EX-13.1 6 dex131.txt ANNUAL REPORT TO SHAREHOLDERS FOR YEAR 2000 EXHIBIT 13.1 Management's Discussion and Analysis Forward-looking Statements This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements regarding expectations for future product introductions, cost reduction and restructuring plans, liquidity, sales and earnings, and market risk. Actual results may differ from expectations contained in such forward-looking statements and can be affected by any number of factors, many of which are outside of management's direct control. Among the factors that could cause such differences are the effects of cost reduction efforts, new product introductions, market and operating conditions affecting specialty chemical customers, availability of critical materials and components, the economic environment, and interest and currency exchange rates. Results of Operations Corporate initiatives - During the past year, MSA made significant progress in improving its competitive position and profitability through new product introductions, targeted acquisitions in focused product and geographic markets, and continuing cost reduction programs. These efforts are expected to continue in 2001 and beyond. In 2000, MSA strengthened its product offerings and commitment to the fire service market in two important ways - the introduction of the Evolution line of Thermal Imaging Cameras and the addition of CairnsHelmets, the most respected and established line of firefighter head protection. Since the mid-nineties, MSA has recognized the dramatic market potential of thermal imaging camera technology in protecting lives and assisting firefighters in the line of duty. During the first quarter of 2000, the company's commitment to the practical application of this technology was demonstrated by the acquisition of ISI Group, Inc. (ISIG), an established manufacturer of infrared cameras, and the mid-year introduction of the MSA-designed and manufactured Evolution line of cameras. In August, MSA acquired CairnsHelmets of Clifton, New Jersey, the best known and respected supplier of firefighter head protection in North America. On February 2, 2001, MSA acquired Surety Manufacturing and Testing, Ltd. in Canada. Surety is a leading provider of fall protection equipment and rescue systems to railway, construction, and utility markets. The acquisition complements the existing line of MSA Rose fall protection products and services. In addition, the Surety line of rescue and retrieval systems further enhances MSA product offerings to the fire service market. Current year results in North America benefited from workforce reduction and voluntary retirement incentive programs that were completed in 1999. Further activities are underway in 2001 to more closely integrate the company's sales and marketing strategy throughout North America and to streamline operations, particularly in Canada. The company remains committed to the previously-announced plan to consolidate office space in Pittsburgh as a means of further reducing operating costs and improving communications and productivity. In Europe, the company is making organizational changes that are expected to dramatically improve profitability by reducing operating costs, improving manufacturing efficiencies, and providing an integrated marketing and distribution approach. Significant European reorganization efforts include centralized customer service, product line management, and inventory planning and control. Country-specific reorganization is also underway in Britain and Germany, including workforce reductions and sale of excess facilities. In South Africa, the company completed its reorganization and facilities consolidation plan following the 1999 acquisition of Campbell Gardwel, a South African maker of personal protective equipment. MSA is now positioned as the largest safety products supplier on the African continent, with strength in both mining and industrial markets. During the year a dedicated team made significant progress in advancing the company's e-business capabilities. Initial applications that facilitate business relationships with the company's North American distributor/partners are expected to be operational in the first half of 2001, including an on-line catalog and internet-enabled inventory, order, and account status query capabilities. Supply-chain management presents MSA with major opportunities for improving inventory management, manufacturing efficiencies, and customer service. In 2000, the company established a team that is focused on improving all aspects of supply chain management. 2000 versus 1999 - Sales for 2000 were $500.4 million, an increase of $2.5 million, or less than 1%, from $497.9 million in 1999. Local currency sales growth of 5% was partially offset by negative exchange rate movements when stated in U.S. dollars. Sales by North American operations were $327.8 million in 2000, an increase of $12.7 million, or 4%, from $315.1 million in 1999. Higher sales in 2000 reflect new product offerings and strong shipments of core safety products to the fire service, industrial and construction markets. Shipments of self-contained breathing apparatus for firefighters, gas masks for defense preparedness, and helmets for industrial and construction worker head-protection all improved significantly during the year. Sales were also strengthened by the third quarter 2000 introductions of the Evolution series of thermal imaging cameras and the CairnsHelmets line of firefighter head protection. The company expects continued sales growth with the inclusion of a full year of sales for these products in 2001. Portable instrument sales were also higher in 2000, reflecting the late-1999 introduction of the improved Passport FiveStar Alarm multigas detector. Specialty chemical sales in 2000 were 8% lower than in the prior year, but rebounded sharply in the fourth quarter. Short-term specialty chemical sales levels are highly dependent on the performance of a limited number of large pharmaceutical and chemical company customers. The company believes that lower specialty chemical sales in the second half of 1999 and the first three quarters of 2000 were largely due to a number of special situations with individual customer's drug development, production and marketing activities. Continued recovery in specialty chemical sales is expected in 2001. Sales by European operations were $99.1 million in 2000, a decrease of $14.3 million, or 13%, from $113.4 million in 1999. However, in local currency, sales in Europe were flat year-to-year. Sales growth in Eastern European markets was offset by mixed, but somewhat lower sales in Western European affiliates. 14 | 2000 MSA Annual Report Sales by MSA's other international operations were $73.2 million in 2000 compared to $68.0 million in 1999, an increase of $5.2 million, or 8%. A 14% improvement in local currency sales was partially offset by unfavorable currency translation effects when stated in U.S. dollars. Sales growth in South America was particularly strong on improved economic conditions in the region. Notable growth also occurred in Africa and China reflecting expanding operations in those areas. Gross profit for 2000 was $187.1 million, an increase of $7.4 million, or 4%, from $179.7 million in 1999. An increase in the ratio of gross profit to sales to 37.4% in 2000 from 36.1% in 1999 is the primary reason for higher gross profit in 2000. Higher sales accounts for approximately $1.0 million of the gross profit improvement. Research and development expenses were largely unchanged in 2000 at $17.2 million, compared to $17.1 million in 1999. These expenses relate primarily to safety and health equipment research and development activities in the U.S. and Germany. Depreciation, selling and administrative expenses decreased $3.8 million to $149.0 million in 2000, and decreased as a percent of sales to 29.8% in 2000 compared to 30.7% in 1999. The decrease follows a similar decrease in 1999 and is the result of cost saving restructuring initiatives in North America and Europe. Depreciation, selling and administrative expenses at other international operations were slightly higher than in 1999. Cost of products sold and selling, general and administrative expenses include net periodic pension benefit costs and credits. As described in note 12, pension credits, combined with pension costs, resulted in net pension credits of $14.9 million in 2000 and $10.2 million in 1999. Net pension credits in 2000 included credits of $2.4 million for settlement and curtailment gains in Canada and Britain. In 1999 net pension credits included a net gain of $2.8 million resulting from the termination benefit costs and settlement gains associated with a voluntary retirement incentive program in the U.S. Future net pension credits can be volatile depending on the future market performance of plan assets, changes in actuarial assumptions regarding discount rates and return on plan assets, changes in the amortization levels of actuarial gains and losses, plan amendments affecting benefit payout levels, and profile changes in the participant populations. Changes in any of these factors could cause net pension credits to change. To the extent net pension credits decline in the future, income would be adversely affected. Interest expense in 2000 was $4.5 million compared to $4.3 million in 1999. Currency exchange gains were $444,000 in 2000 compared to $694,000 in 1999. The most significant gains from currency valuation changes in 2000 occurred in North America. Restructuring charges in 2000 were $2.4 million compared to $4.0 million in 1999. The charges in 2000 relate primarily to severance and early retirement costs associated with workforce reductions in Britain, Germany and Canada. The 1999 charges were principally for severance costs in Germany. Other income, for which further information is included in note 4, was $2.5 million in 2000 compared to $3.8 million in 1999. Other income in 2000 included a discount of $2.7 million on the sale of trade accounts receivable under the securitization agreement, which is more fully-described in note 15. Because the accounts receivable securitization arrangement commenced in November 1999, the comparable loss in the prior year was only $300,000. The effective income tax rate, for which further information is included in note 8, was 31.8% in 2000 and 29.6% in 1999. The effective rate in both years was lower than the U.S. statutory income tax rate primarily due to operating losses in Germany and adjustments to prior years' taxes in the U.S., mainly due to foreign sales corporation tax benefits. As further described in note 16, during 1999 the company changed the reporting periods of a number of international affiliates, including Germany which is the company's largest international affiliate. The effect of this change, which represents the after-tax results of these affiliates for December 1999, is reported as a change in accounting principle. The December 1999 net loss included severance costs related to ongoing workforce reductions in Germany. Net income for 2000 was $23.2 million, an increase of $8.1 million, or 54%, over 1999 net income of $15.1 million. Basic earnings per share of common stock improved to $1.89 in 2000 compared to $1.16 in 1999. Earnings per share benefited from net treasury share repurchases that reduced average shares outstanding by 5% in 2000. 