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, 1999 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, 1999, there were outstanding 4,871,907 shares of common stock without par value, including 567,630 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) (Unaudited) <TABLE> <CAPTION> September 30 December 31 1999 1998 <S> <C> <C> ASSETS Current assets Cash $ 7,269 $ 10,084 Temporary investments, at cost plus accrued interest 11,725 13,936 Accounts receivable, less allowance (1999 - $2,812; 1998 - $3,004) 93,388 94,850 Inventories: Finished products 42,863 36,956 Work in process 15,743 12,445 Raw materials and supplies 35,240 36,090 -------- -------- Total inventories 93,846 85,491 -------- -------- Other current assets 23,445 24,848 -------- -------- Total current assets 229,673 229,209 -------- -------- Property, plant and equipment 378,360 371,687 Accumulated depreciation (213,486) (207,126) -------- -------- Net property 164,874 164,561 -------- -------- Prepaid pension cost 56,256 46,162 Other assets 19,464 16,784 -------- -------- TOTALS $ 470,267 $ 456,716 ======== ======== </TABLE> <TABLE> <S> LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> Current liabilities Notes and accounts payable $ 78,870 $ 68,416 Federal, foreign, state and local income taxes 6,010 991 Other current liabilities 45,618 40,599 -------- -------- Total current liabilities 130,498 110,006 -------- -------- Long-term debt 11,893 11,919 Pensions and other employee benefits 59,339 60,550 Noncurrent liabilities and deferred credits 31,091 31,395 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 20,000,000 shares of no par value; issued 6,779,231 and 6,779,231 (outstanding 4,311,783 and 4,378,874) 12,616 12,591 Common stock compensation trust - 569,600 and 571,690 (26,771) (26,869) shares Less treasury shares, at cost: Preferred - 49,397 and 49,313 shares (1,598) (1,595) Common - 1,897,848 and 1,828,667 shares (93,815) (89,521) Deferred stock compensation (632) (951) Accumulated other comprehensive loss (14,980) (10,240) Retained earnings 359,057 355,862 -------- -------- Total shareholders' equity 237,446 242,846 -------- -------- TOTALS $ 470,267 $ 456,716 ======== ======== </TABLE> See notes to consolidated condensed financial statements
MINE SAFETY APPLIANCES COMPANY CONSOLIDATED CONDENSED STATEMENT OF INCOME (Thousands of dollars, except earnings per share) (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 <S> <C> <C> <C> <C> Net sales $ 118,004 $ 116,060 $ 357,646 $ 364,918 Other income 515 960 1,992 5,143 ---------- ---------- ---------- ---------- 118,519 117,020 359,638 370,061 ---------- ---------- ---------- ---------- Costs and expenses Cost of products sold 76,774 72,158 228,931 231,462 Selling, general and administrative 32,453 32,731 97,816 101,210 Depreciation and amortization 6,004 5,454 17,253 16,732 Interest 891 1,006 2,655 2,416 Currency exchange (gains)/losses (215) 119 (569) 287 Special pension credits (5,925) (1,317) (3,993) Facilities consolidation & 1,465 349 2,327 642 restructuring charges ---------- ---------- ---------- ---------- 111,447 111,817 347,096 348,756 ---------- ---------- ---------- ---------- Income before income taxes 7,072 5,203 12,542 21,305 Provision for income taxes 2,731 2,130 4,894 7,942 ---------- ---------- ---------- ---------- Net income $ 4,341 $ 3,073 $ 7,648 $ 13,363 ========== ========== ========== ========== Basic earnings per common share $ 1.01 $ 0.69 $ 1.76 $ 3.00 ========== ========== ========== ========== Diluted earnings per common share $ 1.00 $ 0.69 $ 1.75 $ 2.99 ========== ========== ========== ========== </TABLE> See notes to consolidated condensed financial statements
MINE SAFETY APPLIANCES COMPANY CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Thousands of dollars) (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30 1999 1998 <S> <C> <C> OPERATING ACTIVITIES Net income $ 7,648 $ 13,363 Depreciation and amortization 17,253 16,732 Deferred taxes,pensions, and other non-cash charges/(credits) (11,062) (9,873) Gain on divestitures (2,238) Changes in operating assets and liabilities 4,729 (4,018) Other - principally currency exchange adjustments (3,928) (2,661) --------- --------- Cash flow from operating activities 14,640 11,305 --------- --------- INVESTING ACTIVITIES Property additions (19,766) (22,838) Property disposals, net 573 700 Net proceeds from divestitures 22,865 Other investing (6,368) (3,589) --------- --------- Cash flow from investing activities (25,561) (2,862) --------- --------- FINANCING ACTIVITIES Additions to long-term debt 362 110 Reductions of long-term debt (295) (693) Changes in notes payable and short term debt 15,508 9,353 Cash dividends (4,453) (4,446) Company stock purchases and sales, net (4,174) (4,507) --------- --------- Cash flow from financing activities 6,948 (183) --------- --------- Effect of exchange rate changes on cash (1,053) (2,494) --------- --------- Net(decrease)/increase in cash and cash equivalents (5,026) 5,766 Beginning cash and cash equivalents 24,020 19,921 --------- --------- Ending cash and cash equivalents $ 18,994 $ 25,687 ========= ========= </TABLE> See notes to consolidated condensed financial statements
MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) (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, 1998 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 the 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 $5.9 million ($3.6 million after-tax) was recognized in the third quarter of 1999 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) 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. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ( In thousands) ( In thousands) <S> <C> <C> <C> <C> Net income $ 4,341 $ 3,073 $ 7,648 $ 13,363 Preferred stock dividends declared 12 37 37 ----- ----- ----- ----- Income available to common shareholders 4,341 3,061 7,611 13,326 ----- ----- ----- ----- Basic shares outstanding 4,315 4,432 4,333 4,445 Stock options 14 21 11 17 ----- ----- ----- ----- Diluted shares outstanding 4,329 4,453 4,344 4,462 ----- ----- ----- ----- Antidilutive stock options 7 7 ----- ----- ----- ----- </TABLE> (7) Comprehensive income was $4,390,000 and $2,908,000 for the three and nine months ended September 30, 1999, respectively, and $1,869,000 and $8,272,000 for the three and nine months ended September 30, 1998, respectively. Comprehensive income includes net income and changes in accumulated other comprehensive income, primarily cumulative translation adjustments, for the period. (8) The company is organized into three geographic operating segments (U.S., Europe, and Other non-U.S.), each of which includes a number of operating companies. There have not been any changes in the basis of segmentation and measurement of segment profit and loss. Reportable segment information is presented in the following table: <TABLE> <CAPTION> (In Thousands) Other Recon- Consol. U.S. Europe non-U.S. ciling totals Three Months Ended September 30, 1999 <S> <C> <C> <C> <C> <C> Sales to external customers $64,744 $28,131 $25,141 ($12) $118,004 Intercompany sales 9,459 4,227 287 (13,973) Net income(loss) 4,649 (783) 1,113 (638) 4,341 Nine Months Ended September 30, 1999 Sales to external customers 206,186 84,109 67,747 (396) 357,646 Intercompany sales 25,094 13,360 1,130 (39,584) Net income(loss) 6,924 (1,081) 2,425 (620) 7,648 Three Months Ended September 30, 1998 Sales to external customers 65,811 28,041 21,463 745 116,060 Intercompany sales 8,056 3,614 524 (12,194) Net income(loss) 2,147 (26) 155 797 3,073 Nine Months Ended September 30, 1998 Sales to external customers 213,994 85,643 63,854 1,427 364,918 Intercompany sales 25,118 10,538 1,308 (36,964) Net income(loss) 12,798 (812) 1,143 234 13,363 Reconciling items consist primarily of intercompany eliminations and items reported at the corporate level. </TABLE>
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 future product introductions, cost reduction and restructuring plans, liquidity, sales and earnings, Year 2000 readiness, 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 cost reduction efforts, new product introductions, market and operating conditions affecting major specialty chemical customers, availability of critical materials and components, Year 2000 readiness of critical third parties, the economic environment, and interest and currency exchange rates. Results of operations - --------------------- Organizational initiatives - -------------------------- During the third quarter of 1999 the company recorded a pre-tax gain of $5.9 million ($3.6 million after-tax, or 83 cents per basic share) relating to lump-sum settlements of pension benefits for participants in a voluntary retirement incentive program (VRIP) for non-production employees in the U.S. Termination benefit charges of $4.6 million pre-tax ($2.8 million after-tax, or 65 cents per basic share) were recognized in the second quarter of 1999. The net effect of the VRIP on year-to-date 1999 results was a pre-tax gain of $1.3 million ($800,000 after-tax, or 18 cents per basic share). The company expects to recognize an additional VRIP-related pension settlement gain in the fourth quarter of 1999. All VRIP participants had retired by July 31, 1999. Staff reductions resulting from the VRIP are expected to lower pre-tax annual operating costs by approximately $4.0 million. The company is also actively pursuing opportunities to consolidate office facilities in the Pittsburgh area as a means of reducing operating costs and improving communications and productivity. In