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 March 31, 2001 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 April 30, 2001, there were outstanding 13,437,969 shares of common stock without par value, including 1,602,660 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) March 31 December 31 2001 2000 ASSETS Current assets Cash $ 17,409 $ 19,408 Temporary investments, at cost which approximates market 5,880 7,133 Trade receivables, less allowance for doubtful accounts $2,130 and $2,363 51,001 47,055 Other receivables 31,106 30,498 Inventories: Finished products 33,268 30,743 Work in process 9,963 10,451 Raw materials and supplies 33,144 31,487 ----------------- ----------------- Total inventories 76,375 72,681 Deferred tax assets 14,638 14,167 Prepaid expenses and other current assets 10,086 10,211 ----------------- ----------------- Total current assets 206,495 201,153 Property, plant and equipment 382,144 383,741 Less accumulated depreciation (224,499) (224,155) ----------------- ----------------- Net property 157,645 159,586 Prepaid pension cost 82,710 78,157 Deferred tax assets 9,331 10,315 Other noncurrent assets 45,631 40,472 ----------------- ----------------- TOTAL $ 501,812 $ 489,683 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable and current portion of long-term debt $ 14,817 $ 6,616 Accounts payable 31,294 32,387 Employees' compensation 12,664 13,202 Insurance 9,590 8,476 Taxes on income 5,905 2,263 Other current liabilities 23,644 24,034 ----------------- ----------------- Total current liabilities 97,914 86,978 ----------------- ----------------- Long-term debt 71,613 71,806 Pensions and other employee benefits 51,612 54,626 Deferred tax liabilities 46,952 47,151 Other noncurrent liabilities 2,548 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 20,335,797 (outstanding 11,831,781 and 11,827,623) 18,927 18,841 Stock compensation trust - 1,617,285 and 1,639,320 shares (25,408) (25,683) Less treasury shares, at cost: Preferred - 50,313 and 49,713 shares (1,629) (1,608) Common - 6,886,731 and 6,868,854 shares (129,411) (129,066) Deferred stock compensation (984) (1,145) Accumulated other comprehensive loss (22,735) (20,869) Earnings retained in the business 388,844 382,426 ----------------- ----------------- Total shareholders' equity 231,173 226,465 ----------------- ----------------- TOTAL $ 501,812 $ 489,683 ================= ================= See notes to consolidated condensed financial statements. 1
MINE SAFETY APPLIANCES COMPANY CONSOLIDATED CONDENSED STATEMENT OF INCOME (Thousands of dollars, except per share amounts) Three Months Ended March 31 2001 2000 Net sales $ 133,595 $ 129,236 Other income 421 1,088 --------------- ---------- 134,016 130,324 --------------- ---------- Costs and expenses Cost of products sold 80,528 78,849 Selling, general and administrative 32,795 32,546 Depreciation and amortization 6,366 6,002 Interest 1,627 784 Currency exchange gains (2) (188) --------------- ---------- 121,314 117,993 --------------- ---------- Income before income taxes 12,702 12,331 Provision for income taxes 4,855 4,872 --------------- ---------- Net income $ 7,847 $ 7,459 =============== ========== Basic earnings per common share $ 0.66 $ 0.58 =============== ========== Diluted earnings per common share $ 0.66 $ 0.58 =============== ========== Dividends per common share $ 0.12 $ 0.11 =============== ========== See notes to consolidated condensed financial statements. 2
MINE SAFETY APPLIANCES COMPANY CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Thousands of dollars) Three Months Ended March 31 2001 2000 OPERATING ACTIVITIES Net income $ 7,847 $ 7,459 Depreciation and amortization 6,366 6,002 Pensions (4,191) (3,410) Net gain on sale of investments and assets (671) (923) Deferred income taxes (134) (655) Changes in operating assets and liabilities (4,570) 3,338 Other - including currency exchange adjustments (3,258) (1,121) ---------- ---------- Cash flow from operating activities 1,389 10,690 ---------- ---------- INVESTING ACTIVITIES Property additions (5,434) (5,159) Dispositions of property and businesses 1,660 1,307 Acquisitions and other investing (6,802) (4,218) ---------- ---------- Cash flow from investing activities (10,576) (8,070) ---------- ---------- FINANCING ACTIVITIES Additions to long-term debt 6 0 Reductions of long-term debt (6) (7) Changes in notes payable and short-term debt 8,404 444 Cash dividends (1,431) (1,471) Company stock purchases (285) (1,240) Company stock sales 361 0 ---------- ---------- Cash flow from financing activities 7,049 (2,274) ---------- ---------- Effect of exchange rate changes on cash (1,114) (481) ---------- ---------- Decrease in cash and cash equivalents (3,252) (135) Beginning cash and cash equivalents 26,541 17,108 ---------- ---------- Ending cash and cash equivalents $ 23,289 $ 16,973 ========== ========== See notes to consolidated condensed financial statements. 3