1999 versus 1998 - Sales for 1999 were $497.9 million, a decrease of $2.3 million, or less than 1%, from $500.2 million in 1998. Sales in 1998 included the HAZCO Services, Inc. and Baseline Industries, Inc. business units until they were divested on June 30, 1998. Sales of ongoing operations improved $19.3 million in 1999, but were partially offset by the negative currency translation effect of the strong U.S. dollar on international affiliate sales. Sales by North American operations were $315.1 million in 1999, an increase of $3.6 million, or 1%, from $311.5 million in 1998. North American sales in 1998 included HAZCO Services, Inc. and Baseline Industries, Inc., through mid-year. The divestitures resulted in approximately $13.6 million less sales in 1999 compared to 1998. The improvement in North American sales from ongoing businesses reflected strong growth in safety products sales, partially offset by lower shipments of specialty chemicals. Sales of self-contained breathing apparatus and thermal imaging cameras to fire service markets in the U.S. and Canada were particularly strong in 1999. Lower specialty chemical sales in 1999 reflect a number of special situations with individual customers during the second half of the year. Sales by European operations, stated in U.S. dollars, were $113.4 million in 1999, a decrease of $8.0 million, or 7%, from $121.4 million in 1998. The decrease reflects a slight decline in local currency sales and negative currency translation effects when stated in U.S. dollars. Flat or somewhat improved local currency sales in most European countries were partially offset by lower sales in Britain. Sales by MSA's other international operations were $68.0 million in 1999 compared to $64.1 million in 1998, an increase of $3.9 million, or 6%. Significant improvements in local currency sales in most countries were partially offset by unfavorable currency translation effects when stated in U.S. dollars. Local currency sales increased in 1999 at most operations, but were 15 | 2000 MSA Annual Report Management's Discussion and Analysis particularly strong in Africa, which benefited from the second quarter acquisition of Campbell Gardwel. Sales in South America were somewhat lower in 1999 due to continuing economic difficulties in Peru and Chile. Gross profit for 1999 was $179.7 million, a decrease of $4.7 million, or 3%, from $184.4 million in 1998. Approximately $1.0 million of the decrease was volume related. The remainder of the decrease in gross profit dollars was due to a small decline in the ratio of gross profit to sales to 36.1% in 1999 compared to 36.9% in 1998. Research and development expenses were largely unchanged in 1999 at $17.1 million, compared to $17.4 million in 1998. These expenses relate primarily to safety and health equipment research and development activities in the U.S. and Germany. Depreciation, selling and administrative expenses decreased $4.9 million to $152.8 million in 1999 compared to $157.7 million in 1998, and decreased as a percent of sales to 30.7% in 1999 compared to 31.5% in 1998. The decrease reflects cost savings resulting from restructuring initiatives in the U.S. and the mid-1998 divestitures of HAZCO Services, Inc. and Baseline Industries, Inc. Depreciation, selling and administrative expenses at international operations were slightly higher than in 1998. Cost of products sold and selling, general and administrative expenses include net periodic pension benefit costs and credits. As described in note 12, pension credits, combined with pension costs, resulted in net pension credits of $10.2 million in 1999 and $10.3 million in 1998. Net pension credits in 1999 and 1998 included settlement gains, net of termination benefit costs, of $2.8 million and $4.0 million, respectively. Currency exchange gains were $694,000 in 1999, compared to losses of $315,000 in 1998. The most significant gains from currency valuation changes in 1999 occurred in Latin America. Restructuring charges in 1999 were $4.0 million compared to $1.0 million in 1998. The charges in both years relate primarily to severance and early retirement costs associated with workforce reductions in Germany. Other income, for which further information is included in note 4, was $3.8 million in 1999 compared to $6.0 million in 1998. Other income for 1999 included pre-tax gains of $2.2 million on sales of real estate. Other income for 1998 included $2.8 million pre-tax gains related to the divestitures of the HAZCO Services, Inc. and Baseline Industries, Inc. affiliates. The operating results of these two affiliates were not material to the consolidated financial statements during the year ended December 31, 1998. The effective income tax rate, for which further information is included in note 8, was 29.6% in 1999 and 35.2% in 1998. The lower effective rate in 1999 reflects tax benefits on international operating losses, primarily in Germany, and adjustments to prior years' taxes in the U.S., mainly due to foreign sales corporation tax benefits. As further described in note 16, during 1999 the company changed the reporting periods of a number of international affiliates, including Germany which is the company's largest affiliate. The change in reporting period reduced 1999 net income by $1.2 million and earnings per share of common stock by $0.09, representing the after-tax results of the affected affiliates for the one month period ended December 31, 1999. This net loss included severance costs related to ongoing workforce reductions in Germany combined with the results of low December operating activity in the units affected. Net income for 1999 was $15.1 million compared to $18.3 million in 1998. Basic earnings per share of common stock declined in 1999 to $1.16, compared to $1.37 in 1998. Earnings per share benefited from share repurchases that reduced average shares outstanding by 2% in 1999. Liquidity and Financial Condition Cash and cash equivalents increased $9.4 million during 2000, compared to a decrease of $6.9 million in 1999. The company's principal source of financing capital expenditures and internal growth is cash flow from operations. Operations provided cash of $52.3 million in 2000 compared to providing $39.4 million in 1999. The most significant reasons for improved operating cash flow were higher earnings and reduced inventories. Cash provided by operations in 1999 was $18.7 million higher than in 1998. Investing activities used cash of $46.2 million in 2000 compared to $29.6 million in 1999. The increased use of cash for investing activities in 2000 was for the acquisitions of CairnsHelmets and ISI Group, Inc. In 1999 acquisitions and other investing included $2.6 million related to the acquisition of Campbell Gardwel in South Africa and $2.7 million for development costs at the Cranberry Woods office park. Cash flow for investing activities in 1998 benefited from net proceeds of $22.9 million received on the sales of HAZCO Services, Inc. and Baseline Industries, Inc. Capital expenditures totaled $19.4 million in 2000, $26.2 million in 1999, and $34.3 million in 1998. Both 1999 and 1998 included increased expenditures for information systems and manufacturing facility improvements associated with U.S. restructuring activities. In the past five years, approximately $137 million has been spent on new facilities, equipment, and information systems. Financing activities provided cash of $4.1 million in 2000 compared to using $15.4 million in 1999. During 2000 the company issued $40 million of private placement debt to finance acquisitions and common stock repurchases. The additional use of cash in 1999 reflects reductions in short-term borrowings during the year. Dividends paid on common stock during 2000 (the 83rd consecutive year of dividend payment) were 47 cents per share, up from 44 cents per share in both 1999 and 1998. Cash dividends are paid at a conservative percentage of income. During 2000 the company repurchased 2.2 million shares of common stock, including 2.1 million shares from the family of a co-founder, for $54.9 million. Approximately 1.1 million shares of common stock held in treasury were sold to the MSA pension plan in 2000 for $27.0 million. As of December 31, 2000, an additional 89,705 shares may be repurchased under current authorizations. Short term debt decreased $2.7 million during 2000 to $1.3 million. The average amount of short term debt outstanding during 2000 and 1999 was $5.6 million and $38.9 million, respectively. Credit available at year-end with financial institutions was the U.S. dollar equivalent of $21.4 million, of which $19.6 million was unused. Long-term debt, including the current portion, increased $40.2 million during 2000 to $77.1 million, or 25.4% of total capital. Total capital