39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:55 AM Page 2 APassion for Safety 2003 Annual Report 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:56 AM Page 3 OUR MISSION... ABOUT THE COVER That men and women may work in safety and that they and their families and their communities may live in health throughout the world, our mission is to be the leading innovator and provider of quality prod- ucts, related technologies and services that protect people’s health, safety and the environment. Behind every successful, and sometimes even life-saving, application of an MSA product stands a team of professionals committed to advancing MSA’s mission of protecting life. Decades ago, MSA founders John T. Ryan and George H. Deike personified this mission while directing rescue operations at a mine explosion in western Pennsylvania. On that particular day, the two men had ventured two miles into the mine with an MSA crew when a second explosion cut loose.Thrown in all directions and stunned, the crew found their way back to fresh air – except one. John Ryan was missing. George Deike donned a breathing appara- tus and ran into the mine.Through the smoke, he saw Ryan kneeling without a mask. He was trying to pick up an injured miner he had found. The miner was wearing Ryan’s mask. For 90 years, MSA has been protecting the lives of people throughout the world with the same Passion for Safety John Ryan and George Deike exhibited in that Pennsylvania mine. In this year’s annual report, we profile the connection that exists between five MSA associates and select MSA customers. In their own way, these associates represent the Passion for Safety that exists among all MSA associates and the principle that truly defines a culture that is unique to MSA. Fittingly, this serves as the theme for our 2003 annual report. APassion for Safety 2003 Annual Report CONTENTS The Business of MSA Chairman’s Letter A Passion for Safety...Southern Peru Copper Corporation A Passion for Safety...in Titusville, Pa. A Passion for Safety...Bechtel A Passion for Safety...Region 13 Terrorism Task Force The MSA Culture...A Passion for Safety 1 2 4 6 8 10 12 Financial Contents Management’s Discussion and Analysis Responsibility Statements Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows 19 20 26 27 28 29 Consolidated Statement of Changes in Retained Earnings and Accumulated Other Comprehensive Income Notes to Consolidated Financial Statements Summary of Selected Financial Data 30 31 41 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:56 AM Page 1 THE BUSINESS OF MSA MSA is in the business of developing, manufacturing and selling innovative products to enhance the safety and health of workers throughout the world. Critical to MSA’s mission is a clear understanding of customer processes and safety needs. MSA dedicates significant resources to research which allows it to develop an understanding of the safety equipment and instrumentation requirements in a diverse range of industries such as the fire service, homeland security, construction, public utilities, mining, chemical, petroleum, transporta- tion, the military and hazardous materials remediation. MSA’s reach has expanded into the home in an effort to better understand and protect the “do-it-yourself ” consumer. MSA’s principal products, each designed to serve the needs of target markets, include respiratory protective equipment, thermal imaging cameras, portable and permanent gas detection instruments, as well as head, eye, face, hearing and fall protection. MSA was founded in 1914 by John T. Ryan and George H. Deike, two mining engineers who had firsthand knowledge of the terrible human loss that was occurring in underground coal mines.Their knowledge of the mining industry provided the foundation for the development of safety equipment to better protect underground miners.While the range of industries served by 19% 9% 24% MSA has expanded greatly over the years, the founding philosophy of under- standing customer safety needs and designing innovative safety equipment solutions remains unchanged. MSA is headquartered in Pittsburgh, Pennsylvania, with operations employing 4,400 associates throughout the world. A publicly held company, MSA’s stock is traded on the American Stock Exchange under the symbol MSA. 22% 26% Annual Sales by Product Group Instruments Air-Supplied Respirators Air-Purifying Respirators Head Protection (Helmet, Eye, Face & Hearing) Other 3% 4% 8% 22% 63% Annual Sales by Region North America Europe Asia & Pacific Rim South America Africa FINANCIAL HIGHLIGHTS For The Year (thousands, except per share) Net sales Net income from continuing operations Discontinued operations – after tax Net income Basic earnings per common share: Continuing operations Discontinued operations Net income At Year End (thousands) Total assets Working capital Common shareholders’ equity Common Stock (thousands) Shares outstanding Market capitalization 2003 2002 2001 $696,473 48,924 16,343 65,267 $564,426 31,213 3,864 35,077 $509,736 25,851 5,780 31,631 1.33 .45 1.78 .85 .11 .96 .72 .16 .88 $643,885 206,216 306,867 $579,765 138,182 288,009 $520,698 135,186 252,451 36,928 $978,715 36,621 $393,677 36,302 $485,844 SALES (in millions) NET INCOME (in millions) (Continuing Operations) $696 $564 $510 $48.9 $31.2 $25.9 01 02 03 01 02 03 1 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:56 AM Page 2 To Our Shareholders, Associates, Customers and Supplier Partners: In the last Leap Year, four years ago, in times of challenge for MSA provided service for the Homeland Security market well the company, I used at a meeting the following words from the Letter of Paul to the Galatians, Chapter 6,Verse 9, “Let us not be weary in doing good; for at the proper time we will reap the harvest if we do not give up.”Though we are now working for many more and better harvests in the years to come, I must say that the 2003 vintage was a very successful and pleasant one. The passion for safety that we have at MSA which has inspired us for years and decades has been particularly evident in the per- formance of the company in recent times. Sales and income from continuing operations reached record levels for the third consecu- tive year and improved over 2002 by 23% and 57%, respectively. The company’s net income from continuing operations for 2003 totaled $48.9 million on sales of $696.5 million. These results came primarily from our focus on being the premier global developer, manufacturer and supplier of safety products. The 2003 success came particularly from fully taking advantage of our opportunities in prosperous markets, limiting the shortfall of business in those markets with difficult economic circumstances, and getting the most out of every bit of our sales by strong per- formance in our manufacturing operations and other elements of productivity within the company. Prosperous markets start with our largest one, the fire service. In the United States increased federal government funding to improve the quality of the equipment used by our firefighters and, particularly, new performance standards increased market demand. Due to the fine efforts of so many MSA associates, MSA was positioned to realize this opportunity and excelled in fulfilling this demand. It was particularly noteworthy that our self-con- tained breathing apparatus was the first, and for a good while the only, such product to be approved under both recent standards – the 2002 National Fire Protection Association (NFPA) standards for SCBA performance and the NIOSH Chemical Biological Radiological and Nuclear (CBRN) standard to protect first responders against terrorist chemical agents. before the tragedies of 2001, and our Millennium Gas Mask is the leading product for this market and one of our Products of the Year in 2003. Several years ago the company identified International operations, which we define as those outside of North America and Europe, as having the greatest proportional opportunity for growing our business. Results from this area were very satisfactory in 2003 with strong growth in sales and even better improvement in earnings. Particularly good results were turned in by MSA Australia, MSA Argentina, MSA Japan, MSA Africa and MSA Middle East. MSA Gallet achieved another excellent year of performance and led the company’s European operations. Distinctly noteworthy is the performance of our U.S. National Sales Force in North America that exceeded its sales targets for the fourth consecutive year and did so this time by a wide margin. Creativity, adaptability and diligent effort backed by a top product line generated these fine results. In North America, this passion for excellence resulted in MSA receiving “Best Field Support and Customer Service” awards from two of our major distribution channel partners – Airgas and Orr Safety. Sales to the U.S. federal government in the year were very strong led by the MCU-2/P Gas Mask and our newest product to protect military people in the war against terrorism – the Advanced Combat Helmet (ACH) with the MICH Communications System.These latter products came from a combined effort of MSA Gallet and MSA North America to fully meet the requirements for a ballistically effective and comfortable new-generation helmet integrated with an effective electronic communications system and are being widely deployed to save the lives of American men and women in combat.This product was recognized by the U.S. Army Material Command as one of the greatest inventions of 2002. As we move forward to meet new challenges, the North American Sales Organization completed a strategic review of its operations to identify areas where MSA’s value proposition to its customers particularly fits the value requirements of our current and potential customers. Based on this study, the company is investing in added sales efforts to focus on selected markets where we think the best opportunities lie. The second element of the company’s success were sales efforts and new prod- uct introductions that enabled the company to sell reasonably well in many parts of the global economy that were sluggish or deteriorating during 2003.This particularly involved elements of industrial North America, continental Western Europe and capital goods markets worldwide. New product development continues to be a crucial element of our efforts. In 2003, we reached a significant internal goal as nearly one-third of sales were generated from products introduced over the last three years. MSA’s North American Sales Organization (NASO) played a major role in helping the company achieve record results in 2003. Shown above with John T. Ryan III (front center) and members of MSA’s executive team are representatives of NASO, including U.S. regional sales managers, market sales managers, and directors responsible for field sales, government sales and customer service. 2 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:56 AM Page 3 As a global leader in the safety products industry, MSA is com- mitted to strategic efforts in new product development that meet market needs and to fulfill, “ahead of the pack,” important new standards.The Evolution 5000 Thermal Imaging Camera was one of our Products of the Year as it combines a superior camera image – for firefighters involved in life-or-death decisions – with compact size, low weight and high durability against both drops and external heat, all delivered at a very market-competitive price. The development of the value-priced MSA Solaris Multigas Detector, with its compact size, was our Process of the Year as it went from initial concept to a product launched in ten months. Many other exciting new products are helping the company as you will read throughout this report, such as the UltimaX permanent instrument sensors and the SafeSite System for homeland security applications. I am pleased to report that our new executives and managers promoted or hired last year have stepped into their new positions without missing a beat, and our team is working smoothly and well. Operational Excellence MSA has been getting the most out of its business with high pro- ductivity. Particularly distinguished were Safety Products Division operations in North America that exceeded measured performance levels by a considerable margin. Initiatives in Lean Sigma, a combi- nation of Lean Manufacturing and Six Sigma programs, have continued to show benefits for our business. One immediate ben- efit from Lean Sigma is to improve the productivity in our use of floor space. In our Murrysville, Pennsylvania factory, this opened up space for an entirely new product line for that factory, improving the throughput and generating new jobs for the area. A bittersweet element of MSA activities in 2003 was the sale of the Callery Chemical Division to the BASF Corporation. From its origin in the late 1930s in making chemicals for life-saving appli- cations for U.S. Naval forces in World War II, Callery Chemical grew to be a leading manufacturer of boron and potassium chemicals. Callery was a valuable and profitable element of MSA for many years. However, it became quite clear that MSA, with our focus on safety, was not in a position to add value to Callery’s growing specialty chemical business and that it would fit better with BASF. MSA shareholders benefited directly from the success of Callery through the special distribution of $4.38 per share, repre- senting the net proceeds the company received from the sale.This transaction sharpens MSA’s focus on driving growth in our core business. As the old saying goes, safety is our business – our only business. It is a wide, complex, diversified, global business involving many technologies and many markets, but it is one where a passion for safety well executed can generate very satisfactory results. Outlook At MSA our passion for safety can be directly expressed in the pursuit of our mission – that men and women may work in safety and that they, their families and communities may live in health throughout the world.We take the tough jobs where people’s lives and health are particularly threatened; and the more difficult the assignment, generally the better MSA’s market position is. We are approaching our 90th anniversary and, throughout this entire time, we and our predecessors in the workplace have been essentially pursuing this very same mission. We had believed for several years now that the area in which the placement of investment in money and organizational effort that would produce the best results is in MSA International oper- ations.We plan to continue to expand our global reach because in every place where workers, including consumers in their home workshops, need protection, MSA wants to be there because every such place is in “our neighborhood.” We should remember that some of our important markets have a history of being volatile. Some sales to the U.S. Department of Defense in 2003 were unique to the requirements of military operations conducted that year and in rebuilding the nation’s stocks of military equipment. However, MSA has received in recent months a number of large orders for the Advanced Combat Helmet and MICH communications system.This is a product in which there will be a steep ramp-up of production at two MSA locations which will present challenges that I’m sure we can successfully meet. Our indications at the present time, both from our internal activity and feedback from our distribution partners and from data on the U.S. Government’s FIRE Act funding are that the North American fire service market should continue to be strong and growing throughout this year. Our Millennium Gas Mask has been the industry’s first prod- uct approved to the new CBRN standard. Funding for homeland security in the United States has been very strong over the last two years.There are differing opinions in the marketplace about the extent of growth in this area in 2004 and 2005, but we feel that it will continue to make a positive contribution to MSA sales. Our efforts in international markets are continuing and accel- erating, and we see good opportunities there in the future in each of our major regions.A new management team is in place in China, and with global support we look forward to good progress there. The overall economies in the U.S. and China seem at the pres- ent time to be going strongly with good prospects.This is helpful for the global economy which, however, is excessively dependent on growth in these two countries.This growth should help MSA’s operations in the affected areas, particularly industrial markets in North America. Growth in China, as well as North America, helps many third country markets in which MSA is particularly active, such as South America. It would be very help- ful, though, for the world that economic development would have more breadth, and particularly have some help from Western Continental Europe which continues to be an area of business slowness and uncertainty. We will continue at MSA to be watchful for both opportunities and challenges in a volatile world where the forces of terrorism have been suppressed but not eliminated. It has been a very satis- fying four years since I used that quote from Galatians which was fulfilled in the interim. Now, opportunities and challenges should develop in new and interesting areas. For a number of years we have been pursuing the goal of solid profitability.While this is a never-ending challenge, I am pleased that we made much progress in this area over the last several years. All of this rewards our shareholders, and a particular measure of this was that MSA stock was one of the top ten performers of the American Stock Exchange in 2003 in terms of stock price improvement over the year. I close with a thought from Woodrow Wilson who was President of the United States in the year MSA was founded, “We are not here merely to make a living; we are here in order to enable the world to live more amply with greater vision and with the finest spirit of hope and achievement.We are here to enrich the world and one impoverishes oneself if one forgets that errand.” With our noble mission, our passion for it and our global reach, we are in a particularly good position to fulfill these ideals and go on to reap new and better harvests. John T. Ryan III Chairman of the Board and Chief Executive Officer 3 At far right, Southern Peru Copper Corporation safety experts leverage MSA’s Manuel Ocsas’ safety expertise. (From left to right Anibal Tapia, Manuel Ocsas, Jorge Medina, Ana Aguilar, and Alberto Paz) At center below, Víctor Díaz, a heavy equipment operator at SPCC’s Cuajone mine goes to work with MSA’s V-Gard® Helmet. 