MSA Safety
Annual Report 2007

Plain-text annual report

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2007 Commission File No. 1-15579 MINE SAFETY APPLIANCES COMPANY (Exact name of registrant as specified in its charter) Pennsylvania (State or other jurisdiction of incorporation or organization) 121 Gamma Drive RIDC Industrial Park O’Hara Township Pittsburgh, Pennsylvania (Address of principal executive offices) 25-0668780 (IRS Employer Identification No.) 15238 (Zip Code) Registrant’s telephone number, including area code: 412-967-3000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, no par value New York Stock Exchange Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer È Non-accelerated filer ‘ Accelerated filer ‘ Smaller reporting company ‘ (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È As of February 15, 2008, there were outstanding 35,672,042 shares of common stock, no par value, not including 2,519,940 shares held by the Mine Safety Appliances Company Stock Compensation Trust. The aggregate market value of voting stock held by non-affiliates as of June 30, 2007 was approximately $1.3 billion. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the May 13, 2008 Annual Meeting of Shareholders are incorporated by reference into Part III. Table of Contents Item No. Part I Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Officers of the Registrant Part II 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . 9. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9A. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9B. Part III 10. 11. 12. 13. 14. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part IV 15. Signatures Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 3 8 12 13 14 15 15 16 18 19 33 35 61 61 61 62 62 62 62 62 63 65 Forward-Looking Statements This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include, but are not limited to, those listed in this report under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report. In some cases, you can identify forward-looking statements by words such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable words. These statements are only predictions and are not guarantees of future performance. Therefore, actual events or results may differ materially from those expressed or forecast in these forward- looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update publicly any of the forward-looking statements after the date of this report whether as a result of new information, future events or otherwise. 2 Item 1. Business PART I Overview—Mine Safety Appliances Company was incorporated in Pennsylvania in 1914. We are a global leader in the development, manufacture and supply of sophisticated products that protect people’s health and safety. Sophisticated safety products typically integrate any combination of electronics, mechanical systems, and advanced materials to protect users against hazardous or life threatening situations. Our comprehensive line of safety products is used by workers around the world in the fire service, homeland security, construction, and other industries, as well as the military. Our broad product offering includes self-contained breathing apparatus, or SCBAs, gas masks, gas detection instruments, head protection, respirators, thermal imaging cameras, fall protection, and ballistic helmets and body armor. We also provide a broad offering of consumer and contractor safety products through retail channels. We dedicate significant resources to research and development, which allows us to produce innovative, sophisticated safety products that are often first to market and exceed industry standards. Our global product development teams include cross-geographic and cross-functional members from various functional areas throughout the company, including research and development, marketing, sales, operations, and quality management. Our engineers and technical associates work closely with the safety industry’s leading standards- setting groups and trade associations, such as the National Institute for Occupational Safety and Health, or NIOSH, and the National Fire Protection Association, or NFPA, to develop industry product requirements and standards and to anticipate their impact on our product lines. Segments—We tailor our product offerings and distribution strategy to satisfy distinct customer preferences that vary across geographic regions. We believe that we best serve these customer preferences by organizing our business into three geographic segments: North America, Europe, and International. Segment information is presented in the note entitled “Segment Information” in Item 8—Financial Statements and Supplementary Data. Because our financial statements are stated in U.S. dollars, currency fluctuations may affect our results of operations and financial position and may affect the comparability of our results between financial periods. Principal Products—We manufacture and sell a comprehensive line of sophisticated safety products to protect workers around the world in the fire service, homeland security, construction, and other industries, as well as the military. We also provide a broad offering of consumer and contractor safety products through retail channels. Our products protect people against a wide variety of hazardous or life-threatening situations. The following is a brief description of each of our principal product categories: Respiratory protection. Respiratory protection products are used to protect against the harmful effects of contamination caused by dust, gases, fumes, volatile chemicals, sprays, micro-organisms, fibers, and other contaminants. We offer a broad and comprehensive line of respiratory protection products. • Self Contained Breathing Apparatus. SCBAs are used by first responders, petrochemical plant workers, and anyone entering an environment deemed immediately dangerous to life and health. SCBAs are also used by first responders to protect against exposure to chemical, biological, radiological, and nuclear, or CBRN, agents. In September 2007, our latest generation SCBA, the FireHawk M7, was certified as meeting new rigorous performance requirements adopted by the NFPA. The FireHawk M7 Air Mask was the first device of its kind to be certified by the Safety Equipment Institute, or SEI, as NFPA compliant for both its breathing apparatus and Personal Alert Safety System, or PASS. The PASS device is an SCBA component that sounds a loud, piercing alarm when a firefighter becomes disabled or lies motionless for 30 seconds. The new NFPA standards also established higher benchmarks for electronics durability. 