10Q - Q2 2015


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
 
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2015
Commission File No. 1-15579
 
MSA SAFETY INCORPORATED
(Exact name of registrant as specified in its charter)
 
Pennsylvania
 
 46-4914539

(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  ý    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 Exchange Act).     Yes  ¨    No  x
As of July 20, 2015, 37,349,911 shares of common stock, of the registrant were outstanding.




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Unaudited
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands, except per share amounts)
 
2015
 
2014
 
2015
 
2014
Net sales
 
$
287,011

 
$
282,493

 
$
543,719

 
$
547,538

Other income, net
 
94

 
45

 
735

 
401

 
 
287,105

 
282,538

 
544,454

 
547,939

Costs and expenses
 
 
 
 
 
 
 
 
Cost of products sold
 
156,522

 
152,823

 
296,407

 
296,053

Selling, general and administrative
 
77,588

 
82,835

 
158,956

 
168,076

Research and development
 
12,984

 
11,943

 
23,898

 
23,184

Restructuring and other charges (Note 4)
 
227

 
857

 
958

 
2,757

Interest expense
 
2,502

 
2,594

 
4,975

 
5,124

Currency exchange losses (gains), net
 
1,557

 
(309
)
 
(991
)
 
43

 
 
251,380

 
250,743

 
484,203

 
495,237

Income from continuing operations before income taxes
 
35,725

 
31,795

 
60,251

 
52,702

Provision for income taxes (Note 10)
 
12,350

 
9,753

 
27,734

 
17,357

 
 


 
 
 
 
 
 
Income from continuing operations
 
23,375

 
22,042

 
32,517

 
35,345

Income from discontinued operations (Note 18)
 
470

 
453

 
778

 
1,067

Net income
 
23,845

 
22,495

 
33,295

 
36,412

 
 
 
 
 
 
 
 
 
Net loss (income) attributable to noncontrolling interests
 
453

 
(7
)
 
685

 
102

 
 
 
 
 
 
 
 
 
Net income attributable to MSA Safety Incorporated
 
$
24,298

 
$
22,488

 
$
33,980

 
$
36,514

 
 
 
 
 
 
 
 
 
Amounts attributable to MSA Safety Incorporated common shareholders:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
23,722

 
$
22,132

 
$
33,038

 
$
35,654

Income from discontinued operations (Note 18)
 
576

 
356

 
942

 
860

Net income
 
$
24,298

 
$
22,488

 
$
33,980

 
$
36,514

 
 
 
 
 
 
 
 
 
Earnings per share attributable to MSA Safety Incorporated common shareholders:
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.63

 
$
0.59

 
$
0.88

 
$
0.96

Income from discontinued operations (Note 18)
 
$
0.02

 
$
0.01

 
$
0.03

 
$
0.02

Net income
 
$
0.65

 
$
0.60

 
$
0.91

 
$
0.98

Diluted
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.62

 
$
0.58

 
$
0.87

 
$
0.94

Income from discontinued operations (Note 18)
 
$
0.01

 
$
0.01

 
$
0.03

 
$
0.02

Net income
 
$
0.63

 
$
0.59

 
$
0.90

 
$
0.96

Dividends per common share
 
$
0.32

 
$
0.31

 
$
0.63

 
$
0.61

The accompanying notes are an integral part of the consolidated financial statements.

-2-



MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
 
2015
 
2014
 
2015
 
2014
Net income
 
$
23,845

 
$
22,495

 
$
33,295

 
$
36,412

Foreign currency translation adjustments
 
3,891

 
54

 
(20,159
)
 
(904
)
Pension and post-retirement plan adjustments, net of tax of $1,477, $1,629, $2,894, and $2,434
 
2,623

 
2,882

 
5,152

 
4,300

Total other comprehensive income (loss), net of tax
 
6,514

 
2,936

 
(15,007
)
 
3,396

Comprehensive income
 
30,359

 
25,431

 
18,288

 
39,808

Comprehensive loss (income) attributable to noncontrolling interests
 
649

 
(7
)
 
1,139

 
244

Comprehensive income attributable to MSA Safety Incorporated
 
$
31,008

 
$
25,424

 
$
19,427

 
$
40,052

The accompanying notes are an integral part of the consolidated financial statements.

-3-



MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
Unaudited 
(In thousands, except share amounts)
 
June 30, 2015
 
December 31, 2014
Assets
 
 
 
 
Cash and cash equivalents
 
$
88,134

 
$
105,998

Trade receivables, less allowance for doubtful accounts of $8,302 and $7,821
 
218,833

 
211,440

Inventories (Note 3)
 
150,415

 
122,954

Deferred tax assets (Note 10)
 
21,447

 
23,830

Prepaid income taxes
 
12,161

 
2,876

Prepaid expenses and other current assets
 
41,618

 
30,771

Total current assets
 
532,608

 
497,869

 
 
 
 
 
Property, plant and equipment, net (Note 5)
 
144,955

 
151,352

Prepaid pension cost
 
79,330

 
75,017

Deferred tax assets (Note 10)
 
18,053

 
20,227

Goodwill (Note 13)
 
248,416

 
252,520

Intangible assets (Note 13)
 
28,474

 
31,323

Other noncurrent assets
 
234,743

 
236,484

Total assets
 
$
1,286,579

 
$
1,264,792

 
 
 
 
 
Liabilities
 
 
 
 
Notes payable and current portion of long-term debt (Note 12)
 
$
6,667

 
$
6,700

Accounts payable
 
80,465

 
70,210

Employees’ compensation
 
35,099

 
40,249

Insurance and product liability
 
81,464

 
47,456

Tax liabilities
 
18,833

 
5,545

Other current liabilities
 
58,827

 
63,897

Total current liabilities
 
281,355

 
234,057

 
 
 
 
 
Long-term debt (Note 12)
 
263,000

 
245,000

Pensions and other employee benefits
 
165,272

 
174,598

Deferred tax liabilities (Note 10)
 
28,334

 
26,306

Other noncurrent liabilities
 
16,059

 
46,198

Total liabilities
 
754,020

 
726,159

Commitments and contingencies (Note 17)
 

 

 
 
 
 
 
Equity
 
 
 
 
Preferred stock, 4 1/2% cumulative, $50 par value (Note 7)
 
3,569

 
3,569

Common stock, no par value (Note 7)
 
156,158

 
148,401

Treasury shares, at cost (Note 7)
 
(295,222
)
 
(286,557
)
Accumulated other comprehensive loss
 
(181,283
)
 
(166,730
)
Retained earnings
 
845,584

 
835,126

Total MSA Safety Incorporated shareholders' equity
 
528,806

 
533,809

Noncontrolling interests
 
3,753

 
4,824

Total shareholders’ equity
 
532,559

 
538,633

Total liabilities and shareholders’ equity
 
$
1,286,579

 
$
1,264,792

The accompanying notes are an integral part of the consolidated financial statements.

