SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 2002 Commission File No. 0-2504 MINE SAFETY APPLIANCES COMPANY (Exact name of registrant as specified in its charter) Pennsylvania 25-0668780 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 121 Gamma Drive RIDC Industrial Park O'Hara Township Pittsburgh, Pennsylvania 15238 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 412/967-3000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of April 30, 2002, there were outstanding 12,165,187 shares of common stock without par value, not including 1,415,373 shares held by the Mine Safety Appliances Company Stock Compensation Trust. PART I FINANCIAL INFORMATION MINE SAFETY APPLIANCES COMPANY CONSOLIDATED CONDENSED BALANCE SHEET (Thousands of dollars, except share data) March 31 December 31 2002 2001 ASSETS Current assets Cash $ 17,282 $ 22,842 Temporary investments, at cost which approximates market 3,953 4,150 Trade receivables, less allowance for doubtful accounts $2,813 and $2,956 52,931 50,704 Other receivables 37,326 38,325 Inventories: Finished products 32,607 30,375 Work in process 14,150 12,099 Raw materials and supplies 35,343 35,400 ---------------- ---------------- Total inventories 82,100 77,874 Deferred tax assets 12,880 12,944 Prepaid expenses and other current assets 11,100 10,158 ---------------- ---------------- Total current assets 217,572 216,997 Property, plant and equipment 391,587 387,789 Less accumulated depreciation (240,210) (236,128) ---------------- ---------------- Net property 151,377 151,661 Prepaid pension cost 96,787 92,437 Deferred tax assets 12,405 12,694 Goodwill 33,724 33,722 Other noncurrent assets 14,084 13,187 ---------------- ---------------- TOTAL $ 525,949 $ 520,698 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable and current portion of long-term debt $ 7,122 $ 6,484 Accounts payable 25,035 24,751 Employees' compensation 12,962 14,368 Insurance 8,804 9,267 Taxes on income 6,958 4,812 Other current liabilities 20,604 22,818 ---------------- ---------------- Total current liabilities 81,485 82,500 ---------------- ---------------- Long-term debt 67,354 67,381 Pensions and other employee benefits 54,156 55,428 Deferred tax liabilities 57,921 56,053 Other noncurrent liabilities 6,153 5,832 Shareholders' equity Preferred stock, 4-1/2% cumulative - authorized 100,000 shares of $50 par value; issued 71,373 shares, callable at $52.50 per share 3,569 3,569 Second cumulative preferred voting stock - authorized 1,000,000 shares of $10 par value; none issued Common stock - authorized 60,000,000 shares of no par value; issued 20,517,939 and 20,483,051 (outstanding 12,129,577 and 12,100,727) 26,476 25,386 Stock compensation trust - 1,415,373 and 1,415,373 shares (22,179) (22,179) Less treasury shares, at cost: Preferred - 50,313 and 50,313 shares (1,629) (1,629) Common - 6,972,989 and 6,966,951 shares (132,570) (132,352) Deferred stock compensation (1,402) (652) Accumulated other comprehensive income (27,240) (26,216) Earnings retained in the business 413,855 407,577 ---------------- ---------------- Total shareholders' equity 258,880 253,504 ---------------- ---------------- TOTAL $ 525,949 $ 520,698 ================ ================ See notes to consolidated condensed financial statements. 2 MINE SAFETY APPLIANCES COMPANY CONSOLIDATED CONDENSED STATEMENT OF INCOME (Thousands of dollars, except earnings per share) Three Months Ended March 31 2002 2001 Net sales $ 134,085 $ 133,595 Other (expense) income (137) 421 ---------------- ---------------- 133,948 134,016 ---------------- ---------------- Costs and expenses Cost of products sold 81,412 80,528 Selling, general and administrative 31,101 32,795 Depreciation and amortization 6,015 6,366 Interest 1,328 1,627 Currency exchange losses (gains) 523 (2) ---------------- ---------------- 120,379 121,314 ---------------- ---------------- Income before income taxes 13,569 12,702 Provision for income taxes 5,585 4,855 ---------------- ---------------- Net income $ 7,984 $ 7,847 ================ ================ Basic earnings per common share $ 0.66 $ 0.66 ================ ================ Diluted earnings per common share $ 0.65 $ 0.66 ================ ================ Dividends per common share $ 0.14 $ 0.12 ================ ================ See notes to consolidated condensed financial statements. 3 MINE SAFETY APPLIANCES COMPANY CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Thousands of dollars) Three Months Ended March 31 2002 2001 OPERATING ACTIVITIES Net income $ 7,984 $ 7,847 Depreciation and amortization 6,015 6,366 Pensions (3,748) (4,191) Net loss (gain) on sale of investments and assets 30 (671) Deferred income taxes 2,073 2,130 Changes in operating assets and liabilities (9,896) (9,360) Other - including currency exchange adjustments (1,246) (732) --------------- --------------- Cash flow from operating activities 1,212 1,389 --------------- --------------- INVESTING ACTIVITIES Property additions (6,016) (5,434) Property disposals 53 1,660 Acquisitions, net of cash acquired, and other investing (62) (6,802) --------------- --------------- Cash flow from investing activities (6,025) (10,576) --------------- --------------- FINANCING ACTIVITIES Additions to long-term debt - 6 Reductions of long-term debt (13) (6) Changes in notes payable and short-term debt 671 8,404 Cash dividends (1,706) (1,431) Company stock purchases (191) (285) Company stock sales 453 361 --------------- --------------- Cash flow from financing activities (786) 7,049 --------------- --------------- Effect of exchange rate changes on cash (158) (1,114) --------------- --------------- Decrease in cash and cash equivalents (5,757) (3,252) Beginning cash and cash equivalents 26,992 26,541 --------------- --------------- Ending cash and cash equivalents $ 21,235 $ 23,289 =============== =============== See notes to consolidated condensed financial statements. 