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:56 AM Page 4 A PASSION FOR SAFETY... Southern Peru Copper Corporation Peru offers some of the world’s most spectacular and varied scenery. But this nation’s rugged and mountainous landscape also presents unique safety and business challenges. MSA Peru, however, has risen to the challenge. By tailoring MSA products to meet specific needs and supporting their customers with out- standing service, MSA Peru leads all other competitors in providing customers with safer workplaces. In South America, perhaps no customer values MSA’s leadership more than Southern Peru Copper Corporation (SPCC), which employs more than 5,000 people at three separate locations in the rugged foothills of the Andes Mountains: the Cuajone and Toquepala mines and the Ito Refinery. At these sites, sales calls can last for weeks and generations of MSA employees can recall the challenges of such visits – including MSA chairman and CEO John T. Ryan III, who remem- bers traveling to the Cuajone Mine nearly 30 years ago. But long hours and years of work by MSA and SPCC do pay off. Just ask Mr. Santos Nuñez, a supply train driver at SPCC’s Mines. In 2001, a rock slide cut loose a boulder down 200 feet of mountainside causing it to crash through the windshield of a locomotive operated by Mr. Santos. Fortunately he was wearing MSA’s V-Gard Helmet, which was credited with saving his life. No one is more grateful than Mr. Nuñez. “My older daughter had just finished Civil Engineering studies and the younger one just earned her bachelor’s degree in Architecture. I could have missed all this, but I had an MSA helmet,” said Mr. Nuñez. Today SPCC employees like Mr. Nuñez are among MSA’s best advocates because they understand that behind the quality of MSA products there is a loyal team of experts who provide unparalleled service and support. “There is no doubt the quality of our products opens doors here in Peru, but it’s also the dedication of our sales team. Our team steadfastly supports all customer requests for training and consultation and this is where we differentiate ourselves from competitors,” said Luis Fernando Flores, MSA’s General Manager, Peru.“In the final analysis, it’s MSA Peru’s people who make a difference.” For SPCC workers like Santos Nuñez it’s Manuel Ocsas, an MSA Peru sales representative, who makes that difference. Manuel helps SPCC leverage new safety technologies to ensure workers like Santos Nuñez are protected. “Each security requirement is unique,” said Manuel.“And the only way to understand the security requirement is to thoroughly know the company and its procedures, visit the exact place where a security solution is required, and then analyze the risks.” Santos Nuñez, left, a supply train driver for the Southern Peru Copper Corporation, credits MSA’s V-Gard® Helmet with saving his life. MSA’s V-Gard® Helmet is on the job with Francisco Calizaza, right, a heavy truck operator at SPCC’s Cuajone mine. 4 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:56 AM Page 5 , d nt MANUEL OCSAS Sales Representative, MSA Peru For Manuel Ocsas, the challenges of his job prompts him to excel. “On a given day I can work where it’s about 85°F (29°C) and then travel 16,400 feet (5,000 meters) above sea level, where the temperature could be around 15°F (-10°C),” said Manuel, whose work typically begins around 4:00 a.m. when he leaves his home office in Arequipa for remote areas in southern Peru where sales calls can last for weeks. “A passion for safety is what drives Manuel,” said Luis Fernando Flores, MSA’s General Manager, Peru. “He is there for the customer, visits them, follows up, and has mastered all of our customer service practices. His passion has helped him earn the respect and trust of our customers. He’s a tremendous asset for MSA Peru and a great ambassador for safety.” 5 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:57 AM Page 6 A PASSION FOR SAFETY... In Titusville, Pa. At right, Andy Fornadel (left) and Vince Colaizzi (right) take pride in MSA’s Evolution® 5000 Thermal Imaging Camera. They go to work every day knowing that across the globe, the Evolution TIC is an integral part of keeping first responders safe. Armed with MSA thermal imaging technology, the Titusville Fire Department safely battles a structure fire. (Below) Walk along Franklin Street in Titusville, Pa., and you can sense the pride residents feel toward their hometown. Home to Drake’s Well, the birthplace of the U.S. oil industry, this close-knit town in northwestern Pennsylvania has a deep sense of community. Although the wells stopped pumping years ago, the bond of shared history gives the people of Titusville an appreciation for their community and each other. City residents rely on Captain Joe Crotty and the Titusville Fire Department to keep this community safe. And the department, which responds to more than 550 calls per year, relies on MSA to advance their firefighting capabilities. In 2000, the Titusville Fire Department, like many departments across the country, sought to improve its capabilities by adding the latest advancement in firefighting technology: an MSA Evolution Thermal Imaging Camera. During a recent summer evening, Chief Crotty and his men learned just how valuable a safety tool an MSA Thermal Imaging Camera can be.The call came in for immediate response to a two-and-a-half story florist shop that was engulfed in smoke. A team of firefighters entered the building, battling the blaze on two floors. Inside, firefighters reported that heat conditions were rapidly worsening. Noticing a subtle shift in the building’s front door frame, Chief Crotty grabbed the Evolution Thermal Imaging Camera and conducted a quick two-sided scan of the exterior. The structure was white hot.The chief ordered the crews out of the building. Seconds later, the first floor began to disintegrate.Within two minutes, the roof collapsed into the second floor. “Thermal imaging can and does save lives,” said Crotty.“The thought of what might have happened at that fire is still sobering. I could have lost half a dozen men.Thank God for the Evolution Thermal Imaging Camera.” Chief Crotty has since incorporated the Evolution Thermal Imaging Camera into Titusville’s standard operating procedures and training processes.“It improves the efficiency of our fire- fighting resources tremendously. Most of all,” he adds,“it protects the most precious resources any fire department has – our firefighters.” At top, Titusville firefighters make quick work of a blaze thanks in part to the latest in thermal imaging technology from MSA. At center, (from left) Chief Joe Crotty, Scott Attenborough and Assistant Fire Chief Ken Leach with their MSA Evolution® TIC. Above, Titusville firefighters apply fire suppression materials to the heart of a florist shop fire. 6 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:57 AM Page 7 Andy Fornadel tests the boundaries of his latest thermal imaging electronic designs. He makes sure that the camera’s display functions properly every time a first responder turns it on. Vince Colaizzi makes sure that the Evolution® 5000 TIC meets the ergonomic needs of first responders and builds the camera to with- stand extreme heat and high impact. ANDY FORNADEL Design Engineer, MSA Instrument Division VINCE COLAIZZI Design Engineer, MSA Safety Products Division The life-saving potential of the Evolution TIC is well known to MSA’s Thermal Imaging Camera team. Engineers Andy Fornadel and Vince Colaizzi often hear stories like the one told by Titusville, Pa. firefighters, and they find them inspiring. “Our team has an immediate and direct impact on safety. We get letters from grateful customers all the time,” says Fornadel, who is responsible for the electronics design and display technologies that are integrated into every MSA Thermal Imaging Camera. “Being able to work on something like this every day is incredible. It has become very evident that the efforts of our team help save lives.” Colaizzi, a design engineer whose contributions have helped shape MSA Evolution cameras into the most ergonomic thermal imaging cameras on the market, concurs. “It’s extremely satisfying to work for a company that focuses on protecting people,” he said. “We don’t just design products; we are an active part of MSA’s mission to protect life.” 7 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:57 AM Page 8 A PASSION FOR SAFETY... Bechtel As part of Bechtel’s safety regimen, employees wear white MSA helmets for their first 30 days on a site. Following this period and safety training, workers gradu- ate to wear the yellow V-Gard® Helmet. Bechtel workers, below center, position steel frames prior to pouring concrete at a work site in Springerville, Ariz. The project is scheduled to employ more than 1,600 workers over the next three years. A t Bechtel, one of the world’s premier engineering construction and management companies, dedication to superior environmental, safety and health practices is a core value, one that pervades the business. So it’s not surprising that Bechtel relies on MSA’s quality products and support services to help it maintain an industry-leading record of zero lost-time incidents on 90 percent of its projects worldwide. Having such an enviable safety record is no easy task for a company like Bechtel, which employs more than 40,000 employees on hundreds of projects in nearly 60 countries. But by teaming up with MSA, this international leader in the construction industry has found a global partner with a shared vision for safety. “A real strength of MSA is their people and service,” said John Mathis, manager of environ- mental safety and health for Bechtel’s largest business line, Bechtel Systems & Infrastructure, Inc. “You’re not just buying MSA equipment; you’re buying the support and service that goes along with that equipment.” Throughout the world – from Chile to China – MSA tirelessly supports Bechtel as it strives for a high level of safety at each of its work sites. Most recently this support includes Bechtel’s efforts to rebuild key infrastructure in Iraq, where MSA is working to ensure that the right safety equipment and training is available to Bechtel on demand. Such global support would not be possible without MSA’s dedicated associates. “They’ve responded to our project needs on a moment’s notice,” said Mathis, who explained that MSA products are a standard part of the company’s inventory and equipment catalog. With this comprehensive support, MSA has consistently demonstrated an ability to bring both top quality equipment and support for that equipment on site under the most difficult conditions. Perhaps nothing better reflects the strength of the relationship between MSA and Bechtel than the moments following the tragic September 11 attacks on New York City. In the hours following the attacks, Bechtel was on site volunteering to provide assistance and turned to MSA to get much of the vital safety equipment and personnel to support its use on site. “The response was absolutely outstanding.These guys got it there right away,” said Mathis, recalling MSA’s ability to get critical safety equipment and personnel to the site of the World Trade Center within 24 hours of the attack. “It was certainly a team effort,” says Victor Vendetti, regional sales manager for MSA’s North American construction market.Vendetti credits many within MSA, Bechtel and the govern- ment for enabling MSA to effectively do its part in the post-September 11 recovery efforts. “Anywhere you find a Bechtel project, you’ll likely find an MSA presence,” says Victor. In Springerville, Ariz., MSA supports Bechtel in the building of a 400 megawatt power plant, right, that wlll provide energy through- out the southwest United States. At far right, safety is always part of the plan as Ben Smith, civil superintendent (left), confers with Greg Zurlinden, carpenter foreman, at Bechtel’s Springerville, Ariz., work site where all employees wear MSA V-Gard® Helmets. 8 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:57 AM Page 9 VICTOR VENDETTI Regional Sales Manager, North American Construction Market "For a safety program to be truly effective, it’s vital you have top down support and that the program has teeth," says Victor Vendetti, MSA’s regional sales manager for the North American construction market. According to Victor, it is customers like Bechtel that help give him the drive and the passion to provide the proper equipment and training. "You’re not just selling equipment or providing training," said the MSA associate who has traveled to more than 40 countries in his 13 years with the company. "You’re helping somebody do their job safely so they can go home every night." Victor unabashedly has a Passion for Safety he shares within his own community of Seven Fields, a suburb near Pittsburgh, Pa. "You really can’t drive anywhere here without seeing a construction site. Sometimes I’ll just stop and talk to the workers about safety. It’s what I do." Where does the passion originate? The answer is simple: "MSA’s culture instills a real passion for protecting people," says Victor. "Any time you use an MSA product, you should know that product has been designed, assembled and sold by people who understand its life-saving ramifications." 9 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:58 AM Page 10 A PASSION FOR SAFETY... Region 13 Terrorism Task Force With a self-proclaimed passion to protect, Alice Martin, right, assembles and tests another Solaris™ unit according to customer specification. The Solaris™ Multigas Detector, below right, gives Region 13 Terrorism Task Force members an easy, reliable method of evaluating the level of harmful gases and quickly implementing proper safety precautions. The world in which we live changed forever on September 11, 2001. It changed the way we travel, the way we work and the way we attend events. It changed the way Federal intelligence and law enforcement agencies communicate, and it changed the way local first response agencies interact, collaborate and share personnel and equipment resources. Perhaps nowhere is this more evident than in western Pennsylvania where 13 counties and the City of Pittsburgh have joined forces to create the Region 13 Terrorism Task Force.Their efforts have been lauded as a best practice example of how a large geographic region, covering nearly 10,000 square miles, can best manage resources in the event of a domestic emergency. A group ahead of its time, the Region 13 Terrorism Task Force was actually formed in 1998 as a proactive means to share services and to formally develop mutual aid and response protocols. Since 2001, this task force has quickly addressed the issues of homeland security by ensuring its personnel are properly equipped to face hazardous situations and unknown chemical and biological agents. Alan Hausman is a consultant to the Allegheny County Department of Emergency Services and the equipment manager for the Region 13 Terrorism Task Force. He has a long-standing relationship with MSA, as the Task Force has relied on the company for safety equipment from the beginning.“Our first priority was respiratory protection,” said Hausman.“We’ve used the Advantage® 1000 Gas Mask for years and are migrating to the new Millennium model.” The group also uses MSA Photo Ionization Detectors that measure trace amounts of airborne volatile organic compounds. Involved in emergency management for more than 20 years, Hausman doesn’t compromise when it comes to purchasing safety equipment.“You never know what you’re walking into,” he says.“And while you hope it never happens, you must be prepared for the worst.” Most recently, Hausman and the more than 725 Region 13 fire departments have turned to MSA’s Solaris Multigas Detector to help them assess emergency situations.“Our staff tested the Solaris and responded positively to its distinctive features such as ergonomics, backlighting and ease of operation,” said Hausman.“An emergency situation can become quite intense with excessive noise and activity. Because the Solaris is easy to read and operate, it allows our personnel to quickly detect and monitor unknown gases in chaotic environments.” Hausman says this is critical to maximizing the safety of both responders and citizens. “I’ve been at this for a long time,” Hausman commented.“I know what works.” At top, intense training exercises prepare Region 13 first responders for emergency scenarios. Securing a position while wearing MSA Advantage® 1000 Gas Masks protects this unit from breathing potentially harmful airborne toxins. A member of the Region 13 Terrorism Task Force, above, wears MSA’s Advantage® 1000 Gas Mask during training maneuvers. Region 13 Terrorism Task Force consultant Alan Hausman in blue, demonstrates the functionality of the MSA Solaris™ Multigas Detector. 10 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:58 AM Page 11 ALICE MARTIN Production Technician, MSA Instrument Division Alice Martin, a 48-year veteran associate of MSA, is not surprised that the Region 13 Terrorism Task Force has opted for MSA’s new Solaris Multigas Detector. “We make some of the most durable and reliable products available,” she says. Martin, a production technician, works in the Assemble-to-Order work cell for the Solaris line. She assembles products according to customer specifications, calibrates the final products and ships them out. Martin says, “Tell us how you want it, and we’ll make sure it works.” For Martin, having a Passion for Safety means that the MSA products she helps produce must function exactly as designed every time. “Our products have to work as soon as a customer opens the box,” Martin says. “I’ve been here a long time and I’ve sent safety equipment all over the world to assist all types of customers. There’s a reason they come to us. We keep people safe.” Martin recalls an instrument that was returned to MSA after being involved in a fire with temperatures approaching 1,600°F. “In my 48 years at MSA, I’ll never forget what that looked like. It was an unbelievable mess, but you know what? When I turned it on, it still worked. That’s a reliable product.” 11 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:58 AM Page 12 The MSA Culture... A PASSION FOR SAFETY United States Army First Sergeant Colin Rich, a native of Raeford, North Carolina, traveled Newport,Vermont manufacturing plant. He was grateful for the Advance Combat Helmet nearly 10,000 miles from the Middle East to express his gratitude to the associates of MSA’s (ACH) MSA produces there, because just seven months earlier one of those helmets saved his life in Afghanistan. Sgt. Rich is just one of the millions of people around the world who benefit from the Passion for Safety that the 4,400 men and women of MSA bring to work each day. Having a Passion for Safety is a principle of working life at MSA.You sense it in the engineering labs and on the manufacturing floor; you hear it in the voice of the customer service representative responding to a customer question; or see it in the dedication of the company’s field sales representa- tives. It reflects a realization that what one contributes at MSA does matter, regardless of the position or job function. It matters to the people who put their trust in MSA products to protect them on the job. It matters to families of those people, who expect their loved ones to return home in the same condi- tion they left. And it matters to the shareholders of MSA, who understand the company’s value propo- sition and put their trust in MSA to achieve its mission. To be sure, 2003 was a year of achievement for MSA on many fronts. From a broad perspective, MSA’s success over the past year is attributable to initiatives begun years ago aimed at positioning the company to become the leading safety equipment provider in markets where the need is greatest – fire service, homeland security, federal government, international and the consumer marketplace. In addition to reaching growth markets, MSA recognized the importance of limiting the impact on the company of a sluggish economy in other markets by continuing efforts to improve productivity, allowing MSA to make the most of these opportunities. Perhaps that is the single greatest reason why, in these uncertain economic times, MSA was able to achieve record earnings and record revenue growth while many companies struggled in 2003. New Product Development With an eye on growth markets, MSA relied on innovative and fast-to-market product development to fuel expansion in 2003. Indeed, from a product development perspective, few companies in the safety industry could match MSA’s achievements in 2003. In North America alone, sales from products intro- duced in the past three years accounted for nearly one third of total North America revenue. With an ever-present global threat of terrorism, MSA responded with new products that directly benefited first responders in the fire service and law enforcement sectors. As an example, MSA led the fire service industry in developing the first self-contained breathing apparatus (SCBA) that met two new performance standards that captured significant industry attention in 2003.The first standard, established by the National Fire Protection Association (NFPA), enhanced SCBA performance for structural firefighting applications. The second, set forth by the National Institute for Occupational Safety and Health (NIOSH), focused on an issue of more growing concern: exposure to chemical, biological, radiological and nuclear agents (CBRN).The NIOSH standard, which is voluntary and an add-on to existing NIOSH approval require- ments, is arguably the most difficult SCBA test protocol ever adopted, due largely to the wide and varied destructive characteristics of these lethal agents on equipment on which the user’s life depends. Borrowing from decades of experience in developing advanced respiratory protection equipment for the military and fire service, MSA won the race to gain both NIOSH CBRN and NFPA During a visit to MSA’s Newport, Vt. production facility, U.S. Army First Sergeant Colin Rich, top right, expresses his appreciation to MSA associate Charles Geraw for his role in producing the Advanced Combat Helmet that saved Rich’s life in Afghanistan. Above, MSA associates Holly Boucher, left, and Abby Smith complete strap assembly for a new shipment of Advance Combat Helmets for the U.S. Army. Associates at the Vermont plant achieved remarkable production levels in 2003 to meet and exceed the Army’s delivery goals. 