-4-



MSA SAFETY INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
 
 
Six Months Ended June 30,
(In thousands)
 
2015
 
2014
Operating Activities
 
 
 
 
Net income
 
$
33,295

 
$
36,412

Depreciation and amortization
 
15,664

 
15,115

Pensions (Note 14)
 
6,032

 
2,804

Net gain from disposal of assets
 
(1,969
)
 

Stock-based compensation (Note 11)
 
6,787

 
6,810

Asset impairment charges
 
2,438

 

Deferred income tax provision
 
4

 
(520
)
Other noncurrent assets and liabilities
 
(45,125
)
 
(23,237
)
Currency exchange (gains), net
 
(783
)
 
(26
)
Excess tax benefit related to stock plans
 
(890
)
 
(2,116
)
Other, net
 
1,045

 
913

Operating cash flow before changes in certain working capital items
 
16,498

 
36,155

(Increase) in trade receivables
 
(13,794
)
 
(8,809
)
(Increase) in inventories (Note 3)
 
(33,725
)
 
(15,050
)
(Increase) in income taxes receivable, prepaid expenses and other current assets
 
(12,886
)
 
(2,612
)
Increase in accounts payable and accrued liabilities
 
51,620

 
5,626

(Increase) in certain working capital items
 
(8,785
)
 
(20,845
)
Cash Flow From Operating Activities
 
7,713

 
15,310

Investing Activities
 
 
 
 
Capital expenditures
 
(16,015
)
 
(14,528
)
Property disposals and other investing
 
7,969

 

Cash Flow From Investing Activities
 
(8,046
)
 
(14,528
)
Financing Activities
 
 
 
 
Proceeds from (payments on) short-term debt, net
 
4

 
(817
)
Proceeds from long-term debt (Note 12)
 
191,000

 
303,000

(Payments on) long-term debt (Note 12)
 
(173,000
)
 
(282,000
)
Restricted cash
 
336

 
499

Cash dividends paid
 
(23,522
)
 
(22,501
)
Company stock purchases
 
(10,009
)
 
(4,775
)
Exercise of stock options
 
1,194

 
4,235

Employee stock purchase plan
 
230

 

Excess tax benefit related to stock plans
 
890

 
2,116

Cash Flow From Financing Activities
 
(12,877
)
 
(243
)
Effect of exchange rate changes on cash and cash equivalents
 
(4,654
)
 
(621
)
(Decrease) in cash and cash equivalents
 
(17,864
)
 
(82
)
Beginning cash and cash equivalents
 
105,998

 
96,265

Ending cash and cash equivalents
 
$
88,134

 
$
96,183

The accompanying notes are an integral part of the consolidated financial statements.

-5-



MSA SAFETY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN RETAINED EARNINGS AND
ACCUMULATED OTHER COMPREHENSIVE LOSS
Unaudited
(In thousands)
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss)
Balances March 31, 2014
$
795,051

 
$
(77,667
)
Net income
22,495

 

Foreign currency translation adjustments

 
54

Pension and post-retirement plan adjustments net of tax of $1,629

 
2,882

Income attributable to noncontrolling interests
(7
)
 

Common dividends
(11,310
)
 

Preferred dividends
(10
)
 

Balances June 30, 2014
806,219

 
(74,731
)
 
 
 
 
Balances March 31, 2015
833,255

 
(187,993
)
Net income
23,845

 

Foreign currency translation adjustments

 
3,891

Pension and post-retirement plan adjustments, net of tax of $1,477

 
2,623

Loss attributable to noncontrolling interests
453

 
196

Common dividends
(11,959
)
 

Preferred dividends
(10
)
 

Balances June 30, 2015
$
845,584

 
$
(181,283
)
(In thousands)
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss)
Balances December 31, 2013
$
792,206

 
$
(78,269
)
Net income
36,412

 

Foreign currency translation adjustments

 
(904
)
Pension and post-retirement plan adjustments net of tax of $2,434

 
4,300

Loss attributable to noncontrolling interests
102

 
142

Common dividends
(22,481
)
 

Preferred dividends
(20
)
 

Balances June 30, 2014
806,219

 
(74,731
)
 
 
 
 
Balances December 31, 2014
835,126

 
(166,730
)
Net income
33,295

 

Foreign currency translation adjustments

 
(20,159
)
Pension and post-retirement plan adjustments, net of tax of $2,894

 
5,152

Loss attributable to noncontrolling interests
685

 
454

Common dividends
(23,502
)
 

Preferred dividends
(20
)
 

Balances June 30, 2015
$
845,584

 
$
(181,283
)
The accompanying notes are an integral part of the consolidated financial statements.

-6-



MSA SAFETY INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1—Basis of Presentation
The Condensed Consolidated Financial Statements of MSA Safety Incorporated and its subsidiaries ("MSA" or the "Company") are unaudited. These Condensed Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, considered necessary by management to fairly state the Company's results. Intercompany accounts and transactions have been eliminated. The results reported in these Condensed Consolidated Financial Statements are not necessarily indicative of the results that may be expected for the entire year. The December 31, 2014 condensed consolidated balance sheet data was derived from the audited consolidated balance sheet but does not include all disclosures required by generally accepted accounting principles (GAAP). This Form 10-Q report should be read in conjunction with MSA's Form 10-K for the year ended December 31, 2014, which includes all disclosures required by GAAP.
Certain segment results in previously issued financial statements were recast to conform to the current period presentation. Refer to Note 8 for further information regarding MSA's segment allocation methodology.
Note 2— Recently Adopted and Recently Issued Accounting Standards
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of an Entity. This ASU amends the definition of a discontinued operation to include a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. This ASU was adopted on January 1, 2015. The adoption of this ASU may have a material effect on our consolidated financial statements in the event that we were to divest of a component that meets the definition of discontinued operations.
In May 2014, the FASB issued ASU 2014-09, Revenue with Contracts from Customers. This ASU clarifies the principles for recognizing revenue such that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB voted to defer the effective date of the standard until January 1, 2018. The Company is currently evaluating the impact that the adoption of this ASU will have on the consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period. This ASU clarifies the accounting treatment for share based payment awards that contain performance targets. This ASU will be effective beginning in 2016. The adoption of this ASU is not expected to have a material effect on our consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern. This ASU clarifies management's responsibility to evaluate whether there is a substantial doubt about the entity's ability to continue as a going concern and provides guidance for related footnote disclosures. This ASU will be effective beginning in 2016. The adoption of this ASU is not expected to have a material effect on our consolidated financial statements.
In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items. This ASU eliminates the requirement to separately present and disclose extraordinary and unusual items in the financial statements. This ASU will be effective beginning in 2016. The adoption of this ASU is not expected to have a material effect on our consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. This ASU changes the analysis that an entity must perform to determine whether it should consolidate certain types of legal entities. This ASU will be effective beginning in 2016. The adoption of this ASU is not expected to have a material effect on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs. This ASU simplifies the presentation of debt issuance costs and requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This ASU will be effective beginning in 2016. The adoption of this ASU is not expected to have a material effect on our consolidated financial statements.

