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 June 30, 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 July 31, 2001, there were outstanding 13,403,976 shares of common stock without par value, including 1,521,467 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) June 30 December 31 2001 2000 ASSETS Current assets Cash $ 13,581 $ 19,408 Temporary investments, at cost which approximates market 4,374 7,133 Trade receivables, less allowance for doubtful accounts $2,343 and $2,363 53,157 47,055 Other receivables 27,007 30,498 Inventories: Finished products 32,031 30,743 Work in process 13,687 10,451 Raw materials and supplies 33,611 31,487 ----------------- ------------------- Total inventories 79,329 72,681 Deferred tax assets 14,828 14,167 Prepaid expenses and other current assets 11,509 10,211 ----------------- ------------------- Total current assets 203,785 201,153 Property, plant and equipment 385,062 383,741 Less accumulated depreciation (228,007) (224,155) ----------------- ------------------- Net property 157,055 159,586 Prepaid pension cost 87,691 78,157 Deferred tax assets 8,883 10,315 Other noncurrent assets 45,538 40,472 ----------------- ------------------- TOTAL $ 502,952 $ 489,683 ================= =================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable and current portion of long-term debt $ 10,074 $ 6,616 Accounts payable 30,951 32,387 Employees' compensation 12,226 13,202 Insurance 10,276 8,476 Taxes on income 6,132 2,263 Other current liabilities 25,468 24,034 ----------------- ------------------- Total current liabilities 95,127 86,978 ----------------- ------------------- Long-term debt 71,362 71,806 Pensions and other employee benefits 51,285 54,626 Deferred tax liabilities 47,132 47,151 Other noncurrent liabilities 2,673 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 11,848,589 and 11,827,623) 19,086 18,841 Stock compensation trust - 1,564,534 and 1,639,320 shares (24,511) (25,683) Less treasury shares, at cost: Preferred - 50,313 and 49,713 shares (1,629) (1,608) Common - 6,922,674 and 6,868,854 shares (130,501) (129,066) Deferred stock compensation (891) (1,145) Accumulated other comprehensive loss (23,898) (20,869) Earnings retained in the business 394,148 382,426 ----------------- ------------------- Total shareholders' equity 235,373 226,465 ----------------- ------------------- TOTALS $ 502,952 $ 489,683 ================= =================== See notes to consolidated condensed financial statements 1
MINE SAFETY APPLIANCES COMPANY CONSOLIDATED CONDENSED STATEMENT OF INCOME (Thousands of dollars, except earnings per share) Three Months Ended Six Months Ended June 30 June 30 2001 2000 2001 2000 Net sales $134,781 $121,683 $268,376 $250,919 Other income 72 830 493 1,918 ----------------- ----------------- ---------------- ---------------- 134,853 122,513 268,869 252,837 ----------------- ----------------- ---------------- ---------------- Costs and expenses Cost of products sold 82,917 78,378 163,445 157,227 Selling, general and administrative 32,211 33,443 65,006 65,989 Depreciation and amortization 6,501 5,813 12,867 11,815 Interest 1,403 877 3,030 1,661 Currency exchange losses (gains) 387 (5) 385 (193) ----------------- ----------------- ---------------- ---------------- 123,419 118,506 244,733 236,499 ----------------- ----------------- ---------------- ---------------- Income before income taxes 11,434 4,007 24,136 16,338 Provision for income taxes 4,460 1,181 9,315 6,053 ----------------- ----------------- ---------------- ---------------- Net income $ 6,974 $ 2,826 $ 14,821 $ 10,285 ================= ================= ================ ================ Basic earnings per common share $ 0.59 $ 0.22 $ 1.25 $ 0.81 ================= ================= ================ ================ Diluted earnings per common share $ 0.58 $ 0.22 $ 1.24 $ 0.80 ================= ================= ================ ================ Dividends per common share $ 0.14 $ 0.12 $ 0.26 $ 0.23 ================= ================= ================ ================ See notes to consolidated condensed financial statements 2
MINE SAFETY APPLIANCES COMPANY CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Thousands of dollars) Six Months Ended June 30 2001 2000 OPERATING ACTIVITIES Net income $ 14,821 $ 10,285 Depreciation and amortization 12,867 11,815 Pensions (8,750) (7,363) Net gain on sale of investments and assets (653) (1,618) Deferred income taxes 86 (1,004) Changes in operating assets and liabilities (4,735) 21,456 Other - including currency exchange adjustments (3,995) (2,966) ---------------- ---------------- Cash flow from operating activities 9,641 30,605 INVESTING ACTIVITIES Property additions (11,448) (9,206) Dispositions of property and businesses 1,581 1,888 Acquisitions and other investing (7,301) (4,593) ---------------- ---------------- Cash flow from investing activities (17,168) (11,911) FINANCING ACTIVITIES Changes in notes payable and