Safety Concerns May Prevent FDA Approval Of Ligand's Drug Aprela

By October 3, 2013, the U.S. Food and Drug Administration (FDA) will decide whether to approve Ligand Pharmaceutical's (LGND) drug Aprela for the treatment of menopausal symptoms and the prevention of postmenopausal osteoporosis in non-hysterectomized women. This drug is being developed by Ligand in partnership with Pfizer (PFE). After reviewing Aprela's clinical trial results and relevant scientific literature, we believe Aprela will fail to receive FDA approval and, consequently, Ligand's stock will underperform in the near term.

Background

Ligand Pharmaceutical is a small biotechnology company with a focus on acquiring and developing drugs that will generate royalty revenue. Aprela, its current lead product, has been developed for the treatment of menopause.

Menopause is the cessation of menstruation. It is a biological process that occurs naturally among women but can also arise from surgical interventions that affect ovary function. The main menopausal symptoms include hot flashes, night sweats, sleep disturbances, vaginal dryness, and vulvar and vaginal atrophy. Hot flashes are the most common type of symptom associated with menopause. In addition, menopause is also a major risk factor for osteoporosis.

Hormone therapy (HT) is the only FDA-approved treatment for menopause. However, the FDA recently approved a non-hormonal therapy named Brisdelle for menopausal hot flashes. HT was considered the gold standard among treatment options until 2002 when a study published by the Women's Health Initiative suggested that HT might increase the risk of breast cancer, venous thromboembolism, and stroke. As a result, the number of women taking HT precipitously dropped.

Aprela combines conjugated estrogens (CE) with bazedoxifene (BZA), a selective estrogen receptor modulator. Estrogens have established efficacy in relieving menopausal symptoms and postmenopausal osteoporosis, while BZA has demonstrated protective effects on the uterus and breast. BZA has been approved in Europe and Japan for the treatment of postmenopausal osteoporosis.

BZA/CE improves menopausal symptoms, but less effectively than standard HT

The efficacy and safety of BZA/CE have been evaluated in multicenter, randomized, double-blind, placebo- and active-controlled, phase III studies referred to as the SMART trials. In total, there are five SMART trials. SMART-1 evaluated the endometrial safety of six BZA/CE doses. Two doses (BZA at 20mg and CE at 0.45 or 0.625 mg) were selected for subsequent trials.

The efficacy of BZA/CE for vasomotor symptoms was evaluated in the SMART-2 trial in 332 symptomatic women. At week 12, treatment with BZA/CE at both doses significantly reduced the number of hot flashes by 74% (10.3 hot flashes at baseline vs. 2.8 at week 12) and 80% (10.4 vs. 2.4), respectively, versus 51% (10.5 vs. 5.4) with placebo. The mean daily hot flush severity was also significantly reduced for both BZA/CE doses compared with placebo at week 12. However, based on results from the Women's Hope study, HT reduced the number of hot flashes from baseline by over 90% and the improvement with mean daily hot flush severity was also greater compared with the two BZA/CE doses.

The efficacy of BZA/CE for vulvar/vaginal atrophy was evaluated using four measures in the SMART-3 trial in 664 postmenopausal women. BZA/CE was shown to be effective at treating these vaginal symptoms compared with placebo or BZA alone.

The efficacy of BZA/CE for osteoporosis prevention was evaluated using bone mineral density (BMD) measures in SMART-4 and SMART-5, and two sub-studies within the SMART-1 trial. In the SMART-1 trial, BZA/CE at both doses significantly increased lumbar spine and total hip BMD compared with placebo at 2 years. Similar phenomenon was observed in the SMART-4 and -5 trials. In SMART-4, however, the increases of BZA/CE on spine BMD (~0.80% increase from baseline) were significantly lower than those observed for HT (~2.22% increase from baseline). In SMART-5, the increases of BZA/CE on spine BMD were also lower than those observed for HT. Although both BZA/CE and HT could effectively increase BMD compared to placebo, HT consistently shows a better efficacy profile with regard to BMD.

BZA/CE trials could not determine long-term safety

The safety of BZA/CE was evaluated against HT or placebo in the SMART-1, -4 and -5 trials. SMART-1, -4, and -5 evaluated endometrial safety as indicated by the incidence of endometrial hyperplasia. Endometrial hyperplasia is excessive growth of cells lining the endometrium or uterus and poses a risk factor for the development of endometrial cancer. At year one, the incidence of endometrial hyperplasia with BZA/CE was similar to that in the placebo group in the SMART-1 and SMART-5 trials. At year one of SMART-4 trial, no cases of endometrial hyperplasia were identified in the BZA 20-mg/CE 0.45-mg group, the CE group, or the placebo group. However, three cases (1.1%) were confirmed for the BZA 20-mg/CE 0.625-mg group. One explanation for this is the difference in the administered BZA/CE formulations. The bioavailability of BZA in the formulation was 18% lower than the formulation used previously, resulting in insufficient level of BZA to maintain endometrial safety. Such formulation and stability issues could serve as a hurdle in the FDA approval process.

High breast density is a risk factor for developing breast cancer. In the SMART-1 trial, BZA/CE demonstrated non-inferiority versus placebo while HT showed a significant increase in mean percent breast density at one year, suggesting a potential advantage of BZA/CE over HT. There was a higher incidence of AEs leading to study discontinuation in the HT group due to metorrhagia, uterine hemorrhage, and vaginal hemorrhage.

For a one-year period, BZA/CE did seem to have a favorable safety/tolerability profile. The overall incidence of adverse events was similar among treatment groups. However, these studies could not properly evaluate longer-term safety effects of BZA/CE. Specifically, the studies did not evaluate AEs such as cancers that occur relatively infrequently. Notably, this cancer risk is a primary concern with HT. Thus, despite having compromised efficacy, BZA/CE may not have better long-term safety than standard HT.

The FDA has set a high safety bar for alternative therapy to treat menopause

Previously, the FDA delayed approval of BZA for the treatment of postmenopausal osteoporosis because of concerns about the incidence of stroke and blood clotting. In particular, the agency required additional analysis of the incidence of stroke and venous thrombotic events, raising doubt about the BZA/CE combination therapy quickly gaining approval.

Recently, the FDA approved the first non-hormonal therapy, Brisdelle, for the treatment of hot flashes. The approval was considered somewhat surprising given the poor efficacy of Brisdelle compared to HT. Overall, this suggests that the FDA prioritizes safety over efficacy in menopausal therapeutics, which further decreases the likelihood of Aprela being approved. In addition, Pfizer previously sought an extended label for its drug Pristiq to cover hot flashes, but received a complete response letter requesting additional studies on the safety of the drug. Generally, the FDA has set a high bar for safety of alternative menopausal therapy and, in our opinion, Aprela does not clear this bar.

A solid business model and extensive pipeline may overcome any short-term setbacks

In early August, many analysts downgraded Ligand's stock. This was likely due to a combination of a run-up in price and a halt in the development of two drug candidates being developed in partnership with The Medicines Company (MDCO) and Merck (MRK). This news came on the heels of the company's second quarter earnings report, which shows revenue up by 67% and royalty payments up by 63% over the previous quarter. The company has also doubled it shareholder's equity from one year ago and is currently generating a positive cash flow. With 85 drugs in its pipeline and the potential to double its royalty-generating assets over the next few years, Ligand can tolerate a few setbacks. Thus, we see Ligand stock as a promising long-term investment, but one to avoid through the beginning of October.