-7-



In April 2015, the FASB issued ASU 2015-04, Retirement Benefits - Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets. This ASU allows entities with a fiscal year end that does not coincide with a month end to use the closest month end for measurement purposes. This ASU also allows entities that have a significant event in an interim period that calls for a remeasurement of defined benefit plan assets and obligations to use the month end date that is closest to the date of the significant event. This ASU will be effective beginning in 2016. The adoption of this ASU is not expected to have a material effect on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, Goodwill and Other Internal Use Software - Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU clarifies when entities should account for fees paid in a cloud computing arrangement as a software license or service contract. This ASU will be effective beginning in 2016. The adoption of this ASU is not expected to have a material effect on our consolidated financial statements.
Note 3—Inventories
(In thousands)
 
June 30, 2015
 
December 31, 2014
Finished products
 
$
75,832

 
$
67,713

Work in process
 
8,161

 
8,942

Raw materials and supplies
 
66,422

 
46,299

Total inventories
 
150,415

 
122,954

Excess of FIFO costs over LIFO costs
 
44,468

 
44,468

Total FIFO inventories
 
$
194,883

 
$
167,422

Note 4—Restructuring and Other Charges
During the three and six months ended June 30, 2015, we recorded restructuring charges of $0.2 million ($0.1 million after tax) and $1.0 million ($0.7 million after tax). International segment restructuring charges of $0.8 million for the six months ended June 30, 2015 were related to severance costs for staff reductions associated with ongoing initiatives to right size our operations in Brazil, China and Australia.
During the three and six months ended June 30, 2014, we recorded charges of $0.9 million ($0.6 million after tax) and $2.8 million ($1.8 million after tax), respectively. European segment restructuring charges for the six months ended June 30, 2014 of $1.5 million related primarily to severance from staff reductions in Germany and Italy and reorganization costs in Germany. International segment charges for the six months ended June 30, 2014 of $1.3 million were related to severance from staff reductions in South Africa and Australia.
Activity and reserve balances for restructuring charges by segment were as follows:
(in millions)
North America
Europe
International
Corporate
Total
Reserve balances at December 31, 2013
$

$
1.7

$

$

$
1.7

Restructuring charges

4.8

3.7


8.5

Asset disposals

(0.4
)
(1.7
)

(2.1
)
Cash payments

(3.5
)
(1.8
)

(5.3
)
Reserve balances at December 31, 2014
$

$
2.6

$
0.2

$

$
2.8

Restructuring charges

0.2

0.8


1.0

Cash payments

(1.7
)
(1.0
)

(2.7
)
Reserve balances at June 30, 2015
$

$
1.1

$

$

$
1.1


-8-



Note 5—Property, Plant and Equipment
The following table sets forth the components of property, plant and equipment:
(In thousands)
June 30, 2015
 
December 31, 2014
Land
$
1,833

 
$
3,573

Buildings
106,263

 
110,144

Machinery and equipment
337,700

 
335,318

Construction in progress
16,195

 
17,327

Total
461,991

 
466,362

Less accumulated depreciation
(317,036
)
 
(315,010
)
Net property
$
144,955

 
$
151,352

Note 6—Reclassifications Out of Accumulated Other Comprehensive Loss
The changes in Accumulated Other Comprehensive Loss by component were as follows:
 
 
MSA Safety Incorporated
 
Noncontrolling Interests
 
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Pension and other postretirement benefits
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(123,041
)
 
$
(75,662
)
 
$

 
$

Amounts reclassified from Accumulated other comprehensive loss:
 
 
 
 
 
 
 
 
Amortization of prior service cost
 
17

 
(63
)
 

 

Recognized net actuarial losses
 
4,083

 
4,574

 

 

Tax benefit
 
(1,477
)
 
(1,629
)
 

 

Total amount reclassified from Accumulated other comprehensive loss, net of tax
 
2,623

 
2,882

 

 

Balance at end of period
 
$
(120,418
)
 
$
(72,780
)
 
$

 
$

Foreign Currency Translation
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(64,952
)
 
$
(2,005
)
 
$
(2,457
)
 
$
(1,744
)
Foreign currency translation adjustments
 
4,087

 
54

 
(196
)
 

Balance at end of period
 
$
(60,865
)
 
$
(1,951
)
 
$
(2,653
)
 
$
(1,744
)

-9-



 
 
MSA Safety Incorporated
 
Noncontrolling Interests
 
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Pension and other postretirement benefits
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(125,570
)
 
$
(77,080
)
 
$

 
$

Amounts reclassified from Accumulated other comprehensive loss:
 
 
 
 
 
 
 
 
Amortization of prior service cost
 
34

 
(126
)
 

 

Recognized net actuarial losses
 
8,012

 
6,860

 

 

Tax benefit
 
(2,894
)
 
(2,434
)
 

 

Total amount reclassified from Accumulated other comprehensive loss, net of tax
 
5,152

 
4,300

 

 

Balance at end of period
 
$
(120,418
)
 
$
(72,780
)
 
$

 
$

Foreign Currency Translation
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(41,160
)
 
$
(1,189
)
 
$
(2,199
)
 
$
(1,602
)
Foreign currency translation adjustments
 
(19,705
)
 
(762
)
 
(454
)
 
(142
)
Balance at end of period
 
$
(60,865
)
 
$
(1,951
)
 
$
(2,653
)
 
$
(1,744
)
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 14—Pensions and Other Post-Retirement Benefits).
Note 7—Capital Stock
Preferred Stock - The Company has authorized 100,000 shares of $50 par value 4.5% cumulative preferred nonvoting stock which is callable at $52.50. There are 71,373 shares issued and 52,878 shares held in treasury at June 30, 2015. There were no treasury purchases of preferred stock during the quarter ended June 30, 2015. The Company has also authorized 1,000,000 shares of $10 par value second cumulative preferred voting stock. No shares have been issued as of June 30, 2015.
Common Stock - The Company has authorized 180,000,000 shares of no par value common stock. There were 37,349,911 and 37,448,310 shares outstanding at June 30, 2015 and December 31, 2014, respectively.
Treasury Shares - On May 12, 2015, the Board of Directors adopted a new stock repurchase program to replace the existing program. The new program authorizes up to $100.0 million in repurchases of MSA common stock in the open market and in private transactions. The share purchase program has no expiration date. The maximum shares that may be purchased is calculated based on the dollars remaining under the program and the respective month-end closing share price. We repurchased 150,000 shares during the three months ended June 30, 2015. We do not have any other share purchase programs. There were 24,731,480 and 24,633,081 Treasury Shares at June 30, 2015 and December 31, 2014, respectively.
The Company began issuing Treasury Shares for all share based benefit plans during 2014. Shares are issued from Treasury at the average Treasury Share cost on the date of the transaction. There were 117,529 Treasury Shares issued for these purposes during the six months ended June 30, 2015.
Note 8—Segment Information
We are organized into nine 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 four reportable segments: North America, Europe, International and Corporate.
The Corporate segment was established on January 1, 2015 to reflect the activities of centralized functions in our corporate headquarters and to capture results in a manner that the chief operating decision maker reviews. The corporate segment primarily consists of administrative expenses and centrally-managed costs such as interest expense and foreign exchange gains or losses. Additionally, effective January 1, 2015, we changed the allocation methodology applied to research and development expense. The 2014 segment results have been recast to conform with current period presentation.
The Company's sales are allocated to each country based primarily on the destination of the end-customer.

-10-



Reportable segment information is presented in the following table:
(In thousands)
 
North
America
 
Europe
 
International
 
Corporate
 
Reconciling
Items
 
Consolidated
Totals
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Sales to external customers
 
$
156,193

 
$
75,317

 
$
55,501

 
$

 
$

 
$
287,011

Intercompany sales
 
35,022

 
56,008

 
5,276

 

 
(96,306
)
 

Net income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
22,253

 
6,596

 
2,989

 
(7,655
)
 
(461
)
 
23,722

Discontinued operations
 

 

 
576

 

 

 
576

Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Sales to external customers
 
$
289,757

 
$
141,330

 
$
112,632

 
$

 
$

 
$
543,719

Intercompany sales
 
70,761

 
102,117

 
10,714

 

 
(183,592
)
 

Net income (loss):
 


 


 


 
 
 


 


Continuing operations
 
36,684

 
2,159

 
6,651

 
(12,492
)
 
36

 
33,038

Discontinued operations
 

 

 
942

 

 

 
942

(In thousands)
 
North
America
 
Europe
 
International
 
Corporate
 
Reconciling
Items
 
Consolidated
Totals
Three Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Sales to external customers
 
