EXHIBIT 13
Management's Discussion and Analysis
Sales and Earnings
Sales were $500,985,000 in 1996, a 3% increase over the prior year's
$487,668,000. Sales in 1995 were 6% higher than sales in 1994 of $459,607,000.
Net income increased 22% in 1996 to $23,061,000 from $18,912,000 in 1995, which
was 23% higher than 1994's income of $15,329,000. Earnings per share of common
stock was $4.74 in 1996, $3.32 in 1995, and $2.58 in 1994. Earnings per share
have benefitted from share repurchases that have reduced average shares
outstanding 14% in 1996 and 4% in 1995.
The 1996 sales increase occurred primarily in U.S. commercial markets, while
sales to U.S. government agencies once again decreased significantly.
International sales improved only slightly, principally in Europe. As in 1995,
commercial sales in the U.S. continue to be adversely affected by the impasse on
issuance of new Superfund and government site cleanup contracts. The 1995 sales
increase occurred primarily in the international markets, particularly in
Europe. Overall, 1995 sales by U.S. operations were about the same as 1994, with
increases in domestic commercial sales being offset by lower sales to the U.S.
government.
U.S. commercial sales increased almost 6% in 1996, as compared to increases of
4% in 1995 and 9% in 1994. Sales of instruments and specialty chemicals
sustained in 1996 the growth patterns shown in 1995 and 1994. Conversely, lower
government funding and changing customer preferences continue to reduce sales of
respiratory protection equipment. A large part of the comparative sales increase
in 1994 resulted from the acquisition of Hazco Services, Inc. in the last half
of 1993.
Sales by international operations, stated in U.S. dollars, increased 1-1/2% in
1996, 16-1/2% in 1995, and 4-1/2% in 1994. The European economic environment was
stagnant in 1996 after notable market growth occurred in Europe in 1995
following stabilization of economic conditions in 1994. Other international
markets were about the same in 1996 after significant market growth in 1995 and
1994 occurred in Australia, Brazil and Chile.
Shipments of products to U.S. government agencies in 1996 were $30,893,000, an
11% decrease from 1995 sales of $34,815,000, which were 25% lower than 1994
shipments of $46,478,000. These sales represent 6% of consolidated sales in 1996
as compared to 7% in 1995 and 10% in 1994. New contracts received in 1996 were
$14,834,000 as compared to $29,002,000 in 1995 and $27,832,000 in 1994. The 1996
year-end backlog was $14,371,000, a 53% decrease from the 1995 year-end backlog
of $30,430,000.
The 1996 gross profit rate was 38.7%, as compared to 39.1% in 1995 and 37.6% in
1994. The profitability of operations reflects cost reductions from improved
manufacturing and distribution processes, along with careful expense management.
Additionally, commercial sales carry greater margins than military sales; thus
the change of sales mix has also contributed to higher profit margins. The 1996
and 1995 gross profit have also been favorably affected by LIFO credits of
$10,361,000 and $5,455,000, respectively, arising from liquidations of LIFO
inventory values calculated at lower costs incurred in prior years, and
adversely affected by charges of $5,200,000 and $2,140,000, respectively,
arising from inventory valuation adjustments. The completion and partial
termination of some government contracts and ongoing process reengineering has
resulted in significant reductions in U.S. manufacturing inventories.
Depreciation, selling and administrative expenses were 31% of sales in 1996, 32%
in 1995, and 31% in 1994. The after-tax effects of foreign currency exchange
losses charged to income in 1996 reduced net income $667,000 or $.14 per share,
as compared to $1,279,000 or $.23 per share in 1995, and $3,840,000 or $.65 per
share in 1994. The more significant losses resulted from the currency valuation
changes that occurred in Brazil and Mexico in each of the three years. The
effective income tax rates were 37.1% in 1996, 42.9% in 1995, and 40.6% in 1994.
Restructuring
During 1996 the company initiated restructuring efforts to reduce its cost
structure and improve its competitive position. These actions included employee
reductions, writedowns for impaired assets, and facilities consolidation, the
most significant of which is the planned closing of the Esmond, Rhode Island
plant primarily because of the low level of personal protective equipment
business with the U.S. government. Commercial product activities currently
performed at Esmond will be relocated to other safety product manufacturing
facilities.
The more significant costs included in the $7,786,000 charge to 1996 operations
are:
(1) separation pay of $4,581,000, of which $1,303,000 was paid in 1996. The
number of employees affected is approximately 270, of which about 110 had
terminated as of December 31, 1996. These terminations were primarily in
manufacturing operations and administration.
(2) building, machinery and tooling writedowns, the primary non-cash provisions,
of $2,961,000.
10
The accrued termination benefits will be paid during 1997. Other significant
cash outlays over the next one to two years will be incurred for relocation of
people and equipment, site preparation, start-up costs, and new equipment, and
will be charged to income primarily when incurred. The major portion of these
costs are expected to occur in 1997. Anticipated future benefits will result
from the reduced costs associated with a downsized production capacity better
aligned with product demands.
Restructuring charges of $730,000 in 1995 related primarily to workforce
reductions at international locations, whereas charges of $3,086,000 in 1994
were primarily applicable to completing the disposition of assets of the former
Catalyst Research Division, which was closed in 1992.