short-term debt 3,652 11,276 Additions to long-term debt 6 7 Reductions of long-term debt (471) (266) Cash dividends (3,100) (3,008) Company stock purchases (1,375) (53,234) Company stock sales 1,392 27,088 ---------------- ---------------- Cash flow from financing activities 104 (18,137) Effect of exchange rate changes on cash (1,163) (318) ---------------- ---------------- (Decrease) increase in cash and cash equivalents (8,586) 239 Beginning cash and cash equivalents 26,541 17,108 ---------------- ---------------- Ending cash and cash equivalents $ 17,955 $ 17,347 ================ ================ 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. Three Months Ended Six Months Ended June 30 June 30 2001 2000 2001 2000 (In thousands) (In thousands) Net income $ 6,974 $ 2,826 $ 14,821 $ 10,285 Preferred stock dividends declared 12 12 24 24 --------------- -------------- --------------- ------------- Income available to common shareholders 6,962 2,814 14,797 10,261 --------------- -------------- --------------- ------------- Basic shares outstanding 11,841 12,599 11,838 12,738 Stock options 165 77 128 52 --------------- -------------- --------------- ------------- Diluted shares outstanding 12,006 12,676 11,966 12,790 --------------- -------------- --------------- ------------- Antidilutive stock options 8 14 8 14 --------------- -------------- --------------- ------------- (6) Comprehensive income was $5,811,000 and $11,792,000 for the three and six months ended June 30, 2001, respectively, and $1,324,000 and $7,050,000 for the three and six months ended June 30, 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. 4
Reportable segment information is presented in the following table: (In Thousands) North Other Recon- Consol. America Europe International ciling totals Three Months Ended June 30, 2001 Sales to external customers $ 93,604 $22,351 $18,794 $ 32 $134,781 Intercompany sales 4,587 5,447 630 (10,664) Net income (loss) 5,939 (45) 1,024 56 6,974 Six Months Ended June 30, 2001 Sales to external customers 184,301 47,417 36,602 56 268,376 Intercompany sales 9,325 10,533 961 (20,819) Net income 12,488 519 1,767 47 14,821 Three Months Ended June 30, 2000 Sales to external customers 78,882 24,311 18,585 (95) 121,683 Intercompany sales 6,709 3,783 373 (10,865) Net income (loss) 2,652 (463) 663 (26) 2,826 Six Months Ended June 30, 2000 Sales to external customers 163,242 51,594 36,002 81 250,919 Intercompany sales 14,257 7,506 682 (22,445) Net income (loss) 9,718 (705) 1,309 (37) 10,285 Reconciling items consist primarily of intercompany eliminations and items reported at the corporate level. (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 June 30, 2001, accounts receivable of $57.9 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 $28.0 million, of which $27.0 million is classified as other receivables. Net proceeds to the company from the securitization arrangement were $29.0 million at June 30, 2001. The key economic assumptions used to measure the retained interest at June 30, 2001 were a discount rate of 6 1/2% and an estimated life of 2.4 months. At June 30, 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 $75,000 and $150,000, 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. (10) The company will adopt FAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. Under FAS No. 142 goodwill and other intangible assets with indefinite lives are not amortized, but are subject to periodic impairment tests that must be performed at least annually. Adoption of this standard will reduce amortization expense beginning in 2002; however, impairment tests could result in future periodic write-downs. The company is reviewing the provisions of this statement and its impact on results of operations and 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 new products, cost reduction programs, fire department funding program, liquidity, sales and earnings, 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, market acceptance of new products, the company's ability to fulfill order backlogs, market fire service market conditions, the economic environment, and interest and currency exchange rates. Results of operations - ---------------------- Three months ended June 30, 2001 and 2000 - ----------------------------------------- Sales for the second quarter of 2001 were $134.8 million, an increase of $13.1 million, or 11%, from $121.7 million in the second quarter of 2000. Second quarter 2001 sales for North American operations were 19% higher than in the second quarter of last year. Sales to the fire service market improved significantly, reflecting the introduction of the Evolution line of thermal imaging cameras and the CairnsHelmets line of firefighter head protection and continuing strength in shipments of breathing apparatus. Second quarter 2001 sales also include higher shipments of gas masks, breathing apparatus, and goggles to the U.S. government. Specialty chemical sales in