$
138,782

 
$
78,883

 
$
64,828

 
$

 
$

 
$
282,493

Intercompany sales
 
30,696

 
28,238

 
4,789

 

 
(63,723
)
 

Net income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
19,407

 
6,780

 
3,172

 
(7,473
)
 
246

 
22,132

Discontinued operations
 

 

 
356

 

 

 
356

Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Sales to external customers
 
$
268,303

 
$
153,821

 
$
125,414

 
$

 
$

 
$
547,538

Intercompany sales
 
58,593

 
57,096

 
8,638

 

 
(124,327
)
 

Net income (loss):
 
 
 
 
 
 
 
 
 
 
 


Continuing operations
 
33,667

 
10,232

 
7,763

 
(15,359
)
 
(649
)
 
35,654

Discontinued operations
 

 

 
860

 

 

 
860

Reconciling items consist primarily of intercompany eliminations and items not directly attributable to operating segments.
The percentage of total sales by product group were as follows:
Three Months Ended June 30,
2015
 
2014
Breathing Apparatus
23%
 
18%
Fire Gas & Flame Detection
21%
 
22%
Portable Gas Detection
13%
 
14%
Industrial Head Protection
12%
 
14%
Fire and Rescue Helmets
5%
 
5%
Fall Protection
4%
 
4%
Other
22%
 
23%

-11-



Six Months Ended June 30,
2015
 
2014
Breathing Apparatus
23%
 
18%
Fire Gas & Flame Detection
22%
 
22%
Portable Gas Detection
14%
 
15%
Industrial Head Protection
12%
 
14%
Fire and Rescue Helmets
5%
 
5%
Fall Protection
4%
 
4%
Other
20%
 
22%
Note 9—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 June 30,
 
Six Months Ended June 30,
(In thousands, except per share amounts)
 
2015
 
2014
 
2015
 
2014
Net income attributable to continuing operations
 
$
23,722

 
$
22,132

 
$
33,038

 
$
35,654

Preferred stock dividends
 
(10
)
 
(10
)
 
(20
)
 
(20
)
Income from continuing operations available to common equity
 
23,712

 
22,122

 
33,018

 
35,634

Dividends and undistributed earnings allocated to participating securities
 
(68
)
 
(137
)
 
(96
)
 
(227
)
Income from continuing operations available to common shareholders
 
23,644

 
21,985

 
32,922

 
35,407

 
 
 
 
 
 
 
 
 
Net income attributable to discontinued operations
 
$
576

 
$
356

 
$
942

 
$
860

Preferred stock dividends
 

 

 

 

Income from discontinued operations available to common equity
 
576

 
356

 
942

 
860

Dividends and undistributed earnings allocated to participating securities
 
(2
)
 
(2
)
 
(3
)
 
(6
)
Income from discontinued operations available to common shareholders
 
574

 
354

 
939

 
854

 
 
 
 


 
 
 
 
Basic weighted-average shares outstanding
 
37,351

 
37,128

 
37,323

 
37,072

Stock options and other stock compensation
 
475

 
591

 
484

 
597

Diluted weighted-average shares outstanding
 
37,826

 
37,719

 
37,807

 
37,669

Antidilutive stock options
 
492

 

 
492

 

 
 
 
 
 
 
 
 
 
Earnings per share attributable to continuing operations:
 
 
 
 
 
 
 
 
Basic
 
$0.63
 
$0.59
 
$0.88
 
$0.96
Diluted
 
$0.62
 
$0.58
 
$0.87
 
$0.94
 
 


 


 
 
 
 
Earnings per share attributable to discontinued operations:
 
 
 
 
 
 
 
 
Basic
 
$0.02
 
$0.01
 
$0.03
 
$0.02
Diluted
 
$0.01
 
$0.01
 
$0.03
 
$0.02

-12-



Note 10—Income Taxes
The Company's effective tax rate for the second quarter of 2015 and 2014 was 34.6% and 30.7%, respectively. The 34.6% tax rate from the second quarter of 2015 differs from the U.S. federal statutory rate of 35% primarily due to income sourced from lower tax jurisdictions. The 30.7% tax rate from the second quarter of 2014 differs from the U.S. federal statutory rate of 35% primarily due to tax benefits of earning income in lower tax foreign jurisdictions.
The effective tax rate for the six month period of 2015 was 46.0%. Excluding $7.6 million of charges for the first quarter of 2015 associated with exit taxes related to our European reorganization, the effective tax rate for the six month periods of 2015 and 2014 was 33.4% and 32.9%, respectively. The 33.4% rate for the six month period of 2015 differs from the U.S. federal statutory rate of 35% primarily due to income sourced from lower tax jurisdictions. The 32.9% rate for the six month period of 2014 differs from the U.S. federal statutory rate of 35% primarily due to tax benefits of earning income in lower tax foreign jurisdictions.
At June 30, 2015, the Company had a gross liability for unrecognized tax benefit of $14.8 million. The Company has recognized tax benefits associated with these liabilities of $5.2 million at June 30, 2015. The gross liability includes a new amount from the first quarter associated with a foreign tax exposure.
The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company's liability for accrued interest and penalties related to uncertain tax positions was $1.1 million at June 30, 2015.
Note 11—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. We issue treasury shares for stock option exercises, restricted stock grants, and performance stock unit grants. Please refer to Note 7 for further information regarding stock compensation share issuance.
Stock compensation expense is as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
 
2015
 
2014
 
2015
 
2014
Stock compensation expense
 
$
1,806

 
$
1,645

 
$
6,787

 
$
6,810

Income tax benefit
 
684

 
603

 
2,596

 
2,490

Stock compensation expense, net of income tax benefit
 
$
1,122

 
$
1,042

 
$
4,191

 
$
4,320

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 option expense is based on the fair value of stock option grants estimated on the grant dates using the Black-Scholes option pricing model and the following weighted average assumptions for options granted in 2015.
 
2015
Fair value per option
$
15.63

Risk-free interest rate
1.77
%
Expected dividend yield
2.32
%
Expected volatility
38.94
%
Expected life (years)
6.71

The risk-free interest rate is based on the U.S. Treasury Constant Maturity rates as of the grant date converted into an implied spot rate yield curve. Expected dividend yield is based on the most recent annualized dividend divided by the 1 year average closing share price. Expected volatility is based on the historical volatility using daily stock prices. Expected life is based on historical stock option exercise data.

-13-



A summary of stock option activity for the six months ended June 30, 2015 follows:
 
 
Shares
 
Weighted Average
Exercise Price
Outstanding at January 1, 2015
 
1,618,561

 
$
35.74

Granted
 
170,683

 
48.64

Exercised
 
(31,022
)
 
38.49

Forfeited
 
(3,222
)
 
49.67

Expired
 
(1,109
)
 
44.36

Outstanding at June 30, 2015
 
1,753,891

 
36.91

Exercisable at June 30, 2015
 
1,300,908

 
$
32.48

Restricted stock is valued at the market value of the stock on the grant date. A summary of restricted stock activity for the six months ended June 30, 2015 follows:
 
 
Shares
 
Weighted Average
Grant Date Fair Value
Unvested at January 1, 2015
 
268,743

 
$
45.34

Granted
 
77,977

 
47.94

Vested
 
(102,380
)
 
37.85

Forfeited
 
(2,832
)
 
48.44

Unvested at June 30, 2015
 
241,508

 
$
49.31

Performance stock units have a market condition and are valued on the grant date based using a Monte Carlo simulation valuation model to determine fair value. 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 the specified performance targets over the performance period. The following weighted average assumptions were used in the Monte Carlo model for units granted in 2015.
 