12 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:58 AM Page 13 certifications for its line of MMR EXTREME Air Masks. Undergoing stringent, live-agent testing, MSA Air Masks were the first to be certified to the latest NFPA requirements and deemed suitable for use in situations involving CBRN agents.Today, one third of all SCBAs produced by MSA are NFPA and CBRN compliant, and this number continues to grow. Utilizing this expertise, MSA quickly followed this achievement with development of the first gas mask to meet new CBRN test criteria for air-purifying respirators. In fact, MSA engineers and technical associates – working closely with the safety industry’s leading trade association – offered expertise to help guide develop- ment of the standard itself.With a final standard in place, MSA sub- mitted the Millennium facepiece and CBRN canister to NIOSH for testing on March 24 – the first day submittals were accepted. Only recently did MSA learn its gas mask was the first to pass muster.With this accomplishment, the company is now positioned as the first manufacturer capable of offering first responders this level of CBRN protection. Thermal Imaging Leadership In 2003, MSA also set performance benchmarks for thermal imaging camera technology.Thermal imaging cameras, also known as TICs, utilize infrared sensing technology to enable firefighters to see through smoke and darkness, locate trapped victims, pinpoint the source of a fire to better combat it, or help firefighters exit from a fire as needed. In short, MSA TICs are the latest develop- ment in advanced fire fighting equipment (see story on Titusville, Pa. Fire Department, page 6). MSA pioneered development of the first hand-held TIC in the late 1990s. Since then, the company has established itself as the In 2003, MSA reaffirmed its leadership position in developing products that meet and exceed new performance standards. The MMR EXTREME® Air Mask, left, was the first SCBA to not only meet new fire service industry requirements but also be approved for protection against chemical, bio- logical, radiological and nuclear agents (CBRN). The Millennium® Gas Mask, far left, followed suit in early 2004 as the industry’s first gas mask approved for CBRN protection. The Evolution® 5000 Thermal Imaging Camera helped MSA distance itself from the competition in 2003. Compact, lightweight and extremely durable, this next genera- tion camera delivers image clarity never before seen in a small-format TIC. leader in TIC technology with a product brand recognized for In head-to-head “live fire” evaluations with competitive products, exceptional durability and quality. the Evolution 5000 TIC was consistently the top performer in The Evolution 5000 is the company’s newest generation ther- 2003.This performance resulted in MSA acquiring more orders mal imaging camera.Weighing 50 percent less than its predecessor, and shipping more cameras in 2003 than in any other previous year. and costing half as much, the Evolution 5000 TIC is the first small- The NFPA-compliant and CBRN-certified breathing apparatus, format thermal imager to deliver a screen resolution equal to if not new air-purifying respirators, and thermal imaging cameras were all better than larger, heavier cameras. It features leading-edge sensing substantial contributors to MSA business growth over the past year. technology with advanced MSA features, including spot tempera- Among the major SCBA orders MSA secured in 2003 were con- ture measurement and a convenient vehicle-mounted charging unit. tracts with some of the largest municipal fire departments in North America as well as the U.S. Department of Defense. 13 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:58 AM Page 14 The MSA Culture... A PASSION FOR SAFETY The technological advancements in air-purifying respirators previously described also helped generate robust sales of gas masks and other respirators to the law enforcement market. Notable users of these products in 2003 included the New York City transit police, the state of Connecticut, and the City of New York. Overall, gas mask sales in 2003 grew 43 percent from the previous year. In the air-purifying respirator arena, MSA also helped combat the frightening outbreak of SARS in Asia and in Canada. Just as MSA has responded in previous times of emergency, associates worked closely with government officials in these countries to provide respirators to the medical community. MSA’s timely development and introduction of these products are not just important for growth, but they are critically important to first responders throughout the world – firefighters, police officers and emergency medical technicians – who rely on MSA innovation, quality products and training to protect them in the event of a terrorist attack or other national emergency. Keeping Tradition Alive While products designed for first responders commanded much of MSA’s attention in 2003, the company also worked to advance products required in everyday applications in the fire service and general industry. The new Cairns 880 Tradition Fire Helmet, developed and introduced in the third quarter, is a perfect example. This historically popular, traditional-style helmet was discontinued more than a decade ago due to changes in NFPA requirements. However, by combining the latest in high performance thermal and impact resistant materials with advanced design techniques, MSA’s 880 Tradition project team was able to develop a state-of-the-art helmet that bridges the gap between traditional designs and advanced protection.The result is a helmet that’s 48 percent smaller and 20 percent less costly than competitive models. More simply, it’s the lightest traditional fire service helmet available today. While firefighters enjoyed the comfort features of the 880 Tradition Helmet, workers in industrial environments benefited from a “cool” new helmet that is a tribute to MSA global resources. As its name implies, the V-Gard Advance hardhat is the next generation of MSA’s flagship product first introduced in the late 1960s. Based on a very successful design originating from MSA Australia, the Advance Helmet sports a vented top to promote cooling. However, to gain broad acceptance of this product in a price competitive market, manufacturing costs needed to be reduced. Contributions came from manufacturing engineers in the U.S., who enabled the product to be produced utilizing innovative press processes in MSA’s Murrysville, Pa., plant. The U.S.-produced V-Gard Advance Helmet achieved a 10 percent weight reduction and a 31 percent cost reduction, demonstrating MSA global strengths in design and manufacturing expertise. A Soldier’s Story Perhaps no other head protection system made headlines in 2003 like MSA’s Advanced Combat Helmet – a key product innovation that is helping protect American forces combating terrorism. Known as the ACH with Modular Integrated Communications system, it has been credited with saving soldiers’ lives during combat operations in Iraq and Afghanistan, including that of First Sergeant Colin Rich of the 82nd Airborne Division, mentioned at the beginning of this report. Sgt. Rich was on duty in Afghanistan in early 2003 when his unit was ambushed by terrorists posing as allies. On a mission to destroy two Taliban positions, Rich was struck in the back of the 14 MSA took a “back-to-the-future” approach in developing the Cairns 880 Tradition™ Fire Helmet, below. What resulted is a helmet that combines the best of both worlds: advanced, lightweight protection with a “traditional look” preferred by many U.S. firefighters. Keeping a cool head is what the new V-Gard® Advance® Hardhat, above, is all about. Featuring design input from MSA Australia, this U.S. produced product is quickly gaining market acceptance among workers exposed to hot, humid environments. 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:58 AM Page 15 at , ok” Sizeable orders for MSA Gallet firefighter helmets helped MSA Europe turn in a strong performance in 2003. At left, members of the Stratchclyde Fire Brigade in Glasgow Scotland proudly display their new F1 Helmets. Shown, from left, are officer Ian Clark, procurement manager David Anderson and officer James Anderson. A technology transfer agreement with Spectronix Ltd., negotiated in 2003, enhances MSA’s ability to serve the oil production industry with advanced infrared detection systems for monitoring potentially hazardous environments. head with a sniper’s shot, but survived because of his ACH. Upon returning to the U.S., Rich made it a point to visit MSA’s factory in Vermont to personally thank the employees for helping save his life. MSA associates there were equally pleased to thank him and his fellow soldiers for their great efforts and sacrifices. Derived from MSA’s acquisition of Gallet in 2002, the ACH was originally designed for U.S. Special Forces units but has since become the helmet of choice by U.S. Army personnel involved in Afghanistan and Iraq.The helmet’s unique retention and suspension system gives maximum balance, stability and comfort, while providing the proper size, fit and ventilation. It’s become such a staple of the U.S. soldier’s arsenal that the U.S.Army Material Command named it one of the greatest inventions of 2002 based on evaluations by six active Army Divisions and the U.S.Army Training and Doctrine Command. In accepting this honor, Ron Herring, Jr., vice president and general manager of MSA’s Safety Products Division, said the recognition is a testimony to the quality, reliability and durability of the products MSA produces every day, and to the commitment and Passion for Safety demonstrated by all MSA associates. Closer to the home front, new product development also helped MSA’s fall protection group fulfill opportunities over the past year. Impressively, 28 percent of 2003 fall protection sales were from products developed just over the past three years, including the versatile Aptura™ SRL and TechnaCurv™ harnesses, both of which exceeded sales goals in their first year of availability. Other new fall protection products that made an impact in 2003 included the FP5K Tieback Snaphook and Lanyard and PointGard™ Anchor. A “Stellar” Performance in Instrumentation In 2003, MSA’s Instrument Division defined its Passion for Safety two ways: innovation and speed to market. Impressively, the Instrument Division improved on-time delivery performance to more than 97 percent – among the finest by any operating unit in MSA North America. But above all, 2003 will be remembered as the year MSA’s instrument professionals established a new benchmark for new product develop- ment (NPD).Their challenge? Develop a new low-cost multigas detector that outpaced the competition in terms of performance, durability and cost – and have it ready in less than a year to meet rapidly intensifying competition. With a global, multi-functional team in place, the Instrument Division launched its most significant 2003 NPD project – the Solaris® Multigas Detector. An affordable, durable and easy-to-use device, the Solaris Detector is one of the smallest and lightest four-gas monitors available today. Designed for first responders and workers in the chemical, construction, mining, oil and gas, and telecommunications industries, the Solaris unit detects the presence of O2, H2S, CO and combustible gas. But what truly differentiates it from the competition, aside from its affordability, is its unobtrusive, lightweight design that doesn’t interfere with a user’s range of motion, making the product comfortable enough to be worn all day long. The list of accomplishments associated with the development of the Solaris Detector is substantial. For example: • The Solaris Detector went from concept-to-customer in a record ten months. • Its value proposition is unmatched (and easy to remember) – “half the size at about half the price.” • The global development team came to within two percent of its established cost target. • The Solaris Detector is proving to be highly successful in the field – the most important measure of NPD success. With these accomplishments, the Solaris Detector proved to be a significant contributor to MSA’s top line in 2003, particularly in Canada where MSA established a special distribution agreement with Acklands-Grainger. Remarkably, Acklands-Grainger achieved its six-month Solaris sales goals in less than two. In the permanent instruments market, gains were more challenging to come by, given the economic recession that has restricted capital expenditures and related large projects – a critical driver for permanent instrument sales. Ultima® XE Sensor Yet, the MSA Instrument Division made real progress into 2003 due in part to such products as the Ultima X line of sensors, which feature an innovative “disconnect under power” feature.This MSA exclusive allows users to change individual sensors in hazardous atmospheres without having to cut off power to the entire sensing system. In addition to convenience, the benefit of this technology is that it enables personnel to perform sensor maintenance without compromising protection in other areas monitored by the system. It’s a remarkable feature and one that further distances MSA from the competition. 15 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:58 AM Page 16 The MSA Culture... A PASSION FOR SAFETY International Performance At MSA, having a Passion for Safety knows no borders. Indeed, this passion helped drive positive results among nearly all of MSA’s global operations in 2003. In particular, MSA Australia delivered remarkable performance in 2003, adding 24 percent sales growth driven largely by increased demand from the fire service market. In fact, fire brigades in Australia are among the most recent beneficiaries of new advancements in MSA firefighter head protection – the 660CAS Metro Helmet. The 660CAS Metro helmet was designed specifically to meet requirements of the New South Wales Fire Brigade – one of the 10 largest fire departments in the world. MSA associates there demonstrated their Passion for Safety by detailing the design for the 660CAS Metro, executing in-house qualification tests, constructing a new mold and achieving certification to Australian standards – all in a remark- able five months.This coordinated effort resulted in an order for 7,000 helmets. Performance in the Pacific Rim was also strengthened by MSA Japan, which achieved a 17 percent increase in revenue while establish- ing what promises to be a mutually rewarding relationship with one of Japan’s largest safety distributors, Midori. In 2003, the company was also pleased to “plant a flag” in a new country, Malaysia, to serve that diverse and growing market. In South America, the company saw robust performance by MSA Argentina, with strong recoveries by MSA Chile and MSA Peru, both of which managed successful transitions to new leadership. Solid results were also achieved by MSA Brazil. In the Middle East, MSA revenues were bolstered by significant business gains generated through sales of head protection products derived from the acquisition of Gallet. Additionally, the company recently gained a large upgrade order for permanent instruments to Qatar Petroleum. MSA Gallet’s contributions in 2003 were particularly evident in Europe where helmet sales helped offset the impact of an ongoing sluggish economy, enabling MSA Europe to record an overall increase in sales. European fire brigades – particularly those in France – turned to MSA Gallet for the latest in firefighter head protection. Through our associates in Europe, MSA was also able to negotiate in 2003 a promising technology transfer agreement with Spectronix Ltd. Under the agreement, the two companies will share technology and production expertise for detection systems that incorporate open-path infrared (OPIR) and IR3 technologies. Extremely versatile, these systems utilize infrared optics to detect potentially hazardous conditions across distances as far as 130 yards (approximately 120 meters), making them ideal for use in such places as storage vessels, refineries, pipelines and ventilation ducts. These technologies were first used in the oil production industry, primarily in offshore drilling platforms to alert personnel of the presence of potentially hazardous situations.Today, the technology is finding broad application in refineries, chemical plants, petrochemical facilities, the transportation industry and pharmaceutical production. With this alliance MSA and Spectronix strengthen their presence in the fire, gas and safety systems marketplace by adding cutting-edge OPIR and flame-detection technologies as new core competencies for personal and plant-wide protection. Among the products MSA expects to market under the alliance are the SafEye® 700 Xenon System and the FlameGard® IR3 XI Detector. Over the past year, MSA Europe also significantly enhanced its position as a leader in thermal imaging cameras for the fire service market by gaining numerous, significant orders.The company was pleased to announce in December that delivery time for TICs, widely sought by European fire brigades, is being significantly reduced as a result of a new export license attained by MSA in the U.S. The license covers export of the Evolution 5000 TIC to governmental fire brigades. In short, it allows MSA Europe greater access to TIC inventory in order to provide European fire service customers with the timely delivery they have been seeking for these life- saving TICs. Fire brigades in Spain also turned to MSA in 2003 for leading edge personal protective equipment, including SCBA and firefighter helmets from MSA Gallet. In fact, sales of SCBA accounted for one fourth of MSA Spain’s annual sales, helping generate overall revenue growth of 26 percent. An increased emphasis on distributor sales, along with a stronger presence in the Portuguese market, served to further enhance MSA Spain’s performance. Ultimately, these initiatives led to greater sales activity in such key markets as chemicals, petrochemicals and the general industry sector. 