Summary

Ligand's Aprela improves menopausal symptoms and postmenopausal osteoporosis simultaneously, although its efficacy seems to be not as good as that for HT. Regarding safety, currently available data do not provide sufficient evidence that Aprela has a better long-term safety profile than HT. We believe that the FDA will likely continue applying stringent safety criteria to potential menopause drugs, leading us to conclude that Aprela is unlikely to obtain FDA approval. Nevertheless, the company's business model and extensive drug pipeline has gained considerable positive attention from investors, which we believe is well deserved.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Business relationship disclosure: Beacon VP Investments is a team of analysts. This article was written by Dr. Hyun Ji Noh and Sophie Wang, two of our team members. We are not receiving compensation for the article (other than from Seeking Alpha). We have no business relationship with any company whose stock is mentioned in this article.

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Newly discovered safety risks related to anti-epileptic drugs not passed to neurologists

Main Category: Epilepsy
Also Included In: Regulatory Affairs / Drug Approvals;  Neurology / Neuroscience
Article Date: 17 Aug 2013 - 0:00 PDT Current ratings for:
Newly discovered safety risks related to anti-epileptic drugs not passed to neurologists

A study by Johns Hopkins researchers shows that a fifth of U.S. neurologists appear unaware of serious drug safety risks associated with various anti-epilepsy drugs, potentially jeopardizing the health of patients who could be just as effectively treated with safer alternative medications.

The findings suggest that the U.S. Food and Drug Administration needs a better way to communicate information to specialists about newly discovered safety risks, the researchers say, since the warnings are in many cases not getting through to doctors making important prescribing decisions. And, the researchers add, while their new study, reported online in the journal Epilepsy and Behavior, was focused on neurologists and anti-epilepsy drugs, they believe their findings are applicable to a wide spectrum of medical specialists and medications.

"There is poor communication from the FDA to specialists, and there's some risk to patients because of this," says study leader Gregory L. Krauss, M.D., a professor of neurology at the Johns Hopkins University School of Medicine. "Unless it's a major change requiring the FDA to issue a black box warning on a product, important information appears to be slipping through the cracks. We need a more systematic and comprehensive method so that doctors receive updated safety warnings in a format that guarantees they will see and digest what they need to protect patients."

Krauss and his colleagues surveyed 505 neurologists from across the nation in different types of medical practices between March and July of 2012. They asked about several new safety risks for antiseizure drugs recently identified by the FDA: increased suicidal thoughts or behavior with newer agents; high risks for birth defects and cognitive impairment in offspring of mothers taking divalproex (sold by the brand name Depakote); and risks for serious hypersensitivity reactions in some patients of Asian descent starting treatment with carbamazepine (Tegretol). One in five of the neurologists surveyed said they knew of none of the risks. Those neurologists who treat two hundred epilepsy patients a year or more were most likely to know all of the risks.

Krauss says he was most struck by the lack of understanding of the risk to certain Asian patients who take carbamazepine to control their seizures. The FDA in 2007 recommended that before initiating the drug in patients of Asian heritage, neurologists should screen to see if those patients have a specific haplotype, a specific section of DNA found in a few percent of Asian people, before prescribing the drug.

The researchers found that 70 percent of the neurologists who responded knew of the recommendation. While 147 neurologists (29.1 percent) reported initiating carbamazepine treatment in Asian patients, only 33 of them (22.5 percent) said they performed haplotype screening. Eighteen neurologists reported that their Asian patients developed carbamazepine-related hypersensitivity reactions - severe skin rashes that can lead to scarring, blisters in the mouth and shredding of the skin - during this time period.

"If their doctors were more educated about the risks," Krauss says, "these patients may have avoided these severe hypersensitivity reactions."

Krauss says doctors may not do the screening because it is difficult to find laboratories able to perform the haplotyping, and he notes that it may make more sense to prescribe an alternate drug to Asian patients.

The researchers found that 80 percent of respondents knew that the FDA had newly warned that the risk of suicide with newer drugs is 4.3 per 1,000, double what had previously been believed. Seventy percent said they counseled patients about the risk.

As for pregnancy risks related to divalproex, fewer than half of the respondents knew that a warning had been issued noting high risks of birth defects and of developmental risks in offspring (an 8 to 9 point drop in IQ). While 93 percent of respondents reported counseling women planning pregnancies about the birth defect risks of divalproex, Krauss says safer drugs should be used if possible during pregnancy.

Krauss says part of the problem is the absence of a single place for neurologists to find updated risk information. Neurologists get safety information from scattered sources; only a few get emails from the FDA, while others get the information from neurology societies, from continuing medical education courses or from newly published journal articles.

"The FDA needs to do better getting the warnings to prescribing doctors," he says. "There has to be a direct way to communicate risks without overwhelming physicians with messages."

Article adapted by Medical News Today from original press release. Click 'references' tab above for source.
Visit our epilepsy section for the latest news on this subject.

New antiepileptic drug safety information is not transmitted systematically and accepted by U.S. neurologists, doi:10.1016/j.yebeh.2013.06.008

Other Johns Hopkins researchers who contributed to the study include Sarah G. Bell, B.A.; Martha Matsumoto, B.A.; and Jason C. Brandt, Ph.D.

Johns Hopkins Medicine

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Importers to audit food safety, says FDA

Editor's Choice
Main Category: Nutrition / Diet
Also Included In: Infectious Diseases / Bacteria / Viruses;  Regulatory Affairs / Drug Approvals
Article Date: 27 Jul 2013 - 0:00 PDT Current ratings for:
Importers to audit food safety, says FDA

The US Food and Drug Administration (FDA) has released two proposed rules to improve the safety of imported foods. According to the Centers for Disease Control and Prevention, foodborne illnesses in the USA are on the rise. The FDA says it aims to make sure imported foods are at least as safe as those grown in the USA.

According to the UPMC Center for Health Security, foodborne pathogens cause 40 million illnesses, 128,000 hospitalizations and 3,000 deaths annually in the USA. The economic toll of foodborne illnesses, including medical expenses and lost productivity is estimated to be at least $77 billion each year. These figures include illnesses from consuming both home grown and imported foods.

The FDA proposal is part of a drive to implement the bipartisan FSMA (Food Safety Modernization Act), signed by President Barack Obama.

The FSMA concentrates on ensuring the safety of foods and making sure food safety problems are prevented. Its objective is for the United States to have a preventive approach, rather than one that mainly relies on responding to problems after they occur.

The FDA is asking Americans "to review and comment on these important proposed rules."

The proposed food import rules will make it the importers' responsibility to check that their suppliers from abroad have implemented modern, prevention-oriented food safety practices, and "achieve the same level of food safety as domestic growers and processors."

Rules have also been proposed to give food safety audits of imported food more teeth, as well as making them more objective and transparent. Many food companies and importers today rely on these safety audits in their management of global food supply chains.

Over half of all the fresh fruits and 20% of fresh vegetables consumed in the USA come from abroad. Approximately 15% all food consumed in the country is imported.

FDA Commissioner Margaret A. Hamburg, M.D., said:

"We must work toward global solutions to food safety so that whether you serve your family food grown locally or imported you can be confident that it is safe. Today's announcement of these two new proposed rules will help to meet the challenges of our complex global food supply system. Our success will depend in large part on partnerships across nations, industries, and business sectors."

Most fruits in the USA are imported

Under the proposed rules for FSVP (Foreign Supplier Verification Programs), American importers would, for the first time, have a clearly defined responsibility to check and make sure that their food suppliers meet U.S. food safety requirements.

Food importers will need to have a plan for their imported produce, which must include hazards linked to food items "that are reasonably likely to occur. Importers would be required to conduct activities that provide adequate assurances that these identified hazards are being adequately controlled."

Michael R. Taylor, deputy commissioner for foods and veterinary medicine, said "FSMA provides the FDA with a modern tool kit that shifts the paradigm for imports, as well as domestic foods, from a strategy of reaction to one of systematic prevention. Rather than relying primarily on FDA investigators at the ports to detect and respond to food safety problems, importers would, for the first time, be held accountable for verifying, in a manner transparent to the FDA, that the food they import is safe."