Financial Condition and Funds Flow
Cash and cash equivalents decreased $6,854,000 during 1996. Accounts receivable
increased $10,785,000 to $101,740,000 at December 31, 1996. Trade receivables
expressed in number of days sales outstanding were 71 days, as compared to 65
days in 1995. Inventories decreased $6,581,000 to $77,040,000 at December 31,
1996, resulting from completion of government contracts, improvements in
manufacturing and distribution processes, and currency exchange rate changes.
Inventory measured against sales turned 6.5 times in 1996 and 5.8 times in 1995.
The working capital ratio was 2.5 and 3.2 to 1 at years-end 1996 and 1995,
respectively.
Short-term debts of international affiliates are payable in local currencies,
which is in keeping with the company's policy of minimizing foreign currency
exposures by offsetting foreign currency assets with foreign currency debt. The
average interest rate on these loans, which include the effects of borrowing in
certain countries where local inflation has resulted in high interest rates, was
approximately 13%.
Long-term debt and the current portion thereof decreased $1,458,000 to
$15,871,000, a conservative 6% of total capital. Total capital is defined as
long-term debt plus current portion of long-term debt and shareholders' equity.
Capital expenditures were $21,583,000 in 1996, as compared to $19,136,000 in
1995. The company has continued its program of plant and equipment modernization
to increase efficiency of existing manufacturing and distribution facilities.
For the most part, capital expenditures were financed internally through
retained earnings. In the past five years, approximately $107 million has been
spent on new plants, equipment and distribution facilities.
Dividends paid on the common stock during 1996 (the 79th consecutive year of a
dividend payment) were $1.10 per share, up from the $1.06 per share paid during
1995 and $.94 per share paid
11
in 1994. Cash dividends have been paid at a conservative percentage of income,
which has permitted the company to finance its growth almost exclusively through
retained earnings. During 1996, the company repurchased 601,962 common shares
for $28,853,000. As of December 31, 1996, an additional 500,000 shares may be
repurchased under current authorizations.
Credit available at year-end with banks was the U.S. dollar equivalent of
$17,157,000. The company's financial position remains strong and should provide
adequate capital resources for growth.
Cumulative Currency Translation Adjustment
The year-end position of the U.S. dollar relative to foreign currencies resulted
in translation losses of $747,000 being charged to the cumulative translation
adjustments shareholders equity account in 1996, as compared to gains of
$2,876,000 in 1995 and $5,050,000 in 1994. Significant losses occurred in
Germany and Japan, offset to some degree by gains in Australia and Britain, in
1996, while significant gains occurred in Germany in 1995 and in Australia,
Britain, and Germany in 1994.
The company's stock transfer agent is Norwest Bank Minnesota, N.A., 161 North
Concord Exchange, P. O. Box 738, South St. Paul, MN 55075-0738.
Common Stock
At December 31, 1996, there were 4,611,125 shares of common stock outstanding.
There were approximately 410 identifiable common stockholders as of November 15,
1996, a recent date for dividends. The common stock last-sale price and up-to-
the-minute volume information (Symbol: MNES) is included in the National
Association of Security Dealers, Inc., (NASDAQ) National Market System. The
quarterly high and low price quotations for common shares follow:
1996 1995
- -----------------------------------------------------------------------------------------------------------
Quarter High Low High Low
- -----------------------------------------------------------------------------------------------------------
First $52-1/4 $45-1/4 $45-3/4 $42-1/2
Second $48 $41 $53 $43-1/2
Third $51-5/8 $41-1/4 $55 $50-1/2
Fourth $55-1/2 $50-1/4 $52-1/4 $41
Common stock quarterly cash dividend information is as follows:
Amount
Per Record Payment
Quarter Share Date Date
- -----------------------------------------------------------------------------------------------------------
1996
- ----
First $ .27 Feb. 16, 1996 March 10, 1996
Second $ .27 May 17, 1996 June 10, 1996
Third $ .28 Aug. 16, 1996 Sept. 10, 1996
Fourth $ .28 Nov. 15, 1996 Dec. 10, 1996
-------
Total $ 1.10
-------
1995
- ----
First $ .25 Feb. 17, 1995 March 10, 1995
Second $ .27 May 12, 1995 June 10, 1995
Third $ .27 Aug. 11, 1995 Sept. 10, 1995
Fourth $ .27 Nov. 17, 1995 Dec. 10, 1995
-------
Total $ 1.06
-------
12
MSA 1996 Financial Review
Report of Management
Mine Safety Appliances Company's consolidated financial statements and related
notes that appear in this Annual Report to Shareholders were prepared by the
company in accordance with generally accepted accounting principles. In
fulfilling its responsibilities for the integrity and objectivity of the
consolidated financial statements, management maintains accounting procedures
designed to provide accurate books, records and accounts which reasonably and
fairly reflect the transactions of the company in a consistent manner on the
accrual basis of accounting.
Company personnel are trained and given responsibilities to ensure adequate
internal accounting controls at a cost commensurate with the risks involved.
Internal accounting controls, monitored by an internal audit staff, provide
reasonable assurances that transactions are executed in accordance with proper
authorization and that adequate accountability for the company's assets is
maintained.
The Board of Directors, through its Audit Committee, is responsible for
assuring that management fulfills its responsibilities in the preparation of the
financial statements. The Audit Committee meets at least twice a year with the
company's independent accountants to discuss the scope of their examination and
any significant findings resulting therefrom.
