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, 2003

Commission File No. 1-15579

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes    X

No

 

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.

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PART I FINANCIAL INFORMATION

MINE SAFETY APPLIANCES COMPANY

CONSOLIDATED CONDENSED BALANCE SHEET

(Thousands of dollars, except share data)

 

		September 30				December 31
		2003				2002
		Unaudited
ASSETS
Current Assets
Cash and cash equivalents		$	101,689			$	36,477
Trade receivables, less allowance for doubtful accounts of $5,912 and $4,134			82,151				58,648
Other receivables			40,702				35,456
Inventories:
Finished products			44,536				28,964
Work in process			18,204				14,936
Raw materials and supplies			26,365				32,848
Total inventories			89,105				76,748
Deferred tax assets			15,283				20,396
Prepaid expenses and other current assets			39,735				10,157
Assets held for sale			4,919				45,062
Total current assets			373,584				282,944
Property, plant and equipment			352,013				348,510
Less accumulated depreciation			(236,160	)			(222,905	)
Net property			115,853				125,605
Prepaid pension cost			119,262				107,338
Deferred tax assets			14,643				7,800
Goodwill			44,104				42,963
Other noncurrent assets			13,025				13,115
TOTAL		$	680,471			$	579,765
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Notes payable and current portion of long-term debt		$	5,014			$	14,060
Accounts payable			36,414				30,979
Employees’ compensation			16,942				16,216
Insurance			12,544				8,899
Taxes on income			13,250				3,748
Other current liabilities			42,598				25,798
Total current liabilities			126,762				99,700
Long-term debt			63,982				64,350
Pensions and other employee benefits			67,793				61,198
Deferred tax liabilities			66,311				61,402
Other noncurrent liabilities			15,072				4,053
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			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 20,580,109 and 20,580,109 (outstanding 12,266,824 and 12,207,029)			29,773				28,626
Stock compensation trust—1,293,794 and 1,384,629 shares			(20,274	)			(21,697	)
Less treasury shares, at cost:
Preferred—51,554 and 50,313 shares			(1,690	)			(1,629	)
Common—7,019,491 and 6,988,451 shares			(134,549	)			(133,198	)
Deferred stock compensation			(1,210	)			(801	)
Accumulated other comprehensive (loss)			(12,775	)			(20,501	)
Earnings retained in the business			477,707				434,693
Total shareholders’ equity			340,551				289,062
TOTAL		$	680,471			$	579,765

 

See notes to consolidated condensed financial statements.

 

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MINE SAFETY APPLIANCES COMPANY

CONSOLIDATED CONDENSED STATEMENT OF INCOME

(Thousands of dollars, except per share amounts)

 

		Three Months Ended September 30 Unaudited								Nine Months Ended September 30 Unaudited
		2003				2002				2003				2002
Net sales		$	171,927			$	143,398			$	508,257			$	413,318
Other income (expense)			1,586				(232	)			2,116				1,923
			173,513				143,166				510,373				415,241
Costs and expenses
Cost of products sold			107,609				90,398				314,644				257,701
Selling, general and administrative			41,761				35,621				123,076				102,874
Depreciation and amortization			5,522				5,480				16,572				15,841
Interest			1,033				1,296				3,325				3,707
Currency exchange (gain) loss			(121	)			866				(1,922	)			314
			155,804				133,661				455,695				380,437
Income from continuing operations before income taxes			17,709				9,505				54,678				34,804
Provision for income taxes			6,725				4,182				21,003				13,860
Net income from continuing operations			10,984				5,323				33,675				20,944
Discontinued operations:
Net income (loss) from discontinued operations			(102	)			470				2,685				2,317
Gain on sale of discontinued operations—after tax			13,658								13,658
Net income		$	24,540			$	5,793			$	50,018			$	23,261
Basic earnings per common share:
Continuing operations		$	0.89			$	0.43			$	2.75			$	1.72
Discontinued operations			1.11				0.04				1.34				0.19
Net income		$	2.00			$	0.47			$	4.09			$	1.91
Diluted earnings per common share:
Continuing operations		$	0.88			$	0.43			$	2.72			$	1.70
Discontinued operations			1.09				0.04				1.32				0.19
Net income		$	1.97			$	0.47			$	4.04			$	1.89
Dividends per common share		$	0.20			$	0.17			$	0.57			$	0.48

 

See notes to consolidated condensed financial statements.