is defined as long-term debt plus the current 16 | 2000 MSA Annual Report portion of long-term debt and shareholders' equity. The increase is due to the issuance of $40 million in fixed rate senior notes payable in installments through 2012. Proceeds of the notes were used for acquisitions and common stock repurchases. Trade receivables decreased $11.8 million to $47.1 million at December 31, 2000. As more-fully described in note 15, the decrease reflects the sale of accounts receivable under the securitization facility. Trade receivables expressed in number of days' sales outstanding was 34 days at December 31, 2000, compared to 43 days at the end of 1999. Other receivables were $30.5 million at December 31, 2000 and $22.7 million at December 31, 1999, representing the company's retained interest in securitized receivables. Inventories decreased $9.4 million to $72.7 million at December 31, 2000. Inventory measured against sales turned 6.9 times in 2000 and 6.1 times in 1999. The working capital ratio was 2.3 to 1 at the end of 2000 and 2.5 to 1 at the end of 1999. The company's financial position remains strong and is expected to provide adequate capital resources for operations, capital expansion and dividends to shareholders. Cumulative Translation Adjustments The year-end position of the U.S. dollar relative to international currencies resulted in translation losses of $5.9 million being charged to the cumulative translation adjustments shareholders' equity account in 2000, compared to losses of $5.1 million in 1999 and $3.6 million in 1998. Translation losses in 2000 occurred primarily in Australia, South Africa, Britain, Canada, and Germany. Translation losses in 1999 occurred primarily in Brazil, Germany and Italy. Significant 1998 translation losses occurred in Germany, Canada and Australia. Financial Instrument Market Risk Market risk represents the risk of adverse changes in the value of a financial instrument caused by changes in currency exchange rates, interest rates, and equity prices. The company is exposed to market risks related to currency exchange rates and interest rates. Currency exchange rate sensitivity - By the very nature of its global operations, the company's cash flow and earnings are subject to fluctuations due to exchange rate changes. However, because the company operates in a number of locations around the world, currency exchange risk is well diversified. Short-term debt of international affiliates is generally payable in local currencies, which is in keeping with the company's policy of reducing currency exchange exposures by offsetting local currency assets with local currency debt. Interest rate sensitivity - The company is exposed to changes in interest rates primarily as a result of borrowing and investing activities used to maintain liquidity and fund business operations. Because of the relatively short maturities of temporary investments and the variable rate nature of industrial development debt, these financial instruments were reported at carrying values which approximate fair value at December 31, 2000. The incremental increase in the fair value of fixed rate long term debt resulting from a hypothetical 10% decrease in interest rates would be approximately $1.5 million. However, the company's sensitivity to interest rate declines and the corresponding increase in the fair value of its debt portfolio would unfavorably affect earnings and cash flows only to the extent that the company elected to repurchase or retire all or a portion of its fixed rate debt portfolio at prices above carrying values. Recently Issued Accounting Standards SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which became effective in the fourth quarter of 2000, provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. The effects of this guidance did not have a significant impact on the company's financial statements. FASB Emerging Issues Task Force Issue No. 00-10, Accounting for Shipping and Handling Costs, which became effective in the fourth quarter of 2000, requires that shipping and handling costs billed to a customer in a sale transaction be classified as revenue in the income statement. Adoption of this guidance by the company, while not significant, increased both net sales and cost of products sold by reclassifying shipping costs billed to customers. Comparative financial statements for periods prior to fourth quarter 2000 were restated to comply with this guidance. FAS No. 133, Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001, establishes accounting and reporting standards for derivative instruments, including those embedded in other contracts. The company does not expect that adoption of this statement will have a significant effect on its results or financial position. Common Stock At December 31, 2000, there were 11,827,623 shares of common stock outstanding. There were at least 875 identifiable common stockholders on November 17, 2000, a recent date for dividends. Common stock price and volume information is included on the American Stock Exchange under the symbol MSA. The quarterly high and low price quotations and cash dividend information for common shares, adjusted to reflect the three-for-one split in May 2000, follow: 2000 1999 -------------------------------------------------------------------------------- Quarter High Low High Low -------------------------------------------------------------------------------- First $21.17 $18.83 $24.92 $17.67 Second 26.50 21.38 27.00 16.83 Third 24.25 18.63 24.96 20.00 Fourth 25.88 19.13 22.33 18.92 Dividend Record Payment Quarter Per Share Date Date -------------------------------------------------------------------------------- 2000 ------------------------------------------ First $.11 Feb. 25, 2000 Mar. 10, 2000 Second .12 May 26, 2000 Jun. 10, 2000 Third .12 Aug. 25, 2000 Sep. 10, 2000 Fourth .12 Nov. 17, 2000 Dec. 10, 2000 ---- Total .47 ---- 1999 ------------------------------------------ First $.11 Feb. 26, 1999 Mar. 10, 1999 Second .11 May 28, 1999 Jun. 10, 1999 Third .11 Aug. 13, 1999 Sep. 10, 1999 Fourth .11 Nov. 19, 1999 Dec. 10, 1999 ---- Total .44 ---- The company's stock transfer agent is Wells Fargo Shareowner Services, 161 North Concord Exchange, P. O. Box 738, South St. Paul, MN 55075-0738. 17 | 2000 MSA Annual Report 2000 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 accounting principles generally accepted in the United States of America. 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 and internal auditors to discuss the scope of their examinations and any significant findings resulting therefrom. /s/ Dennis L. Zeitler Dennis L. Zeitler Vice President Chief Financial Officer and Treasurer 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 changes in retained earnings and accumulated other comprehensive income, and of cash flows present fairly, in all material respects, the financial position of Mine Safety Appliances Company and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America 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 our opinion. As discussed in Note 16 to the financial statements, the Company changed the reporting period for certain subsidiaries in 1999. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Pittsburgh, Pennsylvania February 23, 2001 18 | 2000 MSA Annual Report Consolidated Statement of Income (In thousands, except per share amounts)
Year Ended December 31 2000 1999 1998 Net sales........................................................................... $500,367 $497,908 $500,193 Other income........................................................................ 2,466 3,824 6,026 -------------------------------- 502,833 501,732 506,219 -------------------------------- Costs and expenses Cost of products sold............................................................ 313,279 318,174 315,761 Selling, general and administrative.............................................. 124,456 129,478 135,258 Depreciation and amortization.................................................... 24,557 23,356 22,398 Interest......................................................................... 4,502 4,273 3,258 Currency exchange (gains)/losses................................................. (444) (694) 315 Facilities consolidation and restructuring charges............................... 2,433 3,960 1,021 -------------------------------- 468,783 478,547 478,011 -------------------------------- Income before income taxes.......................................................... 34,050 23,185 28,208 Provision for income taxes.......................................................... 10,811 6,859 9,933 -------------------------------- Income before change in reporting period............................................ 23,239 16,326 18,275 Change in reporting period, net of tax.............................................. (1,192) -------------------------------- Net income.......................................................................... $ 23,239 $ 15,134 $ 18,275 ================================ Basic earnings per common share: Income before change in reporting period......................................... $ 1.89 $ 1.25 $ 1.37 Change in reporting period....................................................... (.09) -------------------------------- Net income....................................................................... $ 1.89 $ 1.16 $ 1.37 ================================ Diluted earnings per common share: Income before change in reporting period......................................... $ 1.88 $ 1.25 $ 1.37 Change in reporting period....................................................... (.09) -------------------------------- Net income....................................................................... $ 1.88 $ 1.16 $ 1.37 ================================
See notes to consolidated financial statements. 19 | 2000 MSA Annual Report Consolidated Balance Sheet (In thousands, except per share amounts)