Europe, a new management team is implementing organizational changes which are expected to reduce operating costs and establish a more integrated approach to business in that area. Workforce reductions made in Europe during 1999 are expected to lower pre-tax operating costs by approximately $2.0 million annually. During the third quarter of 1999 the company incurred pre-tax restructuring charges, primarily in Europe, of $1.5 million ($810,000 after-tax, or 19 cents per basic share). Year-to-date results include pre-tax restructuring charges in the U.S. and Europe totalling $2.3 million ($1.3 million after-tax, or 29 cents per basic share). During the fourth quarter of 1999, the company expects to record additional restructuring charges related to further workforce reductions in Europe. Three months ended September 30, 1999 and 1998 - ---------------------------------------------- Sales for the third quarter of 1999 were $118.0 million, an increase of $1.9 million, or 2%, from $116.1 million in the third quarter of last year. Third quarter 1999 sales for U.S. operations were even with the third quarter of last year. Improvements in U.S. sales of safety products were largely offset by lower instrument and specialty chemical sales. Shipments of self-contained breathing apparatus and thermal imaging cameras to the fire service market continued to be strong in the quarter. Activity was slow in most other U.S. safety markets during the summer. MSA has seen some recovery in September, which is expected to continue. MSA and its distributors in the U.S and other areas were affected by the serious fall in oil prices that affects this key customer group and related industries. Oil prices have recovered in the past quarter and the company looks forward to more purchasing activities and projects in these important areas. Delays in new product introductions continued to depress instrument product sales for much of the quarter. The company began shipping its improved Passport FiveStar Alarm multigas detector late in the third quarter of 1999 and priority efforts are being placed on other new instrument product introductions. Third quarter 1999 sales of specialty chemical were significantly lower than the same period last year. Specialty chemical products are sold to a limited number of large pharmaceutical and chemical companies. Sales levels for specialty chemicals are largely dependent on the performance of these customers' products in their respective markets. The decline in the third quarter was almost entirely due to various special situations with individual customer's production and marketing activity. The company believes that lower specialty chemical sales in the third quarter of 1999 were the result of an accumulation of mostly temporary factors and expects that sales will recover in the fourth quarter and continue to grow next year. Overall, incoming commercial orders for safety products in the U.S. exceeded shipments in the third quarter. U.S. Government incoming orders for safety products have also been good, even without major gas mask projects, and government backlog increased somewhat in the third quarter. European sales for third quarter 1999 were also even with the prior year third quarter. Fire service sales in Germany continued to be strong. These gains were largely offset by seasonal expectations, poor economic conditions in Russia, and currency exchange effects when stated in U.S. dollars. Sales in the company's other international operations were substantially higher than the prior year, which was depressed by the well-publicized economic problems that particularly affected the Asian and South American markets. Sales and profitability of MSA Africa continued to be boosted by the second quarter 1999 acquisition of Campbell Gardwel, making the company the largest safety products supplier on the African continent. Currency exchange effects on sales of other international operations during the quarter were minor. Gross profit for the third quarter of 1999 was $41.2 million, a decrease of $2.7 million, or 6%, from $43.9 million in 1998. The ratio of gross profit to sales was 34.9% in the third quarter of 1999 compared to 37.8% in the corresponding quarter last year. The lower gross profit percentage reflects changes in sales mix and a general narrowing of margins in Europe resulting from the introduction of the Euro-currency. Selling, general and administration costs in the third quarter of 1999 were slightly lower than the prior year third quarter. Higher depreciation and amortization expense in the quarter was primarily related to mid-year production equipment and information technology additions in Europe. Income before income taxes was $7.1 million for third quarter 1999 compared to $5.2 million last year. Third quarter 