SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2000 Commission File No. 0-2504 MINE SAFETY APPLIANCES COMPANY (Exact name of registrant as specified in its charter) Pennsylvania 25-0668780 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 121 Gamma Drive RIDC Industrial Park O'Hara Township Pittsburgh, Pennsylvania 15238 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 412/967-3000 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 As of October 31, 2000, there were outstanding 13,497,879 shares of common stock without par value, including 1,639,320 shares held by the Mine Safety Appliances Company Stock Compensation Trust.
PART I FINANCIAL INFORMATION MINE SAFETY APPLIANCES COMPANY CONSOLIDATED CONDENSED BALANCE SHEET (Thousands of dollars, except share data) <TABLE> <CAPTION> September 30 December 31 2000 1999 <S> <C> <C> ASSETS Current assets Cash $ 10,991 $ 8,898 Temporary investments, at cost which approximates market 8,090 8,210 Trade receivables, less allowance for doubtful accounts $2,055 and $2,322 52,937 58,911 Other receivables 22,387 22,716 Inventories: Finished products 31,630 37,551 Work in process 9,357 11,739 Raw materials and supplies 29,293 32,807 --------- --------- Total inventories 70,280 82,097 Deferred tax assets 15,431 13,348 Prepaid expenses and other current assets 10,438 8,910 --------- --------- Total current assets 190,554 203,090 Property, plant and equipment 378,774 378,495 Less accumulated depreciation (219,226) (214,986) --------- --------- Net property 159,548 163,509 Prepaid pension cost 74,940 61,357 Deferred tax assets 3,775 4,152 Other noncurrent assets 43,067 19,633 --------- --------- TOTALS $ 471,884 $ 451,741 ========= ========= </TABLE>
<TABLE> <S> LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> Current liabilities Notes payable and current portion of long-term debt $ 4,388 $ 4,477 Accounts payable 24,598 29,056 Employees' compensation 14,911 11,048 Insurance 9,027 10,402 Taxes on income 7,643 3,878 Other current liabilities 24,096 21,144 --------- --------- Total current liabilities 84,663 80,005 --------- --------- Long-term debt 76,891 36,550 Pensions and other employee benefits 51,490 54,111 Deferred tax liabilities 36,904 35,961 Other noncurrent liabilities 2,610 2,657 Shareholders' equity Preferred stock, 4-1/2% cumulative - authorized 100,000 shares of $50 par value; issued 71,373 shares, callable at $52.50 per share 3,569 3,569 Second cumulative preferred voting stock - authorized 1,000,000 shares of $10 par value; none issued Common stock - authorized 60,000,000 shares of no par value; issued 20,335,797 and 6,778,599 (outstanding 11,858,559 and 4,291,671) 18,841 12,596 Stock compensation trust - 1,639,320 and 567,630 shares (25,683) (26,679) Less treasury shares, at cost: Preferred - 49,713 and 49,713 shares (1,608) (1,608) Common - 6,837,918 and 1,919,298 shares (128,422) (95,154) Deferred stock compensation (1,342) (504) Accumulated other comprehensive loss (20,852) (14,831) Earnings retained in the business 374,823 365,068 --------- --------- Total shareholders' equity 219,326 242,457 --------- --------- TOTALS $ 471,884 $ 451,741 ========= ========= </TABLE> See notes to consolidated condensed financial statements
MINE SAFETY APPLIANCES COMPANY CONSOLIDATED CONDENSED STATEMENT OF INCOME (Thousands of dollars, except earnings per share) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 2000 1999 2000 1999 <S> <C> <C> <C> <C> Net sales $ 118,751 $ 118,004 $ 367,672 $ 357,646 Other income/(expense) (528) 515 1,390 1,992 --------- ---------- --------- ---------- 118,223 118,519 369,062 359,638 --------- ---------- --------- ---------- Costs and expenses Cost of products sold 75,875 76,774 231,104 228,931 Selling, general and administrative 30,945 33,918 96,934 100,143 Depreciation and amortization 6,162 6,004 17,977 17,253 Interest 1,277 891 2,938 2,655 Currency exchange gains (73) (215) (266) (569) Special pension credits (1,327) (5,925) (1,327) (1,317) --------- ---------- --------- ---------- 112,859 111,447 347,360 347,096 --------- ---------- --------- ---------- Income before income taxes 5,364 7,072 21,702 12,542 Provision for income taxes 1,444 2,731 7,497 4,894 --------- ---------- --------- ---------- Net income $ 3,920 $ 4,341 $ 14,205 $ 7,648 ========= ========== ========= ========== Basic earnings per common share $ 0.33 $ 0.34 $ 1.14 $ 0.59 ========= ========== ========= ========== Diluted earnings per common share $ 0.33 $ 0.33 $ 1.13 $ 0.58 ========= ========== ========= ========== </TABLE> See notes to consolidated condensed financial statements
