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.
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 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
8
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
9
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.
MINE SAFETY APPLIANCES COMPANY | ||||
Date: November 13, 2003 | By | /s/ Dennis L. Zeitler | ||
Dennis L. Zeitler Vice President—Finance; Duly Authorized Officer and Principal Financial Officer |