International segment net income for the first quarter of 2013 was $6.7 million, a decrease of $1.6 million, or 19%, compared to $8.3 million in the same quarter last year. Lower local currency net

income in the current quarter was primarily due to lower sales and higher research and development cost, partially offset by lower selling, general and administrative expenses. Currency translation effects decreased International segment net income, when stated in U.S. dollars, by approximately $0.6 million, primarily due to the weakening of the South African rand and Brazilian real.

The loss reported in reconciling items for the first quarter of 2013 was $7.2 million compared to a loss of $6.2 million in the first quarter of 2012. The higher loss in the current quarter was primarily related to higher administrative and business development expenses, partially offset by lower interest expense and currency exchange losses.

LIQUIDITY AND CAPITAL RESOURCES

Our main source of liquidity is operating cash flows, supplemented by borrowings. 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 decreased $5.9 million during the first quarter of 2013, compared to decreasing $3.3 million during first quarter of 2012.

Operating activities provided cash of $6.1 million during the first quarter of 2013 compared to providing $33.4 million during the first quarter of 2012. Lower operating cash flow in the first quarter of 2013 was primarily related to changes in working capital and higher insurance receivables. Trade receivables were $207.0 million at March 31, 2013, compared to $191.3 million at December 31, 2012, reflecting a local currency increase of $17.9 million, partially offset by unfavorable currency translation effects of $2.2 million. The increase in trade receivables was related to strong sales in March. Inventories were steady during the quarter at $135.6 million at March 31, 2013, compared to $136.3 million at December 31, 2012. Accounts payable were $66.3 million at March 31, 2013, compared to $59.5 million at December 31, 2012. Local currency accounts payable increased $7.5 million, primarily in North America reflecting our ongoing initiative to improve working capital cash flow, partially offset by favorable currency translation effects of $0.7 million.

Investing activities used cash of $7.5 million during the first quarter of 2013, compared to using $7.9 million in the same quarter last year. During the first quarter of 2013 and 2012, we used cash of $7.5 million and $8.0 million, respectively, for capital expenditures, primarily machinery and equipment.

Financing activities used cash of $3.9 million during the first quarter of 2013, compared to using $30.3 million during the first quarter of 2012. The change was primarily related to borrowing activity. During the first quarter of 2013, we made net borrowings of $7.2 million, compared to paying down $21.0 million in the first quarter of 2012. We paid cash dividends of $10.4 million in the first quarter of 2013 compared to paying dividends of $9.6 million in the first quarter of 2012.

CUMULATIVE TRANSLATION ADJUSTMENTS

The position of the U.S. dollar relative to international currencies at March 31, 2013 resulted in a translation loss of $5.0 million being charged to the cumulative translation adjustments shareholders’ equity account during the first quarter of 2013, compared to a gain of $9.0 million during the same quarter in 2012. The translation loss during the first quarter of 2013 was primarily related to the

weakening of the euro and the South African rand. The translation gain during the first quarter of 2012 was primarily related to the strengthening of the euro, Mexican peso and South African rand.

COMMITMENTS AND CONTINGENCIES

We expect to make total contributions of $4.5 million to our pension plans during 2013.

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 $4.7 million at March 31, 2013 and $4.4 million at December 31, 2012. Single incident product liability expense during the three months ended March 31, 2013 and 2012 was $0.3 million and $0.3 million, respectively. We evaluate our single incident product liability exposures on an ongoing basis and make adjustments to the reserve as new information becomes available.

A summary of cumulative trauma product liability claims activity follows:


	Three Months Ended March 31, 2013			Year Ended December 31, 2012
Open claims, beginning of period		2,609			2,321
New claims		134			750
Settled and dismissed claims		(85	)		(462	)

Open claims, end of period		2,658			2,609

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.

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


(In millions)	Three Months Ended March 31, 2013		Year Ended December 31, 2012
Balance beginning of period	$	130.0	$	112.1
Additions		20.1		29.7
Collections and settlements		—		(11.8	)

Balance end of period		150.1		130.0

We are currently involved in insurance coverage litigations with various of our insurance carriers.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). 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, 2012.

RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

Currency exchange rates. We are subject to the effects of fluctuations in currency exchange rates on various transactions and on the translation of the reported financial position and operating results of our non-U.S. companies from local currencies to U.S. dollars. A hypothetical 10% strengthening or weakening of the U.S. dollar would decrease or increase our reported sales and net income for the three months ended March 31, 2013 by approximately $14.7 million and $1.0 million, respectively.

When appropriate, we may attempt to limit our transactional exposure to changes in currency exchange rates through contracts or other actions intended to reduce existing exposures by creating offsetting currency exposures. At March 31, 2013, we had open foreign currency forward contracts with a U.S. dollar notional value of $46.7 million. A hypothetical 10% increase in March 31, 2013 forward exchange rates would result in a $4.7 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.

At March 31, 2013, 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 $2.9 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.

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, 2012 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%
(Decrease) increase in net benefit cost	$	(5,592	)	$	6,050		$	(3,800	)	$	3,800	$	(811	)	$	809
(Decrease) increase in projected benefit obligation		(60,417	)		70,013			—			—		—			—
Increase (decrease) in funded status		60,417			(70,013	)		—			—		19,223			(19,223	)

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.

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
January 1 – January 31, 2013		4,439	$	45.06		—		1,053,661
February 1 – February 28, 2013		40,952		48.86		—		1,039,492
March 1 – March 31, 2013		37,846		49.03		—		981,463

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

We do not have any other share repurchase programs.

Share purchases are 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

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

April 24, 2013		/s/ Dennis L. Zeitler
		Dennis L. Zeitler
		Senior Vice President—Finance; Duly Authorized Officer and Principal Financial Officer

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