MINE SAFETY APPLIANCES COMPANY CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Thousands of dollars) <TABLE> <CAPTION> Nine Months Ended September 30 2000 1999 <S> <C> <C> OPERATING ACTIVITIES Net income $ 14,205 $ 7,648 Depreciation and amortization 17,977 17,253 Pensions (12,486) (8,648) Deferred income taxes (1,213) (2,414) Changes in operating assets and liabilities 21,861 4,729 Other - including currency exchange adjustments (7,524) (3,928) ---------- ---------- Cash flow from operating activities 32,820 14,640 INVESTING ACTIVITIES Property additions (16,133) (19,766) Dispositions of property and businesses 2,120 573 Acquisitions and other investing (25,162) (6,368) ---------- ---------- Cash flow from investing activities (39,175) (25,561) FINANCING ACTIVITIES Additions to long-term debt 40,740 362 Reductions of long-term debt (267) (295) Changes in notes payable and short-term debt 390 15,508 Cash dividends (4,450) (4,453) Company stock purchases (54,304) (4,174) Company stock sales 27,088 0 ---------- ---------- Cash flow from financing activities 9,197 6,948 Effect of exchange rate changes on cash (869) (1,053) ---------- ---------- Increase/(decrease) in cash and cash equivalents 1,973 (5,026) Beginning cash and cash equivalents 17,108 24,020 ---------- ---------- Ending cash and cash equivalents $ 19,081 $ 18,994 ========== ========== </TABLE> See notes to consolidated condensed financial statements
MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (1) The Management's Discussion and Analysis of Financial Condition and Results of Operations which follows these notes contains additional information on the results of operations and the financial position of the company. Those comments should be read in conjunction with these notes. The company's annual report on Form 10-K for the year ended December 31, 1999 includes additional information about the company, its operations, and its financial position, and should be read in conjunction with this quarterly report on Form 10-Q. (2) The results for interim periods are not necessarily indicative of the results to be expected for the full year. (3) Certain prior year amounts have been reclassified to conform with the current year presentation. (4) In the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of these interim periods have been included. (5) A pre-tax gain of $1.3 million ($750,000 after-tax) related to the settlement of pension benefit liabilities to retirees in Canada was recognized in the three and nine months ended September 30, 2000. Third quarter 1999 included a pre-tax gain of $5.9 million ($3.6 million after-tax) related to lump sum settlements of pension benefits for participants in a voluntary retirement incentive program (VRIP) for non-production employees in the U.S. Year-to-date 1999 results reflect a net VRIP-related gain of $1.3 million ($800,000 after-tax) which includes the third quarter settlement gain, partially offset by second quarter termination benefit charges of $4.6 million ($2.8 million after-tax). (6) On May 10, 2000 the shareholders of the company approved a 3-for-1 split of the common stock, which was paid May 24, 2000. (7) Basic earnings per share is computed on the weighted average number of shares outstanding during the period. Diluted earnings per share includes the effect of the weighted average stock options outstanding during the period,using the treasury stock method. Antidilutive options are not considered in computing earnings per share. All share and per share amounts have been restated to reflect the 3-for-1 stock split. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 2000 1999 2000 1999 ( In thousands) ( In thousands) <S> <C> <C> <C> <C> Net income $ 3,920 $ 4,341 $ 14,205 $ 7,648 Preferred stock dividends declared 13 0 37 37 -------- -------- -------- ---------- Income available to common shareholders 3,907 4,341 14,168 7,611 -------- -------- -------- ---------- Basic shares outstanding 11,900 12,945 12,457 12,999 Stock options 46 42 50 33 -------- -------- -------- ---------- Diluted shares outstanding 11,946 12,987 12,507 13,032 Antidilutive stock options 29 21 29 21 -------- -------- -------- ---------- </TABLE> (8) Comprehensive income was $1,134,000 and $8,184,000 for the three and nine months ended September 30, 2000, respectively, and $4,390,000 and $2,908,000 for the three and nine months ended September 30, 1999, respectively. Comprehensive income includes net income and changes in accumulated other comprehensive income, primarily cumulative translation adjustments, for the period. (9) The company is organized into three geographic operating segments (North America, Europe and Other International), each of which includes a number of operating companies. North America (formerly U.S.) includes the United States, Canada and Mexico. Canada and Mexico were formerly part of Other Non-U.S. Comparative amounts for 1999 have been restated. Reportable segment information is presented in the following table: <TABLE> <CAPTION> (In Thousands) Other North Inter- Recon- Consol. America Europe national ciling totals <S> <C> <C> <C> <C> <C> Three Months Ended September 30, 2000 Sales to external customers $78,405 $22,282 $18,085 ($21) $118,751 Intercompany sales 5,101 4,140 729 (9,970) Net income(loss) 3,718 (807) 821 188 3,920 Nine Months Ended September 30, 2000 Sales to external customers 240,575 73,803 53,501 (207) 367,672 Intercompany sales 18,777 11,647 1,992 (32,416) Net income(loss) 13,296 (1,512) 2,144 277 14,205 Three Months Ended September 30, 1999 Sales to external customers 71,990 28,131 17,895 (12) 118,004 Intercompany sales 9,179 4,227 567 (13,973) Net income(loss) 4,900 (783) 862 (638) 4,341 Nine Months Ended September 30, 1999 Sales to external customers 227,729 84,109 46,204 (396) 357,646 Intercompany sales 24,630 13,360 1,594 (39,584) Net income(loss) 7,678 (1,081) 1,671 (620) 7,648 </TABLE> Reconciling items consist primarily of intercompany eliminations and items reported at the corporate level.