3 • Air-purifying respirators. Air-purifying respirators range from the simple, filtering types to powered full-facepiece versions for many hazardous applications, including: • • • • full face gas masks for military personnel and first responders exposed to known and unknown concentrations of hazardous gases, chemicals, vapors, and particulates; half-mask respirators for industrial workers, painters, and construction workers exposed to known concentrations of gases, vapors, and particulates; powered-air purifying respirators for industrial, hazmat, and remediation workers who have longer term exposures to hazards in their work environment; and dust and pollen masks for maintenance workers, contractors, and at-home consumers exposed to nuisance dusts, allergens, and other particulates. • Gas masks. We have supplied gas masks to the U.S. military for several decades. The latest versions of these masks are currently in use by the U.S. military in Iraq, Afghanistan, and other parts of the world. Our commercial version of this gas mask, the Millennium, was developed based on the MCU-2/P, the gas mask currently used by the U.S. Air Force, and U.S. Navy. • Escape hoods. Our Response Escape Hood is used by law enforcement personnel, government workers, chemical and pharmaceutical workers, and anyone needing to escape from unknown concentrations of a chemical, biological or radiological release of toxic gases and vapors. The hood gives users head and upper neck coverage and respiratory protection to help them escape from threatening situations quickly and easily. Portable and permanent gas detection instruments. Our hand-held and permanent instruments are used to detect the presence or absence of various gases in the air. These instruments can be either hand-held or permanently installed. Typical applications of these instruments include the detection of the lack of oxygen in confined spaces or the presence of combustible or toxic gases. • Single- and multi-gas hand-held detectors. Our single- and multi-gas detectors provide portable solutions for detecting the presence of oxygen, hydrogen sulfide, carbon monoxide, and combustible gas, either singularly or all four gases at once. Our hand-held portable instruments are used by chemical workers, oil and gas workers, utility workers entering confined spaces, or anywhere a user needs protection to continuously monitor the quality of the atmosphere they are working in and around. • Multi-point permanently installed gas detection systems. Our comprehensive line of gas monitoring systems is used to continuously monitor for combustible and toxic gases and oxygen deficiency in virtually any gas detection application where continuous monitoring is required. Our systems are used for gas detection in pulp and paper, refrigerant monitoring, petrochemical, and general industrial applications. One of our newest lines, the SafeSite® Multi-Threat Wireless Detection System, designed and developed for homeland security applications, combines the technologies and features from our line of permanent and portable gas detection offerings. The SafeSite System detects and communicates the presence of toxic industrial chemicals and chemical warfare agents. With up to 16 monitoring stations, wirelessly connected to a base station, the SafeSite System allows law enforcement officials to rapidly deploy and set up perimeter gas sensing sentinels that continuously monitor the air for toxic gases at large public events, in subways or at federal facilities, and continuously report their status to incident command. • Flame detectors and open-path infrared gas detectors. Our line of flame and combustible gas detectors is used for plant-wide monitoring of toxic gas concentrations and for detecting the presence of flames. These systems use infrared optics to detect potentially hazardous conditions across distances as far as 120 meters, making them suitable for use in such places as offshore oil rigs, storage vessels, refineries, pipelines, and ventilation ducts. First used in the oil and gas industry, our systems currently have broad applications in petrochemical facilities, the transportation industry, and in pharmaceutical production. 4 Thermal imaging cameras. Our hand-held infrared thermal imaging cameras, or TICs, are used in the global fire service market. TICs detect sources of heat in order to locate downed firefighters and other people trapped inside burning or smoke-filled structures. TICs can also be used to identify “hot spots.” Our Evolution® 5200 and Evolution 5200 HD2 Thermal Imaging Cameras, combine the functionality and durability required by the fire service with features and performance capabilities not found in other small format TICs. The recently-introduced Evolution 5600 Thermal Imaging Camera provides high resolution and an extended high sensitivity operating range in a rugged, user-friendly and affordable design. Head, eye, face, and hearing protection. Head, eye, face, and hearing protection is used in work environments where hazards present dangers such as dust, flying particles, metal fragments, chemicals, extreme glare, optical radiation, and items dropped from above. • • Industrial hard hats. Our broad line of hard hats include full-brim hats and traditional hard hats, available in custom colors and with custom logos. These hard hats are used by plant, steel and construction workers, miners and welders. Fire helmets. Our fire service products include leather, traditional, modern, and specialty helmets designed to satisfy the preferences of firefighters across geographic regions. Our CairnsHELMET is the number one helmet in the North American fire service market based on 2007 sales. Similarly, our Gallet firefighting helmet has a number one