4 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (1) The Management's Discussion and Analysis of Financial Condition and Results of Operations which follows these notes contains additional information on the results of operations and the financial position of the company. Those comments should be read in conjunction with these notes. The company's annual report on Form 10-K for the year ended December 31, 2001 includes additional information about the company, its operations, and its financial position, and should be read in conjunction with this quarterly report on Form 10-Q. (2) The results for the interim periods are not necessarily indicative of the results to be expected for the full year. (3) Certain prior year amounts have been reclassified to conform with the current year presentation. (4) In the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of these interim periods have been included. (5) Basic earnings per share is computed on the weighted average number of shares outstanding during the period. Diluted earnings per share includes the effect of the weighted average stock options outstanding during the period, using the treasury stock method. Antidilutive options are not considered in computing diluted earnings per share. Three Months Ended March 31 2002 2001 (In Thousands) Net income $ 7,984 $ 7,847 Preferred stock dividends 12 12 -------------- -------------- Income available to common shareholders 7,972 7,835 -------------- -------------- Basic shares outstanding 12,109 11,835 Stock options 143 91 -------------- -------------- Diluted shares outstanding 12,252 11,926 -------------- -------------- Antidilutive stock options 176 237 -------------- -------------- (6) Comprehensive income was $6,960,000 and $5,981,000 for the three months ended March 31, 2002 and 2001, respectively. Comprehensive income includes net income and changes in accumulated other comprehensive income, primarily cumulative translation adjustments, for the period. 5 (7) The company is organized into three geographic operating segments (North America, Europe and Other International), each of which includes a number of operating companies. Reportable segment information is presented in the following table: (In Thousands) Three Months Ended March 31, 2002 North Other Consolidated America Europe International Reconciling Totals Sales to external customers $95,507 $22,571 $15,995 $12 $134,085 Intercompany sales 5,126 7,254 503 (12,883) Net income (loss) 7,586 (13) 504 (93) 7,984 Three Months Ended March 31, 2001 North Other Consolidated America Europe International Reconciling Totals Sales to external customers $90,697 $25,066 $17,808 $24 $133,595 Intercompany sales 4,738 5,086 331 (10,155) Net income 6,549 564 743 (9) 7,847 Reconciling items consist primarily of intercompany eliminations and items reported at the corporate level. (8) At March 31, 2002, accounts receivable of $64.4 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 $38.3 million, of which $37.3 million is classified as other receivables. Net proceeds to the company from the securitization arrangement were $25.0 million at March 31, 2002. At March 31, 2001, accounts receivable of $62.0 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 $32.0 million, of which $31.0 million is classified as other receivables. Net proceeds to the company from the securitization arrangement were $29.0 million at March 31, 2001. The key economic assumptions used to measure the retained interest at March 31, 2002 were a discount rate of 4% and an estimated life of 2.4 months. At March 31, 2002, an adverse change in the discount rate or estimated life of 10% and 20% would reduce the fair value of the retained interest by $56,000 and $111,000, respectively. The effect of hypothetical changes in fair value based on variations in assumptions should be used with caution and generally cannot be extrapolated. Additionally, the effect on the fair value of the retained interest of changing a particular assumption has been calculated without changing other assumptions. In reality, a change in one factor may result in changes in others. (9) FAS 141, Business Combinations, requires the purchase method of accounting for all business combinations initiated after June 30, 2001, and established specific criteria for the recognition of intangible assets other than goodwill. There were no material business combinations from June 30, 2001 through March 31, 2002. The company does