/s/ James E. Herald
James E. Herald
Vice President--Finance
Chief Financial Officer
Report of Independent Accountants
To the Shareholders and Board of Directors of Mine Safety Appliances Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of earnings retained in the business, and of
cash flows present fairly, in all material respects, the financial position of
Mine Safety Appliances Company and its subsidiaries at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Pittsburgh, Pennsylvania
February 17, 1997
13
Consolidated Statement of Income
(In thousands, except per share amounts)
Year Ended December 31 1996 1995 1994
Net sales $500,985 $ 487,668 $ 459,607
Other income 5,870 4,191 5,463
--------------------------------
506,855 491,859 465,070
Costs and expenses
Cost of products sold 307,112 296,845 286,725
Selling, general and administrative 133,071 138,187 124,714
Depreciation 22,373 20,002 18,527
Interest 1,595 1,730 2,224
Foreign currency losses 735 1,233 3,968
Facilities consolidation and restructuring charges 7,786 730 3,086
Contract costs recovery (2,484)
--------------------------------
470,188 458,727 439,244
--------------------------------
Income before income taxes 36,667 33,132 25,826
Provision for income taxes 13,606 14,220 10,497
--------------------------------
Net income $ 23,061 $ 18,912 $ 15,329
================================
Earnings per common share $4.74 $3.32 $2.58
================================
Consolidated Statement of Earnings Retained in the Business
(In thousands)
Year Ended December 31 1996 1995 1994
At beginning of year $309,712 $ 296,993 $ 287,286
Net income 23,061 18,912 15,329
Dividends declared
Common (6,811) (6,140) (5,569)
Preferred (64) (53) (53)
--------------------------------
At end of year $325,898 $ 309,712 $ 296,993
================================
See notes to consolidated financial statements.
14
Consolidated Balance Sheet
(In thousands, except per share amounts)
December 31 1996 1995
Assets
Current Assets
Cash $ 7,963 $ 4,807
Temporary investments, at cost which approximates market 17,133 27,143
Receivables, less allowance for doubtful accounts $2,993 and $2,640
101,740 90,955
Inventories 77,040 83,621
Deferred tax assets--net 18,659 16,165
Prepaid expenses and other current assets 5,872 5,934
--------------------
Total current assets 228,407 228,625
--------------------
Property
Land 6,196 6,639
Buildings 106,767 106,927
Machinery and equipment 224,390 218,977
Construction in progress 10,079 6,720
--------------------
Total 347,432 339,263
Less accumulated depreciation (200,374) (188,157)
--------------------
Net property 147,058 151,106
--------------------
Other Assets 32,217 26,869
--------------------
Total $407,682 $ 406,600
====================
Liabilities
Current Liabilities
Notes payable and current portion of long-term debt $ 8,239 $ 6,003
Accounts payable 27,584 24,123
Employees' compensation 13,666 13,109
Insurance 9,965 9,760
Taxes on income 9,156 466
Other current liabilities 23,204 18,523
--------------------
Total current liabilities 91,814 71,984
--------------------
Long-term Debt 13,278 14,746
--------------------
Other Liabilities
Deferred tax liabilities--net 16,781 16,957
Pensions and other employee benefits 43,504 48,276
Other noncurrent liabilities 873 1,097
--------------------
Total other liabilities 61,158 66,330
--------------------
Shareholders' Equity
Preferred stock, 4-1/2% cumulative, $50 par value (callable at $52.50) 3,569 3,569
Common stock, no par value (shares outstanding:
1996--4,611,125; 1995--5,182,757) 10,866 8,300
Stock compensation trust (28,200)
Cumulative translation adjustments 1,430 2,177
Earnings retained in the business 325,898 309,712
Treasury shares, at cost (72,131) (70,218)
--------------------
Total shareholders' equity 241,432 253,540
--------------------
Total $407,682 $ 406,600
====================
See notes to consolidated financial statements.
15
Consolidated Statement of Cash Flows
(In thousands)
Year Ended December 31 1996 1995 1994
Operating Activities
Net income $ 23,061 $ 18,912 $ 15,329
Depreciation 22,373 20,002 18,527
Pensions (2,716) (2,510) (1,305)
Deferred income taxes (2,525) (601) 61
Receivables (10,785) (2,257) (6,801)
Inventories 6,581 (6,655) 4,488
Accounts payable and accrued liabilities 16,157 4,902 6,963
Other assets and liabilities 961 210 (754)
Other--including currency exchange adjustments 3,348 3,607 4,163
--------------------------------
Cash Flow From Operating Activities 56,455 35,610 40,671
--------------------------------
Investing Activities
Property additions (21,583) (19,136) (22,614)
Property disposals 1,889 1,811 4,983
Acquisitions and other investing (10,276) (2,170) 6,130
--------------------------------
Cash Flow From Investing Activities (29,970) (19,495) (11,501)
--------------------------------
Financing Activities
Additions to long-term debt 146 218 2,167
Reductions of long-term debt (1,445) (2,078) (13,949)
Cash dividends (5,438) (6,193) (5,622)
Stock options and purchases of company's stock (27,547) (28,030) (8,526)
Changes in notes payable and short-term debt 2,247 (3,973) 2,978
--------------------------------
Cash Flow From Financing Activities (32,037) (40,056) (22,952)
--------------------------------
Effect of exchange rate changes on cash (1,302) 1,471 1,768
--------------------------------
Increase (decrease) in cash and cash equivalents (6,854) (22,470) 7,986
Beginning cash and cash equivalents 31,950 54,420 46,434
--------------------------------
Ending cash and cash equivalents $ 25,096 $ 31,950 $ 54,420
================================
Supplemental cash flow information:
Interest payments $ 1,419 $ 1,922 $ 1,983
Income tax payments 9,893 13,638 13,947
See notes to consolidated financial statements.