MINE SAFETY APPLIANCES COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS Forward-looking statements This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements regarding expectations for new product introductions, cost reduction and restructuring plans, specialty chemicals market conditions, sales and earnings outlook, liquidity, and market risk. Actual results may differ from expectations contained in such forward-looking statements and can be affected by any number of factors, many of which are outside of management's direct control. Among the factors that could cause such differences are the effects of restructuring efforts in Europe, timing and market acceptance of new safety and instrument product introductions, the company's ability to fulfill backlog orders, market and operating conditions of specialty chemical customers, the economic environment, and interest and currency exchange rates. Results of operations Three months ended September 30, 2000 and 1999 Sales for the third quarter of 2000 were $118.8 million, an increase of $800,000, or 1%, from $118.0 million in the third quarter of 1999. Third quarter 2000 sales for North American operations were 9% higher than the third quarter of last year. Shipments of gas masks for military and civilian defense preparedness and head protection for construction and general industry were significantly higher in 2000. Sales to the fire service market also improved significantly compared to third quarter 1999, reflecting continued strength in self-contained breathing apparatus shipments, the introduction of the Evolution 4000 thermal imaging camera, and the late-August acquisition of the Cairns Helmets firefighter head protection line. Specialty chemical sales in third quarter 2000 were 8% lower than last year's third quarter, continuing a market slow-down that began in mid-1999. The company's specialty chemical products are sold to a limited number of pharmaceutical and chemical companies and sales levels are largely dependent on the performance of these customers' products in their respective markets. Overall, incoming commercial orders of safety products in the U.S. exceeded shipments in third quarter 2000, resulting in an increase in backlog. This increase was offset by a decrease in government backlog for safety products as gas mask shipments to the military exceeded incoming orders during third quarter 2000. Specialty chemical order backlog increased during the current quarter. In Europe, local currency sales for third quarter 2000 were approximately 6% lower than third quarter 1999. When stated in U.S. dollars, however, sales in Europe were 21% lower due to adverse currency exchange rate movements. The decrease in local currency sales in the current quarter reflects lower shipments in Britain, France, and Italy. Sales in other European companies, including Germany, were flat quarter-to-quarter. Third quarter 2000 sales for other international operations were slightly higher than in third quarter 1999, reflecting strong shipments in Australia and Brazil and relatively flat sales in other markets. Adverse currency exchange effects reduced sales of other international operations when stated in U.S. dollars. Gross profit for the third quarter of 2000 was $42.9 million, an increase of $1.7 million, or 4%, from $41.2 million in third quarter 1999. The ratio of gross profit to sales was 36.1% in the third quarter of 2000 compared to 34.9% in the corresponding quarter last year. The slightly higher gross profit percentage is primarily due to changes in sales mix. Selling, general and administration costs in the third quarter of 2000 were $30.9 million, a decrease of $3.0 million, or 9%, compared to $33.9 million in the prior year third quarter. The decrease occurred primarily in Europe. Approximately half of the decrease is due to the absence in third quarter 2000 of one-time restructuring costs incurred in Germany and Britain during third quarter 1999. The remainder of the decrease relates to the effect of currency exchange rate movements in 2000 that reduced European selling, general and administrative expenses when stated in U.S. dollars. Depreciation and amortization expense in third quarter 2000 was $6.2 million, an increase of $158,000, or 3%, over $6.0 million in the corresponding quarter last year. The increase is primarily due to goodwill amortization associated with the recent ISI Group and Cairns Helmets acquisitions. Interest expense was $1.3 million in third quarter 2000 compared to $891,000 in third quarter 1999. Higher interest expense in third quarter 2000 was related to the additional debt required for the June 2000 repurchase of common stock and the August 2000 acquisition of Cairns Helmets. A special pension credit of $1.3 million was recognized in third quarter 2000 related to the settlement of retiree and deferred vested benefit liabilities in Canada. Third quarter 1999 included a settlement gain of $5.9 million related to a voluntary retirement incentive program (VRIP) in the U.S. The third quarter 1999 gain more than offset a second quarter 1999 VRIP special termination benefit charge of $4.6 million. Other income and expense for third quarter 2000 was an expense