2015
Fair value per unit
$
40.06

Risk-free interest rate
0.93
%
Expected dividend yield
2.32
%
Expected volatility
27.00
%
MSA stock beta
1.132

The risk-free interest rate is based on the U.S. Treasury Constant Maturity rates as of the grant date converted into an implied spot rate yield curve. Expected dividend yield is based on the most recent annualized dividend divided by the 1 year average closing share price. Expected volatility is based on the historical volatility using daily stock prices. Stock beta is calculated with three years of daily price data.
A summary of performance stock unit activity for the six months ended June 30, 2015 follows:
 
 
Shares
 
Weighted Average
Grant Date Fair Value
Unvested at January 1, 2015
 
143,961

 
$
52.42

Granted
 
54,856

 
40.06

Performance adjustments
 
16,447

 
41.45

Vested
 
(63,164
)
 
41.66

Forfeited
 
(1,088
)
 
52.15

Unvested at June 30, 2015
 
151,012

 
$
51.24

The performance adjustments above relate to the final number of shares issued for the 2012 Management Performance Units, which were 133.6% of the target award based on Total Shareholder Return during the three year performance period, and vested in the first quarter of 2015.

-14-



Note 12—Long-Term Debt
(In thousands)
June 30, 2015
 
December 31, 2014
2006 Senior Notes payable through 2021, 5.41%
$
46,667

 
$
46,667

2010 Senior Notes payable through 2021, 4.00%
100,000

 
100,000

Senior revolving credit facility maturing in 2019
123,000

 
105,000

Total
269,667

 
251,667

Amounts due within one year
6,667

 
6,667

Long-term debt
$
263,000

 
$
245,000

At June 30, 2015, $173.7 million of the $300.0 million senior revolving credit facility was unused including letters of credit.
The revolving credit facility and note purchase agreements require the Company to comply with specified financial covenants. In addition, the credit facility and the note purchase agreements contain negative covenants limiting the ability of the Company and its subsidiaries to enter into specified transactions. The Company was in compliance with all covenants at June 30, 2015.
The Company had outstanding bank guarantees and standby letters of credit with banks as of June 30, 2015 totaling $6.4 million, of which $3.3 million relate to the senior revolving credit facility. The letters of credit serve to cover customer requirements in connection with certain sales orders and insurance companies. No amounts were drawn on these arrangements at June 30, 2015. The Company is also required to provide cash collateral in connection with certain arrangements. At June 30, 2015, the Company has $2.4 million of restricted cash in support of these arrangements.
Note 13—Goodwill and Intangible Assets
Changes in goodwill during the six months ended June 30, 2015 are as follows:
(In thousands)
Goodwill
Balance at January 1
$
252,520

Currency translation
(4,104
)
Balance at June 30
$
248,416

At June 30, 2015, goodwill of $196.5 million, $49.9 million, and $2.0 million related to the North American, European, and International reportable segments, respectively.
Changes in intangible assets, net of accumulated amortization during the six months ended June 30, 2015 are as follows:
(In thousands)
Intangible Assets
Net balance at January 1
$
31,323

Amortization expense
(1,422
)
Impairment Loss
(723
)
Currency translation
(704
)
Net balance at June 30
$
28,474

In June 2015, we decided to wind down the sales efforts associated with certain non-core products. A discounted cash flow valuation showed that the book value of intangible assets used to support these non-core product sales exceeded their fair value by $0.7 million. This impairment loss is reported in other income in the condensed consolidated statement of income and included in North America in segment information. The impact of this decision is not expected to be significant to future consolidated financial results.

-15-



Note 14—Pensions and Other Postretirement Benefits
Components of net periodic benefit cost consisted of the following:
 
 
Pension Benefits
 
Other Benefits
(In thousands)
 
2015
 
2014
 
2015
 
2014
Three Months Ended June 30,
 
 
 
 
 
 
 
 
Service cost
 
$
2,904

 
$
2,481

 
$
111

 
$
156

Interest cost
 
4,593

 
4,891

 
216

 
299

Expected return on plan assets
 
(8,537
)
 
(8,251
)
 

 

Amortization of prior service cost
 
17

 
21

 
(84
)
 
(84
)
Recognized net actuarial losses
 
4,083

 
2,203

 
7

 
83

Settlements
 
33

 
57

 

 

Net periodic benefit cost
 
$
3,093

 
$
1,402

 
$
250

 
$
454

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
 
Service cost
 
$
5,808

 
$
4,962

 
$
222

 
$
312

Interest cost
 
9,186

 
9,782

 
432

 
598

Expected return on plan assets
 
(17,074
)
 
(16,502
)
 

 

Amortization of prior service cost
 
34

 
42

 
(168
)
 
(168
)
Recognized net actuarial losses
 
8,012

 
4,406

 
14

 
166

Settlements
 
66

 
114

 

 

Net periodic benefit cost
 
$
6,032

 
$
2,804

 
$
500

 
$
908

We made contributions of $2.0 million to our pension plans during the six months ended June 30, 2015. We expect to make total contributions of approximately $4.1 million to our pension plans in 2015.
Note 15—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 U.S. 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 in the condensed consolidated statement of income. The notional amount of open forward contracts was $68.7 million and $60.9 million at June 30, 2015 and December 31, 2014, respectively.
The following table presents the balance sheet location and fair value of assets associated with derivative financial instruments:
(In thousands)
 
June 30, 2015
 
December 31, 2014
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign exchange contracts: other current liabilities
 
$
390

 
$
429

Foreign exchange contracts: other current assets
 
636

 
34

The following table presents the statement of income location and impact of derivative financial instruments:
 
 
 
 
Loss
Recognized in Income
 
 
 
 
Six Months Ended June 30,
(In thousands)
 
Statement of Income
Location
 
2015
 
2014
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign exchange contracts
 
Currency exchange losses, net
 
$
1,100

 
$
1,203


-16-



Note 16—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 15. 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.
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. The reported carrying amount of our fixed rate long-term debt (including the current portion) was $146.7 million and $153.3 million at June 30, 2015 and 2014, respectively. The fair value of this debt was $153.3 million and $162.7 million at June 30, 2015 and 2014, respectively. The fair value of our long-term debt was determined using cash flow valuation models to estimate the market value of similar instruments as of the respective balance sheet dates. The fair value of this debt was determined using Level 3 inputs as described above.
Note 17—Contingencies
MSA LLC, a subsidiary of MSA Safety Incorporated (formerly Mine Safety Appliances Company), categorizes the product liability losses that its various subsidiaries 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 which provide an objective basis for quantifying damages. MSA LLC estimates its liability for single incident product liability claims based on expected settlement costs for pending claims and an estimate of costs for unreported claims. The estimate for unreported claims is based on experience, sales volumes and other relevant information. The reserve for single incident product liability claims was $3.4 million at June 30, 2015 and $3.5 million at December 31, 2014. Single incident product liability expense during the six months ended June 30, 2015 and 2014 was $0.7 million and $0.6 million, respectively. Single incident product liability exposures are evaluated on an ongoing basis and adjustments are made to the reserve as appropriate.
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. MSA LLC is presently named as a defendant in 2,047 lawsuits, some of which involve multiple plaintiffs. In these lawsuits, 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 MSA LLC or its predecessors.
A summary of cumulative trauma product liability lawsuit activity follows:
 
 
Six Months Ended June 30, 2015
 
Year Ended December 31, 2014
Open lawsuits, beginning of period
 
2,326

 
2,840

New lawsuits
 
167

 
542

Settled and dismissed lawsuits
 
(446
)
 
(1,056
)
Open lawsuits, end of period
 
2,047

 
2,326

More than half of the open lawsuits at June 30, 2015 have had a de minimis level of activity over the last 5 years. It is possible that these cases could become active again at any point due to changes in circumstances.