The FDA has been directed by the FDA to establish a program for the Accreditation of Third-Party Auditors for imported food. The FDA proposes a rule that would give the Agency authority to recognize accreditation bodies based on certain criteria, including impartiality and competency. These accreditation bodies could be government agencies of other countries, as well as private companies. They would in turn accredit third-party auditors to inspect and issue certifications of food facilities abroad.

The FDA does not propose that importers be made to obtain certifications. Rather, certifications could be used by the Agency to decide whether imported foods that pose a safety risk to Americans may be admitted.

For the next 120 days members of the public are invited to comment on the two proposed rules listed below:

The FDA and the Centers for Disease Control and Prevention, as well as state and local officials are currently investigating outbreaks of Cyclospora infections in Iowa, Kansas, Nebraska, Illinois, Texas, Wisconsin, New Jersey, Arkansas, Connecticut, New York City, Florida, Georgia, Minnesota, and Missouri.

Cyclospora is a foodborne intestinal parasite common in tropical parts of Southeast Asia and Latin America.

Up to July 25th, 2013, over 321 cases of Cyclospora infections have been reported to the CDC. Neither agency yet knows whether all the outbreaks have the same source.

Written by Christian Nordqvist

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Mine Safety Appliances (MSA) CEO Discusses Q2 2013 Results - Earnings Call Transcript

Executives

Mark C. Deasy – Corporate Communications Director

William M. Lambert – President & CEO

Dennis L. Zeitler – SVP & CFO

Stacy McMahan – SVP of Finance

Joseph A. Bigler – VP & President, MSA North America

Ronald N. Herring, Jr. – President, MSA International (WEZ and MEZ Zones)

Kerry M. Bove – President, MSA International (APZ and ALZ Zones)

Analysts

Edward Marshall – Sidoti & Company

Richard Eastman – Robert W. Baird

Walt Liptak – Global Hunter Securities

Dick Ryan – Dougherty & Company

Mine Safety Appliances (MSA) Q2 2013 Earnings Conference Call July 24, 2013 10:00 AM ET

Operator

Welcome to the MSA Second Quarter Earnings Conference Call. My name is Allen, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Mark Deasy, Director of Corporate Communications, Mr. Deasy, you may begin.

Mark C. Deasy

Thank you Allen, and good morning everybody, I too want to welcome you to our second quarter earnings conference call for 2013. With me this morning are Bill Lambert, President and Chief Executive Officer; Dennis Zeitler, Senior Vice President and Chief Financial Officer; Stacy McMahan, our Senior Vice President of Finance and our three Geographic Segment Presidents, Joe Bigler, Ron Herring and Kerry Bove.

Our second quarter press release was issued this morning at 8:30 and it is available on the home page of MSA’s website at www.msasafety.com. This morning Bill will provide his commentary on our quarter. Dennis will then review our financials and then Bill will conclude his formal remarks with some closing comments. After that we will open up the call for your questions.

Before we begin, I want to remind everybody that the matters discussed on this call, excluding historical information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, including without limitation, all projections and anticipated levels of future performance, involve risks, uncertainties and other factors that may cause our actual results to differ materially from those discussed here. These risks, uncertainties, and other factors are detailed from time to time in our filings with the SEC, including our most recent Form 10-Q, which was filed on April 24 of this year.

You are strongly urged to review all such filings for a more detailed discussion of such risks. Our SEC filings can be easily obtained at no charge at www.sec.gov, our own website, and many other commercial websites. That concludes our forward-looking statements.

At this point, I will now turn the call over to Bill Lambert for his comments. Bill?

William M. Lambert

Thank you, Mark and good morning everyone. As always, I want to begin by saying thank you for joining us today on this conference call and for your continued interest in MSA.

Presumably, all of you have seen our second quarter press release and have our financial figures with all comparisons corresponding to the equivalent period in 2012. I’m going to start by running through some of the highlights of our second quarter earnings and talk about the progress we’re making on some of our strategic priorities.

I will also share some views on the current business environment and how it’s likely to affect us through the remainder of the year before I turn it over to Dennis to run through the actual results. Then we’ll open it up for your questions.

In the second quarter better than anticipated core revenue growth coupled with solid performance in developed markets and continued gains in emerging markets led to record financial performance for MSA. Throughout the first half of the quarter, we saw some very choppy conditions and a somewhat uneven order pace. But, by late May, things had settled down and we saw some strengthening to finish out the quarter.

As I look at where we are, and what we’ve accomplished against our strategic priorities so far this year, I am encouraged by our second quarter financial results. Our ongoing focus and efforts and the gaining share and driving demand of core products in both developed and emerging markets, developing innovative new products and controlling manufacturing and operating costs, all helped us recognize record second quarter continuing sales, operating income and pro-forma net income.

As you saw in our press release, our consolidated sales for the quarter were $300 million. On an as reported basis, sales were up $5 million from a year ago or 2%. However, the second quarter of 2012 included $5 million of ballistic helmet sales in our North American segment. For those of you who are regular participants on our calls, you know, we divested this non-core business in the second quarter of 2012. Additionally, weakening foreign currencies decreased as reported second quarter 2013 sales by $3 million. Excluding this currency effect and the divested business impact, our sales were up 4.5% when compared to the second quarter of 2012.

As we look at where we are in relation to our longer term priorities, we’re seeing tangible benefits of our long term growth strategy and the shift of our revenue mix towards our more profitable core product lines. Dennis will provide more details of our financial performance with a breakdown by end market, by product group and by geographic reporting segment in his comments.

So, this morning I want to discuss and provide some comments regarding our strategy to grow the business and expand our operating margins. Driving demand for core MSA product line, core product lines remains a key element of our long-term strategy. As many of you know well by now, these lines include fixed gas and flame detection instrument systems, portable gas detection instruments, industrial head protection products, supplied air respirators where Self-Contained Breathing Apparatus or SCBA is the principle product and lastly fall protection products.

Sales from these five core product lines comprised 72% of our total second quarter sales and showed local currency revenue growth of 11% when compared to the same period of 2012. I think that’s an important point worth restating that nearly three quarters of our business grew a 11% year-over-year unstated in local currency terms.

Putting a little more texture to the story, the U.S. fire service remains a challenging and competitive environment. But, the results we’re achieving in increasing breathing apparatus were very encouraging in the second quarter. We spoke about this at length in our last investors call.

During the second quarter SCBA revenue remained quite strong and our marketing efforts at this year’s Fire Department's Instructor Conference in Indianapolis or FDIC created strong demand and interest from our distributors and our end users. At that show we launched two new products, the MSA M7XT Air Mask and a new thermal imaging camera called the MSA Evolution 6000.

The FDIC conference also marked for us the launch of a board new marketing campaign built upon our commitment to understanding the unique needs of firefighters and our longstanding partnership with the fire service industry. To underscore that message, our theme for this new campaign is simple and to the point. When you go in, we go in with you. To give you more texture on the fire service and SCBA sales in particular, consolidation SCBA sales to the fire service were up 9% in the quarter led by North America where fire service SCBA sales increased 17% from a year ago.

Our new marketing program along with our ongoing efforts to develop leading edge products for the fire service market was very well received and continues to reinforce our strong commitment to first responders in the global fire service market.

Emerging markets also a key initiative in our corporate strategy were clearly a source of strength for us in the quarter. Our ongoing focus throughout the fire service, the construction, oil and gas, mining and other key industrial markets help drive strong quarterly sales growth in key emerging markets like Brazil and Southeast Asia, where local currency sales increased a very healthy 15% in both Brazil and Southeast Asia during the quarter.

And in China, another emerging market focus area for us, local currency sales increased 19% in the year-over-year quarter. The results we’re seeing in core products and in emerging markets throughout Latin America and Asia are certainly promising and reinforce my optimism as we head into the second half of 2013.

