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
MINE SAFETY APPLIANCES COMPANY
(Exact name of registrant as specified in its charter)
121 Gamma Drive
RIDC Industrial Park
O’Hara Township
Pittsburgh, Pennsylvania
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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
As of October 31, 2003, there were outstanding 12,268,120 shares of common stock without par value, not including 1,292,114 shares held by the Mine Safety Appliances Company Stock Compensation Trust.
PART I FINANCIAL INFORMATION
CONSOLIDATED CONDENSED BALANCE SHEET
(Thousands of dollars, except share data)
ASSETS
Current Assets
Cash and cash equivalents
Trade receivables, less allowance for doubtful accounts of $5,912 and $4,134
Other receivables
Inventories:
Finished products
Work in process
Raw materials and supplies
Total inventories
Deferred tax assets
Prepaid expenses and other current assets
Assets held for sale
Total current assets
Property, plant and equipment
Less accumulated depreciation
Net property
Prepaid pension cost
Goodwill
Other noncurrent assets
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Notes payable and current portion of long-term debt
Accounts payable
Employees’ compensation
Insurance
Taxes on income
Other current liabilities
Total current liabilities
Long-term debt
Pensions and other employee benefits
Deferred tax liabilities
Other noncurrent liabilities
Shareholders’ equity
Preferred stock, 4-1/2% cumulative—authorized 100,000 shares of $50 par value; issued 71,373 and 71,373 shares, callable at $52.50 per share
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 20,580,109 and 20,580,109 (outstanding 12,266,824 and 12,207,029)
Stock compensation trust—1,293,794 and 1,384,629 shares
Less treasury shares, at cost:
Preferred—51,554 and 50,313 shares
Common—7,019,491 and 6,988,451 shares
Deferred stock compensation
Accumulated other comprehensive (loss)
Earnings retained in the business
Total shareholders’ equity
See notes to consolidated condensed financial statements.
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CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Thousands of dollars, except per share amounts)
Three Months EndedSeptember 30
Unaudited
Net sales
Other income (expense)
Costs and expenses
Cost of products sold
Selling, general and administrative
Depreciation and amortization
Interest
Currency exchange (gain) loss
Income from continuing operations before income taxes
Provision for income taxes
Net income from continuing operations
Discontinued operations:
Net income (loss) from discontinued operations
Gain on sale of discontinued operations—after tax
Net income
Basic earnings per common share:
Continuing operations
Discontinued operations
Diluted earnings per common share:
Dividends per common share
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CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Thousands of dollars)
OPERATING ACTIVITIES
Net income from discontinued operations
Gain on the sale of discontinued operations—after tax
Pensions
Gain on sale of investments and assets
Deferred income taxes
Changes in operating assets and liabilities
Other—including currency exchange adjustments
Cash flow from continuing operations
Cash flow from discontinued operations
Cash flow from operating activities
INVESTING ACTIVITIES
Property additions
Property disposals
Net proceeds from sale of discontinued operations
Other investing
Cash flow from investing activities
FINANCING ACTIVITIES
Additions to long-term debt
Reductions of long-term debt
Changes in notes payable and short-term debt
Cash dividends
Company stock purchases
Company stock sales
Cash flow from financing activities
Effect of exchange rate changes on cash
Increase in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNAUDITED
Nine Months Ended
September 30
Preferred stock dividends
Income available to common shareholders
Basic shares outstanding
Stock options
Diluted shares outstanding
Antidilutive stock options
Income from discontinued operations
Cumulative translation adjustments
Accumulated other comprehensive income
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Reportable segment information is presented in the following table:
(In Thousands)
Three Months Ended September 30, 2003
Sales to external customers
Intercompany sales
Nine Months Ended September 30, 2003
Three Months Ended September 30, 2002
Nine Months Ended September 30, 2002
Reconciling items consist primarily of intercompany eliminations and items reported at the corporate level.
At December 31, 2002, accounts receivable of $66.2 million were owned by Mine Safety Funding Corporation. The company held a subordinated interest in these receivables of $36.5 million, of which $35.5 million is classified as other receivables. Net proceeds to the company from the securitization arrangement were $29.0 million at December 31, 2002.
The key economic assumptions used to measure the retained interest at September 30, 2003 were a discount rate of 3.3% and an estimated life of 2.3 months. At September 30, 2003, an adverse change in the discount rate or estimated life of 10% and 20% would reduce the fair value of the retained interest by $35,000 and $70,000, respectively. The effect of hypothetical changes in fair value based on variations in assumptions should be used with caution and generally cannot be extrapolated. Additionally, the effect on the fair value of the retained interest of changing a particular assumption has been calculated without changing other assumptions. In reality, a change in one factor may result in changes in others.