second quarter 2001 were 18% higher than last year's second quarter. Specialty chemical sales to pharmaceutical industry customers were depressed during most of 2000. Incoming orders of safety products exceeded shipments in second quarter 2001, resulting in higher backlog. The increase includes an order from the Chicago Fire department for more than 1,000 self-contained breathing apparatus. Shipments on this order began in June and are expected to be completed in September. Despite the increase in safety products order backlog during the quarter, the company believes that fire service orders are being delayed by continued uncertainty in the timing and selection of recipients of funding to be granted to U.S. fire departments under the Federal Emergency Management Agency (FEMA) Assistance to Firefighters Program. This delay in fire department orders has been observed by other suppliers to the fire service market, and some expect that orders could be strong later in the year from departments that receive FEMA funding 6
and also those who do not but will choose to expend other resources. Specialty chemical order backlog decreased sharply during the current quarter. In Europe, second quarter 2001 sales to external customers were 8% lower than in second quarter 2000. Increases in local currency sales in some markets were more than offset by currency exchange rate movements. Local currency sales growth in the current quarter occurred primarily in Germany. Sales in other European companies, were mixed, but overall, were somewhat lower for the quarter. Second quarter 2001 local currency sales for other international operations were 19% higher than in second quarter 2000, reflecting strong shipments in most markets. However, currency exchange effects reduced U.S. dollar sales growth of other international operations to 1%. Gross profit for the second quarter of 2001 was $51.9 million, an increase of $8.6 million, or 20%, from $43.3 million in second quarter 2000. The ratio of gross profit to sales was 38.5% in the second quarter of 2001 compared to 35.6% in the corresponding quarter last year. The improved gross profit percentage reflects reductions in North American manufacturing costs. Selling and administration costs in the second quarter of 2001 were $32.2 million, a decrease of $1.2 million, or 4%, from $33.4 million in the second quarter of 2000. The decrease occurred in European and other international operations and reflects lower reorganization charges in 2001 and the currency translation effect of the strong U.S. dollar. Depreciation and amortization expense in second quarter 2001 was $6.5 million, an increase of $688,000, or 12%, over $5.8 million in the corresponding quarter last year. The increase is primarily due to depreciation and goodwill amortization associated with acquisitions made in mid-2000 and early 2001. Interest expense was $1.4 million in second quarter 2001 compared to $877,000 in second quarter 2000. Higher interest expense in the current year reflects 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 Cairns Helmets. Other income was $72,000 for second quarter 2001 compared to $830,000 in second quarter 2000. Other income in the second quarter of 2000 included a gain of $700,000 on the sale of property. Income before income taxes was $11.4 million for second quarter 2001 compared to $4.0 million in second quarter 2000. The effective income tax rate for the second quarter of 2001 was 39.0% compared to 29.5% in second quarter 2000. The lower effective rate in 2000 was related to tax 7
benefits on international operating losses, primarily in Germany, and adjustments to prior year foreign sales corporation tax benefits in the U.S. Net income in the second quarter of 2001 was $7.0 million, or 59 cents per basic share, compared to $2.8 million, or 22 cents per basic share, in the second quarter last year. Six months ended June 30, 2001 and 2000 - --------------------------------------- Sales for the six months ended June 30, 2001 were $268.4 million, an increase of $17.5 million, or 7%, from $250.9 million last year. North American sales for the first six months of 2001 were 13% higher than the same period last year. Shipments of thermal imaging cameras and helmets to the fire service market; gas masks and goggles to defense and civilian preparedness markets; and helmets for construction and industrial markets all improved significantly. Instrument sales were also higher, reflecting new product introductions. Sales of specialty chemicals were significantly higher than in the first six months of 2000, which experienced delayed orders from pharmaceutical industry customers. Incoming orders for safety products exceeded sales during the first six months of 2001, particularly in government markets, resulting in a higher backlog. Specialty chemical order backlog decreased during the first six months of 2001. Sales in Europe for the first six months of 2001 were 8% lower than the same period