-17-



Cumulative trauma product liability litigation has been difficult to predict. In our experience, until late in a lawsuit, we cannot reasonably determine whether it is probable that any of MSA LLC's cumulative trauma lawsuits 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. 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 often 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. Consequently, MSA LLC has historically been unable to estimate its cumulative trauma product liability exposure.
As part of the company's ongoing assessment of the ability to estimate MSA LLC's cumulative trauma product liability exposure for both pending and unasserted claims, in the 2014 third quarter, MSA LLC engaged an outside valuation consultant to assist with this effort. This assessment was based on MSA LLC’s cumulative claims experience, including recent claims trends, and the development of enhanced claims data analytics. The analysis focused on claims made or resolved over the last several years as these claims are likely to best represent future claim characteristics.
After extensive review by the valuation consultant, MSA LLC, and its outside counsel, it was determined that MSA LLC cannot estimate its liability for cumulative trauma product liability claims. This is a result of numerous factors, including annual claims levels and indemnity payments that are highly variable and a lack of consistency in the source of the claims. MSA LLC will continue to regularly evaluate its ability to estimate its cumulative trauma product liability exposure.
During the 2014 fourth quarter and into January 2015, MSA LLC settled a number of cumulative trauma cases for $71.8 million, the vast majority of which were insured. The impact of these settlements was reflected in MSA Safety Incorporated’s 2014 consolidated financial statements and in the above year-end roll-forward of lawsuits. As a result of these settlements, at June 30, 2015, the cumulative trauma product liability reserve totaled $72.3 million, most of which will be paid equally over four quarters, beginning in the 2015 third quarter and ending in the 2016 second quarter. All of this amount, was recorded in the insurance and product liability line in the other current liabilities section of the condensed consolidated balance sheet. The cumulative trauma product liability reserve totaled $74.9 million at December 31, 2014, comprising of $35.1 million in other non-current liabilities and the remainder recorded in the insurance and product liability line in the current liabilities section of the consolidated balance sheet. Because litigation is subject to inherent uncertainties, and unfavorable rulings or developments could occur, there can be no certainty that MSA LLC may not ultimately incur charges in excess of presently recorded liabilities. Our aggregate cumulative trauma product liability losses and administrative and defense costs for the three years ended December 31, 2014, totaled approximately $169.6 million, substantially all of which was insured.
Insurance Receivable
With some common contract exclusions, we maintain insurance for cumulative trauma product liability claims. We have purchased insurance policies for the policy years from 1952-1986 from over 20 different insurance carriers that provide coverage for cumulative trauma product liability losses, and in many instances, related defense costs (the "Occurrence-Based Policies"). The available limits of these policies well exceed the recorded insurance receivable balance.
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. Since December 31, 2013, the insurance receivable has increased by $94.2 million as a result of the above noted settlements and related defense costs.
Various factors could affect the timing and amount of recovery of the insurance receivable, 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.
Insurance receivables at June 30, 2015 totaled $219.0 million, of which $2.0 million is reported in other current assets and $217.0 million in other non-current assets. Insurance receivables at December 31, 2014 totaled $220.5 million, of which $2.0 million is reported in other current assets and $218.5 million in other non-current assets.

-18-



A summary of insurance receivable balances and activity related to cumulative trauma product liability losses follows:
(In millions)
 
Six Months Ended June 30, 2015
 
Year Ended December 31, 2014
Balance beginning of period
 
$
220.5

 
$
124.8

Additions
 
3.5

 
98.2

Collections and settlements
 
(5.0
)
 
(2.5
)
Balance end of period
 
$
219.0

 
$
220.5

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 during the three months ended June 30, 2015, and 2014 were $0.3 million, $2.2 million, respectively. Collections primarily represent agreements with insurance companies to pay amounts due that are applicable to cumulative trauma claims. In cases where the payment stream covers multiple years, the present value of the payments is recorded as a note receivable (current and long-term) in the consolidated balance sheet within prepaid expenses and other current assets and other noncurrent assets.
MSA LLC believes that the increase in its insurance receivable balance that it has experienced since 2005 is primarily due to disagreements among its insurance carriers, and consequently with MSA LLC, as to when the individual obligations of insurance carriers to pay are triggered and the amount of each insurer’s obligation, as compared to other insurers. MSA LLC believes that its insurers do not contest that they have issued policies to our subsidiaries or that these policies cover cumulative trauma product liability claims. We believe that successful resolution of insurance litigation with various insurance carriers in recent years demonstrates that we have strong legal positions concerning MSA LLC's rights to coverage.
The collectability of MSA LLC's insurance receivables is regularly evaluated and the amounts recorded are probable of collection. These conclusions are based on analysis of the terms of the underlying insurance policies, experience in successfully recovering cumulative trauma product liability claims from our insurers under other policies, the financial ability of the insurance carriers to pay the claims, understanding and interpretation of the relevant facts and applicable law and the advice of MSA LLC's legal counsel, who believe that the insurers are required to provide coverage based on the terms of the policies.
Although it is impossible to predict the ultimate outcome of current open claims, based on current information, our experience in handling these matters, and our substantial insurance program, we do not believe that the resolution of these claims will have a material adverse effect on our future consolidated financial condition or liquidity.
Insurance Litigation
MSA LLC is currently involved in insurance coverage litigation with a number of our insurance carriers regarding its Occurrence-Based Policies.
In 2009, MSA LLC (as Mine Safety Appliances Company) 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 MSA LLC and that it engaged in bad-faith claims handling. MSA LLC believes that North River’s refusal to indemnify it under the policy for product liability losses and legal fees paid by MSA LLC is wholly contrary to Pennsylvania law and MSA LLC is vigorously pursuing the legal actions necessary to collect all due amounts. Motions for summary judgment on certain issues will be submitted to the court at the earliest possible date. A trial date has not yet been scheduled.
In 2010, North River sued MSA LLC (as Mine Safety Appliances Company) in the Court of Common Pleas of Allegheny County, Pennsylvania seeking a declaratory judgment concerning their responsibilities under three additional policies. MSA LLC asserted claims against North River for breaches of contract for failures to pay amounts owed to MSA LLC. MSA LLC also alleges that North River engaged in bad-faith claims handling. MSA LLC believes that North River’s refusal to indemnify us under these policies for product liability losses and legal fees paid by MSA LLC is wholly contrary to Pennsylvania law and MSA LLC is vigorously pursuing the legal actions necessary to collect all due amounts. Summary judgment on certain issues is pending with the court. A trial date has not yet been scheduled.
In July 2010, MSA LLC (as Mine Safety Appliances Company) filed a lawsuit in the Superior Court of the State of Delaware seeking declaratory and other relief from the majority of its excess insurance carriers concerning the future rights and obligations of MSA LLC and its excess insurance carriers under various insurance policies. The reason for this insurance coverage action is to secure a comprehensive resolution of its rights under the insurance policies issued by the insurers. Motions for summary judgment on certain issues will be submitted to the court at various times in 2015. A trial date is currently scheduled for the second quarter of 2016.