16 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:58 AM Page 17 The hard-to-overlook MSA Safety Works Learning Center, below, served as home base for MSA’s consumer safety educa- tion outreach efforts in 2003. Through a series of fun, interactive demonstra- tions, kids and parents learned about the many home-related hazards that often get overlooked. MSA at Home Bringing a Passion for Safety home has been the driving focus of MSA Safety Works since the unit’s inception in 1999. As the company’s consumer products arm, the group achieved meaningful growth in 2003 while building greater brand awareness and enhancing consumer safety education. Among the group’s achievements were 19 new product introductions, adding a strong rental channel of distribution with 140 new outlets, and strengthening business with the addition of several new retail partners. Following the adage that better service almost always leads to more sales, MSA Safety Works concentrated on improving its already strong record for outstanding customer service. In 2003, the consumer business group successfully trained and supplied pertinent product information to all industrial customer service associates, enabling them to respond to consumer questions quickly and with confidence. The result? Ninety-eight percent of all calls were answered within four rings, with the vast majority answered on the first ring. 17 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:58 AM Page 18 The MSA Culture... A PASSION FOR SAFETY MSA Safety Works also continued its commitment of taking safety education “on the road” with its development of an eye- catching and interactive Home Safety Learning Center.An important new element of the Safety Works’ consumer safety awareness program, the 25' by 37' by 18' inflatable structure visited seven cities in the eastern U.S., generating “inflated” awareness of safety issues within key MSA markets. Supporting this education effort, MSA Safety Works’ highly customized Volkswagen “Safety Bug” also took to road again in 2003. Touring 30-plus cities, the “Bug” resulted in an impressive store satisfaction score of 6.89 out of 7 based on retailer survey data. A Year of Achievement To be sure, MSA’s market presence in 2003, be it in the home, at a fire, in a mine, on the battlefield or inside an industrial plant, has never been greater.The drivers of this growth have been consistent product demand from the fire service, homeland security and mili- tary sectors in the U.S., and from industrial customers outside of the U.S. and Europe. Demand, however, is just part of the equation. MSA associates have a true Passion for Safety. Their commitment to improve MSA, to make the company more competitive, to develop and manufacture innovative and leading-edge products that meet customer needs, and to reach markets that have the greatest need and opportunity, is the true driver of success. For all of MSA’s accomplishments over its history, the company was recognized in 2003 by the Newcomen Society of the United States for outstanding business achievement.The award, which has been presented annually to select companies since the Society’s founding in 1923, recognizes signifi- cant achievement by private institutions in the American free enterprise system. In his presentation to MSA, Leighton Wildrick, president and CEO of the Newcomen Society, commented,“MSA’s mission to protect the health and safety of people throughout the world began in 1914 when the company’s founders convinced Thomas Edison to develop the first battery- powered miner’s cap lamp that greatly reduced the risk of explosion in coal mines. Over these many decades, MSA has stayed true to that mission and today protects life in virtually every industry and anywhere people are at risk.” This recognition is a tribute to the many fine people, past and present, who have served MSA as associates and have consistently demonstrated a Passion for Safety and commitment to protecting life. It is a passion driven by the knowledge that what one does at MSA – on any given day – could make a lifetime of difference for another.The company’s success over the past year is a tribute to these individuals and to MSA customers throughout the world who put their trust in MSA… every day. MSA chairman and CEO John T. Ryan III, left, accepts the Newcomen Award for outstanding business achieve- ment from Leighton Wildrick, president and CEO of the Newcomen Society of the United States. Enclosed with this report is a review of MSA’s history given on the occasion of the Newcomen Award presentation. It provides a retrospective look at how MSA’s Passion for Safety emerged from the very beginning and has continued over these many decades. 18 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:58 AM Page 19 2003 FINANCIAL CONTENTS Management’s Discussion and Analysis Responsibility Statements Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Changes in Retained Earnings and Accumulated Other Comprehensive Income Notes to Consolidated Financial Statements Summary of Selected Financial Data 20 26 27 28 29 30 31 41 19 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 20 MANAGEMENT’S DISCUSSION AND ANALYSIS Forward-looking Statements The following discussion should be read in conjunc- tion with the consolidated financial statements contained in this Annual Report to Shareholders. Certain state- ments contained in this discussion and elsewhere in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from expectations contained in such statements. Factors that may materially affect financial condition and future results include: global economic conditions; the impact of unforeseen economic and political changes, including the threat of terrorism and its poten- tial consequences; the timely and successful introduction of new products; the availability of funding in the fire service, military, and homeland security markets; fluctua- tions in the cost and availability of key materials and components; the company’s ability to generate sufficient cash flow to support capital expenditures, debt repay- ment, and general operating activities; the company’s ability to achieve sales and earnings forecasts; and interest and currency exchange rates. The foregoing list of important factors is not exclusive. The company undertakes no obligation to publicly update or revise its forward-looking statements. Critical Accounting Policies and Estimates MSA prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.The preparation of these financial statements requires MSA to make estimates and judgements that affect the reported amounts of assets, lia- bilities, revenues and expenses, and the related disclosures. MSA bases its estimates and judgements on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. MSA evaluates these estimates and judgements on an on-going basis. Actual results may differ from these estimates and judgements. MSA believes the following critical accounting policies affect the more significant estimates and judgements used in the preparation of the financial statements. MSA recognizes revenue from the sale of products when title, ownership, and risk of loss pass to the customer. MSA records estimated reductions to sales for customer pro- grams including volume-based incentives. If market conditions were to change the amounts due to customers under these programs could differ from the recorded esti- mates. MSA maintains allowances for doubtful accounts for estimated losses resulting from the inability of its cus- tomers to make required payments. If the financial condi- tion of MSA’s customers were to deteriorate, resulting in an impairment of their ability to make payments, addi- tional allowances could be required. MSA provides for the estimated cost of product warranties at the time that sales are recognized.While MSA has extensive product quality programs and processes, the company’s warranty obliga- tion is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage, or service delivery costs differ from MSA’s estimates, revisions to the estimated warranty liability would be required. MSA maintains reserves covering the uninsured portion of product liability claims.These reserves are based on management’s evaluation of known claims and actuarial valuations. Should actual claims be greater than MSA’s estimates, additional product liability charges could be required. MSA writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based on assumptions about future demand and market conditions. If demand and actual market conditions were less favorable than those projected by management, additional inventory write-downs could be required. MSA records an estimated income tax liability based on management’s best judgement of the amounts likely to be paid in the various tax jurisdictions in which it operates.The tax liabilities ultimately paid are depen- dent on a number of factors, including the resolution of tax audits, and may differ from the amounts recorded.Tax liabilities are adjusted through income when it becomes probable that the actual liability differs from the amount recorded.Actuarial assumptions have a significant impact on the determination of net periodic pension costs and credits. If actual experience differs from these assump- tions, future net periodic pension costs and credits could be adversely affected. Significant accounting policies are described in note 1 to the consolidated financial statements. Subsequent Event – 3-for-1 Common Stock Split As more fully described in note 2, the company’s common stock split 3-for-1 on January 28, 2004.All share and per share information in this Management Discussion and Analysis and throughout this annual report to share- holders has been adjusted to reflect the split. Results of Operations Overview – MSA is committed to being the premier world-wide provider of a full line of products that enhance the safety and health of workers. In recent years the company has concentrated on specific initiatives intended to help us meet this commitment and improve our competitive position and profitability by developing innovative new products, by acquiring companies and technologies that expand and complement our product lines, by entering emerging geographic markets where we believe there are opportunities to meet an unan- swered demand for safety products, and by emphasizing operational excellence. To sharpen our focus on our core safety products busi- ness, in November 2002 we announced our decision to explore the potential sale of Callery Chemical, our only non-safety products business unit.As discussed in the fol- lowing section, this division was sold in September 2003. 20 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 21 In 2003, the company achieved record sales and net income from continuing operations for the third consec- utive year.We believe that this performance and our improving financial performance in recent years are the result of initiatives that have allowed us to anticipate and respond quickly to market demand, particularly in the U.S. fire service, homeland security and military markets. Sales growth in the fire service market reflects our ability to quickly bring to market products that comply with changing industry standards and to create new market demand with innovative products like the Evolution 5000 hand-held thermal imaging camera, which is one of the smallest and lightest on the market. In addition, the company has successfully responded to increased homeland security and military market demand for prod- ucts such as the Millennium and MCU 2/P gas masks and the Advanced Combat Helmet that has occurred since the September 11th attacks and during the ongoing war on terrorism. Demand in these markets has more than offset continuing sluggishness in North American industrial markets.The level of demand for our products in the U.S. fire service, homeland security and military markets is strongly influenced by the levels of govern- ment funding available to address the needs of first responders and to meet the requirements of military operations.A reduction in available government funding in the future could adversely affect the demand for our products in these markets. Our results in Europe improved modestly in 2003, but continue to suffer from the effects of the poor economic climate in Western Europe. The acquisition of MSA Gallet in 2002 added the leading line of European firefighter head protection to our product line and has helped improve our overall performance in Europe. In other international markets, 2003 results were generally higher in most markets, but particularly Australia and Latin America.These improvements reflect focused efforts to effectively reach customers and, particularly in Latin America, improvements in general economic conditions. Discontinued Operations – On September 12, 2003, the company sold its Callery Chemical Division to BASF Corporation. In accordance with accounting principles generally accepted in the United States of America, the operating results of the Callery Chemical Division and the gain on the sale to BASF Corporation have been reported as discontinued operations in the consolidated statements of income.The net assets of the division have been classified as assets held for sale in the consolidated balance sheets. Discontinued operations, for which further informa- tion is included in note 17, reported sales of $21.3 mil- lion, $29.5 million, and $33.1 million and net income of $2.7 million, $3.9 million, and $5.8 million for the years ended December 31, 2003, 2002, and 2001, respectively. Discontinued operations for the year ended December 31, 2003, represent operating results of the Callery Chemical Division through the date of sale. The sale of the division to BASF Corporation resulted in an after- tax gain of $13.7 million. At December 31, 2003, approximately $2.3 million of trade receivables related to the Callery operation were reported as assets held for sale.A substantial portion of this balance was collected in January and February 2004. The after-tax proceeds of $53.8 million received from the sale of the division and the subsequent liquidation of net assets retained by the company were distributed to shareholders on November 24, 2003 and charged to retained earnings as a capital distribution. Continuing Operations – 2003 versus 2002 – Sales for 2003 were $696.5 million, an increase of $132.1 million, or 23%, from $564.4 million in 2002. Sales by North American operations were $452.6 mil- lion in 2003, an increase of $82.9 million, or 22%, from $369.7 million in 2002.The sales improvement occurred in the United States and is largely related to higher shipments of self-contained breathing apparatus and thermal imaging cameras to the fire service market and of gas masks and ballistic helmets to military and home- land security markets. Sales of instruments and fall protection equipment were flat, reflecting continued sluggishness in industrial markets. During 2003, the company changed its standard shipping terms to U.S. distributors.The effect of this change was to delay revenue recognition on the affected shipments, which reduced current year sales and gross margins by approxi- mately $4.7 million and $2.7 million, respectively. Sales by European operations were $146.2 million in 2003, an increase of $23.8 million, or 19%, from $122.4 million in 2002.The sales increase in 2003 includes a full year of sales by MSA Gallet, which was acquired during the second quarter of 2002.When stated in U.S. dollars, approximately half of the sales increase in Europe was due to the favorable currency translation effects of the stronger Euro. Sales by international operations were $97.7 million in 2003 compared to $72.2 million in 2002, an increase of $25.5 million, or 35%.The sales improvement occurred primarily in Australia, on higher shipments of breathing apparatus to the Australian Navy, and in Latin America. Approximately one-third of the increase in International sales, when stated in U.S. dollars, was due to the favorable currency translation effects of a stronger Australian dollar and South African Rand. Gross profit for 2003 was $288.3 million, an increase of $55.1 million, or 24%, from $233.2 million in 2002.The ratio of gross profit to sales was steady at 41.4% in 2003 compared to 41.3% in 2002. Selling, general and administrative expenses in 2003 were $170.1 million, an increase of $29.2 million, or 21%, from $140.9 million in 2002.Approximately half of the increase was related to higher marketing and selling expenses required to support the significant sales growth in North America.The remainder of the increase occurred in Europe, and reflects the inclusion of a full year’s expenses for MSA Gallet, which was acquired in the second quarter of 2002, and the currency exchange effect of a stronger Euro. Selling, general and administra- tive expenses were 24.4% of sales in 2003 compared to 25.0% of sales in 2002.. 21 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 22 MANAGEMENT’S DISCUSSION AND ANALYSIS Research and development expenses were $21.7 mil- lion in 2003, an increase of $1.3 million, or 6%, from $20.4 million in 2002. Research and development activi- ties are performed primarily in the U.S and Europe. Depreciation and amortization expense was $23.2 million in 2003, a increase of $1.7 million, or 8%, from $21.5 million in 2002.The increase was due to the inclu- sion of a full year of depreciation for MSA Gallet, which was acquired during the second quarter of 2002, and regular asset additions. Cost of products sold and operating expenses in 2003 were favorably affected by a change in the vacation vest- ing policy for U.S. employees. Under the vacation vesting policy adopted in 2003, employees earn their vacation entitlement during the current year. Previously, vacation was vested on the last day of the prior year. The policy resulted in favorable adjustments to cost of products sold and operating expenses during 2003 of $3.6 million and $1.8 million, respectively. The vacation policy was changed to align the year the benefit is earned with the year it is received. Cost of products sold and operating expenses include net periodic pension benefit costs and credits.As described in note 7, pension credits, combined with pen- sion costs, resulted in net pension credits of $8.8 million in 2003 and $13.1 million in 2002. Net pension credits of $10.8 million in 2003 include a $2.0 million curtailment gain that was related to the sale of the Callery Chemical Division and is reflected in net income from discontinued operations.The current recognition of pension income is primarily the result of the exceptional investment perfor- mance of the U.S. pension fund over the past ten years. During that period, the investment performance of the MSA Noncontributory Pension Fund has ranked among the top 1% of all U.S. pension funds. Future net pension credits can be volatile depending on the future perfor- mance of plan assets, changes in actuarial assumptions regarding such factors as the selection of discount rates and rates of return on plan assets, changes in the amorti- zation levels of actuarial gains and losses, plan amend- ments affecting benefit pay-out levels, and profile changes in the participant populations being valued. 