16
Notes to Consolidated Financial Statements
Note 1--Basis of Presentation
Significant accounting policies are stated in italics at the applicable notes to
consolidated financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
All significant majority-owned companies are included in the consolidated
financial statements. Investments in which the company has an equity interest of
20% to 50% are carried at equity in net assets. Intercompany transactions are
eliminated in consolidation.
Sales under contracts are recorded at fixed or estimated contract sales prices
as deliveries are made. Contracts requiring performance over several periods are
accounted for by the percentage-of-completion method of accounting. Profits
expected to be realized are based on estimates of total sales and costs at
completion. These estimates are periodically reviewed and revised during the
contract performance period. Adjustments to profits are recorded in the period
in which estimates are revised; losses are recognized in full as they are
identified.
Property is stated at cost. Depreciation is based on estimated useful lives
using accelerated and straight-line methods. Maintenance and repairs are charged
to expense. Renewals and betterments which substantially extend the useful life
of property are capitalized. Profits or losses resulting from dispositions are
included in income.
The financial statements of companies for which the United States dollar is
determined to be the functional currency are translated using current and
historic exchange rates; adjustments related thereto are included in income for
the current period. The financial statements of all other companies are
translated from their functional currency into United States dollars using
current exchange rates; the resultant translation adjustments are not included
in income but are accumulated in a separate equity account. Transaction gains
and losses are recognized in income for the current period.
Cash and cash equivalents in the Consolidated Statement of Cash Flows includes
temporary investments that are readily marketable and have minimal risk as to
change in value. Certain securities have maturities in excess of ninety days;
but, as part of the company's cash management program, maturities are scheduled
based on expected cash needs for the ensuing twelve months.
Earnings per share is computed based upon the weighted average number of common
shares outstanding during each year. Shares held by the stock compensation trust
that have not been committed to be released are not considered as outstanding
shares. The computation recognizes dividends paid on preferred stock but does
not include a negligible dilutive effect of stock options.
Note 2--Other Income
Other income is summarized as follows:
(In thousands)
-------------------------
1996 1995 1994
-------------------------
Interest $ 2,628 $3,585 $3,043
Commissions, royalties
and product services 1,944 1,959 1,940
Dispositions of assets 1,725 (320) 103
Equity in earnings of affiliates 656 (451) 212
Other (1,083) (582) 165
-------------------------
Total 5,870 4,191 5,463
-------------------------
Note 3--Inventories
The U.S. inventories are valued on the last-in, first-out (LIFO) cost method.
Other inventories are valued at the lower of cost, using average or current
standard costs which approximate actual costs on a first-in, first-out (FIFO)
basis, or market, determined by replacement cost or net realizable value.
Significant reductions of domestic inventories during 1996, 1995 and 1994 caused
liquidations of LIFO inventory values calculated at lower costs incurred in
prior years. The effect of these liquidations has been to reduce cost of sales
by $10,361,000 in 1996, $5,455,000 in 1995 and $6,923,000 in 1994, and to
increase net income by $6,217,000 ($1.28 per share), $3,200,000 ($.56 per share)
and $4,189,000 ($.71 per share), respectively.
Inventories are summarized as follows:
(In thousands)
-------------------------
1996 1995 1994
-------------------------
Finished products $32,042 $34,970 $33,576
Work in process 15,311 16,135 14,013
Raw materials and supplies 29,687 32,516 29,377
-------------------------
Total inventories 77,040 83,621 76,966
-------------------------
Excess of FIFO costs over LIFO costs 45,740 55,185 59,178
-------------------------
Inventories stated on the LIFO basis represent 39%, 39%, and 43% of the total
inventories at December 31, 1996, 1995, and 1994, respectively.
Note 4--Long-Term Debt
(In thousands)
----------------
U.S. 1996 1995
----------------
Industrial development debt issues
payable through 2022, 4.6% $10,950 $10,750
Other, 2.2% to 16.9% 218 336
International companies
Various notes payable through 1998,
5.3% to 9.0% ($3,348 secured
by pledge of assets located abroad) 4,703 6,243
----------------
Total 15,871 17,329
Amounts due within one year 2,593 2,583
----------------
Long-term debt 13,278 14,746
----------------
Approximate maturities of these obligations over the next five years are
$2,593,000 in 1997, $1,142,000 in 1998, $404,000 in 1999, $330,000 in 2000, and
$326,000 in 2001. Some U.S. loan agreements contain covenants to maintain
specified levels of shareholders' equity.
17
Note 5--Business Segments and International Operations
The company is primarily engaged in the manufacture and sale of safety and
health equipment. Principal products include respiratory protective equipment,
head protection, eye and face protection, hearing protectors, safety clothing,
industrial emergency care products, mining safety equipment and monitoring
instruments. These safety and health products account for more than 90% of
revenues, operating profits and assets. Other products which do not fall within
the safety and health equipment segment of the company's business include boron-
based and other specialty chemicals.