December 31 2000 1999 Assets Current Assets Cash..................................................................... $ 19,408 $ 8,898 Temporary investments, at cost which approximates market................. 7,133 8,210 Trade receivables, less allowance for doubtful accounts of $2,363 and $2,322 ........................................................... 47,055 58,911 Other receivables........................................................ 30,498 22,716 Inventories.............................................................. 72,681 82,097 Deferred tax assets...................................................... 14,167 13,348 Prepaid expenses and other current assets................................ 10,211 8,910 --------------------- Total current assets..................................................... 201,153 203,090 --------------------- Property Land..................................................................... 5,411 4,655 Buildings................................................................ 106,010 105,022 Machinery and equipment.................................................. 262,372 260,664 Construction in progress................................................. 9,948 8,154 --------------------- Total.................................................................... 383,741 378,495 Less accumulated depreciation............................................ (224,155) (214,986) --------------------- Net property............................................................. 159,586 163,509 --------------------- Other Assets Prepaid pension cost..................................................... 78,157 61,357 Deferred tax assets...................................................... 10,315 4,152 Other noncurrent assets.................................................. 40,472 19,633 --------------------- Total.................................................................... $489,683 $451,741 ===================== Liabilities Current Liabilities Notes payable and current portion of long-term debt...................... $ 6,616 $ 4,477 Accounts payable......................................................... 32,387 29,056 Employees' compensation.................................................. 13,202 11,048 Insurance................................................................ 8,476 10,402 Taxes on income.......................................................... 2,263 3,878 Other current liabilities................................................ 24,034 21,144 --------------------- Total current liabilities................................................ 86,978 80,005 --------------------- Long-term Debt ......................................................................... 71,806 36,550 --------------------- Other Liabilities Pensions and other employee benefits..................................... 54,626 54,111 Deferred tax liabilities................................................. 47,151 35,961 Other noncurrent liabilities............................................. 2,657 2,657 --------------------- Total other liabilities.................................................. 104,434 92,729 --------------------- 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: 2000--11,827,623; 1999--4,291,671).................................... 18,841 12,596 Stock compensation trust................................................. (25,683) (26,679) Treasury shares, at cost................................................. (130,674) (96,762) Deferred stock compensation.............................................. (1,145) (504) Accumulated other comprehensive income................................... (20,869) (14,831) Earnings retained in the business........................................ 382,426 365,068 --------------------- Total shareholders' equity............................................... 226,465 242,457 --------------------- Total.................................................................... $489,683 $451,741 =====================
20 | 2000 MSA Annual Report See notes to consolidated financial statements. Consolidated Statement of Cash Flows (In thousands)
Year Ended December 31 2000 1999 1998 Operating Activities Net income................................................................... $ 23,239 $ 15,134 $ 18,275 Depreciation and amortization................................................ 24,557 23,625 22,398 Pensions..................................................................... (14,900) (10,175) (10,344) Net gain on sale of investments and assets................................... (2,136) (2,096) (3,045) Deferred income taxes........................................................ 3,906 3,269 7,599 Receivables and other receivables............................................ 6,007 15,013 (7,730) Inventories.................................................................. 11,927 5,272 (7,764) Accounts payable and accrued liabilities..................................... 3,255 (1,892) 317 Other assets and liabilities................................................. 438 (4,592) (417) Other--including currency exchange adjustments............................... (4,025) (4,136) 1,473 ------------------------------------- Cash Flow From Operating Activities.......................................... 52,268 39,422 20,762 ------------------------------------- Investing Activities Property additions........................................................... (19,360) (26,247) (34,285) Property disposals........................................................... 3,428 1,567 2,834 Net proceeds from divestitures............................................... 22,865 Acquisitions and other investing............................................. (30,291) (4,892) (1,955) ------------------------------------- Cash Flow From Investing Activities.......................................... (46,223) (29,572) (10,541) ------------------------------------- Financing Activities Additions to long-term debt.................................................. 40,720 25,336 402 Reductions of long-term debt................................................. (640) (588) (710) Changes in notes payable and short-term debt................................. (2,276) (28,767) 8,776 Cash dividends............................................................... (5,881) (5,928) (5,947) Company stock purchases...................................................... (54,948) (5,660) (7,647) Company stock sales.......................................................... 27,088 222 648 ------------------------------------- Cash Flow From Financing Activities.......................................... 4,063 (15,385) (4,478) ------------------------------------- Effect of exchange rate changes on cash......................................... (675) (1,377) (1,644) ------------------------------------- Increase (decrease) in cash and cash equivalents................................ 9,433 (6,912) 4,099 Beginning cash and cash equivalents............................................. 17,108 24,020 19,921 ------------------------------------- Ending cash and cash equivalents................................................ $ 26,541 $ 17,108 $ 24,020 ===================================== Supplemental cash flow information: Interest payments............................................................ $ 3,419 $ 4,299 $ 3,299 Income tax payments.......................................................... 6,789 3,648 7,513 Noncash investing activity: Investment sold for other current assets..................................... 1,334
See notes to consolidated financial statements. 21 | 2000 MSA Annual Report Consolidated Statement of Changes in Retained Earnings And Accumulated Other Comprehensive Income (In thousands)
Accumulated Other Retained Comprehensive Comprehensive Earnings Income Income -------------------------------------- Balances January 1, 1998...................................................... $343,534 $ (6,282) Net income................................................................. 18,275 $18,275 Cumulative translation adjustments (a)..................................... (3,625) (3,625) Minimum pension liability adjustments (b).................................. (333) (333) ------- Comprehensive income.................................................... $14,317 ======= Common dividends........................................................... (5,898) Preferred dividends........................................................ (49) ----------------------- Balances December 31, 1998.................................................... 355,862 (10,240) Net income................................................................. 15,134 $15,134 Cumulative translation adjustments......................................... (5,141) (5,141) Minimum pension liability adjustments (b).................................. 550 550 ------- Comprehensive income.................................................... $10,543 ======= Common dividends........................................................... (5,878) Preferred dividends........................................................ (50) ----------------------- Balances December 31, 1999.................................................... 365,068 (14,831) Net income................................................................. 23,239 $23,239 Cumulative translation adjustments......................................... (5,921) (5,921) Minimum pension liability adjustments (b).................................. (117) (117) ------- Comprehensive income.................................................... $17,201 ======= Common dividends........................................................... (5,832) Preferred dividends........................................................ (49) ----------------------- Balances December 31, 2000.................................................... $382,426 $(20,869) =======================
(a) - Charges to cumulative translation adjustments in 1998 include tax expense of $30,000. (b) - Charges in 2000 and 1998 to minimum pension liability adjustments are net of tax benefit of $78,000 and $221,000, respectively. The credit in 1999 is net of tax expense of $367,000. Components of accumulated other comprehensive income are as follows:
(In thousands) -------------------------------- 2000 1999 1998 -------------------------------- Cumulative translation adjustments................................................... $(20,431) $(14,510) $ (9,369) Minimum pension liability adjustments................................................ (438) (321) (871) -------------------------------- Accumulated other comprehensive income............................................... $(20,869) $(14,831) $(10,240) --------------------------------
22 | 2000 MSA Annual Report See notes to consolidated financial statements. Notes to Consolidated Financial Statements Note 1--Basis of Presentation Certain prior year balances have been reclassified to conform with the current year presentation. Significant accounting policies are stated in italics in 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, EXCEPT MINE SAFETY FUNDING CORPORATION, A QUALIFYING SPECIAL PURPOSE ENTITY, 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. REVENUE FROM THE SALE OF PRODUCTS IS RECOGNIZED WHEN BOTH RISK OF LOSS AND TITLE HAVE TRANSFERRED TO THE CUSTOMER. 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. INTANGIBLE ASSETS, INCLUDING GOODWILL AND PATENTS, ARE AMORTIZED ON A STRAIGHT LINE BASIS OVER PERIODS NOT EXCEEDING 35 YEARS. 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 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; 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 OF 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. COMPREHENSIVE INCOME, DETERMINED IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130, INCLUDES NET INCOME AND CHANGES IN OTHER COMPREHENSIVE INCOME ITEMS WHICH ARE REPORTED IN SHAREHOLDERS' EQUITY. OTHER COMPREHENSIVE INCOME IS REPORTED NET OF RELATED INCOME TAX EXPENSE OR BENEFIT. Note 2--Restructuring Restructuring charges of $2,433,000 in 2000, $3,960,000 in 1999, and $1,021,000 in 1998 relate to workforce reductions, primarily in Britain, Germany, and Canada in 2000, and in Germany in 1999 and 1998. Note 3--Research and Development Expense RESEARCH AND DEVELOPMENT COSTS, CHARGED AGAINST INCOME AS INCURRED, were $17,241,000 in 2000, $17,097,000 in 1999, and $17,415,000 in 1998. Note 4--Other Income (In thousands) ---------------------------------- 2000 1999 1998 ---------------------------------- Interest ................................ $ 1,243 $ 914 $ 1,293 Rent .................................... 957 1,310 1,226 Dispositions of assets .................. (528) 1,796 807 Equity in earnings of affiliates ........ 25 45 (6) Divestiture of affiliates ............... 2,807 Other, net .............................. 769 (241) (101) ---------------------------------- Total ................................... 2,466 3,824 6,026 ---------------------------------- Note 5--Inventories MOST 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. Reductions in certain inventory quantities during 2000, 1999, and 1998 resulted in liquidations of LIFO inventory quantities carried at lower costs prevailing in prior years. The effect of these liquidations reduced cost of sales by $1,920,000 in 2000, $216,000 in 1999, and $320,000 in 1998, and increased net income by $1,171,000 ($.10 per share), $132,000 ($.01 per share), and $195,000 ($.01 per share), respectively. (In thousands) ---------------------- 2000 1999 ---------------------- Finished products ................................ $30,743 $37,604 Work in process .................................. 10,451 7,500 Raw materials and supplies ....................... 31,487 36,993 ---------------------- Total inventories ................................ 72,681 82,097 ---------------------- Excess of FIFO costs over LIFO costs ............. 42,711 44,919 ---------------------- Inventories stated on the LIFO basis represent 45%, 48%, and 51% of the total inventories at December 31, 2000, 1999, and 1998, respectively. Note 6--Long-Term Debt (In thousands) -------------------- 2000 1999 -------------------- U.S. Industrial development debt issues payable through 2022, 6.1% ...................... $10,750 $10,750 Series A Senior Notes payable through 2001, 7.3% ...................... 5,000 5,000 Series B Senior Notes payable through 2006, 7.69% ..................... 20,000 20,000 Senior Notes payable through 2012, 8.39% ..................... 40,000 Other, 18% ......................................... 61 89 International Various notes payable through 2003, 4.5% to 8% ($723 and $773 collateralized by pledge of assets located abroad) ............. 1,319 1,110 -------------------- Total ................................................ 77,130 36,949 Amounts due within one year .......................... 5,324 399 -------------------- Long-term debt ....................................... 71,806 36,550 -------------------- Approximate maturities of these obligations over the next five years are $5,324,000 in 2001, $4,281,000 in 2002, $4,007,000 in 2003, $4,000,000 in 2004, and $4,000,000 in 2005. International notes payable include $132,000 with no fixed maturity date. Some debt agreements require the company to maintain certain financial ratios and minimum net worth and contain restrictions on the total amount of debt. 23 | 2000 MSA Annual Report Notes to Consolidated Financial Statements Note 7--Segment Information SEGMENT INFORMATION IS REPORTED IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131, WHICH DESIGNATES THE INTERNAL FINANCIAL INFORMATION THAT IS USED BY MANAGEMENT FOR MAKING OPERATING DECISIONS AND ASSESSING PERFORMANCE AS THE SOURCE FOR IDENTIFYING THE COMPANY'S OPERATING SEGMENTS. The company is organized into three geographic operating segments (North America, Europe, and Other International), each of which includes a number of operating companies. The company is engaged in the manufacture and sale of safety and health equipment, including respiratory protective equipment, head protection, eye and face protection, hearing protectors, safety clothing, industrial emergency care products, mining safety equipment, thermal imaging cameras, and monitoring instruments. In addition, the company manufactures and sells specialty chemicals, including boron-based chemicals. Reportable segment information is presented in the following table:
(In thousands) --------------------------------------------------------------------------------- North Other Reconciling Consolidated America Europe International items totals --------------------------------------------------------------------------------- 2000 Sales to external customers ............... $ 327,849 $ 99,119 $ 73,199 $ 200 $ 500,367 Intercompany sales ........................ 25,573 16,389 1,453 (43,415) Net income ................................ 21,876 (2,225) 3,624 (36) 23,239 Total assets .............................. 365,035 93,955 50,296 (19,603) 489,683 Interest income ........................... 604 285 329 25 1,243 Interest expense .......................... 3,791 216 495 4,502 Noncash items: Depreciation and amortization .......... 19,744 3,374 1,314 125 24,557 Pension income (expense) ............... 16,640 (1,552) (188) 14,900 Equity in earnings of affiliates .......... 25 25 Income tax provision (benefit) ............ 11,001 (2,041) 1,776 75 10,811 Investments in affiliates ................. 1,358 95 1,453 Property additions ........................ 14,031 3,630 1,694 5 19,360 Fixed assets .............................. 132,597 20,681 6,290 18 159,586 1999 Sales to external customers ............... 315,087 113,365 68,032 1,424 497,908 Intercompany sales ........................ 34,128 17,637 1,691 (53,456) Net income ................................ 14,991 (1,724) 3,498 (1,631) 15,134 Total assets .............................. 330,884 92,531 49,836 (21,510) 451,741 Interest income ........................... 298 406 190 20 914 Interest expense .......................... 3,267 285 723 (2) 4,273 Noncash items: Depreciation and amortization .......... 17,451 4,386 1,392 127 23,356 Pension income (expense) ............... 13,002 (3,149) 322 10,175 Equity in earnings of affiliates .......... 45 45 Income tax provision (benefit) ............ 7,502 (2,123) 1,657 (177) 6,859 Investments in affiliates ................. 1,358 70 1,428 Property additions ........................ 20,028 4,662 1,547 10 26,247 Fixed assets .............................. 135,146 21,679 6,660 24 163,509 1998 Sales to external customers ............... 311,495 121,427 64,094 3,177 500,193 Intercompany sales ........................ 34,013 16,922 1,052 (51,987) Net income ................................ 16,353 490 1,076 356 18,275 Total assets .............................. 322,523 108,294 45,144 (18,240) 457,721 Interest income ........................... 253 503 322 215 1,293 Interest expense .......................... 2,173 211 874 3,258 Noncash items: Depreciation and amortization .......... 14,872 4,852 1,274 1,400 22,398 Pension income (expense) ............... 13,727 (3,126) (257) 10,344 Equity in earnings of affiliates .......... (6) (6) Income tax provision ...................... 9,189 (213) 995 (38) 9,933 Investments in affiliates ................. 358 31 389 Property additions ........................ 27,199 4,010 3,073 3 34,285 Fixed assets .............................. 132,771 24,793 6,970 27 164,561