As I’ve noted in the past, we remain deeply committed to developing innovative new core products that enhance the MSA brand and more importantly advance the level of worker safety in the industries we serve. In addition to our efforts to develop pioneering products for the fire service, we continue to develop a number of new and innovative core products for industrial markets. As an example, during the second quarter we launched a new V-Guard headgear system. This new global product provides eye and face protection to workers who are not required to wear head protection, but need eye and face protection nonetheless.

This product is very complimentary to the V-Guard helmet accessory system that we launched around the world just a year ago. I should note this morning that we also continued to see solid progress in our portable gas detection business driven by demand for new products developed and introduced over the past five years. In fact, approximately 50% of our total portable gas detection sales for the second quarter came from new products launched within the last five years. This is particularly encouraging when you consider that portable gas detection sales continued to be one of our fastest growing and most profitable areas with sales growing 20% when compared to the same period a year ago.

This 20% growth has been fueled by the introduction of market leading products and sensors like the Altair 4X and Altair 5X, MSA’s industry leading XL sensor line and our recently introduced GX2 automated testing and calibration system. In a similar way we continue to see strong results from our fixed gas and flame detection business. The investment we made in this area few years ago, when we acquired General Monitors combined with our team’s ongoing focus in developing new products like the soon to be released observer eye ultrasonic gas leak detector continues to deliver robust returns. The observer eye is truly a unique and innovative technology that is generating a lot of market attention, while we won’t formally launch the observer eye detector until later this year, global oil and gas and petrochemical customers who have participated with MSA as part of our product development process are excited about the observer eye’s expanded area coverage, best in class background noise reduction and reduced total cost of ownership.

And in key emerging markets like China, we continue to introduce to innovative low cost new products like a new hard hat suspension system, we call the push key one touch suspension system. In addition to providing customers with a new suspension system option, we believe this product will provide MSA with greater access to an attractive segment of the head protection market in China.

Overall, the results we see from our R&D team continue to be encouraging and reinforce my conviction that innovation and the continuous flow of new product introductions are critical to success in the advanced safety markets that we serve.

The progress we are making in managing manufacturing costs and improving gross profits as a part of our operational excellence initiatives is also a strongly performing element of our strategy. Our efforts to optimize our manufacturing footprint and improve our global supply chain processes continue to yield solid results.

These efforts combined with shifting on a mix focus to our core product lines favorably impact the gross profit margin in the quarter, which increased 250 basis points over the second quarter a year ago. To give you an even longer term perspective of this, gross profit margins have expanded over 700 basis points since 2009, as we have improved our supply chains, improved our focus on the core and developed and introduced innovative and strategically priced products for our markets.

I also want to provide you an update on our Europe 2.0 initiative which as I have discussed with you before is focused on integrating and aligning our SAP IT systems throughout Europe in order to one, simplify our business model there. Two, increase visibility and transparency that drives efficiency. Three, improve customer satisfaction through improved delivery and availability of products and services. And four, improve financial performance through better cost management and centralized sourcing.

In our last call, I informed you we had our first very successful go live with the new system in Germany. In the second quarter, we had our second largest European affiliate in France go live and I am pleased to tell you it’s been our smoothest go live yet. Our two largest affiliates in Europe are now operating under the same system, providing complete visibility of customer data and operational data like product availability.

During the second half of the year, we will be working on MSA Italy and MSA Spain and by the end of the year we will have close to 70% of our European revenues under the new Europe 2.0 SAP operating system. As you know, MSA Europe’s net profit margins are the lowest and most challenged in the MSA family, currently in the mid-single digit. Our goal is to see these net profit margins in the low double-digits when our Europe 2.0 initiative is completed and we believe we’re on track to get there.

Now, I would like to turn the call over to our CFO, Dennis Zeitler who will provide greater insight into our first quarter financial performance. After Dennis finishes with his report, I will provide some closing comments and will open up the call for your questions. Dennis?

Dennis L. Zeitler

Thank you, Bill and good morning. I will share with you my insight into our second quarter financial performance and additional information will be available later today when we file our Form 10-Q with the Securities and Exchange Commission.

As Bill mentioned, continuing sales in the second quarter of 2013 were record $300 million, up $5 million or 2% from the prior year; however, unfavorable currency effects of $3 million and $5 million of divested ballistic helmet sales revenue increased $13 million or 4.5%.

Incoming orders this quarter grew 8% over the first quarter and 7% over a year ago. I will comment on four different ways we look at our sales performance by end markets, by product group, by geographic reporting segment and by emerging markets.

By end markets, our growth was led by our industrial business with local currency revenue growth of 7% and now represents 72% of sales. Global fire service sales were up 3% and were 25% the total. Military sales were 3% of sales down from 6% last year on the divestiture of the U.S. ballistic helmet business.

When we consider our sales by product, our five core product groups deliver growth of a 11% on a local currency basis also making up 72% of total sales. All five core product groups increase led by portable instruments up 20%, fixed gas and flame detection instruments up 14%, fall protection up 12%, breathing apparatus up 8% and head protection up 3%. Several large fixed gas and flame detection and SCBA orders were shipped during the quarter.

The remaining 28% of sales were down 14%, half from the divested business and the remainder across most of our non-core products as we execute the first element of our corporate strategy to focus on core products, our fastest growing and more profitable product groups.

Moving to our reported segment sales performance, in North America sales in the second quarter were up 5% and up 8% excluding the divested ballistic helmet business and the impact of a slightly stronger Mexican Peso. On looking at North American end markets local currency sales to the fire service grew 11% and sales to industrial customers increased 9%, sales through U.S. Military were $1 million in the second quarter.

By product group, our five core product groups represented 81% of sales in North America and were up 14%. Fixed gas and flame detection products led the growth at 21% with several large orders shipped during the quarter followed by the portable instruments at 19% and SCBA sales at 12%, head protection and fall protection each grew 4%.

However, other non-core product groups were down a total of 25% due primarily to the decrease in military sales. Looking onto our international segment, reported sales were down 2%, but local currency sales grew 4% with strong growth in Brazil, Southeast Asia and China offset by lower sales in the developed market of Japan and Australia.

When looking at international end markets, local currency industrial sales were up 5% and comprised 81% of total sales. Fire service, local currency sales were down 4%, and lower sales of thermal imaging cameras compared to last year. Military sales were $2 million in the quarter.

By product group, sales of core products were up 8% for the quarter and grew to 57% of total sales. Fall protection sales were up 32% followed by portable instruments growing at 26% and fixed gas and flame detection instruments up 17%. SCBA sales declined 2% due to a large order that was invoiced in the second quarter of last year and head protection sales fell 1%. All other product groups were down 1%.

Finally, our European segments reported sales were down 1% and down 2% in local currency terms. Europe’s local currency sales to industrial customers represented 56% of total sales and grew 2% driven by our distribution strategy in Western Europe. Fire service sales declined 5% and military sales were down 12%. Core product sales grew 7% this quarter and comprise 68% of total sales. Head protection was up 18% from a small base, portable instruments up 14%, SCBA up 10% and fixed gas and flame detection sales were flat. All other product groups were down 17%.

We end our look at sales growth for the focus on emerging markets. Our corporate strategy includes growing sales in emerging markets where we see strong opportunities for profitable long term revenue growth. We have emerging markets in each geographic reporting segment. Our emerging market sales grew 5% in the second quarter led by 12% growth in our more profitable core product groups.

Emerging market sales represented 30% of total sales in the quarter up from 29% a year ago. Our gross profit rate for this quarter was 44.3% an improvement of 250 basis points over last year. Our double-digit core product sales growth drove this significant improvement and will supplement a buyer continued focus on cost and price. Reported selling, general and administrative costs were up 4% this quarter compared to last year driven by an increase in selling and marketing costs, as we continued to invest in resources focused on driving core product sales around the world.