Net income as reported
Fair value of stock options granted, net of tax
Pro forma net income
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Basic earnings per share:
As reported
Pro forma
Diluted earnings per share:
Income before income taxes
Gain on sale of discontinued operations
Accounts receivable and other current assets
Inventory
Property, net
Basic earnings per share
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Forward-looking statements
Certain statements contained in this discussion and elsewhere in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from expectations contained in such statements.
Factors that may materially affect financial condition and future results include: global economic conditions; the impact of unforeseen economic and political changes, including the threat of terrorism and its potential consequences; the timely and successful introduction of new products; the availability of funding in the fire service and homeland security markets; fluctuations in the cost and availability of key materials and components; the company’s ability to generate sufficient cash flow to support capital expenditures, debt repayment, and general operating activities; the company’s ability to achieve sales and earnings forecasts; and interest and currency exchange rates.
The foregoing list of important factors is not exclusive. The company undertakes no obligation to publicly update or revise its forward-looking statements.
Corporate Initiatives
On September 12, 2003, the company sold the Callery Chemical Division to BASF for $64.6 million, resulting in an after-tax gain of $13.7 million. The Callery Chemical Division develops, manufactures, and sells specialty chemicals, including alkali metal strong bases and borane chemicals for use in pharmaceuticals, agricultural chemicals, plastics, and a number of other applications. The divestiture of the specialty chemical business better positions the company to focus on its core safety business. The operating results of the division, the gain on the sale, and assets sold or to be liquidated have been reported as discontinued operations and assets held for sale in the accompanying financial statements.
Results of operations
Three months ended September 30, 2003 and 2002
Sales for the third quarter of 2003 were $171.9 million, an increase of $28.5 million, or 20%, from $143.4 million in the third quarter of 2002.
Third quarter 2003 sales for North American operations of $112.9 million were $22.4 million, or 25%, higher than in third quarter 2002. The sales improvement in North America was primarily due to strong shipments of breathing apparatus to the fire service market and gas masks to homeland security and military markets. During 2003, the company changed its standard shipping terms to U.S. distributors. The effect of this change was to delay revenue recognition on the affected shipments, which resulted in a
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net reduction in third quarter 2003 sales and gross margins of approximately $1.8 million and $700,000, respectively.
In Europe, third quarter 2003 sales of $34.9 million were flat when compared to the corresponding quarter last year. Somewhat lower local currency sales, reflecting ongoing sluggishness in industrial markets, were offset when stated in U.S. dollars by the favorable translation effect of a stronger Euro.
International sales of $24.1 million in the third quarter of 2003 were $6.2 million, or 35%, higher than in third quarter 2002. Sales growth was primarily related to improved shipments of respiratory protection products in Latin America.
Gross profit for the third quarter of 2003 was $64.3 million, an increase of $11.3 million, or 21%, from $53.0 million in third quarter 2002. The ratio of gross profit to sales was 37.4% in the third quarter of 2003 compared to 37.0% in third quarter 2002. The higher gross profit percentage in the current quarter includes a favorable adjustment related to a change in the vacation vesting policy for U.S. employees. Under the vacation policy adopted in 2003, employees earn their vacation entitlement during the current year. Previously, vacation vested on the last day of the prior year. The policy change resulted in a favorable adjustment to cost of sales of $1.0 million during the third quarter of 2003. This policy change is expected to result in an additional favorable adjustment to cost of sales of approximately $1.0 million in the fourth quarter of 2003.
Selling, general and administrative expenses in the third quarter of 2003 were $41.8 million, an increase of $6.2 million, or 17%, from $35.6 million in third quarter 2002, but improved as a percentage of sales to 24.3% in the third quarter of 2003 compared to 24.8% in the corresponding quarter last year. The increase in selling, general and administrative expenses reflects higher insurance and selling expenses, and the exchange effect of strengthening international currencies, particularly the Euro. Selling, general and administrative expenses for the third quarter of 2003 include a favorable adjustment of $500,000 related to the previously discussed change in the vacation vesting policy for U.S. employees. This change is expected to result in an additional favorable adjustment to selling, general and administrative expenses of approximately $500,000 in the fourth quarter of 2003.
Depreciation and amortization expense was flat in the third quarter of 2003 at $5.5 million.