not expect the requirements of this statement to have a significant effect on its results of operations or financial position. Effective January 1, 2002, the company adopted the non-amortization provisions of FAS No. 142, Goodwill and Other Intangible Assets. Under this standard, goodwill and intangible assets with indefinite lives are not amortized, but are subject to impairment tests that must be performed at least annually. If goodwill amortization had been discontinued January 1, 2001, net income for the year ended December 31, 2001, would have increased by $1.4 million, or eleven cents per share. The company has not yet determined the financial impact that the impairment provisions of FAS No. 142 will have on its consolidated financial statements. Any impairment charge resulting from the transitional impairment testing will be reported as a cumulative effect of a change in accounting principle. The effects of adopting the non-amortization provisions on net income and basic earnings per share for the three months ended March 31, 2002 and 2001 were as follows: In thousands Net Income Basic EPS ---------- --------- 2002 2001 2002 2001 ----- ---- ---- ---- Reported net income $ 7,984 $ 7,847 $ 0.66 $ 0.66 Goodwill amortization 337 0.03 ---------- ----------- -------- --------- Adjusted net income $ 7,984 $ 8,184 $ 0.66 $ 0.69 ========== =========== ======== ========= 6 Intangible assets include non-compete agreements that will be fully amortized in 2003 and patents that will be fully amortized in 2005. These items are included in other noncurrent assets. At March 31, 2002, intangible assets totaled $415,000, net of accumulated amortization of $2.6 million. Intangible asset amortization expense is expected to be approximately $355,000 in 2002, $115,000 in 2003, and $55,000 in 2004. Changes in goodwill and intangible assets, net of accumulated amortization, during the quarter ended March 31, 2002 were as follows: (In thousands) Goodwill Intangibles ------------- ------------- Net balances at December 31, 2001 $33,722 $ 526 Amortization expense (111) Translation 2 -------------- -------------- Net balances at March 31, 2002 $33,724 $ 415 ============== ============== Effective January 1, 2002, the company adopted FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement amends previous accounting and disclosure requirements for impairments and disposals. Provisions of this statement are generally to be applied prospectively. FAS No. 143, Accounting for Asset Retirement Obligations, addresses accounting for obligations associated with the retirement of tangible long-lived assets. The company will adopt FAS No. 143 effective January 1, 2003 and does not expect that the adoption of this statement will have a significant effect on its results of operations or financial position. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS Forward-looking statements - -------------------------- Certain statements contained 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 threat of terrorism and its potential consequences; the timely and successful introduction of new products; timely and successful integration of acquisitions; the availability of funding in the fire service market; the ability of third party suppliers to provide key materials and components; market conditions affecting specialty chemical customers; liquidity; and currency exchange rates. Results of operations - ---------------------- Three months ended March 31, 2002 and 2001 - ------------------------------------------ Sales for the first quarter of 2002 were $134.1 million, an increase of $500,000, or less than 1%, from $133.6 million in the first quarter of 2001. First quarter 2002 sales for North American operations were 5% higher than in the first quarter of last year. Shipments of gas masks and other air purifying respirators were significantly higher in 2002, reflecting continued strong product interest and demand in both government and commercial markets. Specialty chemical sales in first quarter 2002 were $3.0 million lower than in the first quarter of 2001. The decrease is partly a factor of unusually strong specialty chemical shipments in first quarter 2001. Based on current order backlog and anticipated customer needs, specialty chemical shipments are expected to improve for the remainder of the year. Incoming orders of both safety products and specialty chemicals exceeded shipments in first quarter 2002, resulting in an increase in backlog. In Europe, first quarter 2002 local currency sales to external customers were 5% lower than in first quarter 2001. The decrease in the current quarter occurred primarily in Sweden and Switzerland and relates to the discontinuation of third party distribution businesses in those countries during 2001. When stated in U.S. dollars, European sales were 10% lower due to adverse currency exchange rate movements. 