Our investment in research and development this quarter with $11.4 million up $1.1 million over the last year as we continue to invest in a significant pipeline of new products to be introduced over the next 24 months. There was a $1 million foreign currency loss quarter as well as over $2 million in restructuring in Australia in response to continued challenging business conditions and in Europe as part of our ongoing Europe 2.0 plan.

The resulting operating income absent these onetime items was a record $41 million and 13.5% of sales compared to $35 million and 11.8% of sales last year, a 170 basis point improvement year-over-year. We continue to make solid progress towards our goal of a 15% operating margin by 2015.

Our consolidated tax rate this quarter was 30%, down 200 basis points from last year and at our expected rate for the remainder of the year. The bottom line is reported second quarter net income of $24 million or $0.65 per basic share compared to $0.76 last year, however, absent the $8 million of asset sales in the second quarter of last year and $3 million of restructuring and FX expense this quarter, net income was a record $26 million an increase of 20% over last year with pro-forma earnings per share of $0.71.

Our cash position of $82 million is up $5 million from the prior quarter and is composed mostly of cash outside the United States. Our total debt at the end of the quarter was $300 million, up $14 million from the prior quarter. We did see a significant increase in accounts receivable at the end of the quarter as June was a strong invoicing month. We invested $9 million in capitalized items, and we paid over $11 million in dividends.

In summary, our second quarter continuing sales, our operating income and pro-forma net income are all records for MSA. This performance gives us continued confidence in our corporate strategy to grow sales, improve financial performance and enhance shareholder value.

I will now return the microphone to Bill.

William M. Lambert

Thank you, Dennis. As a look back at the quarter we just completed, I am pleased by our success on many fronts and in executing many of our strategic initiatives. As we move forward into the second half of 2013, we will continue to execute the same strategies that have transformed MSA into a company that has proven itself capable of delivering profitable growth even through challenging economic cycles.

I am maintaining a conservative macro outlook while remaining confident in our ability to deliver solid operating margin expansion just as we have talked to you about in the past. We will maintain our investments in innovation and the high growth markets around the world to continue to drive growth and improve our market share position. To sustain this performance the key will be to maintain our focus on driving demand of core products throughout our markets and geographies, driving down manufacturing and operating costs, all while continuing our investment in and introduction of new and innovative safety technologies. This strategy continues to yield strong results and positions MSA to create value for our stakeholders even in times of uncertainty.

In closing, our quarterly results reflect strong profitable growth, however, we still see a significant amount of uncertainty in the markets. Order activity remains uneven and trends are more choppy then I would prefer. While we’re keeping a close eye on economic and business conditions, I assure you that we remain focused on our strategy and our investing in those areas of our business where we see good opportunities for growth.

Thank you for your attention this morning. At this time, Joe Bigler, Kerry Bove, Ron Herring, Dennis Zeitler, Stacy McMahan and I will be happy to take any questions you might have. Please remember that MSA does not give what is referred to as guidance, and that precludes most discussion related to our expectations for future sales and future earnings.

Having said that, we will now open the call up to your questions.

Question-and-Answer session

Operator

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions)

Our first question comes from Edward Marshall with Sidoti & Company. Please go ahead.

Edward Marshall – Sidoti & Company

Good morning guys.

William M. Lambert

Hi, good morning Ed.

Edward Marshall – Sidoti & Company

Good continued work on the operating margin. I wanted to kind of see if I could get maybe some of the puts and takes, net sale on sequential basis because I know there were some executive compensation that was running through there may be higher than normal and then the legal costs from the insurance. So, I just kind of wanted to dig into maybe the line a little bit further if we could?

William M. Lambert

Yeah, the stock compensation expense in this quarter was about $1.8. Is it 1.8 or 2.8?

Dennis L. Zeitler

$2.8 million.

William M. Lambert

It will be $1.8 million less in the next two quarters. So, the 2.8 absolute number this year, this quarter it will be $1 million each of the next two quarters.

Edward Marshall – Sidoti & Company

Okay.

William M. Lambert

And first quarter would have been…

Dennis L. Zeitler

Yeah, it’s a little north of $5 million, so it’s about $2.4 million lower in the second quarter versus the first quarter.

Edward Marshall – Sidoti & Company

Okay. On the legal?

William M. Lambert

The legal tranche really hasn’t changed from quarter-to-quarter, it still running a little over $2 million.

Edward Marshall – Sidoti & Company

And that supposed to spend this year or…

William M. Lambert

I think, they will still run into next year, hopefully, it will be less next year, but that’s a really tough number to guess.

Dennis L. Zeitler

I think it’s safe to say that our second quarter SG&A rates are about where we would expect them to be for the balance of the year.

William M. Lambert

The SG&A relation will be going up the rest of the year because of the stock comp and because of the benefits from the restructuring charges we took, we will see some benefits on that in the third and fourth quarters.

Dennis L. Zeitler

But, we don’t see $2 million an increase and so many expense due to higher sales, we had about $2 million additional selling expense associated with higher commissions and the better sales that we had in our core product areas.

Edward Marshall – Sidoti & Company

If I just think about this intuitively I mean, just the – your 13.5% which is ahead of 13% I guess, go this year 15% by 15, I have asked before, probably not going to make the same mistake again, but I mean, you’re ahead of the game here it seems and you got some costs rolling off into next year and even the back half of this year. What can you comment around that or just leave it alone?

William M. Lambert

We would probably leave it alone Ed, but, I mean, yeah, we got this as a good quarter, but we’re saying 13% for the full year, okay. So, we had to make up for being below our target in the first quarter, so we have to continue to be well above 13 in order to finish this year at 13.

Edward Marshall – Sidoti & Company

It looks like this would be the run rate for the remainder of the year, this 13.5 or so?

William M. Lambert

That’s I think you would need to get to 13 for the full year, you’re right.

Edward Marshall – Sidoti & Company

The industrial pickup that we saw in North America, I might have missed it, I don’t know if you clarified, but was there something that, was there a large order that ran through because I mean, this has been the highest that we have seen that number for some time?

William M. Lambert

By a significant amount.

Edward Marshall – Sidoti & Company

Or with this broad based across the board North America pickup?

William M. Lambert

I think it was more broad based, there wasn’t anything particularly large single orders in the industrial segment for MSA North America that 9% growth I think Dennis mentioned, we had 9% growth in our core industrial for North America and there was nothing, I am looking at Joe Bigler, but there is nothing that I can remember as being one-off big orders. Maybe in the fixed gas and flame detection area we had some fairly significant orders, but that business by its very definition is little bumpy, big order shipped.

Joseph A. Bigler

No, you’re absolutely right. From an industrial standpoint in North America it’s pretty broad based whether you look at light manufacturing, heavy manufacturing, if you look at the energy market, the automobile industry. We saw some positive signs throughout the whole quarter pretty fairly broad based that really helped to drive the second quarter sales for North America from an industrial perspective.

Edward Marshall – Sidoti & Company

And nothing to mention as far as construction yet, I didn’t hear you mention this?

Joseph A. Bigler

Yeah, I mean, certainly housing has picked up to some extent, but we really don’t benefit that much from the housing market, but we’re starting to see some slight positive effects on the industrial construction and the commercial construction side, so I would say, it certainly improved in the second quarter versus the first quarter and that was certainly a small contributor to our industrial pickup in the second quarter overall.

Edward Marshall – Sidoti & Company

And then, finally, I guess on the SCBA, I mean, there is new standard as we’re all aware, how do you see that business kind of playing out through the remainder of the year, I mean, it continues to march higher and you would have assumed that we would see a kind of a slowdown in front of the new standard but that hasn’t happened?

William M. Lambert

Yeah, I think, it’s worth spending some time on this new standard and the impact it might have on SCBA. The government sequestration has impacted the two government agencies that need to approve the new product. So, none of the SCBA manufacturers have approval to that new standard which was to take effect in August next month. And so, what has happened is that because of some of those delays and that sequestration, there is process in place right now that actually would delay the implementation of that new standard to the end of February of next year. So, it’s about a six month delay.