Information about the company's operations in different geographic areas is
summarized as follows:
(In thousands)
------------------------------
1996 1995 1994
------------------------------
Net Sales and Revenues
U.S. operations $283,805 $274,148 $277,591
European operations 139,083 135,367 114,030
Other non-U.S. operations 79,371 79,164 70,091
------------------------------
Net Sales and Revenues 502,259 488,679 461,712
------------------------------
Intercompany Transfers
U.S. operations 24,364 22,779 19,067
European operations 17,588 18,014 13,601
Other non-U.S. operations 769 795 625
------------------------------
Intercompany Transfers 42,721 41,588 33,293
------------------------------
Operating Profit and Income Before Income Taxes
U.S. operations 30,048 22,870 20,195
European operations 4,810 4,984 3,896
Other non-U.S. operations 4,980 6,475 4,624
Eliminations (897) (1,970) (935)
------------------------------
Operating Profit 38,941 32,359 27,780
Interest expense (1,595) (1,730) (2,224)
Corporate income/(expense)--net (679) 2,503 270
------------------------------
Income Before Income Taxes 36,667 33,132 25,826
------------------------------
Identifiable Assets and Total Assets
U.S. operations 246,329 234,237 236,286
European operations 104,676 106,854 96,963
Other non-U.S. operations 45,799 44,050 38,615
Eliminations (19,211) (14,684) (14,476)
------------------------------
Identifiable Assets 377,593 370,457 357,388
Corporate assets 30,089 35,820 58,455
Discontinued operations 323 1,208
------------------------------
Total Assets 407,682 406,600 417,051
------------------------------
Net Assets of Non-U.S. Operations 103,018 99,163 92,285
------------------------------
Net Income of Non-U.S. Operations 8,882 6,364 4,675
------------------------------
Transfers between geographic areas are stated at established intercompany
selling prices. Operating profit is total revenues less operating expenses.
Interest income and expense, equity in unconsolidated affiliates, facilities
consolidation and restructuring charges, contract costs recovery, and income
taxes have not been included in computing operating profit. Corporate assets not
included in identifiable assets are principally cash and investments.
Sales by U.S. operations to U.S. government agencies were $30,893,000 in 1996,
$34,815,000 in 1995, and $46,478,000 in 1994.
Note 6--Restructuring
Restructuring charges of $7,786,000 in 1996, most of which relate to the planned
closing of the company's Esmond, Rhode Island safety products manufacturing
facility, include $4,581,000 for separation pay to approximately 270 employees
and $2,961,000 for impaired assets. Charges of $730,000 in 1995 related
primarily to workforce reductions at international locations, and 1994 charges
of $3,086,000 applied primarily to disposition of assets of the Catalyst
Research Division, which was closed in 1992.
Note 7--Research and Development Expense
Research and development costs, charged against income as incurred, were
$19,122,000 in 1996, $20,366,000 in 1995, and $20,575,000 in 1994.
18
Note 8--Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109. Deferred tax balances are stated at tax rates
expected to be in effect when taxes are actually paid or recovered. No provision
is made for undistributed earnings of international companies since little or no
tax would result under applicable existing statutes or because management
intends that these earnings be permanently reinvested for working capital and
capital expenditure requirements.
The U.S. and non-U.S. components of income before income taxes, and provisions
for income taxes are summarized as follows:
(In thousands)
------------------------------
1996 1995 1994
------------------------------
Income Before Income Taxes
U.S. income $ 31,087 $ 28,501 $ 19,933
Non-U.S. income 12,267 11,700 11,177
Currency translation (losses) (641) (887) (3,024)
Eliminations (6,046) (6,182) (2,260)
------------------------------
Income Before Income Taxes 36,667 33,132 25,826
------------------------------
Provisions For Income Taxes
Current
Federal 9,549 8,451 6,220
State 1,634 1,642 1,537
Non-U.S. 4,948 4,728 2,679
------------------------------
Total current provision 16,131 14,821 10,436
------------------------------
Deferred
Federal (900) (584) (801)
State (146) (13) (43)
Non-U.S. (1,479) (4) 905
------------------------------
Total deferred provision (2,525) (601) 61
------------------------------
Provisions for Income Taxes 13,606 14,220 10,497
------------------------------
The components of deferred taxes are as follows:
Deferred tax assets
Postretirement benefits 5,905 5,666 5,903
Inventory reserves and unrealized profits 5,463 5,975 5,344
Vacation allowances 2,023 2,048 2,054
Postemployment benefits 1,251 1,251 1,580
Liability insurance 3,124 3,153 2,319
Loss carryforwards 350 1,785 2,502
Restructuring 1,089
Other 4,900 3,489 3,583
------------------------------
Total deferred tax assets 24,105 23,367 23,285
------------------------------
Deferred tax (liability)--depreciation (22,227) (24,159) (24,588)
------------------------------
Net deferred taxes 1,878 (792) (1,303)
------------------------------
The following is a reconciliation of income taxes calculated at the U.S. Federal
income tax rate of 35% to the provision for income taxes:
Provision for income taxes at statutory rate 12,833 11,596 9,039
State income taxes 967 1,059 971
Currency translation 313 310 1,058
Non-U.S. taxes (995) 694 (293)
Other--net 488 561 (278)
-----------------------
Provision for income taxes 13,606 14,220 10,497
-----------------------
Undistributed earnings of international companies for which U.S. income taxes
have not been provided were $66,690,000 at December 31, 1996.