8 First quarter 2002 local currency sales for Other International operations were approximately 5% higher than in first quarter 2001 on strong shipments in Australia, South Africa and Brazil. When stated in U.S. dollars, however, sales of Other International operations were 10% lower than in the first quarter of 2001. Gross profit for the first quarter of 2002 was $52.7 million, a decrease of $400,000, or less than 1%, from $53.1 million in first quarter 2001. The ratio of gross profit to sales was 39.3% in the first quarter of 2002 compared to 39.7% in the corresponding quarter last year. The lower gross profit percentage is primarily due to product mix changes. Selling, general and administration costs in the first quarter of 2002 were $31.1 million, a decrease of $1.7 million, or 5%, compared to $32.8 million in the prior year first quarter. The decrease reflects cost reductions resulting from reorganization initiatives in Europe and Other International operations. Depreciation and amortization expense in first quarter 2002 was $6.0 million, a decrease of $350,000, or 5%, from $6.4 million in the corresponding quarter last year. The decrease includes the effect of discontinuing goodwill amortization in first quarter 2002 as prescribed by FAS No. 142. Goodwill amortization expense in 2001 was approximately $550,000 per quarter. Interest expense was $1.3 million in first quarter 2002 compared to $1.6 million in first quarter 2001. Lower interest expense in first quarter 2002 reflects a $5 million reduction in notes payable during December 2001 and significantly lower short-term borrowings. Currency exchange losses of $523,000 in first quarter 2002 were primarily due to the devaluation of the Argentine Peso. Currency exchanges differences were minimal in the first quarter of 2001. Other income and expense was an expense of $137,000 for first quarter 2002 compared to income of $421,000 for first quarter 2001. Other income in first quarter 2001 included a gain of $700,000 on the sales of the safety products distribution business in Sweden. Income before income taxes was $13.6 million for first quarter 2002 compared to $12.7 million in first quarter 2001, an increase of $867,000, or 7%. The effective income tax rate for the first quarter of 2002 was 41.2% compared to 38.2% in first quarter 2001. The higher rate in 2002 relates to proportionately higher income in several high tax rate countries, valuation allowances on deferred tax assets, and differences in permanent items. Net income in the first quarter of 2002 was $8.0 million, or 66 cents per basic share, compared to $7.8 million, or 66 cents per basic share, in the first quarter last year. 9 Corporate Initiatives - --------------------- On April 30, 2002, MSA acquired CGF Gallet, the leading European manufacturer of protective helmets for the fire service, as well as head protection for the police and military. This acquisition complements MSA Europe's strong existing line of fire service products, and provides the opportunity to capitalize on emerging opportunities where Gallet is strong - such as in the law enforcement, military, and aviation markets. Gallet will be integrated into the company's European operations and its products will be marketed under the MSA Gallet name. The integration is expected to be largely completed by the end of 2002. Liquidity and Financial Condition - --------------------------------- Cash and cash equivalents decreased $5.8 million during the first quarter of 2002 compared with a decrease of $3.3 million in the first quarter of 2001. Operating activities provided $1.2 million of cash in first quarter 2002 compared to providing $1.4 million in the same period last year. Cash of $6.0 million was used for investing activities in the first quarter of 2002 compared with the use of $10.6 million in first quarter 2001. Higher use of cash for investing activities in the first quarter of 2001 was primarily related to the acquisition of Surety Manufacturing and Testing, Ltd. Financing activities used $786,000 in the first quarter of 2002 and provided $7.0 million in the same period last year. Higher cash provided by financing activities in 2001 relates primarily to short term borrowings used to finance the Surety acquisition. There were no significant changes in indebtedness during first quarter 2002. Available credit facilities and internal cash resources are considered adequate to provide for future operations, capital requirements, and dividends to shareholders. Financial Instrument Market Risk - -------------------------------- There have been no material changes in the company's financial instrument market risk during the first three months of 2002. For additional information, refer to page 19 of the company's Annual Report to Shareholders for the year ended December 31, 2001. Recently Issued Accounting Standards - ------------------------------------ FAS 143, Accounting for Asset Retirement Obligations, effective January 1, 2003, addresses accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets. The company does not expect that the adoption of this statement will have a significant effect on its results or financial position. 10 PART II OTHER INFORMATION MINE SAFETY APPLIANCES COMPANY Item 1. Legal Proceedings Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MINE SAFETY APPLIANCES COMPANY Date: May 9, 2002 By /s/ Dennis L. Zeitler ---------------------------- Dennis L. Zeitler Vice President - Finance; Principal Financial Officer 11