of $528K compared to income of $515K in third quarter 1999. The net expense for third quarter 2000 includes losses totaling approximately $1.2 million on dispositions of assets. Income before income taxes was $5.4 million for third quarter 2000 compared to $7.1 million in third quarter 1999. Income before taxes in both quarters included the previously-mentioned special pension credits. Excluding these items in both quarters, income before taxes in the third quarter of 2000 was $2.9 million higher than in 1999, primarily due to lower selling, general and administration costs and improved margins. The effective income tax rate for the third quarter of 2000 was 26.9% compared to 38.6% in third quarter 1999. The lower effective rate in 2000 reflects tax benefits on international operating losses, primarily in Germany, and adjustments to prior year taxes in the U.S. related to foreign sales corporation tax benefits. Net income in the third quarter of 2000 was $3.9 million, or 33 cents per basic share, compared to $4.3 million, or 34 cents per basic share, in the third quarter last year. Nine months ended September 30, 2000 and 1999 Sales for the nine months ended September 30, 2000 were $367.7 million, an increase of $10 million, or 3%, from $357.7 million last year. North American sales for the first nine months of 2000 were 6% higher than the same period last year. Improved sales of safety products were partially offset by lower specialty chemical sales. Shipments of self-contained breathing apparatus, thermal imaging cameras and helmets to the fire service market; gas masks to defense and civilian preparedness markets; and helmets for construction and industrial markets all improved significantly. Portable instrument sales also improved compared to the same period last year, reflecting new product introductions. Sales of specialty chemicals were significantly lower than in the first nine months of 1999. The company's specialty chemical products are sold to a limited number of large pharmaceutical and chemical companies and are largely dependent on the performance of these customers' products in their respective markets. Overall, sales of safety products in the U.S. were somewhat higher than incoming orders in the first nine months of 2000, which reduced backlog slightly. Specialty chemical order backlog increased during the first nine months of 2000. Local currency sales in Europe for the first nine months of 2000 were generally flat compared to the same period in 1999. When stated in U.S. dollars, however, sales in Europe were 12% lower due to adverse currency exchange rate movements. Current year sales improved in Eastern Europe and were mixed in other European markets. Sales of other international operations for the first nine months of 2000 were 16% higher than in the same period last year, with improvements in nearly every market. Sales in Africa benefited from the acquisition of Campbell Gardwel in late 1999. Currency exchange effects reduced sales of other international operations about 5% year-to-year. Gross profit for the nine months ended September 30, 2000 was $136.6 million, an increase of $7.9 million, or 6%, from $128.7 million in the first nine months of 1999. The ratio of gross profit to sales was 37.1% in the nine months ended September 30, 2000 compared to 36.0% in the corresponding period last year. The somewhat higher gross profit percentage is largely related to changes in sales mix. Selling, general and administration costs in the nine months ended September 30, 2000 were $96.9 million compared to $100.1 million in the same period last year. Approximately half of the decrease is due to the absence in 2000 of one-time restructuring costs incurred in Germany and Britain during 1999. The remainder of the decrease relates to the effect of currency exchange rate movements in 2000 that reduced European selling, general and administrative expenses when stated in U.S. dollars. Depreciation and amortization expense was $18.0 million in the nine months ended September 30, 2000 an increase of $700,000, or 4%, from $17.3 million in the same period last year. The increase was primarily due to mid-1999 production equipment and information technology additions in Europe and additional goodwill associated with the ISIG and Cairns Helmets acquisitions in 2000. Higher interest expense in the nine months ended September 30, 2000 reflects the additional debt required for the June 2000 repurchase of common stock and the August 2000 acquisition of Cairns Helmets. Special pension credits were $1.3 million in the first nine months of both 2000 and 1999. The 2000 special pension credit related to the settlement of retiree and deferred vested benefit liabilities in Canada. The nine months ended September 30, 1999 included a second quarter charge of $4.6 million for special termination benefits related to a voluntary retirement incentive program in the U.S and a related settlement gain of $5.9 million in the third quarter. Other income and expense for the nine months ended September 30, 2000 was income of $1.4 million compared to income of $2.0 million for the same period last year. The decrease in 2000 is primarily due to a net loss on dispositions