 

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MINE SAFETY APPLIANCES COMPANY

CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS

(Thousands of dollars)

 

		Nine Months Ended September 30 Unaudited
		2003				2002
OPERATING ACTIVITIES
Net income		$	50,018			$	23,261
Net income from discontinued operations			(2,685	)			(2,317	)
Gain on the sale of discontinued operations—after tax			(13,658	)
Net income from continuing operations			33,675				20,944
Depreciation and amortization			16,572				15,841
Pensions			(8,704	)			(11,123	)
Gain on sale of investments and assets			(1,691	)			(44	)
Deferred income taxes			4,412				4,425
Changes in operating assets and liabilities			(17,420	)			3,481
Other—including currency exchange adjustments			(1,865	)			2,214
Cash flow from continuing operations			24,979				35,738
Cash flow from discontinued operations			5,621				6,902
Cash flow from operating activities			30,600				42,640
INVESTING ACTIVITIES
Property additions			(13,300	)			(17,680	)
Property disposals			169				214
Net proceeds from sale of discontinued operations			63,042
Other investing			(570	)			(14,070	)
Cash flow from investing activities			49,341				(31,536	)
FINANCING ACTIVITIES
Additions to long-term debt			229				44
Reductions of long-term debt			(731	)			(1,403	)
Changes in notes payable and short-term debt			(9,149	)			(2,901	)
Cash dividends			(7,004	)			(5,873	)
Company stock purchases			(1,412	)			(846	)
Company stock sales			1,626				2,466
Cash flow from financing activities			(16,441	)			(8,513	)
Effect of exchange rate changes on cash			1,712				466
Increase in cash and cash equivalents			65,212				3,057
Beginning cash and cash equivalents			36,477				26,701
Ending cash and cash equivalents		$	101,689			$	29,758

 

See notes to consolidated condensed financial statements.

 

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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, 2002 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)

During 2003, the company changed the vacation vesting policy for U.S. employees. Under the new policy, employees earn their vacation entitlement during the current year. Previously, vacation vested on the last day of the prior year. The vacation policy change resulted in a favorable adjustment of $1.5 million during the third quarter of 2003 and $4.0 million for the nine months ended September 30, 2003. This policy change is expected to result in an additional favorable adjustment of approximately $1.5 million in the fourth quarter of 2003.

 

(6)

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 reduced third quarter 2003 sales and gross margins by approximately $1.8 million and $700,000, respectively, and year-to-date sales and gross margins by approximately $4.4 million and $2.0 million, respectively.

 

(7)

Basic earnings per share is computed on the weighted average number of shares outstanding during the period. Diluted earnings per share includes the effect of the weighted average stock options outstanding during the period, using the treasury stock method. Antidilutive options are not considered in computing diluted earnings per share.

 

		Three Months Ended September 30						Nine Months Ended September 30
		2003			2002			2003			2002
		(In Thousands)						(In Thousands)
Net income from continuing operations		$	10,984		$	5,323		$	33,675		$	20,944
Preferred stock dividends			11			12			35			36
Income available to common shareholders			10,973			5,311			33,640			20,908
Basic shares outstanding			12,248			12,194			12,230			12,159
Stock options			199			112			138			137
Diluted shares outstanding			12,447			12,306			12,368			12,296
Antidilutive stock options			0			184			0			184

 

(8)	Components of comprehensive income are as follows:

 

		Three Months Ended September 30							Nine Months Ended September 30
		2003			2002				2003			2002
		(In Thousands)							(In Thousands)
Net income from continuing operations		$	10,984		$	5,323			$	33,675		$	20,944
Income from discontinued operations			13,556			470				16,343			2,317
Cumulative translation adjustments			910			(1,881	)			7,726			2,612
Accumulated other comprehensive income			25,450			3,912				57,744			25,873

 

(9)	The company is organized into three geographic operating segments (North America, Europe and International), each of which includes a number of operating companies.