-19-



MSA LLC has resolved claims against certain of its insurance carriers on some of their policies, including the Occurrence-Based Policies through negotiated settlements. When a settlement is reached, MSA LLC dismisses the settling carrier from relevant above noted lawsuit(s). Assuming satisfactory resolution, once disputes are resolved with each of the remaining carriers responsible for the Occurrence-Based Policies, MSA LLC anticipates having commitments to provide future payment streams which should be sufficient to satisfy its recorded receivables due from insurance carriers. In addition, MSA LLC likely will retain some coverage through coverage-in-place agreements, although that coverage may not be immediately accessible. When these insurance coverage matters are fully resolved, MSA LLC (and its coverage-in-place carriers, where applicable) will be responsible for expenses related to cumulative trauma product liability claims.
Note 18—Discontinued Operations
The Company is actively negotiating the sale of substantially all of the assets and liabilities of its South African personal protective equipment distribution business and its Zambian operations. Management continues to conclude it is probable that the sale of these assets and liabilities will close in 2015. The operations of this business qualify as a component of an entity under FASB ASC 205-20 "Presentation of Financial Statements - Discontinued Operations", and thus the operations have been reclassified as discontinued operations and prior periods have been reclassified to conform to this presentation.
Summarized financial information for discontinued operations is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2015
 
2014
 
2015
 
2014
Discontinued Operations
 
 
 
 
 
 
 
Net sales
$
11,384

 
$
10,589

 
$
22,541

 
$
20,649

Other income, net
107

 
15

 
173

 
28

Cost and expenses:
 
 
 
 
 
 
 
Cost of products sold
9,058

 
8,455

 
18,048

 
16,151

Selling, general and administrative
1,682

 
1,605

 
3,284

 
3,159

Currency exchange losses (gains), net
38

 
(62
)
 
208

 
(69
)
Income from discontinued operations before income taxes
713

 
606

 
1,174

 
1,436

Provision for income taxes
243

 
153

 
396

 
369

Income from discontinued operations, net of tax
$
470

 
$
453

 
$
778

 
$
1,067

Certain balance sheet items that are related to the Company's South African personal protective equipment distribution business and its Zambian operations are reported as discontinued operations. These items are reported in the following consolidated balance sheet lines:
(In thousands)
June 30, 2015
 
December 31, 2014
Discontinued Operations assets and liabilities
 
 
 
Trade receivables, less allowance for doubtful accounts
$
6,949

 
$
6,638

Inventories
11,643

 
11,829

Net property
288

 
342

Other assets
1,896

 
2,022

Total assets
20,776

 
20,831

Accounts payable
4,053

 
5,263

Accrued and other liabilities
1,059

 
991

Total liabilities
5,112

 
6,254

Net assets
$
15,664

 
$
14,577


-20-



The following summary provides financial information for discontinued operations related to net loss related to noncontrolling interests:
 
Three Months Ended  June 30,
 
Six Months Ended June 30,
(In thousands)
2015
 
2014
 
2015
 
2014
Net loss (income) attributable to noncontrolling interests
 
 
 
 
 
 
 
Loss from continuing operations
$
347

 
$
90

 
$
521

 
$
309

Loss (income) from discontinued operations
106

 
(97
)
 
164

 
(207
)
Net loss (income)
$
453

 
$
(7
)
 
$
685

 
$
102


-21-



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, including those discussed in the sections of our annual report entitled “Forward-Looking Statements” and “Risk Factors.”
Certain centrally managed expenses were historically allocated and reported in the North America, Europe and International Segments as well as in the reconciling items column contained in our segment disclosure. Effective January 1, 2015, interest expense, foreign exchange (gain) loss and an allocation of SG&A expenses are now contained in the Corporate segment. Additionally, effective January 1, 2015, we changed the allocation methodology applied to Research and Development expense. The 2014 results presented below have been recast to reflect the above noted changes. Please refer to Note 8 Segment Information, for further information.
MSA's South African personal protective equipment distribution business and MSA's Zambian operations had historically been part of the International reportable segment. The results of these operations are excluded from continuing operations and are presented as discontinued operations in all periods presented. Please refer to Note 18 Discontinued Operations, for further commentary on these discontinued operations.
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. To best serve these customer preferences, we have organized our business into nine geographical operating segments that are aggregated into three reportable geographic segments: North America, Europe and International. Each reporting segment includes a number of operating segments. In 2014, 48%, 28% and 24% 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 countries along with locations in the Middle East and Russia. In our largest countries, Germany and France, we develop, manufacture and sell a wide variety of products. The technology associated with the development of our products in these countries is owned by our European Principal Operating company which is located in Rapperswil-Jona, Switzerland. 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., Ireland, Sweden 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 Brazil and China. 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.

-22-



PRINCIPAL PRODUCTS
The following is a brief description of each of our principal product categories:
Core products. MSA's corporate strategy includes a focus on driving sales of core products, which typically realize a higher gross profit margin than non-core products. Core products include fixed gas and flame detection systems, breathing apparatus where SCBA is the principal product, portable gas detection instruments, head protection products and fall protection devices. These products receive the highest levels of investment and resources and provide higher levels of return on investment in alignment with our commitment to grow core product sales in both emerging and developed markets. Effective January 1, 2015, fire and rescue helmets are included as a core head protection product.
Non-core products. MSA maintains a portfolio of non-core products which includes both adjacent and peripheral offerings. Adjacent products reinforce and extend the core, drawing upon our customer relationships, distribution channels, geographical presence and technical experience. These products are complementary to the core offerings and have their roots within the core product value chain. Key adjacent products include respirators, eye and face protection, thermal imaging cameras, ballistic helmets, and gas masks. Gas masks and ballistic helmet sales represent the primary purchases of our military customers and were approximately $30.0 million globally in the first six months of 2015. Peripheral products are primarily sold to the mining industry and reflect a small portion of consolidated sales.
A detailed listing of our significant product offerings in the aforementioned product groups above is included in the MSA's Annual Report on Form 10-K for the year ended December 31, 2014.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014
Net sales. Net sales for the three months ended June 30, 2015 were $287.0 million, an increase of $4.5 million, or 2%, compared with $282.5 million for the three months ended June 30, 2014. The unfavorable translation effects of weakened foreign currencies decreased sales, when stated in U.S. dollars, by 9%. Excluding the effects of weakening currencies, sales increased 11%.
Net Sales
Three Months Ended  June 30,
 
Dollar
Increase
(Decrease)
 
Percent
Increase
(Decrease)
(In millions)
2015
 
2014
 
North America
$
156.2

 
$
138.8

 
$
17.4

 
13
 %
Europe
75.3

 
78.9

 
(3.6
)
 
(5
)%
International
55.5

 
64.8

 
(9.3
)
 
(14
)%
Total
287.0

 
282.5

 
4.5

 
2
 %
Net sales for the North American segment were $156.2 million in the second quarter of 2015, an increase of $17.4 million, or 13%, compared to $138.8 million in the second quarter of 2014. During the quarter, breathing apparatus shipments increased 90% over the prior year period on continued strong demand for the G1 self-contained breathing apparatus ("SCBA"). A higher level of fixed gas and flame detection ("FGFD") sales in Mexico also drove results in the segment, up 6% on a local currency basis. These increases were partially offset by weaker demand in energy-related markets, resulting in a decline in shipments of portable instruments and industrial head protection, down 18% and 8%, respectively.
Net sales for the European segment were $75.3 million for the second quarter of 2015, a decrease of $3.6 million, or 5%, compared to $78.9 million for the second quarter of 2014. Local currency sales in Europe increased 16% over prior year sales in the same period, driven by increased shipments of ballistic helmets in France, up 97% in the segment, as well as strength from large FGFD project orders and increased shipments of portable instruments in the Middle East, up 21% and 12% in the segment, respectively. Currency translation effects decreased European segment sales, when stated in U.S. dollars, by 21%.
Net sales for the International segment were $55.5 million in the second quarter of 2015, a decrease of $9.3 million, or 14%, compared to $64.8 million for the second quarter of 2014. Local currency sales in the International segment decreased 3% for the quarter on a lower level of industrial head protection, fall protection, and breathing apparatus shipments, down 16%, 13%, and 8%, respectively. These decreases were notably driven by challenging economic conditions in Brazil and were partially offset by a higher level of fire helmet shipments in Asia and Australia and portable instrument shipments across Latin America, up 146% and 17% in the segment, respectively. Local currency international sales excluding Brazil increased 3% over the prior year quarter. Currency translation effects decreased International segment sales by 11% across several geographies when stated in U.S. dollars, most notably related to the weakening Brazilian real and Australian dollar.