19
Note 9--Capital Stock
The authorized capital of the company consists of:
. Common stock, no par value--20,000,000 shares
. Second cumulative preferred voting stock, $10 par value--1,000,000 shares
. 4-1/2% cumulative preferred stock, $50 par value--100,000 shares
Common stock activity is summarized as follows:
(In thousands)
Stock Stock ----------------------------------
Shares Compensation Shares In Common Compensation Treasury
Issued Trust Treasury Stock Trust Cost
------------------------------------ ---------------------------------
Balances January 1, 1994 6,713,503 701,875 $ 8,048 $(31,878)
Management Share Incentive Plan forfeitures 632 (27)
Purchased for treasury 195,324 (8,483)
------------------------------------ ---------------------------------
Balances December 31, 1994 6,713,503 897,831 8,048 (40,388)
Stock options exercised 5,900 252
Purchased for treasury 638,815 (28,277)
------------------------------------ ---------------------------------
Balances December 31, 1995 6,719,403 1,536,646 8,300 (68,665)
Management Share Incentive Plan issues 17,050 771
Management Share Incentive Plan forfeitures (560) (25)
Stock options exercised 13,840 602
Sale to Stock Compensation Trust 600,000 (600,000) 1,218 $(28,200) 26,982
Purchased for treasury 601,962 (28,853)
------------------------------------ ---------------------------------
Balances December 31, 1996 6,749,733 600,000 1,538,608 10,866 (28,200) (70,536)
------------------------------------ ---------------------------------
Second cumulative preferred voting stock--none has been issued.
As to the 4-1/2% cumulative preferred stock, 71,373 shares have been issued
(none during the three years ended December 31, 1996), while the amounts held in
treasury at each year end are 1996 - 49,313 shares, $1,595; 1995 - 47,935
shares, $1,553; and 1994 - 47,775 shares, $1,548.
The company has established the Mine Safety Appliances Company Stock
Compensation Trust, the purpose of which is to fund certain benefit plans,
including employee stock options and awards. In June 1996, the company sold
600,000 treasury shares, at market value, to the Trust, in exchange for a
$28,200,000 promissory note, 8% interest, payable to the company.
On February 10, 1997, the company adopted a Shareholder Rights Plan which
includes distribution of rights as a dividend at the rate of one right for each
share of the company's common stock owned on February 21, 1997. Each right will
entitle the holder to buy a fraction of a share of a participating preferred
stock for $225 in the event certain persons or groups acquire 15% or more of the
company's outstanding common stock. Each right will entitle its holder to
purchase common stock having a value twice the exercise price. These rights will
expire on February 21, 2007.
Note 10--Leases
The company leases warehouses, sales offices, manufacturing facilities and
equipment under agreements expiring at various dates through 2001, with renewal
options existing for varying periods. Rental expense for these leases charged to
income was $6,956,000 in 1996, $6,970,000 in 1995, and $6,452,000 in 1994.
Future minimum rental commitments under noncancelable leases are not
significant.
Note 11/Quarterly Financial Information (Unaudited)
(In thousands, except earnings per share)
1996 1995
----------------------------------------------------- ------------------------------------------------
Quarters Quarters
-------------------------------------------- ---------------------------------------
1st 2nd 3rd 4th Year 1st 2nd 3rd 4th Year
----------------------------------------------------- ------------------------------------------------
Net sales $115,371 $123,879 $121,744 $139,991 $500,985 $118,162 $125,207 $119,995 $124,304 $487,668
Gross profit 41,325 44,491 47,465 60,592 193,873 46,346 48,523 45,110 50,844 190,823
Net income 3,139 3,756 6,116 10,050 23,061 5,718 5,611 3,836 3,747 18,912
----------------------------------------------------- ------------------------------------------------
Earnings per share .61 .76 1.26 2.11 4.74 .98 .96 .67 .71 3.32
----------------------------------------------------- ------------------------------------------------
20
Note 12--Short-Term Debt
Short-term bank lines of credit amounted to $19,131,000 of which $17,157,000 was
unused at December 31, 1996. Generally, these short-term lines of credit are
renewable annually and there are no significant commitment fees or compensating
balance requirements. Short-term borrowings with banks, which exclude the
current portion of long-term debt, were $5,491,000 and $3,362,000 at December
31, 1996 and 1995, respectively. The average month-end balance of total short-
term borrowings during 1996 was $2,912,000 while the maximum month-end balance
of $5,491,000 occurred at December 31, 1996. The average interest rate during
1996 was approximately 13% based upon total short-term interest expense divided
by the average month-end balance outstanding, and 18% at year-end. This average
interest rate is affected by borrowings in certain countries where local
inflation has resulted in relatively high interest rates.
Note 13--Retirement Plans
Substantially all employees are covered by non-contributory pension plans.
Various U.S. employees also participate in a contributory retirement savings
plan wherein employees may contribute from 1% to 10% of their compensation to a
trust fund, to which the company contributes an amount equal to 50% of the
employees' contributions not in excess of 8%. The company's expense for these
plans was $2,798,000 in 1996, $3,069,000 in 1995, and $4,647,000 in 1994.