 

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  Reportable segment information is presented in the following table:

 

(In Thousands)

 

Three Months Ended September 30, 2003

 

 

		North America			Europe			International			Reconciling				Consolidated Totals
Sales to external customers		$	112,867		$	34,890		$	24,148		$	22			$	171,927
Intercompany sales			5,361			12,625			694			(18,680	)
Net income from continuing operations			9,558			493			867			66				10,984
Income from discontinued operations			13,556													13,556

 

Nine Months Ended September 30, 2003

 

			North America			Europe			International			Reconciling				Consolidated Totals
Sales to external customers		$	331,034		$	106,164		$	71,039		$	20			$	508,257
Intercompany sales			18,241			38,292			2,339			(58,872	)
Net income from continuing operations			26,520			2,158			3,637			1,360				33,675
Income from discontinued operations			16,343													16,343

 

Three Months Ended September 30, 2002

 

		North America			Europe			International			Reconciling				Consolidated Totals
Sales to external customers		$	90,506		$	34,948		$	17,927		$	17			$	143,398
Intercompany sales			4,670			8,559			1,009			(14,238	)
Net income from continuing operations			4,053			951			647			(328	)			5,323
Income from discontinued operations			470													470

 

Nine Months Ended September 30, 2002

 

		North America			Europe			International			Reconciling				Consolidated Totals
Sales to external customers		$	273,888		$	86,725		$	52,651		$	54			$	413,318
Intercompany sales			14,762			24,508			2,099			(41,369	)
Net income from continuing operations			17,308			1,920			1,861			(145	)			20,944
Income from discontinued operations			2,317													2,317

 

Reconciling items consist primarily of intercompany eliminations and items reported at the corporate level.

 

(10)

At September 30, 2003, accounts receivable of $56.1 million were owned by Mine Safety Funding Corporation, an unconsolidated wholly-owned bankruptcy-remote subsidiary of the company. The company held a subordinated interest in these receivables of $41.7 million, of which $40.7 million is classified as other receivables. Net proceeds to the company from the securitization arrangement were $15.0 million at September 30, 2003.

 

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.

 

(11)

The company has adopted the disclosure-only provisions of FAS 123, Accounting for Stock-Based Compensation, and FAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Accordingly, no compensation cost has been recognized for the company’s stock option plans. If the company had elected to recognize compensation cost based on the fair value of the options at the grant date as prescribed by FAS 123, net income and earnings per share would have been reduced to the pro forma amounts shown below:

 

		Three Months Ended September 30								Nine Months Ended September 30
(In thousands)		2003				2002				2003				2002
Net income as reported		$	24,540			$	5,793			$	50,018			$	23,261
Fair value of stock options granted, net of tax			(419	)			(679	)			(928	)			(1,702	)
Pro forma net income			24,121				5,114				49,090				21,559

 

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Basic earnings per share:
As reported		$	2.00		$	0.47		$	4.09		$	1.91
Pro forma			1.97			0.42			4.01			1.77
Diluted earnings per share:
As reported		$	1.97		$	0.47		$	4.04		$	1.89
Pro forma			1.94			0.41			3.97			1.75

 

Stock options granted in 2003 vest in one year. Options granted in 2002 vested in six months. For purposes of the proforma disclosure, the estimated fair value of the stock options is amortized over the vesting period. The fair value of the options granted was estimated at the grant dates using the Black-Scholes option pricing model and the following weighted average assumptions for options granted in 2003 and 2002, respectively: risk-free interest rate of 4.0% and 5.3%; dividend yield of 2.1% and 2.0%; expected option life of 9.9 years and 9.9 years; and expected volatility factor of 23% and 23%.

 

(12)

In September 2003, the company sold certain assets of the Callery Chemical Division to BASF for $64.6 million. This transaction resulted in an after-tax gain of $13.7 million. The operating results of Callery Chemical and the gain on the sale of the division, as summarized below, have been classified as discontinued operations for all periods presented.