Edward Marshall – Sidoti & Company

So, what does that mean then to overall SCBA sales?

William M. Lambert

Well, it enables all the manufacturers including MSA to continue to sell their current product line which we view as probably a neutral thing, maybe good to neutral. Anybody that was holding off for the new standard or for the new products now knows that well, they’re going to have wait another six months and do they really want to do that. We saw some good strong buying during the second quarter based on the FDIC show, based on the introduction of some of the new products that we had.

So, we think that the SCBA market is a little bit stronger then what we had planned going into the year but that’s probably a good thing and it’s in-line with our expectation that a lot of SCBA that are in the market right now are approaching that useful life period of ten years or so and in the big heavy AFG years of 2003 and 2004, 2005 you got a lot of breathing apparatus that are now approaching the end of their life and needing to be replaced. And so, we’re seeing some of that play-out in the North America, in the U.S. SCBA market for sure. So, what will the impact be on delaying the new standard? We don’t know for sure, but we don’t see it as a negative thing, if anything it’s probably neutral to perhaps slightly positive.

Edward Marshall – Sidoti & Company

And the new mass that you’re rolling out in relation to the delay and the standard?

William M. Lambert

Well, we are continuing on our track to roll that product out late this year to be introducing it late this year, but obviously it’s all dependant on getting these approval, so there is two government agencies that need to approve the product and they’re without question impacted by some of the sequestration that has gone on. So, we may be delayed by that impact, it’s really hard for us to tell, we have no visibility into these approval agencies.

Edward Marshall – Sidoti & Company

And so there will be no, even if you were delayed, you wouldn’t be able to kind of estimate how long that delay would be I assume?

William M. Lambert

Yeah, that’s right Ed, I really don’t, but it would be measured in months, it wouldn’t be measured in quarters.

Edward Marshall – Sidoti & Company

So, more of a delay then a full postponement or something like that?

William M. Lambert

Yes.

Edward Marshall – Sidoti & Company

Okay, thanks guys.

William M. Lambert

You’re welcome Ed.

Operator

The next question comes from Richard Eastman with Robert W. Baird. Please go ahead.

Richard Eastman – Robert W. Baird

Yes, thank you. Could I just ask about international, we saw nice uptick in some of the international markets, you rattled off a couple of them, China, Brazil, Southeast Asia. Could you just talk maybe a bit about the drivers in those markets, is it industrial and also maybe sustainability there?

William M. Lambert

Sure. The Brazilian market for us has been quite a bit about share gains in our penetration into markets like the oil and gas market and other industrial markets. The rate of growth that we’re seeing and have seen in Brazil far outpaces GDP growth in that country. So, a lot of that growth then is coming from us penetrating new markets and taking share, same thing with Southeast Asia quite honesty. China had an uptick in demand, they had a slow first quarter due to some holiday schedules and the way certain fell on the Chinese calendar, but second quarter was very strong almost 20% growth we saw in China and I think that’s just, that again, also is very broad based in the oil and gas market, construction market and industrial market that we see over there.

But, some of the offsets in the international because we didn’t see that that upside everywhere, some of the offsets were Australia, Australia continues to suffer, the mining industry in Australia, the mining industry in South Africa both under a lot of stress right now, the mining industry in Chile and Peru also under stress right now. So, those were some of the negatives against some of the great positives that we’re seeing broadly in China, Southeast Asia and Brazil.

Richard Eastman – Robert W. Baird

It’s super enough strength in some of these, I guess, the emerging markets that you incorporate into international, is there enough strength in these markets to continue to see growth, local currency growth accelerate in the international?

William M. Lambert

I think, unquestionably.

Richard Eastman – Robert W. Baird

Yes, okay from the second quarter level. And then, also in Europe, could you just dissect it, at one point you were willing to kind of dissect Western Europe from Eastern Europe and just, is all the growth coming out of distribution gains in Western Europe, did Eastern Europe show any growth?

William M. Lambert

Give me a second there Rick to take a look. When I look at Eastern Europe’s performance overall, it was just about flat, up about 1%. Actually the strength that we’re seeing in Europe quite remarkably is in the countries that you hear the most negative news about in the news. So, when you read the newspaper and you hear about France and Italy and Spain and even Germany perhaps, we actually saw some nice solid gains in that part of our business and where we are year-to-date in that part of our business. The U.K., Northern Europe is where we have seen a – that part of the business has been off versus previous years and then as we look over further east into Poland and Hungary and even into Russia, Kazakhstan that part of the business is up, but not where we had expected it to be although we’re starting to see some of these large orders look like they’re going to break free.

Ron Herring, I know you’re on the line, Ron do you want to add anything to that.

Ronald N. Herring

Sure Bill. I mean, talking about that’ll be for Central Europe for example, we're moving from our, one of the strategies we have is moving from government to private and we see a transition moving from there pretty significant, for example, last year I think about 52% of our Central European sales were from the private sector and were tracking at around 55% right now year-to-date and that is mostly from growth going through industrial distribution adding industrial distribution and share gain in those areas.

William M. Lambert

Ron, maybe also, maybe also comment on Middle East Ron, because we have seen some weakness in the Middle East and that’s a part of MSA as a reporting segment.

Ronald N. Herring

Yeah, what we are seeing really is in some of the large orders we’re hoping that falls are being delayed and I think a lot of that has to do with some of the unrest that you see there, but we continue to monitor that very closely and have our adjusting strategies so that were going after the industrial segment and looking at industrial distribution there. But overall, the Middle East is one of those troubling areas that were not performing at a level we’d originally planned for the year.

Richard Eastman – Robert W. Baird

Okay, very good. And then, it was a comment made, I think about orders in the quarter being up about 8% was that comment specific to the five core product groups?

William M. Lambert

That’s an overall comment.

Richard Eastman – Robert W. Baird

Overall quarters…

William M. Lambert

That’s overall consolidated sales.

Richard Eastman – Robert W. Baird

Okay and then I’m sorry, just one last thing any sense for any anticipated restructuring in the second half, is there a number that you might be able to share?

William M. Lambert

It’ll be relatively small number if we have some more restructuring in Europe, but it’ll be small I would thing.

Richard Eastman – Robert W. Baird

We’re done in Australia then?

William M. Lambert

Hopefully.

Richard Eastman – Robert W. Baird

Okay, all right. Thank you very much, very nice next quarter.

William M. Lambert

Thanks Rick.

Operator

(Operator Instructions) The next question comes from Walt Liptak with Global Hunter Securities, please go ahead.

Walt Liptak – Global Hunter Securities

Thanks, good morning guys.

William M. Lambert

Hi, Walt.

Walt Liptak – Global Hunter Securities

So, I wanted to ask about the Europe 2.0 and you outlined 4 points, I want to focus on the forth one and financial performance and so if we get a little more detail about what would you think that should be into kind of that margin for Europe and the timeframe for that?

William M. Lambert

So, that was in my commentary, so I’ll address it briefly and then look to Dennis to add some color to it. Our Europe 2.0 initiative has the four legs of the stool that we talked about or the support roles I should say that we’re trying to achieve there. And the last element there is to improve financial performance through this better cost management and centralized sourcing and purchasing that would be able to go on there as well as consolidation of warehouses and that sort of thing. Right now, as we look at net profit margins for MSA Europe, we are in the low to mid single digits, it is our goal here by the time we are done with Europe 2.0 that our net profit margins would be in a low double digits.

So, up in that 10%, 11%, 12% range well, how long does it take us to get there, we’ll probably midstream right now, so I would imagine that we’ve got another two years until we see some of those kinds of results assuming, of course that that top line growth continues along the path that we are projecting it to be. And we’re getting some good signs in that regard from what we’re doing there. So, I would think we’re midstream and probably another two years as we get into 2015 will begin to and we’ll track this, you’ll see this, this is not going to be a step change this would be somewhat linear quarter-by-quarter, year-by-year. Dennis anything you’d like to add.