Sales by product line: (In thousands) ------------------------------------ 2000 1999 1998 ------------------------------------ Safety and health equipment .......... $468,032 $462,608 $460,694 Specialty chemicals .................. 32,335 35,300 39,499 ------------------------------------ 500,367 497,908 500,193 ------------------------------------ Reconciling items consist primarily of intercompany eliminations and items reported at the corporate level. Sales are attributed to countries based on the location of the selling company. Sales in Germany were $47,471,000 in 2000, $56,017,000 in 1999, and $58,239,000 in 1998. 24 | 2000 MSA Annual Report 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 ENACTED TAX RATES EXPECTED TO BE IN EFFECT WHEN TAXES ARE ACTUALLY PAID OR DEDUCTIONS ARE TAKEN. NO PROVISION IS MADE FOR UNDISTRIBUTED EARNINGS OF INTERNATIONAL AFFILIATES 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) ------------------------------------- 2000 1999 1998 ------------------------------------- Income Before Income Taxes U.S. income .......................... $ 32,053 $ 23,790 $ 25,811 Non-U.S. income ...................... 6,080 3,225 5,083 Currency translation (losses) ........ (95) (487) Eliminations ......................... (4,083) (3,735) (2,199) ------------------------------------- Income Before Income Taxes ........... 34,050 23,185 28,208 ------------------------------------- Provision For Income Taxes Current Federal ............................ 2,713 (834) (146) State .............................. 804 367 (328) Non-U.S ............................ 3,388 3,281 2,808 ------------------------------------- Total current provision ............ 6,905 2,814 2,334 ------------------------------------- Deferred Federal ............................ 5,540 5,779 7,364 State .............................. 1,221 921 1,382 Non-U.S ............................ (2,855) (2,655) (1,147) ------------------------------------- Total deferred provision ........... 3,906 4,045 7,599 ------------------------------------- Provision for Income Taxes ........... 10,811 6,859 9,933 ------------------------------------- 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 .. 11,918 8,115 9,873 State income taxes, net of federal benefit .... 1,316 837 685 Adjustment of prior years' income taxes ....... (782) (954) (469) Non-U.S. taxes ................................ (1,323) (774) (332) Other--net .................................... (318) (365) 176 ------------------------------ Provision for income taxes .................... 10,811 6,859 9,933 ------------------------------ The components of deferred taxes are as follows: (In thousands) ----------------------- 2000 1999 ----------------------- Deferred tax assets Postretirement benefits .......................... $ 5,946 $ 5,399 Inventory reserves and unrealized profits ........ 4,745 4,568 Vacation allowances .............................. 2,050 1,986 Loss and credit carryforwards .................... 12,590 6,574 Liability insurance .............................. 2,036 3,111 Accrued liabilities .............................. 2,274 2,377 Basis of investments ............................. (2,825) (429) Allowance for doubtful accounts .................. 483 409 Trademarks and license fees ...................... 642 608 Warranties ....................................... 871 856 Other ............................................ 397 417 ----------------------- Total deferred tax assets ........................ 29,209 25,876 ----------------------- Deferred tax liabilities Depreciation ..................................... (26,296) (25,585) Pension .......................................... (25,582) (18,752) ----------------------- Total deferred tax liabilities ................... (51,878) (44,337) ----------------------- Net deferred taxes ................................. (22,669) (18,461) ----------------------- Undistributed earnings of international companies for which U.S. income taxes have not been provided were $78,237,000 at December 31, 2000. The company has tax credit carryforwards of $2,613,000 that expire between 2003 and 2018. The company also has net operating loss carryforwards of $9,059,000 with no expiration date, primarily in Germany, and $918,000 that expire in 2008. 25 | 2000 MSA Annual Report Notes to Consolidated Financial Statements Note 9--Capital Stock . Common stock, no par value - 60,000,000 shares authorized . Second cumulative preferred voting stock, $10 par value - 1,000,000 shares authorized; none issued . 4 1/2% cumulative preferred stock, $50 par value - 100,000 shares authorized; 71,373 shares issued and 49,713 shares ($1,608,000) held in treasury (no activity in 2000 and 1998; 400 shares, $13,000, purchased for treasury in 1999) Common stock activity is summarized as follows:
Shares Dollars (In thousands) ------------------------------------- ---------------------------------- Stock Stock Shares Compensation Shares In Shares Compensation Treasury Issued Trust Treasury Issued Trust Cost ------------------------------------- ---------------------------------- Balances January 1, 1998........................ 6,778,599 (600,000) (1,722,684) $ 12,270 $ (28,200) $ (81,847) Management Share Incentive Plan issues.......... 16,130 219 758 Stock options exercised......................... 12,180 75 573 Purchased for treasury.......................... (105,351) (7,647) ------------------------------------- ---------------------------------- Balances December 31, 1998...................... 6,778,599 (571,690) (1,828,035) 12,564 (26,869) (89,494) Stock options exercised......................... 4,060 32 190 Purchased for treasury.......................... (91,263) (5,660) ------------------------------------- ---------------------------------- Balances December 31, 1999...................... 6,778,599 (567,630) (1,919,298) 12,596 (26,679) (95,154) Management Share Incentive Plan issues (pre-split)........................... 19,760 318 929 Purchased for treasury (pre-split).............. (74,616) (4,994) Three-for-one stock split....................... 13,557,198 (1,095,740) (3,987,828) Management Share Incentive Plan forfeitures (post-split)..................... (2,790) (58) Stock options exercised (post-split)............ 4,290 21 67 Purchased for treasury (post-split)............. (2,009,322) (49,954) Issued from treasury (post-split)............... 1,125,000 5,906 21,094 ------------------------------------- ---------------------------------- Balances December 31, 2000...................... 20,335,797 (1,639,320) (6,868,854) 18,841 (25,683) (129,066) ------------------------------------- ----------------------------------
On May 10, 2000, the company's shareholders approved a three-for-one stock split of both the issued and authorized common stock, which was distributed on May 24, 2000, to shareholders of record on May 12, 2000. During 2000, the company purchased 2.1 million shares of common stock from a major shareholder for $54.9 million. In a subsequent transaction, the company sold 1,125,000 shares of common stock that were held in treasury to the MSA Non-Contributory Pension Plan for Employees for $27 million. The Mine Safety Appliances Company Stock Compensation Trust was established to fund certain stock-related benefit plans, including employee stock options and awards. Shares held by the Stock Compensation Trust, and the corresponding cost of those shares, are reported as a reduction of common shares issued. Differences between the cost of the shares held by the Stock Compensation Trust and the market value of shares released for stock-related benefits are reflected in shares issued. The company has a Shareholder Rights Plan under which each outstanding share of common stock is granted one-third of a preferred share purchase right. The rights are exercisable for a fraction of a share of preferred stock, only if a person or group acquires or commences a tender offer for 15% or more of the company's common stock. In the event a person or group acquires 15% or more of the outstanding common stock, each right not owned by that person or group will entitle the holder to purchase that number of shares of common stock having a value equal to twice the $225 exercise price. The Board of Directors may redeem the rights for $.01 per right at any time until ten days after the announcement that a 15% position has been acquired. The rights expire on February 21, 2007. Note 10--Earnings per Share BASIC EARNINGS PER SHARE IS COMPUTED ON THE WEIGHTED AVERAGE NUMBER OF COMMON 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. (In thousands) --------------------------------- 2000 1999 1998 --------------------------------- Net income ................................. $ 23,239 $ 15,134 $ 18,275 Preferred stock dividends .................. (49) (50) (49) --------------------------------- Income available to common shareholders .... 23,190 15,084 18,226 --------------------------------- Basic shares outstanding ................... 12,301 12,972 13,290 Stock options .............................. 55 33 51 --------------------------------- Diluted shares outstanding ................. 12,356 13,005 13,341 --------------------------------- Antidilutive stock options ................. 18 108 9 --------------------------------- 26 | 2000 MSA Annual Report Note 11--Short-Term Debt Short-term bank lines of credit amounted to $21,426,000 of which $19,600,000 was unused at December 31, 2000. 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 $1,288,000 and $4,071,000 at December 31, 2000 and 1999, respectively. The average month-end balance of total short-term borrowings during 2000 was $5,611,000 while the maximum month-end balance of $15,858,000 occurred at June 30, 2000. The average interest rate during 2000 was approximately 14% based upon total short-term interest expense divided by the average month-end balance outstanding, and 14% at year-end. Note 12--Pensions and Other Postretirement Benefits THE COMPANY'S 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 AND MEXICO, WHERE IT IS COMMON PRACTICE AND PERMISSIBLE UNDER TAX LAWS TO ACCRUE BOOK RESERVES. A minimum liability is recognized for unfunded defined benefit plans for which the accumulated benefit obligation exceeds accrued pension costs. The amount of the minimum liability in excess of unrecognized prior service cost, net of tax benefit, is recorded as a reduction in shareholders' equity. 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. 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. Information pertaining to defined benefit pension plans and other postretirement benefits plans, PREPARED IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 132, is provided in the following table.