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 2003 was $4.6 million compared to $4.8 million in 2002.The decrease relates to reductions in long term debt and lower average short term borrowings. Currency exchange gains of $3.4 million were recorded in 2003 compared to gains of $191,000 in 2002. Currency exchange gains in 2003 were primarily related to Euro and Canadian dollar denominated assets held by the U.S. company, and reflect a significant strengthening of those currencies during the year. Other income, for which further information is included in note 12, was $1.7 million in 2003 compared to $2.3 million in 2002. The effective income tax rate, for which further infor- mation is included in note 5, was 33.7% in 2003 and 35.1% in 2002.The effective tax rate in 2003 was lower than the U.S. statutory income tax rate due in part to the favorable effect of research and development credits and the one-time effect of releasing $1.2 million of previously- established valuation allowances on foreign tax credit carry forwards.These valuation allowances were released in 2003 as a result of tax planning strategies that were implemented during the year and an improved outlook for foreign source income.The company has maintained tax reserves established in prior years on research and development credits that were claimed in tax years that are currently being examined by the Internal Revenue Service. Management is cautiously optimistic that a favorable settlement of these examinations could be reached in late 2004. Net income from continuing operations was $48.9 million in 2003, an increase of $17.7 million, or 57%, over 2002 net income from continuing operations of $31.2 million. Continuing operations basic earnings per share of common stock improved to $1.33 in 2003 compared to 85 cents in 2002. Continuing Operations – 2002 versus 2001 – Sales for 2002 were $564.4 million, an increase of $54.7 million, or 11%, from $509.7 million in 2001. Sales by North American operations were $369.7 mil- lion in 2002, an increase of $26.1 million, or 8%, from $343.6 million in 2001.The sales improvement occurred in the United States and is largely related to higher ship- ments of gas masks to the military and homeland security markets. Sales to the fire service market were relatively flat year-to-year with increased shipments of self-contained breathing apparatus being offset by lower shipments of thermal imaging cameras.Thermal imaging camera sales are dependent on the level of federal government funding provided to local fire departments. During 2002 much of this funding was diverted to meeting homeland security requirements. Sales of instruments and fall protection equipment were slightly lower in 2002. Sales by European operations were $122.4 million in 2002, an increase of $28.2 million, or 30%, from $94.2 million in 2001.A significant portion of the improve- ment was due to the acquisition of MSA Gallet during the second quarter. European sales also benefited from strong shipments of escape breathing devices for use in the merchant marine fleet. Sales by international operations were $72.2 million in 2002 compared to $71.7 million in 2001, an increase of $471,000, or 1%. Local currency sales growth of approxi- mately 7% was largely offset by unfavorable currency translation effects when stated in U.S. dollars. Substantial local currency sales growth was achieved in Africa, Brazil, and Australia. 22 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 23 Gross profit for 2002 was $233.2 million, an increase of $16.4 million, or 8%, from $216.8 million in 2001.The ratio of gross profit to sales was 41.3% in 2002 compared to 42.5% in 2001.The lower gross profit percentage is largely related to sales mix changes and somewhat lower gross margins in North American industrial markets. Selling, general and administrative expenses increased $10.8 million, or 8%, to $140.9 million in 2002, but decreased as a percent of sales to 25.0% in 2002 com- pared to 25.5% in 2001.The increase in selling, general and administrative expenses occurred in North America and Europe and reflects costs associated with higher sales volumes, higher insurance costs, and the acquisition of MSA Gallet. Research and development expenses in 2002 were $20.4 million, an increase of $3.7 million, or 22%, from $16.7 million in 2001.These expenses relate to safety products equipment research and development activities conducted primarily in the U.S. and Europe.The increase reflects higher research and development costs in the U.S. and the acquisition of MSA Gallet in the second quarter of 2002. Depreciation and amortization expense was $21.5 mil- lion in 2002, a decrease of $1.1 million, or 5%, from $22.6 million in 2001.As required by FAS No. 142, goodwill amortization was discontinued at the beginning of 2002. Goodwill amortization expense was $2.2 mil- lion in 2001.The decrease associated with the absence of goodwill amortization in 2002 was partially offset by the inclusion of MSA Gallet depreciation following its acquisition and regular asset additions. Cost of products sold and operating expenses include net periodic pension benefit costs and credits.As described in note 7, pension credits, combined with pen- sion costs, resulted in net pension credits of $13.1 million in 2002 and $15.0 million in 2001. Interest expense in 2002 was $4.8 million compared to $5.3 million in 2001.The decrease relates to reductions in long term debt. Currency exchange gains of $191,000 were recorded in 2002 compared to a loss of $1.2 million in 2001.The favorable swing was primarily due to the strengthening of the Euro during 2002.The most significant losses from currency valuation changes in 2001 related to the strength- ening of the U.S. dollar against the Canadian dollar. Other income, for which further information is included in note 12, was $2.3 million in 2002 compared to $2.8 million in 2001. The effective income tax rate, for which further infor- mation is included in note 5, was 35.1% in 2002 and 40.7% in 2001.The effective tax rate in 2002 was sub- stantially the same as the U.S. statutory income tax rate due to favorable tax effects associated with the charitable donation of property and adjustments to prior year tax provisions, net of valuation allowances taken on deferred tax assets.The 2001 rate was higher than the U.S. statutory income tax rate due to the recognition of a valuation allowance on deferred tax assets related to foreign tax credit carry-forwards in the U.S. and improved earnings in high tax rate countries. Net income from continuing operations was $31.2 million in 2002, an increase of $5.4 million, or 21%, over 2001 net income from continuing operations of $25.9 million. Continuing operations basic earnings per share of common stock improved to 85 cents in 2002 com- pared to 72 cents in 2001. Liquidity and Financial Condition The main sources of liquidity for the company are cash generated from operations and borrowing capacity.The company’s principal liquidity requirements are for working capital, capital expenditures, and principal and intrest pay- ments on outstanding indebtedness. Cash and cash equivalents increased $36.8 million dur- ing 2003, compared to an increase of $9.8 million in 2002. Continuing operations provided cash of $32.5 million in 2003 compared to providing $43.0 million in 2002. Higher net income from continuing operations in 2003 was more than offset by increases in net operating assets. In 2003, increases in receivables used cash of $27.0 mil- lion compared to using $3.0 million in 2002. Increases in inventories during 2003 used $3.2 million compared to inventory reductions in 2002 which provided $5.5 mil- lion in cash.Trade receivables related to continuing oper- ations were $89.9 million at December 31, 2003.Trade receivables for continuing operations expressed in num- ber of days sales outstanding were 47 days at December 31, 2003, compared to 38 days at December 31, 2002. The increase in trade receivables and days sales outstand- ing reflect increased government and international receivables. Other receivables were $39.0 million at December 31, 2003 and $35.5 million at December 31, 2002, representing a retained interest in securitized receivables. Inventories of continuing operations were $90.1 million at December 31, 2003 and $76.7 million at December 31, 2002. Inventory measured against sales turned 7.7 times in 2003 and 7.4 times in 2002. Cash flow from continuing operations in 2002 was $22.9 million higher than in 2001. Improved cash flow from continuing operations in 2002 reflects higher operating income and relatively small changes in receivables and inventories. Cash provided by discontinued operations in 2003 was $1.6 million higher than in 2002.The increase is primar- ily related to the liquidation of trade receivables. Cash provided by discontinued operations in 2002 was $1.2 million lower than in 2001, mainly due to lower income. Investing activities provided cash of $66.7 million in 2003 compared to using $34.1 million in 2002. In 2003, the sale of the Callery Chemical Division and property in Germany provided cash of approximately $63.0 mil- lion and $22.9 million, respectively. In 2002, net cash of approximately $14. 5 million was used for the acquisition of Gallet. In 2001, cash was used for the acquisition of Surety Manufacturing and Testing, Ltd. Capital expendi- tures of $19.6 million in 2003, $20.1 million in 2002, and 20.0 million in 2001 were primarily related to pur- chases of new or replacement tooling and production equipment. 23 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 24 MANAGEMENT’S DISCUSSION AND ANALYSIS Financing activities used cash of $76.3 million in 2003 compared to using $7.1 million in 2002.The higher use of cash in 2003 includes a special distribution to com- mon shareholders of $53.8 million, representing the after-tax proceeds from the sale of the Callery Chemical Division and the subsequent liquidation of net assets retained by the company. Dividends paid on common stock during 2003 (the 86th consecutive year of dividend payment) were 26 cents per share. Dividends paid per share in 2002 and 2001 were 22 cents and 18 cents, respectively. The average amount of short term debt outstanding during 2003 and 2002 was $560,000 and $3.1 million, respectively. Credit available at year-end with financial institutions was the U.S. dollar equivalent of $20.4 mil- lion, of which $19.6 million was unused. Long-term debt, including the current portion, at December 31, 2003 was $64.8 million, or 17.4% of total capital. For purposes of this calculation, total capital is defined as long-term debt plus the current portion of long-term debt and shareholders’ equity. Outstanding short and long-term indebtedness at December 31, 2003 and 2002 was as follows: (In thousands) Bank lines of credit . . . . . . . . . . . . . Industrial development debt . . . . . . Senior notes . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . Current portion . . . . . . . . . . . . . . . . . 2003 $ 828) 10,750) 52,000) 2,003) 65,581) (5,666) 59,915) 2002 $09,096) 10,750) 56,000) 2,564) 78,410) (14,060) 64,350) Accounts Receivable Securitization As described in note 9, the company sells eligible trade accounts receivable to Mine Safety Funding Corporation (MSF), an unconsolidated wholly-owned subsidiary. MSF was established in November 1999 to provide the com- pany with an inexpensive and reliable source of financing to replace borrowings under short term lines of credit. Under accounting principles generally accepted in the United States of America, MSF is not consolidated with MSA because legally it is a bankruptcy remote entity. In the event that MSA declared bankruptcy all cash collec- tions on trade receivables owned by MSF would first be used to satisfy MSF’s borrowings before any remaining proceeds could be returned to MSA.This arrangement permits MSF to borrow at advantageous interest rates using its portfolio of trade receivables as security.As a result of the securitization agreement, $15.0 million of accounts receivable and short-term debt has been removed from the company’s December 31, 2003 balance sheet.At December 31, 2002, $29.0 million of accounts receivable and short-term debt were removed from the company’s balance sheet under this arrangement. Cumulative Translation Adjustments The year-end position of the U.S. dollar relative to international currencies resulted in translation gains of $14.7 million being credited to the cumulative transla- tion adjustments shareholders’ equity account in 2003, compared to gains of $5.8 million in 2002 and losses of $4.9 million in 2001.Translation gains in 2003 reflect the strengthening of most currencies against the U.S. dollar. The most significant gains related to MSA’s operations in Europe and Australia.Translation gains in 2002 occurred primarily in Europe, partially offset by losses in South America.Translation losses in 2001 occurred primarily in South Africa, Brazil, Chile and most European countries. Commitments and Contingencies The company is obligated to make future payments under various contracts, including debt and lease agreements. Significant cash obligations of MSA as of December 31, 2003 were as follows: (In thousands) Long-term debt . . . . . . . . . . . . . . . . . . . . Operating leases . . . . . . . . . . . . . . . . . . . Technology transfer agreement . . . . . . . . Take or pay supply contract . . . . . . . . . . . Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total $ 64,753 27,613 2,250 7,000 101,616 2004 $ 4,838 5,262 1,500 1,500 13,100 2005 $ 4,561 4,259 750 1,500 11,070 2006 $ 8,231 3,621 – 1,500 13,352 2007 $ 105 2,739 – 1,500 4,344 2008 $ 8,105 2,657 – 1,000 11,762 Thereafter $38,913 9,075 – – 47,988 The company expects to make net contributions of $1.3 million to its pension plans in 2004. The company has purchase commitments for materi- als, supplies, services, and property, plant and equipment as part of the ordinary conduct of business. During the third quarter of 2003, the company sold its real property in Berlin, Germany for approximately $25.7 million, resulting in a gain of approximately $13.6 mil- lion.At the same time, the company entered into an eight year agreement to lease back the portion of the property that it occupies. Under sale-leaseback account- ing, $12.1 million of gain was deferred and is being amortized over the term of the lease. On September 12, 2003, the company entered into a lease agreement with BASF Corporation pertaining to that portion of the Callery Chemical site that is occupied by MSA’s Evans City, PA manufacturing operations.The initial term of the lease is one year and the company has the option to renew for five successive one year periods. 24 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 25 Various lawsuits and claims arising in the normal course of business are pending against the company. These law- suits are primarily product liability claims. Pending claims include several multi-party asbestosis or silicosis suits, generally as a result of the presence of safety equipment supplied by MSA and other manufacturers at locations named in the suits.While the amounts claimed may be substantial, the ultimate liability of the company is not determinable because of uncertainties, including the number of defendants in each suit and the jurisdiction. The company maintains a reserve for uninsured prod- uct liability based on expected settlement charges for pending claims and an estimate of unreported claims derived from experience, sales volumes, and other rele- vant information.The company reevaluates its exposures on an ongoing basis and makes adjustments to reserves as appropriate. Based on information currently available, management believes that the disposition of matters that are pending will not have a materially adverse effect on the financial position of the company. The company has retained responsibility for certain environmental costs at the Callery Chemical site in the event that corrective action is required by governmental agencies or regulations. Under the terms of the asset pur- chase agreement with BASF, MSA’s maximum liability for these matters is capped at $50.0 million. Based on environmental studies performed prior to the sale of the division, the company does not believe that its potential exposure under the terms of this agreement will materi- ally affect the results of operations, cash flows, or financial condition. 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 our global operations, the company’s cash flow and earnings are subject to fluctuations due to exchange rate changes. Because the company operates in a number of locations around the world, currency exchange risk is well diversified.When appropriate, the company may attempt to limit its exposure to changes in currency exchange rates through both operational and financial market actions.These actions may include contracts and other actions designed to reduce existing exposures by essentially creating offsetting currency exposures.At December 31, 2003, contracts for the purpose of hedging cash flows were not significant. Interest Rate Sensitivity – The company is exposed to changes in interest rates primarily as a result of borrow- ing 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 are reported at carrying values which approximate fair values. As more fully described in note 11, the company has $52.0 million of fixed rate debt which matures at various dates through 2012.The incremental increase in the fair value of fixed rate long term debt resulting from a hypo- thetical 10% decrease in interest rates would be approxi- mately $1.1 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. Related Party Transactions The company does not have any related party transac- tions that materially affect the results of operations, cash flow, or financial condition. Common Stock At December 31, 2003, there were 36,927,984 shares of common stock outstanding and approximately 7,500 iden- tifiable common stockholders. 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 follow. On November 24, 2003, the com- pany made a special distribution of $1.46 per common share, representing the after-tax proceeds received from the sale of the Callery Chemical Division and the subsequent liquidation of net assets retained by the company, to share- holders of record on November 14, 2003. Quarter First Second Third Fourth Quarter First Second Third Fourth Total First Second Third Fourth Total 2003 High $12.44 14.99 22.63 28.83 Low $10.05 11.76 14.21 17.27 2002 High $14.40 16.83 13.58 13.08 Low $11.78 11.67 10.63 9.13 Dividend Per Share Record Date 2003 Payment Date $ .06 .06 .07 .07 .26 $ .04 .06 .06 .06 .22 Feb. 21, 2003 Mar. 10, 2003 Jun. 10, 2003 May 21, 2003 Aug. 15, 2003 Sep. 10, 2003 Nov. 17, 2003 Dec. 10, 2003 2002 Feb. 22, 2002 Mar. 10, 2002 May 17, 2002 Jun. 10, 2002 Aug. 26, 2002 Sep. 10, 2002 Nov. 22, 2002 Dec. 10, 2002 The company’s stock transfer agent is Wells Fargo Bank, N.A., Shareowner Services, 161 North Concord Exchange, South St. Paul, MN 55075. 