market position in Europe based on 2007 sales. • Military helmets and communication systems. The Advanced Combat Helmet, or ACH, is used by the military for ballistic head protection. The ACH was originally designed for the Special Forces of the U.S. military and has now been designated as the “basis of issue” by the U.S. Army. In recent years military forces in Iraq and Afghanistan have trusted MSA’s battle-tested ACH and related Modular Integrated Communication Headset, or MICH™. MICH is a light weight and comfortable communication system that provides superior hearing protection as well as clear radio/intercom communications. • Eye, face, and hearing protection. We manufacture and sell a broad line of hearing protection products, non-prescription protective eyewear, and face shields, used in a variety of industries. Body protection. • • Fall protection. Our broad line of fall protection equipment includes confined space equipment, harnesses/fall arrest equipment, lanyards, and lifelines. Ballistic body armor. Our MSA Paraclete Releasable Assault Vest and Releasable Modular Vest are used primarily by the U.S. military, including Special Forces Units. Our ForceField™ Body Armor line features concealable ballistic vests and over-the-uniform tactical vests designed primarily for law enforcement applications. Customers—Our customers generally fall into three categories: industrial and military end-users, distributors, and retail consumers. In North America, we make nearly all of our non-military sales through our distributors. In our European and International segments, we make our sales through both indirect and direct sales channels. Our U.S. military customers, which are comprised of multiple U.S. government entities, including the Department of Defense, accounted for approximately 8% of our 2007 sales. The year-end backlog of orders under contracts with U.S. government agencies was $35.1 million in 2007, $33.1 million in 2006, and $57.9 million in 2005. 5 Industrial and military end-users—Examples of the primary industrial and military end-users of our core products are listed below: Products Respiratory Protection Gas Detection Head, Eye and Face, and Hearing Protection Thermal Imaging Cameras Primary End-Users First Responders; General Industry Workers; Military Personnel Oil, Gas, Petrochemical and Chemical Workers; First Responders; Hazmat, and Confined Space Workers Construction Workers and Contractors; First Responders; General Industry Workers; Military Personnel First Responders Sales and Distribution—Our sales and distribution team consists of distinct marketing, field sales and customer service organizations for our three geographic segments: North America, Europe, and International. We believe our sales and distribution team, totaling over 400 dedicated associates, is the largest in our industry. In most geographic areas, our field sales organizations work jointly with select distributors to call on end-users, educating them about hazards, exposure limits, safety requirements, and product applications, as well as specific performance requirements of our products. In our International segment and Eastern Europe where distributors are not well established, our sales associates work with and sell directly to end-users. Our development of relationships with end-users is critical to increasing the overall demand for our products. The in-depth customer training and education provided by our sales associates to our customers are critical to ensure proper use of many of our products, such as SCBAs and gas detection instruments. As a result of our sales associates working closely with end-users, they gain valuable insight into customers’ preferences and needs. To better serve our customers and to ensure that our sales associates are among the most knowledgeable and professional in the industry, we place significant emphasis on training our sales associates with respect to product application, industry standards and regulations, sales skills and sales force automation. We believe our sales and distribution strategy allows us to deliver a customer value proposition that differentiates our products and services from those of our competitors, resulting in increased customer loyalty and demand. In areas where we use indirect selling, we promote, distribute, and service our products to general industry through select authorized national, regional, and local distributors. Some of our key distributors include Airgas, W.W. Grainger Inc., Fisher Safety, and Hagemeyer. In North America, we distribute fire service products primarily through specially trained local and regional distributors who provide advanced training and service capabilities to volunteer and paid municipal fire departments. In our European and International segments, we primarily sell to and service the fire service market directly. Because of our broad and diverse product line and our desire to reach as many markets and market segments as possible, we have over 4,000 authorized distributor locations worldwide. We market consumer products under the MSA Safety Works brand through a dedicated sales and marketing force. We serve the retail consumer through various channels, including distributors, such as Orgill Bros., hardware and equipment rental outlets, such as United Rentals, and retail chains, such as The Home Depot and TrueValue. Competition—We believe the worldwide personal protection equipment market, including the sophisticated safety products market in which we compete, generates annual sales in excess of $13 billion. The industry supplying this market is broad and highly fragmented with few participants able to offer a comprehensive line of safety products. Generally, global demand for safety products has been stable or growing because purchases of these products are non-discretionary since they protect workers in hazardous and life-threatening work environments and because their use is often mandated by government and industry regulations. Moreover, safety products industry revenues reflect the need to consistently replace many safety products that have limited life spans due to normal wear-and-tear or because they are one-time use products by design. 