The non-contributory pension plans are accounted for in accordance with
Statement of Financial Accounting Standards No. 87 which requires use of the
projected unit credit cost method to determine the projected benefit obligation
and plan cost. The principal U.S. plan is funded in compliance with the Employee
Retirement Income Security Act (ERISA). It is the general policy to fund current
costs for the international plans except in Germany, where it is common practice
and permissible under tax laws to accrue book reserves. Non-contributory plan
benefits are generally based on years of service and employees' compensation
during the last years of employment. Benefits are paid from funds previously
provided to trustees or are paid by the company and charged to the book
reserves.
Information pertaining to the non-contributory defined benefit plans is provided
in the following tables.
Cost for Defined Benefits Plans U.S. Plans International Plans
--------------------------------- -------------------------------
(In thousands) 1996 1995 1994 1996 1995 1994
- -------------- --------------------------------- -------------------------------
Service cost--benefits earned during the period $ 3,205 $ 2,826 $ 3,458 $ 2,036 $ 1,939 $ 1,686
Interest cost on projected benefit obligation 9,892 10,023 9,834 4,003 4,055 3,170
Actual (return)/loss on plan assets (33,411) (45,817) (971) (1,861) (1,964) (704)
Net amortization and deferral 15,667 29,169 (13,137) 601 896 (267)
Special pension benefit adjustments associated
with early retirement and restructuring (508)
--------------------------------- -------------------------------
Pension expense (income) (4,647) (4,307) (816) 4,779 4,926 3,885
--------------------------------- -------------------------------
Funding Status and Projected Benefit Obligation
Reconciliation
December 31 (In thousands)
- --------------------------
Actuarial present value of benefit obligations
Accumulated benefit obligation
Vested 119,131 119,959 108,697 38,088 47,125 41,058
Nonvested 1,904 1,962 2,043 9,874 1,230 2,422
--------------------------------- -------------------------------
Total 121,035 121,921 110,740 47,962 48,355 43,480
--------------------------------- -------------------------------
Plan assets at fair value, primarily listed stocks and
bonds 234,591 209,902 173,171 20,744 18,211 16,922
Projected benefit obligation 141,702 146,097 128,389 50,565 54,101 48,112
--------------------------------- -------------------------------
Plan assets in excess of (less than) projected benefit
obligation 92,889 63,805 44,782 (29,821) (35,890) (31,190)
--------------------------------- -------------------------------
The excess (less than) consists of
Unamortized portion of transition gain (loss),
being recognized over future years 6,104 7,017 7,931 (1,111) (1,422) (1,325)
Unrecognized net gain (loss) from past experience
different from that assumed 77,562 52,979 38,144 5,131 (331) (1,719)
Unrecognized prior service cost (2,326) (2,693) (3,074) (675) (815) (544)
Minimum liability for unfunded plans 963 1,301 1,042
(Accrued)/prepaid pension cost included in the
consolidated balance sheet 10,586 5,201 739 (33,166) (33,322) (27,602)
--------------------------------- -------------------------------
Total 92,889 63,805 44,782 (29,821) (35,890) (31,190)
--------------------------------- -------------------------------
Assumed long-term rates of return on assets 9% 9% 9% 8-9% 8-9% 8-9%
Assumed discount rates for future benefits 7-1/2 7-1/4 8-1/4 6.1-8 7-8-1/2 7-8.9
Assumed long-term rates for compensation increases 4-1/2 5 5 3-6 4-6-1/2 4-6
21
Note 14--Postretirement Benefits
The company provides certain health care benefits and limited life insurance for
retired employees and their eligible dependents, the costs for which are
accounted for in accordance with Statement of Financial Accounting Standards
(SFAS) No. 106. SFAS No. 106 requires recognition of retiree health and life
insurance benefits during the employees' service with the company. Further
information about these benefits is provided in the following tables.
Cost for Benefits
(In thousands) 1996 1995 1994
- -------------- ---------------------------
Service cost--benefits earned during the period $ 408 $ 349 $ 471
Interest cost on projected benefit obligation 1,152 1,168 1,198
Amortization of (gain)/loss 40
Special benefit adjustments associated with early retirement and restructuring 36 (247)
---------------------------
Retirement benefits expense 1,596 1,270 1,709
---------------------------
Funded Status and Accumulated Postretirement Benefit Obligation Reconciliation
December 31 (In thousands)
- --------------------------
Accumulated postretirement benefit obligation
Active employees 3,214 3,352 3,188
Other active participants 6,955 7,224 6,098
---------------------------
10,169 10,576 9,286
Retirees 6,268 6,031 5,389
---------------------------
Total 16,437 16,607 14,675
Unamortized (loss) (1,431) (2,241) (222)
---------------------------
Accrued postretirement benefit cost included in consolidated balance sheet 15,006 14,366 14,453
---------------------------
Assumed discount rates for future benefits 7-1/2% 7-1/4% 8-1/4%
---------------------------
Annual rates of increase in the costs of covered health care benefits assumed
for 1996 were 7%, decreasing gradually to 4% for the year 1999 and thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported; a one-percentage-point increase in each year would increase
the accumulated postretirement benefit obligation by $1,157,000 and increase the
current service and interest costs for the year by $147,000.
Note 15--Stock Plans
The company's Management Share Incentive Plan permits the granting of restricted
stock awards and stock options to eligible key employees through December 1997.