25 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 26 RESPONSIBILITY STATEMENTS Responsibility for Financial Statements The management of Mine Safety Appliances Company prepared the accompanying financial statements and is responsible for their integrity and objectivity.These state- ments were prepared in conformity with accounting principles generally accepted in the United States of America.The financial statements include amounts that are based on management’s best estimates and judgments. The other information in this annual report is consistent with the financial statements. The company maintains a system of internal controls, including a program of internal auditing. Management believes that the company’s system of internal controls provides reasonable assurance that assets are safeguarded against losses and that the financial records are reliable for use in preparing financial statements.The concept of rea- sonable assurance recognizes that the cost of a control should not exceed the expected benefits. Management believes that its internal control system appropriately recognizes this cost/benefit relationship. Management recognizes its responsibility for fostering a strong ethical climate so that the company’s affairs are conducted according to the highest standards of personal and corporate conduct.This responsibility is character- ized and reflected in a broad business ethics policy that addresses, among other things, conduct of business activities within the laws of the United States and other countries in which the company operates and potential conflicts of interest of its associates. Ethics policy violations are throughly investigated and may lead to disciplinary action, including termination of employment. The Audit Committee of the Board of Directors per- forms an oversight role in the preparation of the financial statements.The Audit Committee is composed of four independent directors.The Audit Committee meets regularly to discuss audit and financial reporting matters with management, the internal auditors, and the inde- pendent auditors.The internal auditors and independent auditors have direct access to the Audit Committee to discuss the results of their audits or any other matters. Report of Independent Auditors To the Shareholders and Board of Directors of Mine Safety Appliances Company: In our opinion, the accompanying consolidated bal- ance sheets and the related consolidated statements of income, 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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.These finan- cial 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 finan- cial statement presentation.We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Pittsburgh, Pennsylvania February 20, 2004 David W. Bishop II Controller Chief Accounting Officer Dennis L. Zeitler Vice President and Treasurer Chief Financial Officer John T. Ryan III Chairman of the Board Chief Executive Officer 26 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 27 CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts) Year Ended December 31 2003 2002 2001 Net sales.......................................................................................................................... $696,473) $564,426) $509,736 Other income................................................................................................................... 1,724) 2,271) 2,776 Costs and expenses Cost of products sold .................................................................................................. Selling, general and administrative ............................................................................. Research and development ........................................................................................ Depreciation and amortization..................................................................................... Interest......................................................................................................................... Currency exchange (gains) losses .............................................................................. 698,197) 566,697) 512,512 408,219) 170,081) 21,722) 23,208) 4,564) (3,356) 331,215) 140,924) 20,372) 21,525) 4,769) (191) 292,940 130,092 16,740 22,590 5,349 1,197 624,438) 518,614) 468,908 Income from continuing operations before income taxes............................................. Provision for income taxes.............................................................................................. Net income from continuing operations......................................................................... Net income from discontinued operations..................................................................... Gain on sale of discontinued operations – after tax....................................................... 73,759) 24,835) 48,924) 2,685) 13,658) 48,083) 16,870) 31,213) 3,864) 43,604 17,753 25,851 5,780 Net income ...................................................................................................................... $ 65,267) $035,077) $031,631 Basic earnings per common share: Continuing operations.................................................................................................. $0001.33) $0 00.85) $0 00.72 Discontinued operations.............................................................................................. .45) .11) .16 Net income .................................................................................................................. $0001.78) $0 00.96) $0 00.88 Diluted earnings per common share: Continuing operations.................................................................................................. $ 001.31) $0 00.85) $0 00.71 Discontinued operations.............................................................................................. .44) .10) .16 Net income .................................................................................................................. $0001.75) $0 00.95) $0 00.87 See notes to consolidated financial statements. 27 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 28 CONSOLIDATED BALANCE SHEET (In thousands, except share amounts) December 31 Assets Current Assets Property ) ) Other Assets Liabilities Current Liabilities Long-Term Debt Other Liabilities Shareholders’ Equity Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade receivables, less allowance for doubtful accounts of $6,418 and $4,134 . . . Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 2002 $ 73,244) $ 36,477) 58,648) 35,456) 76,748) 20,396) 10,157) 45,062) 282,944) 5,615) 91,320) 250,797) 5,580) 353,312) (222,905) 130,407) 107,338) 7,800) 42,963) 8,313) $643,885) $579,765) 89,919) 38,981) 90,103) 17,890) 10,794) 02,311) 323,242) 4,642) 80,044) 269,739) 5,521) 359,946) (239,386) 120,560) 121,290) 23,047) 44,810) 10,936) Notes payable and current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employees’ compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance and product liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pensions and other employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 05,666) $014,060) 30,979) 16,216) 8,899) 3,748) 25,798) 99,700) 64,350) 61,198) 61,402) 4,053) 126,653) 40,029) 15,486) 13,518) 4,976) 35,040) 114,715) 59,915) 74,808) 70,845) 15,744) 161,397) Preferred stock, 41⁄2% cumulative, $50 par value (callable at $52.50) . . . . . . . . . . Common stock, no par value (shares outstanding: 2003—36,927,984 2002—12,207,029) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock compensation trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury shares, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings retained in the business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,569) 3,569) 31,187) (19,385) (137,173) (993) (6,037) 436,690) 307,858) 28,626) (21,697) (134,827) (801) (20,501) 434,693) 289,062) $643,885) $579,765) 28 See notes to consolidated financial statements. 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 29 CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) Year Ended December 31 Operating Activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on the sale of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sale of investments and assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other—including currency exchange adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . Cash Flow From Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash Flow From Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash Flow From Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing Activities Property additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions, net of cash acquired, and other investing . . . . . . . . . . . . . . . . . . . . . . . Cash Flow From Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing Activities Additions to long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in notes payable and short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends and special distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company stock purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company stock sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash Flow From Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beginning cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 2002 2001 $65,267) (2,685) (13,658) 48,924) 23,208) (8,845) (2,332) 4,922) (27,039) (3,162) 1,253) (1,864) (2,554) 32,511) 8,029) 40,540) (19,628) 23,521) 63,042) (279) 66,656) 245) (4,902) (9,146) (63,270) (2,309) 3,036) (76,346) 5,917) 36,767) 36,477) $73,244) $35,077) (3,864) (000) 31,213) 21,525) (13,125) (35) 4,765) (3,008) 5,518) (3,616) (1,775) 1,582) 43,044) 6,412) 49,456) (20,072) 649) ) (14,667) (34,090) 677) (7,089) 5,578) (7,961) (846) 2,508) (7,133) $31,631) (5,780) (000) 25,851) 22,590) (14,962) (1,764) 9,259) (16,846) (10,716) (2,955) 4,132) 5,561) 20,150) 7,635) 27,785) (19,987) 6,685) ) (6,765) (20,067) 12) (5,259) 1,150) (6,480) (3,227) 7,477) (6,327) 1,543) 9,776) 26,701) $36,477) (1,231) 160) 26,541) $26,701) Supplemental cash flow information: Interest payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $05,025) 35,743) $05,890) 18,546) $06,566) 9,765) See notes to consolidated financial statements. 29 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 30 CONSOLIDATED STATEMENT OF CHANGES IN RETAINED EARNINGS AND ACCUMULATED OTHER COMPREHENSIVE INCOME (In thousands) Balances January 1, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minimum pension liability adjustments (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balances December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minimum pension liability adjustments (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balances December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minimum pension liability adjustments (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Special distribution to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . Common dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balances December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Other Comprehensive Income $(20,869) Comprehensive Income $31,631) (4,934) (413) $26,284) $35,077) 5,772) (57) $40,792) $65,267) 14,699) (235) $79,731) (4,934) (413) (26,216) 5,772) (57) (20,501) 14,699) (235) $(6,037) Retained Earnings $382,426) 31,631) (6,432) (48) 407,577) 35,077) (7,914) (47) 434,693) 65,267) (53,799) (9,425) (46) $436,690) (a) – Charges to minimum pension liability adjustments in 2003, 2002 and 2001 are net of tax benefits of $157,000, $38,000 and $275,000, respectively. Components of accumulated other comprehensive income are as follows: Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minimum pension liability adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 $(4,894) (1,143) $(6,037) (In thousands) 2002 $(19,593) (908) $(20,501) 2001 $(25,365) (851) $(26,216) 30 See notes to consolidated financial statements. 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Significant Accounting Policies Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabil- ities 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. Principles of Consolidation – The consolidated financial statements include the accounts of the company and all subsidiaries except Mine Safety Funding Corporation. Intercompany accounts and transactions are eliminated.To facilitate timely reporting, several inter- national subsidiaries have November 30th fiscal year ends. Certain prior year amounts have been reclassified to conform with the current year presentation. Currency Translation – The functional currency of all significant foreign subsidiaries is the local currency.Assets and liabilities of these subsidiaries are translated at year-end exchange rates. Income statement accounts are translated at the average rates of exchange prevailing during the year.Translation adjustments for these companies are reported as a component of shareholders’ equity and are not included in income. Foreign currency transaction gains and losses are included in net income for the period. Cash Equivalents – Cash equivalents include temporary deposits with financial institutions and highly liquid investments with original maturities of 90 days or less. Inventories – Inventories are stated at the lower of cost or market. Most U.S. inventories are valued on the last-in, first-out (LIFO) cost method. Other inventories are valued on the average cost method or at standard costs which approximate actual costs. Property and Depreciation – Property is recorded at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. Expenditures for significant renewals and improvements are capitalized. Ordinary repairs and maintenance are expensed as incurred. Gains or losses on property dispositions are included in income and the cost and related depreciation are removed from the accounts. Goodwill and Other Intangible Assets – Effective January 1, 2002, the company adopted 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 impair- ment write-down tests that must be performed at least annually. For years ending prior to 2002, goodwill was amortized on a straight line basis over periods not exceeding 35 years. Other intangible assets are amortized on a straight-line basis over their useful lives. Revenue Recognition – Revenue from the sale of products is recognized when title, ownership, and risk of loss pass to the customer. Shipping and Handling – Shipping and handling expenses for products sold to customers are charged to cost of products sold as incurred.Amounts billed to customers for shipping and handling are included in net sales. Research and Development – Research and development costs are expensed as incurred. Income Taxes – Deferred income taxes are provided for temporary differences between financial and tax reporting. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recov- ered or settled. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. No provision is made for possible U.S. taxes on the undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely. Calculation of the unrecognized deferred tax liability for temporary differences related to these earnings is not practicable.Where it is contemplated that earnings will be remitted, credits for foreign taxes already paid are expected to generally offset applicable U.S. income taxes. In cases where they will not offset U.S. income taxes, appropriate provisions are recorded. Stock-Based Compensation Plans – The company applies the intrinsic value-based method in accordance with Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees.Accordingly, no compensation cost is recognized for stock option grants. Compensation cost for restricted stock awards is measured at the market value of the shares when awarded. Unearned stock compensation is reported in shareholders’ equity and is charged to income over the restriction period. If the company had elected to recognize compensation cost based on the fair value of the options at the grant date as prescribed by FAS 148,Accounting for Stock-Based Compensation – Transition and Disclosure, net income and earnings per share would have been reduced to the pro forma amounts shown below: Net income as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of stock options granted, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share: 2003 $65,267) (1,374) 63,893) (In thousands) 2002 $35,077) (1,717) 33,360) 2001 $31,631) (1,519) 30,112) As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.00$ 1.78) 0.01.74) $ .96) .91) $ .88) .84) Diluted earnings per share: As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The fair value of the options granted was estimated at the grant dates using the Black-Scholes option pricing model and the $ 1.75) 0.001.71) $ .95) .90) $ .87) .83) following weighted average assumptions for options granted in 2003, 2002, and 2001, respectively; risk-free interest rate of 4.0%, 5.3%, and 5.2%; dividend yield of 2.1%, 2.0%, and 2.1%; expected option life of 9.9 years, 9.9 years, and 9.9 years; and expected volatility factor of 23%, 23%, and 23%. Derivative Instruments – The company uses derivative instruments to dampen the effects of changes in currency exchange rates and to achieve a targeted mix of fixed and floating interest rates on outstanding debt. The company does not enter into derivative transactions for speculative purposes and does not hold derivative instruments for trading purposes. Derivative instruments, including interest rate swaps and forward exchange contracts, are not accounted for as hedges and are marked-to-market each period. The real- ized and unrealized gains or losses on these instruments are recognized in income in the current period. MSA estimates the fair value of all derivatives based on quoted market prices or pricing models, and records all derivatives on the balance sheet at fair value. 31 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2 – Subsequent Event On January 28, 2004, the company paid a 3-for-1 stock split of the common stock to shareholders of record on January 16, 2004. Share and per share information in this report has been adjusted to reflect the split. Note 3 – Capital Stock • Common stock, no par value - 180,000,000 shares authorized • Second cumulative preferred voting stock, $10 par value - 1,000,000 shares authorized; none issued • 41/2% cumulative preferred nonvoting stock, $50 par value - 100,000 shares authorized; 71,373 shares issued and 51,554 shares ($1,690,000) held in treasury (1,241 shares, $61,000, purchased for treasury in 2003; no activity in 2002; 600 shares, $21,000, purchased for treasury in 2001) Common stock activity is summarized as follows: Shares Stock Dollars (In thousands) Stock Shares Issued Compensation Shares in Treasury Trust Shares Issued Compensation Treasury Trust Cost 147,254) Balances January 1, 2001 . . . . . . . . . . . . . . . . . . . 20,335,797) Restricted stock awards . . . . . . . . . . . . . . . . . . . . . Restricted stock awards forfeited . . . . . . . . . . . . . Stock options exercised . . . . . . . . . . . . . . . . . . . . . Tax benefit related to stock plans . . . . . . . . . . . . . . Treasury shares purchased . . . . . . . . . . . . . . . . . . . Balances December 31, 2001 . . . . . . . . . . . . . . . . 20,483,051) 23,198) Restricted stock awards . . . . . . . . . . . . . . . . . . . . . Stock options exercised . . . . . . . . . . . . . . . . . . . . . 73,860) Tax benefit related to stock plans . . . . . . . . . . . . . . Treasury shares purchased . . . . . . . . . . . . . . . . . . . Balances December 31, 2002 . . . . . . . . . . . . . . . . 20,580,109) 00,000) Restricted stock awards . . . . . . . . . . . . . . . . . . . . . 00,000) Restricted stock awards forfeited . . . . . . . . . . . . . 00,000) Stock options exercised . . . . . . . . . . . . . . . . . . . . . Tax benefit related to stock plans . . . . . . . . . . . . . . Treasury shares purchased . . . . . . . . . . . . . . . . . . . Balances December 31, 2003 . . . . . . . . . . . . . . . . 20,580,109) 3-for-1 stock split (January 2004) . . . . . . . . . . . . . . 