of assets and lower rental income in 2000. Income before income taxes was $21.7 million for the nine months ended September 30, 2000 compared to $12.5 million in the first nine months of 1999. Improved income before tax in 2000 is primarily due to higher gross profits and lower selling, general and administrative expenses. The effective income tax rate for the nine months ended September 30, 2000 was 34.5% compared to 39% in the same period last year. The lower effective rate reflects tax benefits on international operating losses, primarily in Germany, and adjustments in the U.S. related to prior year foreign sales corporation tax benefits. Net income in the nine months ended September 30, 2000 was $14.2 million, or $1.14 per basic share, compared to $7.6 million, or 59 cents per basic share, in the first nine months of 1999. Other Matters In August 2000, the company acquired Cairns Helmets, the leading U.S. manufacturer of protective helmets for the fire service. This acquisition is expected to significantly strengthen the company's presence in the fire service market by adding fire helmets to an already strong product line of self-contained breathing apparatus, thermal imaging cameras, and portable gas detection instruments. During 2000, the company purchased approximately 2.2 million shares of common stock for $54 million and sold approximately 1.1 million shares held in treasury to the MSA pension plan for $27 million. The combined effect of these transactions reduced total shares outstanding by approximately 1.1 million shares, or 8.4%. The financial impact of these transactions is expected to be accretive to earnings per share and return on shareholders' equity. Liquidity and Financial Condition Cash and cash equivalents increased $2.0 million during the first nine months of 2000 compared with a decrease of $5.0 million in the first nine months of 1999. Operating activities provided $32.8 million of cash in the first nine months of 2000 compared to providing $14.6 million in the same period last year. The improvement is due to higher net income and favorable changes in operating assets and liabilities, primarily related to lower inventories. Cash of $39.2 million was used for investing activities in the first nine months of 2000 compared with the use of $25.6 million in the nine months ended September 30, 1999. The increased use of cash is primarily related to the August 2000 acquisition of Cairns Helmets. Financing activities provided $9.2 million in the first nine months of 2000 and provided $6.9 million in the same period last year. Higher cash provided by financing activities in 2000 relates to the issuance of $40 million in private placement notes partially offset by significant treasury stock purchases. Available credit facilities and internal cash resources are considered adequate to provide for future capital requirements. Financial Instrument Market Risk There have been no material changes in the company's financial instrument market risk during the first nine months of 2000. For additional information, refer to page 15 of the company's Annual Report to Shareholders for the year ended December 31, 1999. Recently Issued Accounting Standards FAS No. 133, Accounting for Derivative Instruments and Hedging Activities, establishes accounting and reporting standards for derivative instruments, including those embedded in other contracts. FAS No. 133 is effective for fiscal years beginning after September 15, 2000. Adoption of this statement is not expected to have a significant effect on company results or financial position. SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which is effective beginning in fourth quarter 2000, provides guidance on the recognition, presentation, and disclosure of revenue. The company is evaluating the effects of this guidance, if any, on its financial statements. FASB Emerging Issues task Force Issue No. 00-10, Accounting for Shipping and Handling Costs, which is effective beginning in fourth quarter 2000, requires that shipping and handling costs billed to a customer in a sale transaction be classified as revenue in the income statement. Adoption of this guidance by the company will increase both net sales and cost of products sold by reclassifying shipping costs that are billed to customers, with no effect on gross profit dollars or net income. Adoption of this guidance will result in lower gross profit percentages than currently reported. Comparative financial statements for periods prior to fourth quarter 2000 will also be reclassified to comply with this guidance. The company is currently evaluating the effect on reported sales and cost of sales for each applicable reporting period.
PART II OTHER INFORMATION MINE SAFETY APPLIANCES COMPANY Item 1. Legal Proceedings Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (3) (ii) By-Laws of the registrant, as amended to August 29, 1990. (b) Reports on Form 8-K No reports on Form 8-K were filed during the third quarter ended September 30, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MINE SAFETY APPLIANCES COMPANY Date: November 1, 2000 By S/Dennis L. Zeitler Dennis L. Zeitler Vice President - Finance; Principal Financial and Accounting Officer