Dennis L. Zeitler

I think and Walt, there is two pieces to Europe 2.0, one is to improve the operating efficiency of the business, so you’ll see operating profits up the operating margin as a percentage of sales increased gradually as it has been increasing and improving and there would also be some tax efficiency involved, so as Bill said, it will be linear, you have to be able to follow the improvement in Europe maybe not every quarter, but year-by-year until we get into that range Bill mentioned 11% to 12% net profit in our total European segment.

Walt Liptak – Global Hunter Securities

Okay, that sounds great. Is Europe 2.0 is the final like in this cost reduction and productivity for Europe or is there a still some program of consolidation or whatever behind it?

William M. Lambert

Well, it’s certainly the most of it, the majority of it Walt, the only thing that would remain is as our presence grows in Eastern Europe and into Russia and these higher growth market segments, those segments start to take on more mass, more meat and they need to be under the same kind of operating systems as those in Western and Central Europe do. But, those are multi-year efforts and we will be facing those in overtime, so when we talk about Europe 2.0 and then fairly significant European transformation that we have, have been involved with over the past few years, most of that will be behind us over the next two years.

Walt Liptak – Global Hunter Securities

Okay, thanks very much.

Operator

The next question comes from Dick Ryan with Dougherty, please go ahead.

Dick Ryan – Dougherty & Company

Thank you. See Dennis on the R&D may be a broader comment on operating expenses, significant products coming out over the next couple of years and what do we see for R&D and then your comment about OpEx staying in this range, are you talking absolute or percentage wise?

Dennis L. Zeitler

I’m talking absolute for the next two quarters.

Dick Ryan – Dougherty & Company

Okay.

Dennis L. Zeitler

Okay. As far as R&D goes, we do have a lot of efforts going on right now, we’ve some great new products that are coming out. I would not expect R&D expense to increase over the next two quarters either, but that’s a guess right now.

I mean, it can dip, all these approval fees and all that could send to that R&D numbers are just and there not inexpensive. So, when we are allowed to get approval etcetera I just don’t know.

Dick Ryan – Dougherty & Company

Okay. So, Bill on market share you talked about gaining share and some of these markets, but do you have a more kind of global commentary on what you are able to achieve in market share, is it coming through new products pricing and may be what is the outlook for pricing over the next six months or so?

William M. Lambert

Let me first say that on market share, most of the market share data that we have is secondary research, some primary and some secondary research that we conduct ourselves. So, when we look at market share gains, it’s not validated by outside sources with one exception and that is within the U.S. In the U.S. we’ve some pretty good, we got a pretty good hand on what our market share position is and some of the product lines that -- in some of our core product line areas that’s number one. Number two, I think that the reason for market share gains is multifaceted, one certainly product innovation is an element of that.

Secondly, I think its sales coverage and the efforts that we’ve put into customer satisfaction and customer loyalty and driving the behaviors of this organization to be more customers responsive and to be a better partner with our distributors. So, and we’ve taken that globally Dick, and some of those programs and processes and work procedures are now employed by our organization around the world and we’re seeing the kinds of impacts that we would hope to see from that. I don’t think it’s related to pricing, we are not the least expensive brand out there by a wide margin, in many cases we are a price leader. But quality of our product, the durability of our product, the support and service we provide is among the best in the industry and that’s how we’re gaining market share.

Dick Ryan – Dougherty & Company

Okay. You talked about the kind of the order patterns strengthening late May, is that kind of continuing with the early look into the September quarter?

William M. Lambert

That’s a good try Dick.

Dick Ryan – Dougherty & Company

Well, I can try.

William M. Lambert

We try to hold off on providing some of that, some of those forward-looking statements, so I’m just going to pass on that one.

Dick Ryan – Dougherty & Company

All right, thanks guys. Good quarter.

William M. Lambert

You’re welcome Dick.

Operator

Our next question is a follow up from Richard Eastman with Robert W. Baird, please go ahead.

Richard Eastman – Robert W. Baird

Yes, Bill or may be Dennis. The core product mix in the quarter first thing ancillary products or other, should we think about that as kind of normalizing now around this 72% or call it 75% of sales is that kind of steady state going forward now with ACH divestiture out and so we can build a kind of a growth rate around core products versus ancillary products?

William M. Lambert

Rick, I think that you’ll continue, you will probably see the rate of change decreasing, but overtime, you’ll continue to see that number inch upward.

Richard Eastman – Robert W. Baird

Right.

William M. Lambert

As more and more of our product is, is in the core area of our business and as we give less attention to those peripheral products that are in our product line.

Richard Eastman – Robert W. Baird

But, I would think on a year-over-year basis in the second half then we would start to see a more normalized gross margin given the sales mix is that, is that a fair statement?

William M. Lambert

I think that’s a fair statement.

Richard Eastman – Robert W. Baird

Yeah. And ancillary products is down 13%, you did mention you know half of that is the ACH divested business, is the other half of that declined, is that was like the mining weaknesses shown up and is that may be the biggest single piece there?

William M. Lambert

That’s probably the second biggest piece or may be as big as the ACH business, but we also had a big drop off in gas and that’s for military driven by several million dollars. There’s three things going there, but you’re right, you continue to see that mining difficulty in Chile, in Peru, in Colombia, in Australia and some of it in South Africa.

Richard Eastman – Robert W. Baird

Yeah, okay. And then, may be a question for Joe, I just wanted to follow up on North American SCBA and Bill you give a really good kind of detailed commentary around the push on the standard change. But, we’re curious kind of as we track through the second quarter there was a general feeling that there might be some pre-buy of the old product that or the noncompliant product, I’m just because there was some familiarity with that product, we kind of pick that up in the market place and I’m curious now with the standards pushed. Do you feel like the order pattern or demand pattern, May still fall off and September or is there any indication of what that quarter-to-quarter order and sales pattern could look like for North American SCBA.

Joseph A. Bigler

That’s a challenging question, I would say in the second quarter we did see a slight bump in some departments, in some of our distributors picking up and what we call our current unit, the unit that doesn’t meet the new standard, so that was a contributor in the second quarter to some extent. I really think as Bill mentioned, the third and fourth quarter depending upon what happens with this extension that would allow us to sell the current unit as well as the new approved unit whenever the government approves that, it really is, it’s going to, it’s a challenge to call what the order pattern is going to look like. It really could be a good third and fourth quarter, it could be slower than what we expect, it really is a tossup, I think the manufactures will know a lot more come the very end of August, beginning of September because will know by, should know by the end of August as to whether or not we can continue to sell the existing unit until the end of February and we have a lot better understanding as to when manufactures will receive approval on the new unit and can really move forward on the new unit.

Richard Eastman – Robert W. Baird

Because it’s looking at the sequestered impact and the push and the standard and kind of the order pattern or sales pattern, if you look at and I’m sure you do that but this safer grounds and the fire grounds, the number is down in absolute terms and the funds granted against that lower number have been really slow as well.

Joseph A. Bigler

Yeah, they have.

Richard Eastman – Robert W. Baird

And that’s part of the sequester impact in this issue?

Joseph A. Bigler

It is to some extent, some of the funding, the funding for the AFG program is about $320 million when you look at the real absolute numbers, most of the 2012 money has all been given out, the 2013 grants hopefully are going to start sometime the end of this year and will go into next year, but funding there’s about $320 million for AFG both what we gave out this year, which is basically all depleted and the new grants that will be forthcoming and in fact the Senate just approved approximately the same amount tentatively for 2014.