1999 results included the previously- discussed $5.9 million credit related to the VRIP and restructuring charges of $1.5 million. Third quarter 1998 results included restructuring charges of $350,000. Third quarter income before taxes adjusted for the effects of these special items in both years declined 53%. The decrease is primarily due to the lower sales of specialty chemicals discussed above. The effective income tax rate for the third quarter of 1999 was 38.6% compared to 40.9% in 1998. The lower third quarter 1999 effective rate reflected the proportionately higher income in the U.S. and tax benefits associated with losses in Europe. Net income in the third quarter of 1999 was $4.3 million, or $1.01 per basic share, compared to $3.1 million, or 69 cents per basic share last year. Excluding the after-tax effects of the special pension credits and restructuring charges in both years, net income was down 51%. Nine months ended September 30, 1999 and 1998 - --------------------------------------------- Sales for the nine months ended September 30, 1999 were $357.6 million, a decrease of $7.3 million, or 2%, from $364.9 million last year. Sales in the prior year included the HAZCO Services, Inc. and Baseline Industries, Inc. business units until they were divested on June 30, 1998. Excluding these units, year-to-date sales of ongoing businesses increased 2% compared to last year. Total sales of ongoing U.S. operations for the nine months ended September 30, 1999 were 3% higher than last year. The improvement continued to reflect strength in self-contained breathing apparatus and thermal imaging camera sales to the fire service market and safety products sales in government markets. Instrument product sales year-to-year were relatively flat. Specialty chemical sales for the nine months were somewhat lower than the prior year, reflecting the previously-discussed decrease in the third quarter of 1999. Year-to-date 1999 sales in Europe were flat compared to 1998. Currency exchange effects on sales in Europe when stated in U.S. dollars were minimal for the nine months. Sales of other international operations improved in most markets, although these gains were partially offset by unfavorable exchange rate movements when stated in U.S. dollars. Gross profit for the nine months ended September 30, 1999 was $128.7 million, a decrease of $4.8 million, or 4%, from $133.5 million in 1998. The 1999 ratio of gross profit to sales was 36.0% compared to 36.6% last year. The decrease in selling and administrative costs reflects the absence of the HAZCO and Baseline operations in 1999, partially offset by higher operating costs associated with the new enterprise-wide computer system. As discussed previously, specific cost improvement efforts have been completed in 1999 and additional initiatives are in progress. Slightly higher depreciation and amortization expense in 1999 primarily reflects higher depreciation associated with information systems which were placed in service in mid-1998, largely offset by the divestitures of the HAZCO and Baseline business units at the end of second quarter 1998. Income before income taxes was $12.5 million for the nine months ended September 30, 1999 compared to $21.3 million in 1998. The 1999 results included the net VRIP gain of $1.3 million and restructuring charges of $2.3 million. The 1998 results included the $3.0 million gain on the divestitures of the HAZCO and Baseline business units, a $4.0 million pension settlement gain, and $640,000 in restructuring charges. The 1998 pension gain resulted from settling remaining pension liabilities to former employees from the Esmond, Rhode Island plant which was closed in 1997. Year-to-date income before taxes adjusted for the effects of these special items in both years declined 9%. The effective income tax rate for the nine months ended September 30, 1999 was 39.0% compared with 37.3% last year. The lower 1998 rate reflects recognition of tax benefits associated with the divestiture of the Baseline business unit. Net income for the nine months ended September 30, 1999 was $7.6 million, $1.76 per basic share, compared to $13.4 million or $3.00 per basic share last year. Excluding the after-tax effects of the special pension credits and restructuring charges in both years and the gain on sales of business units in 1998, net income was down 10%. Liquidity and Financial Condition - --------------------------------- Cash and cash equivalents decreased $5.0 million during the first nine months of 1999 compared with an increase of $5.8 million last year, which included net proceeds from divestitures of nearly $23.0 million. Cash provided by operating activities totaled $14.6 million for the first nine months of 1999 compared to $11.3 million last year. The improvement was