41,160,218) Adjusted balances December 31, 2003 . . . . . . . . . 61,740,327) (1,639,320) 860) 223,087) (6,868,854) (3,900) (1,415,373) (94,197) (6,966,951) 30,744) (1,384,629) 27,235) ) 120,317) (21,500) (6,988,451) (1,000) (1,237,077) (2,474,154) (3,711,231) (44,253) (7,033,704) (14,067,408) (21,101,112) $ 18,841) 12) 4,226) 2,307) 25,386) 915) 1,786) 539) 28,626) 517) ) 1,151) 893) $ (25,683) $(129,066) 13) 3,491) (22,179) 482) (21,697) 427) 1,885) (80) (3,206) (132,352) (846) (133,198) (37) (2,248) (135,483) 31,187) (19,385) 31,187 (19,385) (135,483) The Mine Safety Appliances Company Stock Compensation Trust was established to fund certain benefit plans, including employee and non-employee directors 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-ninth of a pre- ferred 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. 32 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 33 Note 4 – Segment Information The company is organized into three geographic operating segments: North America, Europe, and International.The company is engaged in the manufacture and sale of safety 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. Reportable segment information is presented in the following table: (In thousands) 2003 Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . Intercompany sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income from continuing operations . . . . . . . . . . . . . . Net income from discontinued operations . . . . . . . . . . . . . Gain on sale of discontinued operations . . . . . . . . . . . . . . Total assets continuing operations . . . . . . . . . . . . . . . . . . Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncash items: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . Pension income (expense) . . . . . . . . . . . . . . . . . . . . . . Equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . . Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . Property additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . Intercompany sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income from continuing operations . . . . . . . . . . . . . . Net income from discontinued operations . . . . . . . . . . . . . Total assets continuing operations . . . . . . . . . . . . . . . . . . Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncash items: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . Pension income (expense) . . . . . . . . . . . . . . . . . . . . . . Equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . . Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . Property additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 Sales to external customers . . . . . . . . . . . . . . . . . . . . . . . Intercompany sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income from continuing operations . . . . . . . . . . . . . . Net income from discontinued operations . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncash items: North America $452,567) 24,215) 38,666) 2,685) 13,658) 419,472) 2,311) 576) 4,357) 17,071) 14,999) ) 18,632) 366) 13,221) 93,296) 369,728) 21,472) 25,933) 3,864) 363,999) 45,062) 424) 4,501) 16,012) 16,360) ) 13,884) 1,374) 15,538) 100,213) 343,646) 20,074) 22,575) 5,780) 399,912) 513) 4,844) Europe International Items Totals Reconciling Consolidated $146,162) 49,499) 2,795) $097,744) 3,061) 6,349) $000000) (76,775) 1,114) 190,179) 68,611) (36,688) 115) 123) 4,972) (3,847) 2,069) )158 3,976) 19,918) 278) 84) 1,144) (307) (5) 2,985) 153) 2,423) 7,319) 122,377) 35,733) 2,519) 072,206) 3,116) 2,372) 102) ) 21) )13,125 ) 1,149) ) 8) 27) 000115) (60,321) 389) 145,663) 50,364) (25,323) 142) 67) 4,446) (3,123) 1,056) )158 3,698) 25,329) 94,187) 21,668) 130) 96,372) 146) 156) 281) 201) 1,047) (112) 23) 1,647) 158) 831) 4,824) 71,735) 2,124) 3,619) 48,816) 408) 349) 106) ) 20) )13,125 ) 283) ) 5) 41) 168) (43,866) (473) (24,402) 116) ) $696,473) ) 48,924) 2,685) 13,658) 641,574) 2,311) 1,071) 4,564) 23,208) 10,845) (5) 24,835) 519) 19,628) 120,560) 564,426) ) 31,213) 3,864) 534,703) 45,062) 953) 4,769) 21,525) 13,125) 23) 16,870) 1,532) 20,072) 130,407) 509,736) ) 25,851) 5,780) 520,698) 1,183) 5,349) Depreciation and amortization . . . . . . . . . . . . . . . . . . . . Pension income (expense) . . . . . . . . . . . . . . . . . . . . . . Equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . . Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . Property additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) Reconciling items consist primarily of intercompany eliminations and items reported at the corporate level. Sales are attributed to segments and countries based on the location of the selling company. Sales to external customers in Germany 17,714) 17,885) ) 15,094) 1,374) 13,407) 132,213) 22,590) 14,962) 40) 17,753) 1,509) 19,987) 156,413) 1,170) (140) 40) 1,732) 135) 1,621) 6,033) 900) ) 4,916) 18,118) 26) ) ) 27) ) 43) 49) 3,680) (2,783) were $57,973,000 in 2003, $50,925,000 in 2002, and $46,865,000 in 2001. 33 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 – Income Taxes The U.S. and non-U.S. components of income before income taxes and provisions for income taxes are summarized as follows: Income From Continuing Operations Before Income Taxes U.S. income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-U.S. income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency translation gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision For Income Taxes Current Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The following is a reconciliation of the U.S. Federal income tax rate to the effective tax rate for continuing operations: Provision for income taxes at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effects of foreign operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustment of prior years income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The components of deferred taxes are as follows: Deferred tax assets Postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vacation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign tax credit carryforwards (expiring between 2004 and 2008) . . . . . . . . . . . . . . Liability insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis of capital assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 (In thousands) 2002 $64,289) 15,148) 28) (5,706) 73,759) $47,850) 10,190) (317) (9,640) 48,083) 9,608) 2,526) 7,779) 19,913) 5,251) 937) (1,266) 4,922) 24,835) 8,115) 610) 3,380) 12,105) 4,101) 936) (272) 4,765) 16,870) 2001 $34,190) 6,226) (776) 3,964) 43,604) 5,370) 404) 2,720) 8,494) 8,377) 1,732) (850) 9,259) 17,753) 2003 2002 2001 35.0% 3.0) .7 (.7) (1.6)) (1.1) (1.1) (.5) 33.7% 35.0% 2.9) 3.2) (.2) (4.4) (1.4) 35.1% 35.0% 3.4) .2) (.5) 2.3) (1.0) 1.3 40.7% (In thousands) 2003 2002 $05,598) 5,691) 1,184) 7,407) 1,901) 3,134) 6,400) 1,409) 3,528) 5,272) 41,524) (587) 40,937) (20,033) (44,752) (6,060) (70,845) (29,908) $05,628) 4,836) 2,560) 5,023) 1,975) 1,363) 5,105) 1,371) 1,016) 3,734) 32,611) (1,975) 30,636) (26,213) (37,296) (333) (63,842) (33,206) During 2003, the company released $1.2 million of foreign tax credit carry forward valuation allowances based on the implementation of various tax planning strategies and an improved outlook for utilization of these credits in future years. Net operating loss carryforwards of $6,817,000 have no expiration date and $66,000, $471,000 and $53,000 expire in 2006, 2008 and 2013, respectively. Undistributed earnings of international companies for which U.S. income taxes have not been provided were $90,927,000 at December 31, 2003. 34 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 35 Note 6 – Stock Plans The 1998 Management Share Incentive Plan provides for grants of restricted stock awards and stock options to eligible key employees through March 2008.The 1990 Non-Employee Directors’ Stock Option Plan, as amended April 1, 2001, provides for annual grants of stock options and restricted stock awards to eligible directors.As of December 31, 2003, there were 1,684,815 shares and 162,021 shares, respectively, reserved for future grants under these plans. Restricted stock awards are granted without payment to the company in consideration of services to be performed in the ensuing three years (four years for employee awards prior to 2002). Restricted stock awards of 81,705 shares (fair value of $944,000), 69,594 shares (fair value of $915,000), and 2,580 shares (fair value of $25,000) were granted in 2003, 2002, and 2001, respectively. Restricted stock awards expense charged to operations was $716,000 in 2003, $766,000 in 2002, and $437,000 in 2001. 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). Stock options granted in 2003 are exercisable beginning one year after the grant date. Options granted prior to 2003 were exercisable six months after the grant date. During November 2003, the company made a special distribution of $1.46 per common share to shareholders of record on November 14, 2003. For options outstanding as of November 12, 2003, the ex-distribution date, option shares and exercise prices were adjusted to reflect the change in intrinsic value that resulted from the special distribution.The adjustments were based on the ratio of the change in the market price of common stock that occurred as a result of the special distribution. A summary of option activity under the two plans follows: Outstanding January 1, 2001 . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding December 31, 2001 . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding December 31, 2002 . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised before adjustment . . . . . . . . . . . Adjustment for special distribution . . . . . . . Exercised after adjustment . . . . . . . . . . . . Outstanding December 31, 2003 . . . . . . . . Shares 1,634,382) 733,032) (1,111,023) (15,930) 1,240,461) 552,165) (313,812) 1,478,814) 744,630) (259,752) 153,057) (101,199) 2,015,550) Weighted-Average Exercise Price Exercisable at Year-end $ 6.69) 8.46) 6.95) 6.26) 7.52) 13.17) 7.23) 9.69) 11.58) 8.16) (.77) 9.06) 9.88) 1,240,461 1,478,814 1,270,920 The following table summarizes information about options outstanding at December 31, 2003: Shares 677,046 781,203 557,301 2,015,550 Range of Exercise Price per Share $5.88 - $7.80 $9.03 - $10.65 $11.72 - $13.57 $ 5.88 - $13.57 Weighted-Average Exercise Price $ 7.14 10.60 12.20 9.88 Remaining Life 6.5 9.1 7.8 7.9 35 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7 – Pensions and Other Postretirement Benefits The company maintains various defined benefit and defined contribution plans covering the majority of its employees.The princi- pal 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. Information pertaining to defined benefit pension plans and other postretirement benefits plans is provided in the following table. (In thousands) Pension Benefits 2002 2003 Other Benefits 2002 2003 Change in Benefit Obligations Benefit obligations at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Curtailments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency translation effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit obligations at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in Plan Assets Fair value of plan assets at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 420 transfer to retiree medical plan . . . . . . . . . . . . . . . . . . . . . . Reimbursement of German benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency translation effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets at December 31 . . . . . . . . . . . . . . . . . . . . . . . . Funded Status Funded status at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized transition gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized net actuarial (gains)/losses . . . . . . . . . . . . . . . . . . . . . . . . Prepaid (accrued) benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts Recognized in the Balance Sheet Prepaid benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued benefit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minimum pension liability adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid (accrued) benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $218,010) 6,802) 14,036) 159) 000) 10,844) (13,178) (2,143) 9,810) 244,340) 269,836) 97,710) 3,822) 223) (13,178) (1,900) (2,478) 2,442) 356,477) 112,137) 342) 1,323) (46,909) 66,893) 121,290) (56,785) 524) 1,864) 66,893) $193,603) 5,378) 12,917) 214) 454) 11,666) (12,242) 6,020) 218,010) 314,122) (32,599) 2,433) 263) (12,242) (2,000) (719) 578) 269,836) 51,826) (137) 1,647) 9,846) 63,182) 107,338) (46,226) 557) 1,513) 63,182) Accumulated Benefit Obligation for all Defined Benefit Plans . . . . . . . 202,856) 177,424) $20,677) 423) 1,395) $21,835) 392) 1,404) (0,000) 2,509) (2,131) (1,319) 487) (2,122) 22,873) 20,677) 231) 122) (2,131) 1,900) (2,122) 2,000) (22,873) (20,677) (1,910) 8,686) (16,097) (2,138) 6,768) (16,047) (16,097) (16,047) (16,097) (16,047) (In thousands) Components of Net Periodic Benefit Cost (Credit) Service cost................................................................. Interest cost ................................................................ Expected return on plan assets.................................. Amortization of transition asset.................................. Amortization of prior service cost .............................. Recognized net actuarial (gains) losses ..................... Curtailment (gain) loss ................................................ Net periodic benefit (credit) cost................................ 36 2003 2001 Pension Benefits 2002 $0,6,802) $0,5,378) $0,4,645) 12,393) 12,917) (27,202) (27,332) (597) (592) 300) 298) (4,745) (3,794) 244) ) (14,962) (13,125) 14,036) (27,785) (509) 310) (1,677) (2,022) (10,845) Other Benefits 2002 $0,392) 1,404) 2003 $0,423) 1,395) 2001 $0,502) 1,488) ) (228) 590) ) 2,180) (138) 552) (108) 377) 2,210) 2,259) 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 37 Assumptions used to determine benefit obligations Discount rate............................................................... Rate of compensation increase.................................. Pension Benefits 2002 2003 6.4% 6.1% 3.5% 3.5% Assumptions used to determine net periodic benefit cost Discount rate............................................................... Expected return on plan assets.................................. Rate of compensation increases................................ 6.3% 8.5% 3.5% 6.4% 8.4% 3.5% Other Benefits 2003 6.3% 2002 6.5% 6.5% 7.0% The expected return on assets for the 2003 net periodic pension cost was determined by multiplying the expected returns of each asset class (based on historical returns) by the expected percentage of the total portfolio invested in that asset class. A total return was determined by summing the expected returns over all asset classes. Asset Category Equity securities.......................................................... Debt securities............................................................ Real estate .................................................................. Cash/other................................................................... Total ............................................................................. Plan Assets at December 31 2003 79.2% 15.3% 0.3% 5.2% 100.0% 2002 74.5% 20.2% 0.3% 5.0% 100.0% Investment policies are determined by the Plan’s Investment Committee and set forth in the Plan’s Investment Policy.Asset managers are granted discretion for determining sector mix, selecting securities and timing transactions, subject to the guidelines of the Investment Policy.An aggressive, flexible management of the portfolio is permitted. No target asset allocations are set forth in the Investment Policy. The company expects to make net contributions of $1.3 million to its pension plans in 2004 For measurement purposes, a 7.5% increase in the costs of covered health care benefits was assumed for the year 2003, decreasing by .5% for each successive year to 4% in 2010 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 $1.0 million and $100,000, respectively. Expense for defined contribution pension plans was $3,360,000 in 2003, $3,049,000 in 2002, and $2,739,000 in 2001. The U.S. defined benefit pension plan owned 2,533,500 shares (market value $67.1 million) at December 31, 2003 and 3,049,500 shares (market value $32.8 million) at December 31, 2002 of the company’s common stock.The pension plan received dividends and distributions of $4,506,865 and $666,650, respectively, on these shares. In December 2003, Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003.The act incorporates a plan sponsor subsidy based on a percentage of the beneficiary’s annual prescription drug benefits, within certain limits, and provides the retiree with the opportunity to obtain prescription drugs under Medicare. Specific authoritative guidance on the accounting for federal subsidy is pending and that guidance, when issued, could require plan sponsors to change previously reported information. Management is currently evaluating the effect of the act on the company, but does not expect the reductions in postretire- ment benefit costs to be significant. In accordance with FASB Staff Position FAS 106-1, the company has elected to defer accounting for the effect of the act.Accordingly, the benefit obligation and net periodic benefit cost do not reflect any potential effects of the act. Note 8 – 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. Net income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Antidilutive stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 $48,924) (46) 48,878) 36,730) 534) 37,264) 0) (In thousands) 2002 $31,213) (47) 31,166) 36,512) 373) 36,885) 552) 2001 $25,851) (48) 25,803) 35,729) 508) 36,237) 0) 37 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 – Accounts Receivable Securitization The company has securitization agreements with Mine Safety Funding Corporation (MSF) 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, bank- ruptcy-remote subsidiary of the company. Financial assets, net of retained interests, are removed from the balance sheet when the assets are sold and control is surrendered. 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, 2003, accounts receivable of $55.2 million were owned by MSF.The company held a subordinated interest in these receivables of $40.0 million, of which $39.0 million is classified as other receivables. Net proceeds to the company from the securitization arrangement were $15.0 million at December 31, 2003.The company incurred net costs associated with the securitization facility of $1.8 million in 2003, repre- senting the discount loss on the sale of the receivables, partially offset by related servicing income and dividends received from MSF. The net cost includes $473,000 in bad debt expense borne by MSF during 2003. At December 31, 2002, accounts receivable of $66.2 million were owned by MSF.The company held a subordinated inter- est in these receivables of $36.5 million, of which $35.5 mil- lion is classified as other receivables. Net proceeds to the company from the securitization arrangement were $29.0 million at December 31, 2002.The company incurred net costs associated with the securitization facility of $2.1 million in 2002, representing the discount loss on the sale of the receivables, partially offset by related servicing income and dividends received from MSF.The net cost includes $884,000 in bad debt expense borne by MSF during 2002. The key economic assumptions used to measure the retained interest at December 31, 2003 were a discount rate of 3.3% and an estimated life of 2.2 months. At December 31, 2003, an adverse change in the discount rate or estimated life of 10% and 20% would reduce the fair value of the retained interest by $32,000 and $64,000, 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. 