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, 2000 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) 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. First quarter 2000 share and per share amounts have been restated to reflect a 3-for-1 stock split in May 2000. Three Months Ended March 31 2001 2000 (In Thousands) Net income $ 7,847 $ 7,459 Preferred stock dividends 12 12 ------------- ------------- Income available to common shareholders 7,835 7,447 ------------- ------------- Basic shares outstanding 11,835 12,876 Stock options 91 27 ------------- ------------- Diluted shares outstanding 11,926 12,903 ------------- ------------- Antidilutive stock options 237 369 ------------- ------------- (6) Comprehensive income was $5,981,000 and $5,726,000 for the three months ended March 31, 2001 and 2000, respectively. Comprehensive income includes net income and changes in accumulated other comprehensive income, primarily cumulative translation adjustments, for the period. (7) The company is organized into three geographic operating segments (North America, Europe and Other International), each of which includes a number of operating companies. Reportable segment information is presented in the following table: (In Thousands) Three Months Ended March 31, 2001 North Other Recon- Consol. America Europe International ciling totals Sales to external customers $90,697 $25,066 $17,808 $ 24 $133,595 Intercompany sales 4,738 5,086 331 (10,155) Net income (loss) 6,549 564 743 (9) 7,847 Three Months Ended March 31, 2000 North Other Recon- Consol. America Europe International ciling totals Sales to external customers 84,360 27,283 17,417 176 129,236 Intercompany sales 7,548 3,723 309 (11,580) Net income (loss) 7,066 (242) 646 (11) 7,459 Reconciling items consist primarily of intercompany eliminations and items reported at the corporate level. 4
(8) FAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, applies a control-oriented, financial components approach to financial-asset-transfer transactions. Financial assets, net of retained interests, are removed from the balance sheet when the assets are sold and control is surrendered. In September 2000, FAS No. 125 was replaced by FAS 140 which revised certain accounting and disclosure requirements for securitizations and other transfers of financial assets, but carried over most FAS No. 125 provisions. At March 31, 2001, accounts receivable of $62.0 million were owned by Mine Safety Funding Corporation (MSF), an unconsolidated wholly-owned special purpose bankruptcy-remote subsidiary of the company. The company held a subordinated interest in these receivables of $32.0 million, of which $31.0 million is classified as other receivables. Net proceeds to the company from the securitization arrangement were $29.0 million at March 31, 2001. The key economic assumptions used to measure the retained interest at March 31, 2001 were a discount rate of 8% and an estimated life of 2.75 months. At March 31, 2001, an adverse change in the discount rate or estimated life of 10% and 20% would reduce the fair value of the retained interest by $100,000 and $215,000, 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. (9) Effective January 1, 2001, the company adopted FAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including those embedded in other contracts. Adoption of this standard did not have a significant effect on the company's results or financial position. 5
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, 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 cost reduction efforts, timing and market acceptance of new product introductions, the company's ability to fulfill backlog orders, market and operating conditions of specialty chemical customers, availability of critical raw materials and components, the economic environment, and interest and currency exchange rates. Results of operations - ---------------------- Three months ended March 31, 2001 and 2000 - ------------------------------------------ Sales for the first quarter of 2001 were $133.6 million, an increase of $4.4 million, or 3%, from $129.2 million in the first quarter of 2000. First quarter 2001 sales for North American operations were 8% higher than the first quarter of last year. Shipments of head protection for construction and general industry were significantly higher in 2001. Sales to the fire service market also improved significantly compared to first quarter 2000, reflecting the introduction of the Evolution 4000 thermal imaging camera and the addition of the CairnsHelmets firefighter head protection line which was acquired in 2000. Specialty chemical sales in first quarter 2001 were 18% higher than last year's first quarter, reflecting the rebound in demand from the pharmaceutical industry that began late last year. Incoming orders of both safety products and specialty chemicals exceeded shipments in first quarter 2001, resulting in a strong increase in backlog. In Europe, first quarter 2001 local currency sales to external customers were approximately 2% higher than in first quarter 2000. When stated in U.S. dollars, however, these sales were 8% lower due to adverse currency exchange rate movements. 6