(In thousands) -------------------------------------------------------------- Pension Benefits Other Benefits --------------------------- -------------------------- 2000 1999 2000 1999 --------------------------- -------------------------- Change in Benefit Obligations Benefit obligations at January 1 .......................... $ 186,886 $ 207,269 $ 18,546 $ 17,353 Service cost .............................................. 4,461 5,426 409 437 Interest cost ............................................. 12,537 13,049 1,390 1,212 Employee contributions .................................... 117 65 Plan amendments ........................................... 621 Actuarial (gains) losses .................................. 1,282 (11,759) 858 1,048 Benefits paid ............................................. (12,540) (12,918) (1,833) (1,504) Curtailments .............................................. (332) Settlements ............................................... (12,460) (15,923) Termination benefits ...................................... 5,842 Currency translation effects .............................. (3,540) (4,165) --------------------------- -------------------------- Benefit obligations at December 31 ........................ 177,032 186,886 19,370 18,546 --------------------------- -------------------------- Change in Plan Assets Fair value of plan assets at January 1 .................... 341,250 330,890 Actual return on plan assets .............................. 9,921 35,502 Employer contributions .................................... 2,247 2,633 43 1,504 Employee contributions .................................... 221 169 Benefits paid ............................................. (12,540) (12,918) (1,504) Section 420 transfer to retiree medical plan .............. (1,790) 1,790 Settlements ............................................... (12,460) (15,276) (1,833) Currency translation effects .............................. (2,025) 250 --------------------------- -------------------------- Fair value of plan assets at December 31 .................. 324,824 341,250 --------------------------- -------------------------- Funded Status Funded status at December 31 .............................. 147,792 154,364 (19,370) (18,546) Unrecognized transition gains ............................. (1,274) (5,320) Unrecognized prior service cost ........................... 1,806 1,664 (1,065) (69) Unrecognized net actuarial (gains) losses ................. (106,703) (125,933) 4,726 2,985 --------------------------- -------------------------- Prepaid (accrued) benefit cost ............................ 41,621 24,775 (15,709) (15,630) --------------------------- -------------------------- Amounts Recognized in the Balance Sheet Prepaid benefit cost ...................................... 78,157 61,357 Accrued benefit liability ................................. (37,954) (37,479) (15,709) (15,630) Intangible asset .......................................... 689 362 Minimum pension liability adjustments ..................... 729 535 --------------------------- -------------------------- Prepaid (accrued) benefit cost ............................ 41,621 24,775 (15,709) (15,630) --------------------------- --------------------------
27 | 2000 MSA Annual Report Notes to Consolidated Financial Statements
(In thousands, except percents) ---------------------------------------------- Pension Benefits Other Benefits -------------------- ---------------- 2000 1999 2000 1999 -------------------- ---------------- Acturial Assumptions at December 31 Discount rate....................................................... 7% 7% 7.5% 7.5% Expected return on plan assets...................................... 9% 9% Rate of compensation increases...................................... 4% 4% Plans with Accumulated Benefit Obligations in Excess of Plan Assets Projected benefit obligations....................................... $39,761 $40,298 Accumulated benefit obligations..................................... 38,329 36,818 Plan assets......................................................... 0 0
(In thousands) Pension Benefits Other Benefits ----------------------------------- ------------------------------- Components of Net Periodic Benefit Cost (Credit) 2000 1999 1998 2000 1999 1998 ----------------------------------- ------------------------------- Service cost ......................................... $ 4,358 $ 5,426 $ 5,057 $ 409 $ 437 $ 319 Interest cost ........................................ 12,537 13,049 13,327 1,390 1,212 1,089 Expected return on plan assets ....................... (25,181) (23,061) (22,002) Amortization of transition (asset) ................... (624) (703) (729) Amortization of prior service cost ................... 302 382 387 (108) (8) (8) Recognized net actuarial (gains) losses .............. (3,914) (2,487) (2,391) 310 278 8 Settlement gain ...................................... (2,093) (8,623) (3,993) Curtailment gain ..................................... (285) Termination benefits ................................. 5,842 ----------------------------------- ------------------------------- Net periodic benefit cost (credit) ................... (14,900) (10,175) (10,344) 2,001 1,919 1,408 ----------------------------------- -------------------------------
For measurement purposes, a 7.5% increase in the costs of covered health care benefits was assumed for the year 2000, decreasing by .5% for each successive year to 4% in 2007 and thereafter. A one-percentage-point change in assumed health care cost trend rates would have increased or decreased the other postretirement benefit obligations and current year plan expense by approximately $1 million and $100,000, respectively. Expense for defined contribution pension plans was $2,619,000 in 2000, $2,750,000 in 1999, and $3,113,000 in 1998. Note 13--Acquisitions During 2000, the company acquired ISI Group, Inc. (ISIG), an established manufacturer of infrared thermal imaging cameras, and CairnsHelmets (Cairns), a leading supplier of firefighter head protection. The acquisitions were recorded using the purchase method of accounting. The aggregate purchase price of $29.7 million was allocated to the assets acquired and the liabilities assumed based on estimated fair values and included $24.9 million in goodwill, which is being amortized on a straight line basis over 10 years for ISIG and 35 years for Cairns. The results of operations of ISIG and Cairns are included in the financial statements from their respective dates of acquisition. The acquisition agreement for ISIG provides for additional consideration to be paid to the seller annually based on a defined calculation of gross profit from the sale of certain thermal imaging cameras in 2000 through 2003. Additional consideration will be charged to goodwill when paid and amortization expense will be adjusted to fully amortize ISIG goodwill by the end of the 10 year period. The following unaudited pro forma summary presents information as if ISIG and Cairns had been acquired at January 1, 1999: (In thousands, except earnings per share) 2000 1999 --------------------- Net sales................................................ $509,937 $515,785 Net income............................................... 23,551 15,624 Basic earnings per share................................. 1.91 1.20 The pro forma amounts include certain adjustments, primarily to recognize goodwill amortization and interest expense, and do not recognize any benefits which may be achieved from combining operations. The pro forma information does not necessarily reflect the actual results that would have occurred and is not necessarily indicative of future results of operations of the combined companies. 28 | 2000 MSA Annual Report Note 14--Leases The company leases office space, manufacturing and warehouse facilities, automobiles and other equipment under operating leases expiring at various dates through 2015. Rent expense was $5,700,000 in 2000, $5,813,000 in 1999, and $5,846,000 in 1998. Minimum rental commitments under noncancelable leases are $1,133,000 in 2001, $752,000 in 2002, $657,000 in 2003, $548,000 in 2004, $555,000 in 2005, and $5,227,000 after 2005. Note 15--Accounts Receivable Securitization STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES (FAS NO. 125), APPLIES A CONTROL-ORIENTED, FINANCIAL COMPONENTS APPROACH TO FINANCIAL-ASSET-TRANSFER TRANSACTIONS. FINANCIAL ASSETS, NET OF RETAINED INTERESTS, ARE REMOVED FROM THE BALANCE SHEET WHEN THE ASSETS ARE SOLD AND CONTROL IS SURRENDERED. IN SEPTEMBER 2000, FAS NO. 125 WAS REPLACED BY FAS NO. 140 WHICH REVISED CERTAIN ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR SECURITIZATIONS AND OTHER TRANSFERS OF FINANCIAL ASSETS, BUT CARRIED OVER MOST FAS NO. 125 PROVISIONS. In November 1999, the company and Mine Safety Funding Corporation (MSF) entered into securitization agreements under which the company sells MSF, on a continuous basis, an undivided interest in eligible trade accounts receivable generated by the company, while maintaining a subordinated interest in a portion of the receivables. MSF is an unconsolidated wholly-owned special purpose, bankruptcy-remote subsidiary of the company. The company services the sold receivables for MSF at market rates and, accordingly, no servicing asset or liability has been recorded. MSF and the company have also entered into securitization agreements with financial institutions under which MSF may sell up to $30 million of accounts receivable to a multi-seller asset-backed commercial paper issuer. At December 31, 2000, accounts receivable of $53.2 million were owned by MSF. The company held a subordinated interest in these receivables of $31.5 million, of which $30.5 million is classified as other receivables. Net proceeds to the company from the securitization arrangement were $21.0 million at December 31, 2000. The company incurred costs associated with the securitization facility of $2.4 million in 2000, representing the discount loss on the sale of the receivables, partially offset by related servicing income. At December 31, 1999, accounts receivable of $43.3 million were owned by MSF. The company held a subordinated interest in these receivables of $23.7 million, of which $22.7 million is classified as other receivables. Net proceeds to the company from the securitization arrangement were $18.7 million at December 31, 1999. The company incurred costs associated with the securitization facility of $300,000 in 1999, representing the discount loss on the sale of the receivables, partially offset by related servicing income. Note 16--Change in Reporting Period Beginning in 1999, certain international affiliates which had been consolidated based on fiscal years ending November 30 changed to fiscal years ending December 31. The after-tax effect of the change in reporting period is included in the 1999 income statement as a change in accounting principle. (In thousands) -------------- Net sales..................................................... $11,290 Cost of products sold......................................... 8,629 Selling, general and administrative........................... 3,497 Depreciation and amortization................................. 372 Facilities consolidation and restructuring charges............ 