 

		Three Months ended September 30							Nine Months ended September 30
(In thousands)		2003				2002			2003			2002
Net sales		$	6,522			$	6,026		$	21,345		$	20,910
Income before income taxes			(216	)			748			4,210			3,684
Provision for income taxes			(114	)			278			1,525			1,367
Net income from discontinued operations			(102	)			470			2,685			2,317
Gain on sale of discontinued operations			22,390							22,390
Provision for income taxes			8,732							8,732
Gain on sale of discontinued operations—after tax			13,658							13,658

 

Net assets of Callery Chemical Division classified as held for sale include inventory and property that were sold to BASF and accounts receivable and other current assets that have been retained and will be liquidated.

 

		September 30			December 31
(In thousands)		2003			2002
Accounts receivable and other current assets		$	4,919		$	7,983
Inventory						7,705
Property, net						29,374
Assets held for sale			4,919			45,062

 

(13)

On April 30, 2002, the company acquired CGF Gallet, the leading European manufacturer of protective helmets for the fire service, as well as head protection for the police and military. The acquisition of Gallet complements the company’s strong existing line of fire service products and provides the opportunity to capitalize on opportunities in other areas where Gallet is strong – such as the law enforcement, military, and aviation markets. Gallet has been integrated into the company’s operations and its products are being marketed under the MSA Gallet name. Gallet’s results of operations have been included in the company’s consolidated financial statements from the acquisition date.

 

The following pro forma summary presents the company’s consolidated results as if the Gallet acquisition had occurred at the beginning of 2002. The pro forma information does not necessarily reflect the actual results that would have occurred and is not necessarily indicative of future results of operations for the combined companies.

 

		Nine Months Ended September 30
(In thousands, except earnings per share)		2003			2002
Net sales		$	508,257		$	427,144
Net income from continuing operations			33,675			21,920
Basic earnings per share			2.75			1.80

 

(14)

Various lawsuits and claims have been or may be instituted or asserted against the company, including those pertaining to product liability. While the amounts claimed may be substantial, the ultimate liability of the company may not be determinable because uncertainties exist. Based on information currently available, management believes that the disposition of matters that are pending or asserted will not have a materially adverse effect on the financial position of the company.

 

(15)

On November 4, 2003, the company announced that it will distribute to shareholders net proceeds of $53.9 million received from the sale of the Callery Chemical Division. The net proceeds, estimated to be $4.38 per common share, will be distributed on November 24 to shareholders of record on November 14.

 

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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

MINE SAFETY APPLIANCES COMPANY

 

Item 1. Legal Proceedings

 

Not Applicable

 

Item 6. Exhibits and Reports on Form 8-K

 

(a) Exhibits

 

31.1		Certification of Chief Executive officer pursuant to Rule 13a-14(a)
31.2		Certification of Chief Financial officer pursuant to Rule 13a-14(a)
32		Certification pursuant to 18 U.S.C. (S) 1350

 

(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:

 

Date		Contents
July 21		Item 5—press release announcing Asset Purchase Agreement with BASF Corporation for the sale of the company’s Callery Chemical Division.
August 6		Item 9 (pursuant to Item 12)—press release announcing financial results for the quarter ended June 30, 2003.
September 25		Items 2 and 7—reporting completion of sale of Callery Chemical Division to BASF Corporation and including pro forma consolidated condensed balance sheet as of June 30, 2003.

 

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.

 

 

Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a)

 

I, John T. Ryan III, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Mine Safety Appliances Company;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 13, 2003

 

Exhibit 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a)

 

I, Dennis L. Zeitler, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Mine Safety Appliances Company;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 13, 2003

 

Exhibit 32

 

Certification

 

Pursuant to 18 U.S.C. (S) 1350, the undersigned officers of Mine Safety Appliances Company (the “Company”), hereby certify, to the best of their knowledge, that the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (the “Report”) fully complies with the requirements of Section 13 (a) or 15 (d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: November 13, 2003