So, there’s been some affect on the sequestering, but for the most part AFG money has held firm at about $320 million. I will say that the demand in the fire service is there, it’s coming for all the reasons that we’ve talked, Bill has mentioned as a new standard units being old from 9/11. So it does seem to be a focus of the lot in North America Fire Department that they are taking a look at their SCBA, it’s just the timing of that demand over the next 12 to 18 months I think is a real, is a real question.

Richard Eastman – Robert W. Baird

Understand, okay. And then, just a last question, Dennis can you just kind of talk to the free cash flow and again, year-to-date, you did address the receivables, but I’m curious do you expect a significant improvement in the free cash flow in the second half of the year?

Dennis L. Zeitler

Yeah absolutely, just like we had last year. Second half of the year and now that we’re probably at a peak for receivables, we had a really strong invoicing month in June, once you get to the end of the year there’s last couple of weeks December don’t go lot of invoicing, so receivables will be down, our insurance receivables probably not be increasing much and inventory that have been built up for shipment will be down. So yeah, I think it will like a lot like last year’s pattern where we were weak towards the middle year and finished the year with a very strong free cash flow.

Richard Eastman – Robert W. Baird

Okay, okay. All right, thank you. Thank you again for the follow ups.

Operator

We have no further questions at this time. I would like to turn the call back over to Mark Deasy for closing remarks.

Mark C. Deasy

Okay, thank you Allen, and given that we do not have any more questions that will conclude this morning’s call. I just want remind everybody if you miss the portion of the conference an audio replay will be available on our website for the next 30 days as well the transcript of the call. So on behalf of Bill, Dennis, Deasy, Joe, Ron and Kerry again I want to thank you for joining us this morning and we look forward to talking with you again soon. Hope that everybody has a great day. Take care.

Operator

Thank you ladies and gentlemen, this concludes the MSA’s Second Quarter Earnings Conference Call. Thank you for participating. You may now disconnect.

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Mixing ISO-14001, Environment, and OHSAS-18001 Safety and health, Right into a Unified System

Mixing the ISO-14001 Environment Management and OHSAS-18001 Safety and health Management standards right into a single, unified system, can provide substantial advantages over applying scalping strategies individually. Costs could be reduced having a single, combined group of documentation, reduced training costs, along with a lower registration audit cost. This is actually the most practical and least time intensive road to registration.

ISO-14001 and OHSAS-18001 are two of the most common and many asked for ISO management systems outdoors from the ISO-9001 (or even the more industry specific AS-9100, ISO/TS-16949, and ISO-13485) Quality Management System. Increasingly more forward thinking information mill asking for their providers come with an effective Environment Management system in-place. This is particularly important when confronted with companies whose public image is essential for them. Many European information mill flowing lower their environment management needs for their sub-tier providers too. When you are registered towards the ISO type quality system, adding registration towards the Environment and Safety and health standards isn't difficult whatsoever. You have the knowledge of how scalping strategies work and just how they're given, enhanced and maintained. Which means that applying both can't only help you save considerable money over applying individually, but it will likewise enhance your company's bottom lime once the savings of controlling these critical facets of business begins to start working. Applying both of these management systems greatly reduces your company's contact with legal cases too. Let us examine all these systems and discuss how effective implementation can help you save money and control risks.

ISO-14001 may be the Worldwide Environment Management standard. This is actually the second most implemented ISO system. By 2012, nearly one fourth of the million companies have grown to be ISO licensed. The ISO 14001 standard doesn't dictate environment performance needs. Rather, it works as a framework to help organizations in developing their very own environment management systems. ISO 14001 could be integrated along with other management functions and assists companies in meeting their environment and economic goals. ISO 14001, like ISO-9001 is extremely scalable, therefore it might be put on any size or kind of organization, service or product, in almost any sector of activity, so whether you've three or 5,000 employees, manufacture hazardous chemicals, or only produce intellectual property, you are able to approve your company to ISO-14001.

OHSAS-18001 is really a virtual mirror of ISO-14001 other than it focuses its management efforts around the company's safety and health issues instead of its environment issues. Because of this applying both isn't a lot more difficult than applying just one. A lot of the effort in applying these is training the employees how you can effectively rely on them. ISO accreditation agencies and registrars recognize this to allow them to provide a reduced registration audit when you are performing both systems concurrently - over a 30% reduction.

Additionally to enhanced procedures efficiencies, applying these standards can lead to a large discount in insurance charges. Both insurance, as you have substantially less contact with legal cases, and workers comp insurance, since you address, monitor and manage your company's safety and health issues, could be reduced - sometimes having to pay back the price of implementation is really a single year, based on your company's size, exposure along with other relevant issues.

Learning and applying the ISO-14001 Environment Management and OHSAS-18001 Safety and health Management standards, whilst not hard for a previously qualified ISO-9001 Quality System manager, simply requires trading time to get learning both of these standards as well as in how you can mix them. Many methods and techniques could be combined. For example, you simply need one corrective action procedure, one management review meeting, and a bouquet of documents which will cover the needs of both standards. One method to ease this time around consuming process is to apply qualified and trained consultants. Should you want to follow this path, make sure your consultants are not only seen trained on the ISO-14001 and OHSAS-18001 standards, but additionally regarding how to mix them right into a single combined system. ANAB accredited registrars are actually offering Lead Auditor practicing combined management systems.

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Pros and cons for Accredited Safety and health Training

If this involves safety and health training, among the issues that should be considered is whether or not you and alsoOror perhaps your employees require a certified or non-accredited training program. Associated with pension transfer things in existence, you will find pros and cons for each.

Course training content

Accredited safety and health courses like the NEBOSH Certificates (General, Construction, Fire and Environment), ConstructionSkills (SMSTS and SSSTS), IOSH (Controlling, Working, Pointing Securely) etc all have specific syllabuses which have to be adopted to be able to fulfill the assessment criteria. Which means that there might be large sections that are irrelevant for various people around the course as well as their particular job role, which can lead to associates becoming bored and "switching off". This is probably not an issue for that part that is not highly relevant to them, but when they don't "re-engage" when relevant details are being trained, they risk potentially missing crucial information. There's additionally a danger of annoying others around the course who need to know very well what has been trained.

Unlike accredited courses which, as pointed out above need to follow specific syllabuses, individuals that aren't accredited could be customized for an organisation's specific place of work hazards and dealing practices. Which means that the topic matter will probably be a lot more highly relevant to individuals attending. A non-accredited course may even incorporate the organisation's safety and health policy and emergency methods in to the trained subject material.

They might not be customized, bear in mind the status

The advantage of a certified safety and health training program is the fact that just the companies who've been pre-authorized by the relevant giving body are permitted to provide their particular courses. This enables for greater satisfaction (very important when parting with a lot of money!), as teaching standards happen to be evaluated as meeting a particular standard and pass rates are consistently good.

The truth that syllabuses are consistent and exams exactly the same across companies, this means that individuals who've acquired the qualification could be regarded as as getting an advanced of competency and safety and health understanding because they have passed the needed assessment, whereas a non-accredited qualification might have been granted to somebody after attending a training course that is way too simple and easy ,, more pertinently, doesn't supply the understanding essential for working securely or controlling others in the place of work. Simply because somebody includes a nice searching certificate does not necessarily mean they might perform their role towards the necessary requirement in the place of work if they don't have the sufficient understanding to choose it. Individuals having a genuine certificate from the recognised and well-respected giving body can be to others they have this understanding simply by showing the certificate.

However this status may come in a cost. For individuals undertaking accredited safety and health training, there's frequently a lot of course material and hefty books that are integrated into this course cost or need to be bought being an added extra, in addition to exam registration and official certification costs. There may also be lengthy waits to get exam results and certificates after finishing a certified course, which may be particularly frustrating for individuals who are required the qualification before beginning or using for jobs.

Conclusion

So to conclude, neither accredited or non-accredited training can be explained as "better", as it is viability will be based not just around the needs of the individual or company needing working out, but additionally on the standard from the training provider who's delivering this course.

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