38 Note 10 – Inventories Finished products . . . . . . . . . . . . . . . . . Work in process . . . . . . . . . . . . . . . . . . Raw materials and supplies . . . . . . . . . . Total inventories . . . . . . . . . . . . . . . . . . Excess of FIFO costs over LIFO costs . (In thousands) 2003 $34,660 17,476 37,967 90,103 39,083 2002 $25,928 14,936 35,884 76,748 39,431 Inventories stated on the LIFO basis represent 40%, 38%, and 52% of the total inventories at December 31, 2003, 2002, and 2001, respectively. Reductions in certain inventory quantities during 2002 resulted in liquidations of LIFO inventories carried at lower costs prevailing in prior years.The effect of these liquidations reduced cost of sales by $387,000 in 2002, and increased net income by $235,000. Note 11 – Long-Term Debt (In thousands) 2002 2003 U.S. Industrial development debt issues payable through 2022, 1.3% . . . . . . . $10,750 Series B Senior Notes payable through 2006, 7.69% . . . . . . Senior Notes payable through 2012, 8.39% . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . International Various notes payable through 2010, 40,000 150 12,000 $10,750 16,000 40,000 200 5.06% to 19.0% . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts due within one year . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . 1,853 64,753 4,838 59,915 2,364 69,314 4,964 64,350 Approximate maturities of these obligations over the next five years are $4,838,000 in 2004, $4,561,000 in 2005, $8,231,000 in 2006, $105,000 in 2007, and $8,105,000 in 2008. Some debt agreements require the company to maintain certain financial ratios and minimum net worth and contain restrictions on the total amount of debt. Note 12 – Other Income Interest . . . . . . . . . . . . . . . . Rent . . . . . . . . . . . . . . . . . . Dividends . . . . . . . . . . . . . . Dispositions of assets . . . . . Other, net . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . Note 13 – Leases 2003 $1,071) 532) 1,048) (826) (101) 1,724) (In thousands) 2002 $0953) 710) 725) (864) 747) 2,271) 2001 $1,183) 739) 625) (136) 365) 2,776) The company leases office space, manufacturing and ware- house facilities, automobiles and other equipment under operating lease arrangements. Rent expense was $9,120,000 in 2003, $6,879,000 in 2002, and $6,020,000 in 2001. Minimum rental commitments under noncancelable leases are $5,262,000 in 2004, $4,259,000 in 2005, $3,621,000 in 2006, $2,739,000 in 2007, $2,657,000 in 2008, and $9,075,000 after 2008. 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 39 Note 14 – Goodwill and Intangible Assets During 2002, the company adopted FAS No. 142, Goodwill and Other Intangible Assets. Under this standard, goodwill and other intangible assets with indefinite lives are not amortized, but are subject to impairment tests that must be performed at least annually. Transitional impairment tests performed as of January 1, 2002 indicated that no goodwill impairment existed and as a result the company did not recognize a transitional impairment loss.Annual goodwill impairment tests performed during the fourth quarters of 2002 and 2003 also indicated that no goodwill impairment existed and as a result the company has not recognized an impairment loss. The effects of adopting the non-amortization provisions of FAS 142 on net income from continuing operations and basic earnings per share were as follows: (In thousands, except per share amounts) 2003 2002 2001 Reported net income from continuing operations . . . . . $48,924 Goodwill amortization, net of tax Adjusted net income from $31,213 $25,851 1,365 continuing operations . . . . . 48,924 31,213 27,216 Basic earnings per share: Reported net income from continuing operations . . . . . Goodwill amortization, net of tax Adjusted net income from $1.33 $ .85 $ .72 .04 continuing operations . . . . . 1.33 .85 .76 Intangible assets include patents and license agreements that will be fully amortized in 2005 and 2008, respectively. These items are included in other noncurrent assets. At December 31, 2003, intangible assets totaled $3,307,000, net of accumulated amortization of $2.9 million. Intangible asset amortization expense is expected to be $702,000 in 2004, $655,000 in 2005, $650,000 in 2006, $650,000 in 2007 and $650,000 in 2008. Changes in goodwill and intangible assets, net of accumulated amortization during the year ended December 31, 2003 were as follows: Net balances at January 1, 2003 Goodwill acquired Intangibles acquired Amortization expense Currency translation and other Net balances at December 31, 2003 (In thousands) Goodwill $42,963 200 Intangibles $ 171) 3,250) (114) 3,307) 1,647 44,810 At December 31, 2003, goodwill of $34.3 million and $10.5 million related to the North American and European operating segments, respectively. Note 15 – Short-Term Debt Short-term bank lines of credit amounted to $20,403,000 of which $19,575,000 was unused at December 31, 2003. Generally, these short-term lines of credit are renewable annu- ally, and there are no significant commitment fees or compen- sating balance requirements. Short-term borrowings with banks, which exclude the current portion of long-term debt, were $828,000 and $9,096,000 at December 31, 2003 and 2002, respectively. The average month-end balance of total short-term borrowings during 2003 was $560,000 while the maximum month-end balance of $1,929,000 occurred at March 31, 2003.The average interest rate during 2003 was approximately 9% based upon total short-term interest expense divided by the average month-end balance outstanding, and 3% at year-end. Note 16 – Acquisitions On April 30, 2002, the company acquired CGF Gallet of Lyon, France, the leading European manufacturer of protective helmets for the fire service, as well as head protection for the police and military. The acquisition of Gallet complements the company’s strong existing line of fire service products and pro- vides the opportunity to capitalize on opportunities in other areas where Gallet is strong – such as the law enforcement, military, and aviation markets. Gallet’s results of operations have been included in the company’s consolidated financial state- ments from the acquisition date. The aggregate purchase price was $16.6 million of cash and includes amounts paid to the previous owners and other direct external costs associated with the acquisition.The acquisition was recorded using the purchase method of accounting and, accordingly, the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The following table summarizes the estimated fair values of the Gallet assets acquired and the liabilities assumed at the date of acquisition: (In thousands) Current assets.............................................. Property ....................................................... Goodwill ....................................................... Total assets acquired ................................... Current Liabilities ......................................... Long term debt ............................................ Other liabilities ............................................. Total liabilities assumed ............................... Net assets acquired ..................................... April 30 2002 $17,427 5,800 7,863 31,090 11,093 3,016 349 14,458 16,632 Goodwill related to the Gallet acquisition, which is included in the European operating segment, is not expected to be deductible for tax purposes. On February 1, 2001, the company acquired Surety Manufacturing and Testing, Ltd. (Surety), a leading provider of fall protection equipment and rescue systems.The acquisition was recorded using the purchase method of accounting.The purchase price of $7.1 million was allocated to assets acquired and liabilities assumed based on estimated fair values and included $5.6 million in goodwill, which is included in the North American operating segment. The results of operations of Surety are included in the finan- cial statements from the acquisition date. The following unaudited pro forma summary presents the company’s consolidated results as if the acquisitions had occurred at the beginning of 2001.The pro forma information does not necessarily reflect the actual results that would have occurred and is not necessarily indicative of future results of operations for the combined companies. (In thousands, except earnings per share) Net sales . . . . . . . . . . . . . . Net income from continuing operations . . . Basic earnings per share . . 2003 2002 $696,473 $578,252 $535,317 2001 48,924 1.33 32,189 .88 26,559 .74 39 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 – Discontinued Operations On September 12, 2003, the company sold certain assets of the Callery Chemical Division to BASF Corporation for $64.6 million. The operating results of the Callery Chemical Division and the gain on the sale of the division, as summarized below, have been classified as discontinued operations for all periods presented. Net income from discontinued operations for 2002 includes $42,000 of expenses directly related to the sale of the division. Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of discontinued operations – after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (In thousands) 2002 $29,473 2001 $33,120 6,147 2,283 3,864 9,282 3,502 5,780 2003 $21,345 4,210 1,525 2,685 $22,390 8,732 13,658 At December 31, 2003 and 2002, discontinued operations net assets classified as held for sale consisted of the following: Accounts receivable and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (In thousands) 2003 $2,311 2,311 2002 $ 7,983 7,705 29,374 45,062 Note 18 – Contingencies Various lawsuits and claims arising in the normal course of business are pending against the company.These lawsuits are primarily product liability claims. Pending claims include several multi-party asbestosis or silicosis suits, generally as a result of the presence of safety equipment supplied by MSA and other manufacturers at locations named in the suits.While the amounts claimed may be substantial, the ultimate liability of the company is not determinable because of uncertainties, including the number of defendants in each suit and the jurisdiction. The company maintains a reserve for uninsured product liability based on expected settlement charges for pending claims and an estimate of unreported claims derived from experience, sales volumes, and other relevant information.The company reevaluates its expo- sures on an ongoing basis and makes adjustments to reserves as appropriate. Based on information currently available, management believes that the disposition of matters that are pending will not have a materially adverse effect on the financial position of the company. The company has retained responsibility for certain environmental costs at the Callery Chemical site in the event that corrective action is required by governmental regulations. Under the terms of the asset purchase agreement with BASF, MSA’s maximum liability for these matters is capped at $50.0 million. Based on environmental studies performed prior to the sale of the division, the company does not believe that its potential exposure under the terms of this agreement will materially affect the results of operations, cash flows, or financial condition. Note 19 – Quarterly Financial Information (Unaudited) (In thousands, except earnings per share) 2003 Quarters 1st 2nd 3rd 4th Year Net sales . . . . . . . . . . . . . . . . . . . . . $160,391 $175,939 $171,927 $188,216 $696,473 Gross profit . . . . . . . . . . . . . . . . . . 79,146 288,254 66,538 72,652 69,918 2002 Quarters 1st 2nd 3rd $128,058 $141,862 $143,398 $151,108 $564,426 233,211 57,910 57,090 55,638 62,573 Year 4th Net income from continuing operations Net income from discontinued operations Gain on sale of discontinued operations – after tax . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share: Continuing operations . . . . . . . . . . Discontinued operations . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share: Continuing operations . . . . . . . . . . Discontinued operations . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . 40 10,499 12,192 10,984 15,249 48,924 7,724 7,897 5,323 10,269 31,213 1,514 1,273 (102) 2,685 260 1,587 470 1,547 3,864 12,013 13,465 13,658 24,540 13,658 65,267 15,249 7,984 9,484 5,793 11,816 35,077 .29 .04 .33 .29 .04 .33 .33 .04 .37 .33 .04 .37 .30 .37 .67 .29 .36 .65 .41 .41 .40 .40 1.33 .45 1.78 1.31 .44 1.75 .21 .01 .22 .21 .01 .22 .21 .04 .25 .21 .03 .24 .15 .01 .16 .15 .01 .16 .28 .05 .33 .28 .05 .33 .85 .11 .96 .85 .10 .95 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 41 SUMMARY OF SELECTED FINANCIAL DATA (In thousands, except as noted) Summary of Operations Net sales Other income Cost of products sold 2003 2002 2001 2000 1999 $696,473) $564,426) $509,736) $468,307) $462,166) 1,724) 2,271) 2,776) 2,444) 3,619) 408,219) 331,215) 292,940) 277,972) 282,687) Selling, general and administrative 170,081) 140,924) 130,092) 124,840) 131,281) Research and development Depreciation and amortization Interest expense Currency exchange (gains) losses Provision for income taxes 21,722) 20,372) 16,740) 15,988) 15,235) 23,208) 21,525) 22,590) 20,936) 20,550) 4,564) (3,356) 4,769) (191) 5,349) 1,197) 24,835) 16,870) 17,753) (444) 8,531) 4,040) 3,916) (694) 3,098) 9,712) 6,614) Net income from continuing operations 48,924) 31,213) 25,851) 18,888) Net income from discontinued operations 2,685) 3,864) 5,780) 4,351) Gain on sale of discontinued operations - after tax Change in reporting period, net of tax 13,658) ) ) ) ) 0(1,192) Net Income 65,267) 35,077) 31,631) 23,239) 15,134) Basic per common share continuing operations (in dollars) Diluted per common share continuing operations (in dollars) Dividends paid per common share (in dollars) 1.33) 1.31) .26) .85) .85) .22) .72) .71) .18) .51) .51) .16) .22) .22) .15) Weighted average number of common shares outstanding—basic 36,730) 36,512) 35,729) 36,904) 38,917) Year-End Position Working capital Working capital ratio Net property Total assets Long-term debt $206,216 $138,182 $135,186) $114,175) $123,085) 2.8 2.4 2.6) 2.3) 2.5) 120,560 130,407 156,413) 159,586) 163,509) 643,885 579,765 520,698) 489,683) 451,741) 59,915 64,350 67,381) 71,806) 36,550) Common shareholders’ equity 306,867 288,009 252,451) 225,382) 241,374) Equity per common share (in dollars) 8.31 7.86 6.95) 6.35) 6.25) Market capitalization 00978,715 393,677 485,844) 297,169) 274,624) Notes: Cost of products sold and operating expenses include noncash pension income. $ 8,845 a. Noncash pension income, pre-tax $ 13,125 $14,962) $14,900) $10,175) b. In 1999, the fiscal year end for certain international affiliates was changed from November 30th to December 31st. The after-tax effect of the change in reporting period is included in the 1999 income statement as a change in accounting principle. c. Working capital at December 31, 2003 and 2002 excludes assets held for sale. 41 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 42 MSA Principal Operations North America Mine Safety Appliances Company, Corporate Headquarters – Pittsburgh, PA Manufacturing – Clifton, NJ; Cranberry Twp., PA; Englewood, CO; Evans City, PA; Jacksonville, NC; Murrysville, PA; Newport,VT; Sparks, MD Research – John T. Ryan Memorial Laboratory, Cranberry Twp., PA MSA Canada, Toronto; MSA Gallet, Quebec MSA de Mexico, S.A. de C.V., Mexico City Europe MSA Europe (Headquarters), Berlin, Germany Aritron Instrument A.G., Forch, Switzerland MSA-Auer Almay, Almaty, Kazakhstan (Service Center/Office) MSA Auer, Berlin, Germany MSA-Auer GmbH, Czech o.z., Praha, Czech (Service Center) MSA-Auer Polska Sp. z o.o., Warsaw, Poland MSA-Auer Poznan, Poznan, Poland (Service Center) MSA-Auer Hungaria Safety Technology, Budapest, Hungary MSA-Auer Kiev, Kyiv, Ukraine (Representative Office) MSA-Auer Miskolc, Tiszaujvaros, Hungary (Service Center) MSA-Auer GmbH Romania, o.z., Bucuresti, Romania (Branch) MSA-Auer Petrosani, Petrosani, Romania (Service Center) MSA-Auer Moscow, Moscow, Russia (Representative Office) MSA-Auer Sicherheitstechnik Vertriebs GmbH, Absdorf,Austria MSA-Auer GmbH, Slovakia o.z., Pezinok, Slovakia (Service Center) MSA-Auer Szczecin, Szczecin, Poland (Service Center) MSA Belgium, N.V., Lier MSA (Britain) Limited, Glasgow MSA Española, S.A., Barcelona MSA de France, Paris MSA Gallet, Chatillon sur Chalaronne, France; Mohammedia, Morocco MSA Italiana S.p.A., Milan MSA Nederland, B.V., Hoorn MSA Nordic, Malmo, Sweden International MSA Africa (Pty.) Ltd., Johannesburg MSA de Argentina S.A., Buenos Aires MSA (Aust.) Pty. Limited, Sydney MSA (Australia), Auckland, New Zealand (Branch Office) MSA do Brasil Ltda., São Paulo MSA de Chile Ltda., Santiago MSA (India) Limited, Calcutta MSA Japan Ltd., Tokyo MSA Safety Malaysia Snd Bhd, Kuala Lumpur MSA Middle East, Abu Dhabi, U.A.E. MSA del Peru S.A.C., Lima MSA S.E. Asia Pte. Ltd., Singapore MSA Zimbabwe (Pvt.) Limited, Harare Wuxi-MSA Safety Equipment Co., Ltd., Wuxi, China Board of Directors John T. Ryan III (1) (4) Chairman of the Board and Chief Executive Officer Calvin A. Campbell, Jr. (2) (3) (4) Retired, formerly Chairman, President and Chief Executive Officer, Goodman Equipment Corporation (manufactured underground mining and tunneling locomotives and parts and services for plastics injection molding machinery) James A. Cederna (2) (3) Founder and owner, Cederna International, Inc. Thomas B. Hotopp (1) Retired, formerly President Mine Safety Appliances Company Diane M. Pearse (2) Chief Financial Officer, Crate and Barrel (home furnishings retailer) L. Edward Shaw, Jr. (3) (4) Attorney in private practice John C. Unkovic (3) (4) Partner and General Counsel – Reed Smith LLP (full service law firm) Thomas H.Witmer (1) (2) (3) Chairman, Granite State Log Homes (log home construction) (1) Member of Executive Committee (2) Member of Audit Committee (3) Member of Compensation Committee (4) Member of Nominating and Governance Committee Director Emeritus Eugene W. Merry Officers John T. Ryan III Chairman of the Board and Chief Executive Officer James H. Baillie Vice President; President, MSA Europe Joseph A. Bigler Vice President Kerry M. Bove Vice President Roberto Cañizares Vice President; President, International Benedict DeMaria Vice President Ronald N. Herring, Jr. Vice President William M. Lambert Vice President; President, North America Douglas K. McClaine Secretary and General Counsel Dennis L. Zeitler Vice President, Chief Financial Officer and Treasurer 42 39451 MSA Financials 10F COMBO. 3/25/04 10:52 AM Page 43 MSA BOARD OF DIRECTORS (Front) John T. Ryan III, Diane M. Pearse, (back, from left) Calvin A. Campbell, Jr.,Thomas H.Witmer, Thomas B. Hotopp, L. Edward Shaw, Jr., James A. Cederna and John C. Unkovic. Shareholders’ Inquiries A copy of the company’s 2003 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, may be obtained by shareholders after April 1, 2004. Printed and electronic versions are available. Requests should be directed to the Vice President-Finance, who can be reached at one of the following: 412-967-3046 Phone: Fax: 412-967-3367 Internet: MSAnet.com U.S. Mail: MSA Vice President-Finance P. O. Box 426 Pittsburgh, PA 15230 43 39451 MSA '03 Ann. Rpt NARR COM 3/25/04 10:55 AM Page 1 Mine Safety Appliances Company 121 Gamma Drive RIDC Industrial Park O’Hara Township Pittsburgh, PA 15238 412-967-3000 www.MSAnet.com