6 The safety products market is highly competitive, with participants ranging in size from small companies focusing on a single type of personal protection equipment to a few large multinational corporations which manufacture and supply many types of sophisticated safety products. Our main competitors vary by region and product. We believe that participants in this industry compete primarily on the basis of product characteristics (such as functional performance, agency approvals, design and style), price, brand name recognition and service. We believe we compete favorably within each of our operating segments as a result of our high quality and cost-efficient product offering and strong brand trust and recognition. Research and Development—To maintain our position at the forefront of safety equipment technology, we operate three sophisticated research and development facilities. We believe our dedication and commitment to innovation and research and development allow us to produce innovative sophisticated safety products that are often first to market and exceed industry standards. In 2007, 2006, and 2005, on a global basis, we spent approximately $30.2 million, $26.0 million, and $21.9 million, respectively, on research and development. Our engineering groups operate primarily in the United States and Germany, and to a lesser extent in France and Sweden. Our global product development teams include cross-geographic and cross-functional members from various areas throughout the company, including research and development, marketing, sales, operations, and quality management. These teams are responsible for setting product line strategy based on their understanding of the markets and the technologies, opportunities and challenges they foresee in each product area. We believe our team-based, cross-geographic and cross-functional approach to new product development is a source of competitive advantage. Our approach to the new product development process allows us to tailor our product offerings and product line strategies to satisfy distinct customer preferences and industry regulations that vary across our three geographic segments. We believe another important aspect of our approach to new product development is that our engineers and technical associates work closely with the safety industry’s leading standards-setting groups and trade associations, such as the National Institute for Occupational Safety and Health, or NIOSH, and the National Fire Protection Association, or NFPA, to develop industry product requirements and standards and anticipate their impact on our product lines. For example, nearly every consensus standard-setting body around the world that impacts our product lines has one of our key managers as a voting member. Key members of our management team understand the impact that these standard-setting organizations have on our new product development pipeline and devote time and attention to anticipating a new standard’s impact on our net sales and operating results. Because of our technological sophistication, commitment to and membership on global standard-setting bodies, resource dedication to research and development and unique approach to the new product development process, we believe we are well-positioned to anticipate and adapt to the needs of changing product standards and gain the approvals and certifications necessary to meet new government and multinational product regulations. Patents and Intellectual Property—We own and have obtained licenses to significant intellectual property, including a number of domestic and foreign patents, patent applications and trademarks related to our products, processes and business. Although our intellectual property plays an important role in maintaining our competitive position in a number of markets that we serve, no single patent, or patent application, trademark or license is, in our opinion, of such value to us that our business would be materially affected by the expiration or termination thereof, other than the “MSA” trademark. Our patents expire at various times in the future not exceeding 20 years. Our general policy is to apply for patents on an ongoing basis in the United States and other countries, as appropriate, to perfect our patent development. In addition to our patents, we have also developed or acquired a substantial body of manufacturing know-how that we believe provides a significant competitive advantage over our competitors. Raw Materials and Suppliers—Nearly all components of our products are formulated, machined, tooled, or molded in-house from raw materials. For example, we rely on integrated manufacturing capabilities for breathing apparatus, gas masks, ballistic helmets, hard hats, and circuit boards. The primary raw materials that we source from third parties include rubber, chemical filter media, eye and face protective lenses, air cylinders, certain metals, electronic components, and ballistic resistant and non-ballistic fabrics. We purchase these materials both 7 domestically and internationally, and we believe our supply sources are both well established and reliable. We have close vendor relationship programs with the majority of our key raw material suppliers. Although we generally do not have long-term supply contracts, we have not experienced any significant problems in obtaining adequate raw materials. Associates—At December 31, 2007, we had approximately 5,100 associates, approximately 2,800 of whom were employed by our European and International segments. None of our U.S. associates are subject to the provisions of a collective bargaining agreement. Some of our associates outside the United States are members of unions. We have not experienced a work stoppage in over 10 years and believe our relations with our associates are good. Available Information—We post the following filings on the Investor Relations page on our Web site at www.msanet.com as soon as reasonably practicable after they have been electronically filed with or furnished to the Securities and Exchange Commission: our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such filings on our Investor Relations Web page are available to be viewed