421 Other expenses, net........................................... 258 Income tax benefit............................................ (695) ------- Change in reporting period, net of tax........................ (1,192) Note 17--Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS No. 133), which later was amended by FAS Nos. 137 and 138. FAS No.133 requires the recognition of all derivatives, including those embedded in other contracts, as either assets or liabilities at fair value. Changes in fair value are to be reflected in either current period net income or other comprehensive income, depending on the designation of the derivative instrument. The company may elect not to designate a derivative instrument as a hedge even if the strategy would be expected to qualify for hedge accounting treatment. The adoption of FAS No. 133 will change the timing of recognition for derivative gains and losses as compared to previous accounting standards. The company will adopt FAS No.133 effective January 1, 2001. The company does not expect that adoption of this statement will have a significant effect on its results or financial position. 29 | 2000 MSA Annual Report Notes to Consolidated Financial Statements Note 18--Stock Plans The 1998 Management Share Incentive Plan permits the granting of restricted stock awards and stock options to eligible key employees through March 2008. The 1990 Non-Employee Directors' Stock Option Plan provides for annual grants of stock options to eligible directors. As of December 31, 2000, there were 1,260,114 shares and 83,400 shares, respectively, reserved for future grants pursuant to these plans. THE COMPANY APPLIES ACCOUNTING PRINCIPLES BOARD OPINION 25 AND RELATED INTERPRETATIONS IN ACCOUNTING FOR THE PLANS. ACCORDINGLY, NO COMPENSATION COST IS RECOGNIZED FOR STOCK OPTION GRANTS. COMPENSATION COST FOR 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. Restricted stock awards are granted to employees without payment to the company in consideration of services to be performed in ensuing four-year periods. Restricted stock awards of 19,760 shares (pre-split), with a fair value of $63.06 per share, were granted in 2000. Restricted stock awards expense charged to operations was $547,000 in 2000, $448,000 in 1999, and $368,000 in 1998. 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). If compensation cost for stock option grants had been determined based on the fair value method provided in Statement of Financial Accounting Standards No. 123, proforma net income in 2000, 1999 and 1998 would have been $21,775,000, $14,609,000, and $17,805,000 and earnings per basic share would have been $1.77, $1.13, and $1.34, respectively. The fair value of the options granted was estimated at the grant date using the Black-Scholes option pricing model and the following weighted average assumptions for options granted in 2000, 1999, and 1998, respectively: risk-free interest rate of 7.0%, 5.1%, and 5.5%; dividend yield of 2.3%, 2.2%, and 2.0%; expected option life of 9.8 years, 9.8 years, and 9.7 years; and expected volatility factor of 19% in all three years. A summary of stock option activity under the two plans, adjusted to reflect the three-for-one stock split in May 2000, follows:
2000 1999 1998 ------------------------------------------------------------------------------------ Weighted-Average Weighted-Average Weighted-Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------------------------------------------------------------------------------------ Outstanding at beginning of year.... 305,379 $19.24 215,715 $18.25 165,003 $16.88 Granted............................. 267,120 21.11 101,844 21.24 87,252 20.62 Exercised........................... (4,290) 20.56 (12,180) 18.30 (36,540) 17.73 Forfeited........................... (23,415) 19.30 ------------------------------------------------------------------------------------ Outstanding at end of year.......... 544,794 20.08 305,379 19.24 215,715 18.25 ------------------------------------------------------------------------------------ Options exercisable at year-end..... 544,794 305,379 215,715 ------------------------------------------------------------------------------------
The weighted average remaining contractual life of all options outstanding at December 31, 2000 was approximately 7 years. Weighted average remaining contractual life by exercise price range is summarized as follows: Exercise prices of $13.48 to $15.71 - 4 years Exercise prices of $18.33 to $23.88 - 8 years Note 19--Quarterly Financial Information (Unaudited) (In thousands, except earnings per share)
2000 1999 ------------------------------------------------ ------------------------------------------------- Quarters Quarters -------------------------------------- -------------------------------------- 1st 2nd 3rd 4th Year 1st 2nd 3rd 4th Year ------------------------------------------------ ------------------------------------------------- Net sales................... $129,236 $121,683 $119,745 $129,703 $500,367 $116,879 $124,633 $118,889 $137,507 $497,908 Gross profit................ 50,387 43,305 42,939 50,457 187,088 42,034 42,308 45,284 50,108 179,734 Net income.................. 7,459 2,826 3,920 9,034 23,239 2,570 737 4,341 7,486 15,134 ------------------------------------------------ ------------------------------------------------- Basic earnings per share.... .58 .22 .33 .76 1.89 .20 .05 .34 .58 1.16 ------------------------------------------------ ------------------------------------------------- Diluted earnings per share.. .58 .22 .33 .76 1.88 .20 .05 .33 .58 1.16 ------------------------------------------------ -------------------------------------------------
Fourth quarter 1999 net income and earnings per share include a loss of $1,192,000 or $.09 per share resulting from the change in reporting period. The effect of this change on full year 1999 net income and earnings per share was $1,192,000 or $.09 per share. Shipping charges billed to customers have been reclassified from cost of products sold to net sales to comply with FASB Emerging Issues Task Force Issue 00-10, Accounting for Shipping and Handling Costs. Amounts reclassified in the first, second, third, and fourth quarters of 2000 were $1,018,000, $980,000, $994,000, and $945,000, respectively, and for the first, second, third, and fourth quarters of 1999 were $912,000, $958,000, $885,000, and $926,000, respectively. Earnings per share information has been adjusted to reflect the three-for-one stock split in May 2000. 30 | 2000 MSA Annual Report Summary of Selected Financial Data
Summary of Operations 2000 1999 1998 1997 1996 (In thousands, except as noted) Net sales $ 500,367 $ 497,908 $500,193 $503,191 $509,086 ------------------------------------------------------------------------------------------------------------------------------------ Other income 2,466 3,824 6,026 6,802 7,141 ------------------------------------------------------------------------------------------------------------------------------------ Cost of products sold 313,279 318,174 315,761 306,280 311,143 ------------------------------------------------------------------------------------------------------------------------------------ Selling, general and administrative 124,456 129,478 135,258 139,256 137,141 ------------------------------------------------------------------------------------------------------------------------------------ Depreciation and amortization 24,557 23,356 22,398 23,233 23,644 ------------------------------------------------------------------------------------------------------------------------------------ Interest expense 4,502 4,273 3,258 2,781 1,595 ------------------------------------------------------------------------------------------------------------------------------------ Currency exchange (gains) losses (444) (694) 315 40 735 ------------------------------------------------------------------------------------------------------------------------------------ Facilities consolidation and restructuring charges 2,433 3,960 1,021 2,164 5,302 ------------------------------------------------------------------------------------------------------------------------------------ Provision for income taxes 10,811 6,859 9,933 14,385 13,606 ------------------------------------------------------------------------------------------------------------------------------------ Income before change in reporting period 23,239 16,326 18,275 21,854 23,061 ------------------------------------------------------------------------------------------------------------------------------------ Change in reporting period, net of tax (1,192) ------------------------------------------------------------------------------------------------------------------------------------ Net Income 23,239 15,134 18,275 21,854 23,061 ------------------------------------------------------------------------------------------------------------------------------------ Basic per common share (in dollars) 1.89 1.16 1.37 1.60 1.58 ------------------------------------------------------------------------------------------------------------------------------------ Diluted per common share (in dollars) 1.88 1.16 1.37 1.60 1.58 ------------------------------------------------------------------------------------------------------------------------------------ Dividends paid per common share (in dollars) .47 .44 .44 .41 .37 ------------------------------------------------------------------------------------------------------------------------------------ Weighted average number of common shares outstanding--basic 12,301 12,972 13,290 13,608 14,556 ------------------------------------------------------------------------------------------------------------------------------------ Year-end Position ------------------------------------------------------------------------------------------------------------------------------------ Working capital $ 114,175 $ 123,085 $119,203 $116,373 $136,593 ------------------------------------------------------------------------------------------------------------------------------------ Working capital ratio 2.3 2.5 2.1 2.1 2.5 ------------------------------------------------------------------------------------------------------------------------------------ Net property 159,586 163,509 164,561 157,957 147,058 ------------------------------------------------------------------------------------------------------------------------------------ Total assets 489,683 451,741 457,721 437,153 422,515 ------------------------------------------------------------------------------------------------------------------------------------ Long-term debt 71,806 36,550 11,919 12,270 13,278 ------------------------------------------------------------------------------------------------------------------------------------ Common shareholders' equity 225,382 241,374 241,743 240,004 239,738 ------------------------------------------------------------------------------------------------------------------------------------ Equity per common share (in dollars) 19.06 18.75 18.40 17.95 17.33 ------------------------------------------------------------------------------------------------------------------------------------
31 | 2000 MSA Annual Report