in 2000. Modest local currency sales growth was more than offset by currency exchange rate movements when stated in U.S. dollars. The local currency sales improvement occurred primarily in Germany. Local currency sales of other international operations for the first six months of 2001 were 18% higher than in the same period last year, with all markets showing improvement. When stated in U.S. dollars, however, other international sales increased 2% due to currency exchange rate movements. Local currency sales were higher in all geographic markets, but particularly Australia, Brazil and South Africa. Gross profit for the six months ended June 30, 2001 was $104.9 million, an increase of $11.2 million, or 12%, from $93.7 million in the first six months of 2000. The ratio of gross profit to sales was 39.1% in the six months ended June 30, 2001 compared to 37.3% in the corresponding period last year. The higher gross profit percentage reflects manufacturing cost reductions and favorable cost adjustments on several large orders. Selling, general and administration costs in the six months ended June 30, 2001 were $65.0 million, a decrease of $1.0 million, or 2%, from $66.0 million in the same period last year. The decrease occurred in European and other international operations and reflects lower reorganization charges in 2001 and the translation effect of the strong U.S. dollar. 8
Depreciation and amortization expense was $12.9 million in the six months ended June 30, 2001 an increase of $1.1 million, or 9%, from $11.8 million in the same period last year. The increase is primarily due to depreciation and goodwill amortization associated with acquisitions made in mid-2000. Interest expense for the six months ended June 30, 2001 was $3.0 million, an increase of $1.3 million, or 76%, from $1.7 million in the same period last year. Higher interest expense in 2001 relates to mid-2000 borrowings to finance acquisitions and stock repurchases. Other income was $493,000 for six months ended June 30, 2001 compared to $1.9 million in the first half of 2000. Other income in the first half of 2000 included $1.5 million in gains on sales of property and the Merrillville repair business. Income before income taxes was $24.1 million for the six months ended June 30, 2001 compared to $16.3 million in the first six months of 2000, an increase of $7.8 million or 48%. The effective income tax rate for the six months ended June 30, 2001 was 38.6% compared to 37.0% in the same period last year. The lower effective rate in 2000 was due to 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 six months ended June 30, 2001 was $14.8 million, or $1.25 per basic share, compared to $10.3 million, or 81 cents per basic share, in the first six months of 2000. Liquidity and Financial Condition - --------------------------------- Cash and cash equivalents decreased $8.6 million during the first half of 2001 compared with an increase of $239,000 in the first half of 2000. Operating activities provided $9.6 million of cash in first half of 2001 compared to providing $30.6 million in the same period last year. Lower cash provided by operations in 2001 is related to changes in working capital, primarily receivables and inventory. During the first half of 2001, inventory and receivables increased, while in the same period last year these items were reduced. Cash of $17.2 million was used for investing activities in the first half of 2001 compared with the use of $11.9 million in 2000. The increased use of cash is primarily related to the acquisition of Surety Manufacturing and Testing, Ltd. in February 2001 and manufacturing and e-business system property additions. Financing activities provided $104,000 in the first half of 2001 and used $18.1 million in the same period last year. Higher use of cash in 2000 related to the June 2000 repurchase of common stock from the family of a co-founder. 9
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 six 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. 10
PART II OTHER INFORMATION MINE SAFETY APPLIANCES COMPANY Item 1. Legal Proceedings Not Applicable Item 4. Submission of Matters to a Vote of Security Holders (a) May 10, 2001 - Annual Meeting (b) Directors elected at Annual Meeting: John T. Ryan III Directors whose term of office continued after the meeting: Joseph L. Calihan Calvin A. Campbell, Jr. Thomas B. Hotopp L. Edward Shaw, Jr. Thomas H. Witmer (c) Election of one Director for a term of three years: John T. Ryan III For 11,258,684 Withhold 426,146 Abstentions/ -0- Broker Nonvotes Selection of PricewaterhouseCoopers LLP as independent accountants for the year ending December 31, 2001. For 11,682,548 Against 1,562 Abstentions/ 720 Broker Nonvotes (d) 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 June 30, 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: August 8, 2001 By /s/ Dennis L. Zeitler Dennis L. Zeitler Vice President - Finance; Principal Financial Officer 11