on this page free of charge. Information contained on our Web site is not part of this annual report on Form 10-K or our other filings with the Securities and Exchange Commission. Item 1A. Risk Factors A reduction in the spending patterns of government agencies could materially and adversely affect our net sales, earnings and cash flow. The demand for our products sold to the fire service market, the homeland security market, and to U.S. government agencies, including the Department of Defense, is, in large part, driven by available government funding. For example, the level of government funding in these areas increased significantly after the attacks of September 11, 2001, fueling the demand for many of our products such as SCBAs, gas masks, and Advanced Combat Helmets, and declined in 2005 and 2006, as government funding priorities changed. Approximately 8% of our net sales for the year ended December 31, 2007 were made directly to U.S. military customers. Government budgets are set annually and we cannot assure you that government funding will be sustained at the same level in the future. A significant reduction in available government funding in the future could materially and adversely affect our net sales, earnings and cash flow. The markets in which we compete are highly competitive, and some of our competitors have greater financial and other resources than we do. The competitive pressures faced by us could materially and adversely affect our business, results of operations and financial condition. The safety products market is highly competitive, with participants ranging in size from small companies focusing on single types of safety products, to large multinational corporations that manufacture and supply many types of safety products. Our main competitors vary by region and product. We believe that participants in this industry compete primarily on the basis of product characteristics (such as functional performance, agency approvals, design and style), price, brand name trust and recognition, and customer service. Some of our competitors have greater financial and other resources than we do and our cash flows from operations could be adversely affected by competitors’ new product innovations, technological advances made to competing products and pricing changes made by us in response to competition from existing or new competitors. We may not be able to compete successfully against current and future competitors and the competitive pressures faced by us could materially and adversely affect our business, results of operations and financial condition. 8 If we fail to introduce successful new products or extend our existing product lines, we may lose our market position and our financial performance may be materially and adversely affected. In the safety products market, there are frequent introductions of new products and product line extensions. If we are unable to identify emerging consumer and technological trends, maintain and improve the competitiveness of our products and introduce new products, we may lose our market position, which could have a materially adverse effect on our business, financial condition and results of operations. Although we continue to invest significant resources in research and development and market research, continued product development and marketing efforts are subject to the risks inherent in the development of new products and product line extensions, including development delays, the failure of new products and product line extensions to achieve anticipated levels of market acceptance, and the cost of failed product introductions. Product liability claims and our ability to collect related insurance receivables could have a materially adverse effect on our business, operating results, and financial condition. We face an inherent business risk of exposure to product liability claims arising from the alleged failure of our products to prevent the types of personal injury or death against which they are designed to protect. Although we have not experienced any material uninsured losses due to product liability claims, it is possible that we could experience material losses in the future. In the event any of our products prove to be defective, we could be required to recall or redesign such products. In addition, we may voluntarily recall or redesign certain products that could potentially be harmful to end users. A successful claim brought against us in excess of available insurance coverage, or any claim or product recall that results in significant expense or adverse publicity against us, could have a materially adverse effect on our business, operating results, and financial condition. In the normal course of business, we make payments to settle product liability claims and for related legal fees and record receivables for the amounts covered by insurance. Various factors could affect the timing and amount of recovery of insurance receivables, including: the outcome of negotiations with insurers, legal proceedings with respect to product liability insurance coverage, and the extent to which insurers may become insolvent in the future. Failure to recover amounts due from our insurance carriers could have a materially adverse effect on our business, operating results, and financial condition. Our ability to market and sell our products is subject to existing regulations and standards. Changes in such regulations and standards or our failure to comply with them could materially and adversely affect our results of operations. Most of our products are required to meet performance and test standards designed to protect the health and safety of people around the world. Our inability to comply with these standards may materially and adversely affect our results of operations. Changes in regulations could reduce the demand for our products or require us to reengineer our products, thereby creating opportunities for our competitors. Regulatory approvals for our products may be delayed or denied for a variety of reasons that are outside of our control. Additionally, market anticipation of significant new standards, such as the National Fire Protection Association (NFPA) standard