-23-



Gross profit. Gross profit for the second quarter of 2015 was $130.5 million, an increase of $0.8 million, or 1%, compared to $129.7 million for the second quarter of 2014. The ratio of gross profit to net sales was 45.5% in the second quarter of 2015 compared to 45.9% in the same quarter last year. The lower gross profit ratio during the current quarter was driven by product mix.
Selling, general and administrative expenses. Selling, general and administrative expenses were $77.6 million during the second quarter of 2015, a decrease of $5.2 million, or 6%, compared to $82.8 million in the second quarter of 2014. Selling, general and administrative expenses were 27.0% of net sales in the second quarter of 2015, compared to 29.3% of net sales in the second quarter of 2014. Local currency selling, general, and administrative expense increased 2% on higher non-cash pension expense and higher selling costs. These increases were partially offset by lower spend on corporate initiatives. Currency translation effects decreased current quarter selling, general and administrative expenses, when stated in U.S. dollars, by 8%, primarily related to the weakening currencies in Europe, Latin America, and Australia.
Research and development expense. Research and development expense was $13.0 million during the second quarter of 2015, an increase of $1.1 million, or 9%, compared to $11.9 million during the second quarter of 2014. Research and development expense was 4.5% of net sales in the second quarter of 2015, compared to 4.2% of net sales in the second quarter of 2014. The Company continues to focus on developing new and innovative technologies for the G1 platform and other core areas, closely aligned with our strategic goals. Currency translation effects decreased current quarter research and development expense, when stated in U.S. dollars, by 9%.
Restructuring and other charges. During the three months ended June 30, 2015, the Company recorded restructuring charges of $0.2 million ($0.1 million after tax).
During the three months ended June 30, 2014, we recorded restructuring charges of $0.9 million ($0.6 million after tax). International segment charges of $0.9 million were related to severance costs for staff reductions associated with ongoing initiatives to reduce our footprint in South Africa and Australia.
Currency exchange. Currency exchange losses were $1.6 million in the second quarter of 2015, compared to gains of $0.3 million in the second quarter of 2014. Currency exchange gains and losses in the second quarter of 2015 were mostly unrealized and related primarily to the effect of weakening currencies on unsettled inter-company balances. Refer to Note 15 to the Condensed Consolidated Financial Statements in Part I Item I of this Form 10-Q, for information regarding our currency exchange rate risk management strategy.
Income taxes. The reported effective tax rate for the second quarter of 2015 was 34.6% and 30.7% for the same quarter last year. The effective tax rate increase was due to non-deductible losses in certain jurisdictions.
Net income attributable to MSA Safety Incorporated. Net income from continuing operations was $23.7 million for the second quarter of 2015, or $0.63 per basic share, an increase of $1.6 million, or 7%, compared to $22.1 million, or $0.59 per basic share, for the same quarter last year.
North American segment net income for the second quarter of 2015 was $22.3 million, an increase of $2.9 million, or 15%, compared to $19.4 million in the second quarter of 2014. Higher sales and controlled operating expenses contributed to the increase over the prior year period.
European segment net income for the second quarter of 2015 was $6.6 million, a decrease of $0.2 million, or 3%, compared to net income of $6.8 million during the second quarter of 2014. Higher sales drove local currency net income 24% above the second quarter of 2014. Currency translation effects decreased current quarter European segment net income, when stated in U.S. dollars, by 27%.
International segment net income for the second quarter of 2015 was $3.0 million, a decrease of $0.2 million, or 6%, compared to $3.2 million in the prior year quarter. Local currency net income in the International segment increased 4% in the current quarter, reflecting one-time asset disposal gains in Australia as the Company continues to right-size operations and optimize its global footprint. Currency translation effects decreased current quarter International segment net income, when stated in U.S. dollars, by 10%, primarily reflecting a weakening in the Brazilian real and Australian dollar.
Corporate segment net loss for the second quarter of 2015 was $7.7 million compared to a net loss of $7.5 million in the second quarter of 2014. The higher loss was driven by unfavorable foreign exchange losses on intercompany balances, partially offset by lower corporate legal expense and lower spend on corporate initiatives.

-24-



Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014
Net sales. Net sales for the six months ended June 30, 2015 were $543.7 million, a decrease of $3.8 million, or 1%, compared with $547.5 million for the six months ended June 30, 2014. The unfavorable translation effects of weakened foreign currencies decreased sales, when stated in U.S. dollars, by 8%. Excluding the effects of weakening currencies, sales increased 7%.
Net Sales
Six Months Ended  June 30,
 
Dollar
Increase
(Decrease)
 
Percent
Increase
(Decrease)
(In millions)
2015
 
2014
 
North America
$
289.8

 
$
268.3

 
$
21.5

 
8
 %
Europe
141.3

 
153.8

 
(12.5
)
 
(8
)%
International
112.6

 
125.4

 
(12.8
)
 
(10
)%
Total
543.7

 
547.5

 
(3.8
)
 
(1
)%
Net sales for the North American segment were $289.8 million for the six months ended June 30, 2015, an increase of $21.5 million, or 8%, compared to $268.3 million for the same period in 2014. Increased shipments of SCBA and FGFD drove growth in the segment over the prior year period, up 77% and 8%, respectively. These increases were partially offset by a decline in shipments of portable instruments and industrial head protection, down 18% and 8%, respectively.
Net sales for the European segment were $141.3 million for the six months ended June 30, 2015, a decrease of $12.5 million, or 8%, compared to $153.8 million for the same period in 2014. Local currency sales in Europe increased 10% over prior year sales in the same period, driven by increased shipments of ballistic helmets, portable instruments, and FGFD, up 77%, 19%, and 4%, respectively. Currency translation effects decreased European segment sales, when stated in U.S. dollars, by 18%.
Net sales for the International segment were $112.6 million for the six months ended June 30, 2015, a decrease of $12.8 million, or 10%, compared to $125.4 million for the same period in 2014. Local currency sales in the International segment were flat compared to the same period in 2014. Increased shipments of fire and rescue helmets, FGFD, and portable instruments, up 93%, 23%, and 15%, respectively, were offset by a lower level of industrial head protection in Brazil, down 14%, decreased deliveries of breathing apparatus in Asia, down 9%, and smaller decreases across non-core products. Currency translation effects decreased International segment sales by 10% across several geographies when stated in U.S. dollars, most notably related to the weakening Brazilian real and Australian dollar.
Gross profit. Gross profit for the six months ended June 30, 2015 was $247.3 million, a decrease of $4.2 million, or 2%, compared to $251.5 million for the same period in 2014. The ratio of gross profit to net sales was 45.5% for the six months ended June 30, 2015 compared to 45.9% in