Interest expense of $1.0 million was $300,000 lower than in third quarter 2003, reflecting lower short- and long-term debt.
Currency exchange adjustments resulted in a gain of $121,000 in the third quarter of 2003 compared to a loss of $866,000 in the same quarter last year. Current quarter gains were primarily due to the strengthening of the Euro and the Canadian dollar. The third quarter 2002 loss related primarily to the Canadian dollar and the Chilean peso.
Other income and expense was income of $1.6 million in the third quarter of 2003 compared to an expense of $232,000 in the same quarter last year. During the current
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quarter, the company sold its real property in Berlin, Germany for approximately $25.7 million, resulting in a gain of approximately $13.6 million. At the same time, the company entered into an eight year agreement to lease back the portion of the property that it occupies. Under sale-leaseback accounting, $12.1 million of the gain has been deferred and will be amortized over the term of the lease. A gain of $1.5 million was recognized at closing and is included in other income in third quarter 2003.
Income from continuing operations before income taxes was $17.7 million for third quarter 2003 compared to $9.5 million in third quarter 2002, an increase of 86%.
The effective income tax rate for the third quarter of 2003 was 38.0% compared to 44.0% in third quarter 2002. The higher rate in third quarter 2002 related to proportionately higher losses in lower tax rate jurisdictions and differences in permanent items in non-U.S. taxing jurisdictions.
Net income from continuing operations in the third quarter of 2003 was $11.0 million, or 89 cents per basic share, compared to $5.3 million, or 43 cents per basic share, in the third quarter of last year.
Net income from discontinued operations, for which further information is contained in note 12, was a loss of $102,000 for the third quarter of 2003, compared to income of $470,000 in third quarter 2002. The loss in 2003 was primarily related to costs incurred in conjunction with the sale of the Callery Chemical Division. In the third quarter of 2003, an after-tax gain of $13.7 million was recognized from the sale of the Callery Chemical Division to BASF.
Net income for the third quarter of 2003 was $24.5 million, or $2.00 per basic share, compared to $5.8 million, or 47 cents per basic share, in third quarter 2002.
Nine months ended September 30, 2003 and 2002
Sales for the nine months ended September 30, 2003 were $508.3 million, an increase of $95.0 million, or 23%, from $413.3 million for the nine months ended September 30, 2002.
North American sales for the nine months ended September 30, 2003 of $331.0 million were $57.1 million, or 21%, higher than the same period last year. Higher shipments of breathing apparatus to the fire service market and gas masks to homeland security and military markets accounted for a significant portion of the improvement. During 2003, the company changed its standard shipping terms to U.S. distributors. The effect of this change was to delay revenue recognition on the affected shipments, which resulted in a net reduction in sales and gross margins for the nine months ended September 30, 2003 of approximately $4.4 million and $2.0 million, respectively.
Sales in Europe for the nine months ended September 30, 2003 of $106.2 million were $19.4 million, or 22%, higher than the same period in 2002. Improvement in local currency sales reflect the acquisition of Gallet during the second quarter of 2002. When
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stated in U.S. dollars, European sales in the current period also benefited from the favorable currency translation effect of the stronger Euro.
International sales for the first nine months of 2003 of $71.0 million were $18.4 million, or 35%, higher than in the same period last year. Sales growth occurred primarily in the Latin America and Asia Pacific regions. Sales for the nine months ended September 30, 2003 included large shipments of breathing apparatus to the Royal Australian Navy.
Gross profit for the nine months ended September 30, 2003 was $193.6 million, an increase of $38.0 million, or 24%, from $155.6 million in the first nine months of 2002. The ratio of gross profit to sales was 38.0% in the nine months ended September 30, 2003 compared to 37.7% in the corresponding period last year. The higher gross profit percentage in the current year includes a favorable adjustment related to a change in the vacation vesting policy for U.S. employees. Under the vacation policy adopted in 2003, employees earn their vacation entitlement during the current year. Previously vacation vested on the last day of the prior year. The policy change resulted in a favorable adjustment to cost of sales of $2.7 million during the nine months ended September 30, 2003. This policy change is expected to result in an additional favorable adjustment to cost of sales of approximately $1.0 million in the fourth quarter of 2003.