for breathing apparatus which was recently promulgated and became effective August 31, 2007, can cause customers to accelerate or delay buying decisions. We have significant international operations, and we are subject to the risks of doing business in foreign countries. We have business operations in over 30 foreign countries. In 2007, approximately 50% of our net sales were made by operations located outside the United States. Our international operations are subject to various political, economic, and other risks and uncertainties, which could adversely affect our business. These risks include the following: • • unexpected changes in regulatory requirements; currency exchange rate fluctuations; 9 • • • • • • • • • • • changes in trade policy or tariff regulations; changes in tax laws and regulations; intellectual property protection difficulties; difficulty in collecting accounts receivable; complications in complying with a variety of foreign laws and regulations, some of which conflict with U.S. laws; trade protection measures and price controls; trade sanctions and embargos; nationalization and expropriation; increased international instability or potential instability of foreign governments; the need to take extra security precautions for our international operations; and costs and difficulties in managing culturally and geographically diverse international operations. Any one or more of these risks could have a negative impact on the success of our international operations, and thereby materially and adversely affect our business as a whole. Our future results are subject to availability of, and fluctuations in the costs of, purchased components and materials due to market demand, currency exchange risks, material shortages, and other factors. We depend on various components and materials to manufacture our products. Although we have not experienced any difficulty in obtaining components and materials, it is possible that any of our supplier relationships could be terminated. Any sustained interruption in our receipt of adequate supplies could have a materially adverse effect on our business, results of operations and financial condition. We cannot assure you that we will be able to successfully manage price fluctuations due to market demand, currency risks or material shortages, or that future price fluctuations will not have a materially adverse effect on our business, results of operations and financial condition. If we lose any of our key personnel or are unable to attract, train and retain qualified personnel, our ability to manage our business and continue our growth would be negatively impacted. Our success depends in large part on the continued contributions of our key management, engineering, and sales and marketing personnel, many of whom are highly skilled and would be difficult to replace. Our success also depends on the abilities of new personnel to function effectively, both individually and as a group. If we are unable to attract, effectively integrate and retain management, engineering or sales and marketing personnel, then the execution of our growth strategy and our ability to react to changing market requirements may be impeded, and our business could suffer as a result. Competition for personnel is intense, and we cannot assure you that we will be successful in attracting and retaining qualified personnel. In addition, we do not currently maintain key person life insurance. We are subject to various environmental laws and any violation of these laws could adversely affect our results of operations. We are subject to federal, state, and local laws, regulations and ordinances relating to the protection of the environment, including those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, and the maintenance of a safe workplace. These laws impose penalties for noncompliance and liability for response costs and certain damages resulting from past and current spills, disposals, or other releases of hazardous materials. We could incur substantial costs as a result of noncompliance with or liability for cleanup 10 pursuant to these environmental laws. We have identified several known and potential environmental liabilities, which we do not believe are material. Environmental laws have changed rapidly in recent years, and we may be subject to more stringent environmental laws in the future. If more stringent environmental laws are enacted, these future laws could have a materially adverse effect on our results of operations. Our inability to successfully identify, consummate and integrate future acquisitions, or to realize anticipated cost savings and other benefits could adversely affect our business. One of our key operating strategies is to selectively pursue acquisitions. Any future acquisitions will depend on our ability to identify suitable acquisition candidates and successfully consummate such acquisitions. Acquisitions involve a number of risks including: • • • • • • failure of the acquired businesses to achieve the results we expect; diversion of our management’s attention from operational matters; our inability to retain key personnel of the acquired businesses; risks associated with unanticipated events or liabilities; potential disruption of our existing business; and customer dissatisfaction or performance problems at the acquired businesses. If we are unable to integrate or successfully manage businesses that we may acquire in the future, we may not realize anticipated cost savings, improved manufacturing efficiencies and increased revenue, which may result in materially adverse short- and long-term effects on our operating results, financial condition and liquidity. Even if we are able to integrate the operations of our acquired businesses into our operations, we may not realize the full benefits of the cost savings, revenue enhancements or other benefits that we may have expected at the time of acquisition. In addition, even if we achieve the expected benefits, we may not be able to achieve them within the anticipated time frame, and such benefits may be offset by costs incurred in integrating the companies and increases in other expenses. Because we derive a significant