primarily related to favorable changes in operating assets and liabilities. Investing activities used cash of $25.6 million in the nine months ended September 30, 1999 compared with cash outflows of $2.9 million in 1998. Lower cash used for investing activities in 1998 reflected the proceeds from the divestitures of the HAZCO and Baseline business units. Financing activities provided $6.9 million in the first nine months of 1999, mainly from increased short-term borrowings, compared to a minor use of cash in 1998. Available credit facilities and internal cash resources are considered adequate to provide for ensuing capital requirements. Year 2000 Readiness - ------------------- The company is continuing Year 2000 readiness action plans which focus on computerized and automated systems and processes that are critical to operations, key vendors and service providers, and MSA products. State of readiness - In 1996, to provide the information infrastructure for MSA's evolving global management strategy, the company began a project to replace significant information technology (IT) systems world-wide with a fully-integrated Enterprise Wide System (EWS) using SAP R/3. Because SAP R/3 is Year 2000 compliant, implementation of EWS at various MSA companies has been timed to reduce the Year 2000 impact on IT systems. EWS is currently operating at all MSA locations in the U.S. and at international affiliates in Britain, Germany, Sweden, and Mexico. Operations which have implemented EWS account for approximately 75% of sales and 90% of manufacturing activity. IT systems at all international operations that are not on EWS are Year 2000 compliant except for two. Readiness efforts are ongoing at these two companies, neither of which is material to the consolidated results, and are expected to be completed before the end of 1999. MSA continues to address Year 2000 compliance in a number of other areas, including: non-IT systems and processes (such as physical plant and manufacturing systems), key vendors and service providers, EDI systems, and MSA products. The following chart provides estimated percentages of completion for the inventory of systems and processes that may be affected by the Year 2000, the analysis performed to determine the Year 2000 impact on inventoried systems and processes, and the Year 2000 readiness of the inventoried systems and processes. Percent Completed --------------------------------- Y2K Y2K Impact Y2K As of October 31, 1999 Inventory Assessment Readiness --------- --------- --------- Information technology 100% 100% 98% Non-information technology 98% 95% 95% Costs of Year 2000 remediation - Costs associated with Year 2000 remediation, which exclude costs associated with the EWS project, are estimated to total less than $5 million. These costs, which are funded from operating cash flow, are expensed as incurred each year. Risks and contingency plans - Failure to identify and correct significant Year 2000 issues could result in interruption of normal business operations. The company believes that the efforts described above should reasonably identify and address the impact of the Year 2000 issue and its effect on operations and should reduce the possibility of significant interruptions. However, due to the uncertainties inherent in the Year 2000 problem, including the readiness of third party vendors and service providers and customers, the most likely worst case Year 2000 scenario would be temporary disruption of business in certain locations in the event of noncompliance by the company or third parties. Disruptions could include temporary production stoppages and delays in delivery of product. Year 2000 contingency plans have been developed by each major operating location and functional area. Contingency plans may include stockpiling raw materials and finished goods inventories, developing emergency recovery procedures, identifying alternate suppliers, replacing electronic applications with manual processes, and other appropriate measures. Year 2000 contingency planning is an ongoing process which will continue through the remainder of this year as new information becomes available. Financial Instrument Market Risk - -------------------------------- There have been no material changes in the company's financial instrument market risk during the third quarter of 1999. For additional information, refer to page 14 of the company's Annual Report to Shareholders for the year ended December 31, 1998.
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 (10) (n) MSA Supplemental Savings Plan (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 1999. 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 10, 1999 By S/James E. Herald James E. Herald Vice President - Finance; Principal Financial and Accounting Officer