The increase in local currency sales in the current quarter is primarily related to higher shipments in Germany. Sales in other European companies were mixed for the quarter. First quarter 2001 local currency sales for other international operations were 16% higher than in first quarter 2000, reflecting strong shipments in most markets, but particularly Australia and South America. Adverse currency exchange effects reduced sales growth of other international operations to 2% when stated in U.S. dollars. Gross profit for the first quarter of 2001 was $53.1 million, a increase of $2.7 million, or 5%, from $50.4 million in first quarter 2000. The ratio of gross profit to sales was 39.7% in the first quarter of 2001 compared to 39.0% in the corresponding quarter last year. The improved gross profit percentage reflects favorable cost adjustments on several large orders. Excluding this effect, the gross profit percentage remained flat year-to-year. Selling, general and administration costs in the first quarter of 2001 were $32.8 million, an increase of $249,000, or 1%, compared to $32.5 million in the prior year first quarter. The increase occurred in North America and relates mainly to selling expenses in the consumer products market and compensation expenses. Reported selling, general and administrative expenses at international companies were somewhat lower as a result of the strong U.S. dollar. Depreciation and amortization expense in first quarter 2001 was $6.4 million, an increase of $364,000, or 6%, over $6.0 million in the corresponding quarter last year. The increase is primarily due to depreciation expense and goodwill amortization associated with acquisitions made in mid-2000. Interest expense was $1.6 million in first quarter 2001 compared to $784,000 in first quarter 2000. Higher interest expense in first quarter 2001 was related to the additional debt required for the June 2000 repurchase of common stock from the family of a co-founder and the August 2000 acquisition of CairnsHelmets. Other income was $421,000 for first quarter 2001 compared to $1.1 million in first quarter 2000. Other income in first quarter 2001 includes a gain of $700,000 on the sale of a safety products distribution business in Sweden. The prior year first quarter included a $900,000 gain on the sale of the Merrillville, Indiana repair facility. Income before income taxes was $12.7 million for first quarter 2001 compared to $12.3 million in first quarter 2000, an increase of $371,000, or 3%. The effective income tax rate for the first quarter of 2001 was 38.2% compared to 39.5% in first quarter 2000. The lower effective rate in 2001 reflects lower tax rates in Germany and proportionately higher income in Sweden at a lower statutory rate. Net income in the first quarter of 2001 was $7.8 million, or 66 cents per basic share, compared to $7.5 million, or 58 cents per basic share, in the first quarter last year. 7
Corporate Initiatives - --------------------- In February 2001, MSA acquired Surety Manufacturing and Testing, Ltd. in Canada. Surety is a leading provider of fall protection equipment and rescue systems to railway, construction, and utility markets. This acquisition complements the existing line of MSA Rose fall protection products and services. In March 2001, the company sold its safety products distribution business in Sweden for a pre-tax gain of approximately $700,000. The sale, which will allow the company to focus on core MSA products, is part of ongoing European reorganization and cost-reduction efforts. During the first quarter of 2001, the company made significant progress in advancing its e-business capabilities. Initial applications, which are currently coming on-stream, facilitate business relationships with the company's North American distributor/partners, including an on-line catalog, and internet- enabled inventory, order, and account status query capabilities. Liquidity and Financial Condition - --------------------------------- Cash and cash equivalents decreased $3.3 million during the first quarter of 2001 compared with a decrease of $135,000 in the first quarter of 2000. Operating activities provided $1.4 million of cash in first quarter 2001 compared to providing $10.7 million in the same period last year. Lower cash provided by operations in first quarter 2001 was due primarily to increases in inventory and trade receivables. Cash of $10.6 million was used for investing activities in the first quarter of 2001 compared with the use of $8.1 million in the first quarter of 2000. The increased use of cash is primarily related to the acquisition of Surety Manufacturing and Testing, Ltd. Financing activities provided $7.0 million in the first quarter of 2001 and used $2.3 million in the same period last year. Higher cash provided by financing activities in 2001 relates primarily to short term borrowing and lower treasury stock purchases. Available credit facilities and internal cash resources are considered adequate to provide for future operations, capital requirements and dividends to shareholders. Financial Instrument Market Risk - -------------------------------- There have been no material changes in the company's financial instrument market risk during the first three months of 2001. For additional information, refer to page 17 of the company's Annual Report to Shareholders for the year ended December 31, 2000. 8
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 None (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 2001. 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: May 11, 2001 By /s/ Dennis L. Zeitler -------------------------- Dennis L. Zeitler Vice President - Finance; Principal Financial Officer 9