portion of our sales from the operations of our foreign subsidiaries, future exchange rate fluctuations may adversely affect our results of operations and financial condition, and may affect the comparability of our results between financial periods. For the year ended December 31, 2007, our operations in our European and International segments each accounted for approximately 24% of our net sales. The results of our foreign operations are reported in the local currency and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements. The exchange rates between some of these currencies and the U.S. dollar have fluctuated significantly in recent years, and may continue to do so in the future. In addition, because our financial statements are stated in U.S. dollars, such fluctuations may affect our results of operations and financial position, and may affect the comparability of our results between financial periods. We cannot assure you that we will be able to effectively manage our exchange rate risks or that any volatility in currency exchange rates will not have a materially adverse effect on our results of operations and financial condition. Our continued success depends on our ability to protect our intellectual property. If we are unable to protect our intellectual property, our net sales could be materially and adversely affected. Our success depends, in part, on our ability to obtain and enforce patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. We have been issued patents and have registered trademarks with respect to many of our products, but our competitors could independently develop similar or superior products or technologies, duplicate any of our designs, trademarks, processes or other intellectual property or design around any processes or designs on which we have or may obtain patents or trademark protection. In addition, it is possible that third parties may have, or will acquire, licenses for patents or 11 trademarks that we may use or desire to use, so that we may need to acquire licenses to, or to contest the validity of, such patents or trademarks of third parties. Such licenses may not be made available to us on acceptable terms, if at all, and we may not prevail in contesting the validity of third party rights. In addition to patent and trademark protection, we also protect trade secrets, know-how, and other confidential information against unauthorized use by others or disclosure by persons who have access to them, such as our employees, through contractual arrangements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our technologies, our results of operations and financial condition could be materially and adversely affected. Item 1B. Unresolved Staff Comments None. 12 Item 2. Properties Our principal executive offices are located at 121 Gamma Drive, RIDC Industrial Park, O’Hara Township, Pittsburgh, Pennsylvania 15238 in a 93,000 square-foot building owned by us. We own or lease our primary facilities located in seven states in the United States and in a number of other countries. We believe that all of our facilities, including the manufacturing facilities, are in good repair and in suitable condition for the purposes for which they are used. The following table sets forth a list of our primary facilities: Location Function Manufacturing Office, Research and Development, and Manufacturing Manufacturing Manufacturing Manufacturing Office Distribution Office, Manufacturing and Distribution Research and Development Manufacturing Distribution Manufacturing Office, Research and Development, and Manufacturing Distribution Square Feet Owned or Leased 295,000 212,000 194,000 144,000 107,000 93,000 81,000 77,000 68,000 41,000 15,000 12,000 7,000 5,000 Owned Owned Leased Leased Owned Owned Leased Leased Owned Leased Leased Leased Leased Leased North America Murrysville, PA Cranberry Twp., PA Evans City, PA St. Pauls, NC Jacksonville, NC Pittsburgh, PA Pittsburgh, PA Queretaro, Mexico Cranberry Twp., PA Englewood, CO Englewood, CO Newport, VT Bowling Green, KY Toronto, Canada Europe Berlin, Germany Office, Research and Development, Manufacturing, and 340,000 Leased Distribution Chatillon sur Chalaronne, France Office, Research and Development, Manufacturing, and 94,000 Owned Distribution Glasgow, Scotland Milan, Italy Mohammedia, Morocco Vernamo, Sweden Office and Manufacturing Office, Research and Development, and Distribution Manufacturing Office, Research and Development, Manufacturing, and 25,000 25,000 24,000 17,000 Leased Owned Owned Leased Glasgow, Scotland Office and Distribution 6,000 Leased Distribution International Wuxi, China Office, Research and Development, Manufacturing, and 92,000 Owned Distribution Johannesburg, South Africa Sao Paulo, Brazil Office, Manufacturing, and Distribution Office, Research and Development, Manufacturing, and 89,000 60,000 Leased Owned Distribution Sydney, Australia Office, Research and Development, Manufacturing, and 57,000 Owned Lima, Peru Rajarhat, India Buenos Aires, Argentina Distribution Office and Distribution Office and Distribution Office and Distribution 34,000 10,000 9,000 Owned Leased Owned 13 Item 3. Legal Proceedings We are subject to federal, state, and local laws, regulations and ordinances relating to the protection of the environment, including those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, and the maintenance of a safe workplace. There are no current or expected legal proceedings or expenditures with respect to environmental matters that would materially affect our operations. Various lawsuits and claims arising in the normal course of business are pending against us. These lawsuits are primarily product liability claims. We are presently named as a defendant in approximately 2,600 lawsuits primarily involving respiratory protection products allegedly manufactured and sold by us. Collectively, these lawsuits represent a total of approximately 16,500 plaintiffs. Approximately 90% of these lawsuits involve plaintiffs alleging they suffer from silicosis, with the remainder alleging they suffer from other or combined injuries, including asbestosis. These lawsuits typically allege that these conditions resulted in part