The 1990 Non-Employee Directors' Stock Option Plan provides for annual grants of
stock options to eligible directors. As of December 31, 1996, there were 257,090
shares and 37,800 shares, respectively, reserved for future grants pursuant to
these Plans.
Stock options are generally granted at market value option prices and expire
after ten years (limited instances of option prices in excess of market value
and expiration after five years). Restricted stock awards are granted (17,050
shares in 1996) to employees without payment to the company in consideration of
services to be performed in ensuing five-year periods. The company applies
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for the Plans. Accordingly, no compensation cost has been recognized
for the stock option grants. Compensation cost for the restricted stock awards
is measured by the market value of the shares when awarded and is amortized by
charges to operations over the period that the employee provides the service.
The expense charged to operations was $350,000 in 1996, $238,000 in 1995, and
$413,000 in 1994. The company's net income and earnings per share would not be
significantly affected if compensation cost for these Plans was determined based
on fair value at grant dates consistent with the method provided in Statement of
Financial Accounting Standards No. 123.
A summary of the two stock option plans follows:
1996 1995 1994
------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------------------------------------------------------------------------------
Outstanding at beginning of year 46,360 $46.18 49,260 $45.89 32,520 $48.31
Granted 31,455 46.37 3,000 44.00 20,140 44.59
Exercised (13,840) 43.49 (5,900) 42.62
Forfeited (5,610) 47.50 (3,400) 61.33
------------------------------------------------------------------------------------
Outstanding at end of year 58,365 46.77 46,360 46.18 49,260 45.89
------------------------------------------------------------------------------------
Options exercisable at year-end 58,365 44,473 45,101
------------------------------------------------------------------------------------
The options outstanding at December 31, 1996 have a weighted-average remaining
contractual life of approximately 7.3 years and an exercise price range of
$40.43 to $55.75.
22
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
SUMMARY OF OPERATIONS 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
(In thousands, except as noted)
Net sales $500,985 $487,668 $459,607 $429,220 $502,366
- -------------------------------------------------------------------------------------------------------------
Other income 5,870 4,191 5,463 5,885 9,755
- -------------------------------------------------------------------------------------------------------------
Cost of products sold 307,112 296,845 286,725 273,350 327,555
- -------------------------------------------------------------------------------------------------------------
Selling, general and administrative 133,071 138,187 124,714 121,529 130,182
- -------------------------------------------------------------------------------------------------------------
Depreciation 22,373 20,002 18,527 17,294 16,831
- -------------------------------------------------------------------------------------------------------------
Interest expense 1,595 1,730 2,224 1,713 1,536
- -------------------------------------------------------------------------------------------------------------
Foreign currency losses 735 1,233 3,968 3,201 5,507
- -------------------------------------------------------------------------------------------------------------
Unusual items 5,302 730 3,086 (223) 2,700
- -------------------------------------------------------------------------------------------------------------
Taxes on income 13,606 14,220 10,497 7,686 11,107
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations 23,061 18,912 15,329 10,555 16,703
- -------------------------------------------------------------------------------------------------------------
Per common share (in dollars)(1) 4.74 3.32 2.58 1.73 2.67
- -------------------------------------------------------------------------------------------------------------
Discontinued operations (5,067)
- -------------------------------------------------------------------------------------------------------------
Cumulative effect to January 1, 1992 of
changes in accounting principles(2) (8,964)
- -------------------------------------------------------------------------------------------------------------
Net income 23,061 18,912 15,329 10,555 2,672
- -------------------------------------------------------------------------------------------------------------
Per common share (in dollars)(1) 4.74 3.32 2.58 1.73 .42
- -------------------------------------------------------------------------------------------------------------
Cash dividends 5,438 6,193 5,622 5,640 5,608
- -------------------------------------------------------------------------------------------------------------
Per common share (in dollars) 1.10 1.06 .94 .92 .89
- -------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding(1) 4,852 5,681 5,921 6,069 6,225
- -------------------------------------------------------------------------------------------------------------
YEAR-END POSITION
- -------------------------------------------------------------------------------------------------------------
Working capital $136,593 $156,641 $166,494 $164,199 $177,287
- -------------------------------------------------------------------------------------------------------------
Working capital ratio 2.5 3.2 3.4 3.7 4.2
- -------------------------------------------------------------------------------------------------------------
Property, at cost 347,432 339,263 322,109 306,691 305,908
- -------------------------------------------------------------------------------------------------------------
Total assets 407,682 406,600 417,051 407,884 407,772
- -------------------------------------------------------------------------------------------------------------
Long-term debt 13,278 14,746 16,564 27,476 28,868
- -------------------------------------------------------------------------------------------------------------
Common shareholders' equity 240,329 252,368 264,795 258,539 261,927
- -------------------------------------------------------------------------------------------------------------
Equity per common share (in dollars) 52.12 48.69 45.53 43.00 43.09
- -------------------------------------------------------------------------------------------------------------
(1) Earnings per common share are calculated after deducting dividends on
preferred stock and are based on the weighted average number of shares
outstanding during each year. Shares not committed by the Stock Compensation
Trust are not considered as outstanding shares.
(2) Statements of Financial Accounting Standards No. 106 (Postretirement
Benefits), No. 109 (Income Taxes), and No. 112 (Postemployment Benefits)
adopted January 1, 1992.
23