Selling, general and administrative costs for the nine months ended September 30, 2003 were $123.1 million, an increase of $20.2 million, or 20%, from $102.9 million in the same period last year, but improved somewhat as a percentage of sales to 24.2% in the first nine months of 2003 compared to 24.9% in the corresponding period last year. The increase includes higher sales expenses in the U.S., the post-acquisition expenses of Gallet, and the currency translation effects of a stronger Euro. Selling, general and administrative expenses for the nine months ended September 30, 2003 include a favorable adjustment of approximately $1.3 million related to the previously discussed change in the vacation vesting policy for U.S. employees. This change is expected to result in an additional favorable adjustment to selling, general and administrative expenses of approximately $500,000 in the fourth quarter of 2003.
Depreciation and amortization expense was $16.6 million in the nine months ended September 30, 2003, an increase of $731,000, or 5%, from $15.8 million in the same period last year. The increase is primarily due to a full nine months depreciation expense on Gallet assets.
Interest expense for the nine months ended September 30, 2003 was $3.3 million, a decrease of $382,000, or 10%, from $3.7 million in the same period last year. Lower interest expense in 2003 related to reductions in short- and long-term borrowings.
Currency exchange adjustments were a gain of $1.9 million in the nine months ended September 30, 2003 compared to a loss of $314,000 in the same period last year. The 2003 gain related primarily to the strengthening of the Euro and Canadian dollar.
Other income was $2.1 million for the nine months ended September 30, 2003 compared to $1.9 million in the same period last year. During the current year, the company sold its real property in Berlin, Germany for $25.7 million, resulting in a gain of approximately
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$13.6 million. At the same time, the company entered into an eight year agreement to lease back the portion of the property that it occupies. Under sale-leaseback accounting, $12.1 million of the gain has been deferred and will be amortized over the term of the lease. A gain of $1.5 million was recognized at closing and is included in other income for the first nine months of 2003. Other income in the first nine months of 2002 included a gain of $2.1 million on the sale of real estate development property in Pittsburgh.
Income from continuing operations before income taxes was $54.7 million for the nine months ended September 30, 2003 compared to $34.8 million in the first nine months of 2002, an increase of $19.9 million, or 57%.
The effective income tax rate for the nine months ended September 30, 2003 was 38.4% compared to 39.8% in the same period last year. The higher effective rate in 2002 related to differences in permanent items in non-U.S. taxing jurisdictions.
Net income from continuing operations was $33.7 million for the nine months ended September 30, 2003 compared to $20.9 million in the same period last year, an increase of $12.8 million, or 61%.
Income from discontinued operations, for which further information is contained in note 12, was $2.7 million for the first nine months of 2003, an increase of $368,000 from income of $2.3 million in same period last year. The income improvement in 2003 includes the favorable effect of the discontinuance of depreciation expense on property classified as held for sale, partially offset by costs incurred in conjunction with the sale of the Callery Chemical Division. In the current period, an after-tax gain of $13.7 million was recognized from the sale of the Callery Chemical Division to BASF.
Net income for the first nine months of 2003 was $50.0 million, or $4.09 per basic share, compared to $23.3 million, or $1.91 per basic share, in third quarter 2002.
Liquidity and Financial Condition
Continuing operations provided $25.0 million of cash during the nine months ended September 30, 2003 compared to providing $35.7 million in the same period last year. Higher income from continuing operations in the current period was more than offset by changes in operating assets, particularly increases in accounts receivable, which used $17.4 million of cash during the first nine months of 2003. In the same period last year, changes in operating assets and liabilities provided $3.5 million of cash.
Discontinued operations provided $5.6 million of cash in the nine months ended September 30, 2003 compared to providing $6.9 million in the same period last year.
Investing activities provided cash of $49.3 million in nine months ended September 30, 2003 compared to using $31.5 million in the same period last year. Proceeds from the sale of the Callery Chemical Division provided net cash of $63.0 million during the nine months ended September 30, 2003. In 2002, net cash of approximately $14.5 million was used to acquire CGF Gallet.
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Financing activities used $16.4 million of cash in the nine months ended September 30, 2003 compared to using $8.5 million in the same period last year. The higher use of cash for financing activities in 2003 related primarily to reductions in short-term debt.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the company’s financial instrument market risk during the nine months ended September 30, 2003. For additional information, refer to page 19 of the company’s Annual Report to Shareholders for the year ended December 31, 2002.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the company’s disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, the company’s management, including the CEO and CFO, concluded that the company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the company in such reports is accumulated and communicated to the company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. There was no change in the company’s internal control over financial reporting that occurred during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
During the quarter ended September 30, 2003, the company filed or furnished the following reports on Form 8-K:
Contents
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.
Dennis L. Zeitler
Vice President—Finance;
Duly Authorized Officer and
Principal Financial Officer