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.
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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
========== =========== ======== =========
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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.
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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