from respirators that were negligently designed or manufactured by us. Consistent with the experience of other companies involved in silica and asbestos-related litigation, in recent years there has been an increase in the number of asserted claims that could potentially involve us. We cannot determine our potential maximum liability for such claims, in part because the defendants in these lawsuits are often numerous, and the claims generally do not specify the amount of damages sought. With some limited exceptions, we maintain insurance against product liability claims. We also maintain 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. We evaluate our exposures on an ongoing basis and make adjustments to the reserve as appropriate. Based on information currently available, we believe that the disposition of matters that are pending will not have a materially adverse effect on our financial condition. In the normal course of business, we make payments to settle product liability claims and for related legal fees and record receivables for the amounts covered by insurance. Various factors could affect the timing and amount of recovery of insurance receivables, including: the outcome of negotiations with insurers, legal proceedings with respect to product liability insurance coverage, and the extent to which insurers may become insolvent in the future. We are currently involved in coverage litigation with Century Indemnity Company (Century). Century filed a lawsuit in the Superior Court of New Jersey seeking a declaration of Century’s obligations with respect to certain asbestos, silica and other claims under five insurance policies issued to us by Century. The New Jersey Superior Court issued an order granting our motion to dismiss this case on jurisdictional grounds. Century appealed that order and on February 26, 2008, the Appellate Division of the Superior Court of New Jersey affirmed the decision of the trial court dismissing the case. It is unknown whether Century will seek to appeal that decision. We have sued Century in the Court of Common Pleas of Allegheny County, Pennsylvania, alleging that Century breached the five insurance policies by failing to pay amounts owing to us. The Pennsylvania court has denied a motion by Century to stay or dismiss the Pennsylvania lawsuit in favor of the New Jersey action and the Pennsylvania action is proceeding. We believe that Century’s refusal to indemnify us under the policies is wholly contrary to Pennsylvania law and we are vigorously pursuing the legal actions necessary to collect all amounts. The case is currently in discovery. We regularly evaluate the collectibility of these receivables and record the amounts that we conclude are probable of collection based on our analysis of our various policies, pertinent case law interpreting comparable policies and our experience with similar claims. The net balance of receivables from insurance carriers was $39.1 million and $18.4 million at December 31, 2007 and 2006, respectively. 14 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of our security holders during the fourth quarter of 2007. Executive Officers of the Registrant The following sets forth the names and ages of our executive officers as of February 29, 2008, indicating all positions held during the past five years: Name Age Title John T. Ryan III . . . . . . . . . . . . . . . . 64 Chairman of the Board of Directors and Chief Executive Officer since October 1991. William M. Lambert(a) . . . . . . . . . . . . 49 President and Chief Operating Officer since March 2007. Joseph A. Bigler(b) . . . . . . . . . . . . . . . 58 Vice President and President, MSA North America since May 2007. Kerry M. Bove(c) . . . . . . . . . . . . . . . . 49 Vice President, Global Operational Excellence since May 2007. Rob Cañizares(d) . . . . . . . . . . . . . . . . 58 Executive Vice President and President, MSA International since May 2007. Ronald N. Herring, Jr.(e) . . . . . . . . . . 47 Vice President, Global Product Leadership since May 2007. Douglas K. McClaine(f) . . . . . . . . . . . 50 Vice President, Secretary and General Counsel since May 2005. Stephen C. Plut(g) . . . . . . . . . . . . . . . . 48 Vice President and Chief Information Officer since May 2005. Paul R. Uhler(h) . . . . . . . . . . . . . . . . . 49 Vice President, Global Human Resources since May 2007. Dennis L. Zeitler(i) . . . . . . . . . . . . . . . 59 Senior Vice President, Chief Financial Officer and Treasurer since June 2007. (a) Prior to his present position, Mr. Lambert held the positions of Vice President and President, MSA North America; and Vice President and General Manager of the Safety Products Division. (b) Prior to his present position, Mr. Bigler was Vice President, primarily responsible for North American Sales and Distribution. (c) Prior to his present position, Mr. Bove was Vice President, primarily responsible for Global Manufacturing Operations and Materials Management. (d) Prior to his present position, Mr. Cañizares was Vice President and President, MSA International. (e) Prior to his present position, Mr. Herring held the positions of Vice President, primarily responsible for Global Marketing, Research and Engineering and Quality Assurance; and General Manager, Safety Products Division. (f) Prior to his present position, Mr. McClaine was Secretary and General Counsel. (g) Prior to his present position, Mr. Plut was Chief Information Officer. (h) Prior to his present position, Mr. Uhler held the positions of Vice President, primarily responsible for North American Human Resources and Corporate Communications; Director of Human Resources and Corporate Communications; and Manager of the Murrysville, PA plant. (i) Prior to his present position, Mr. Zeitler was Vice President, Chief Financial Officer and Treasurer. 15 PART II Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Our common stock is traded on the New York Stock Exchange under the symbol “MSA”. Stock price ranges and dividends declared were as follows: Year ended December 31, 2006 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year ended December 31, 2007 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price Range of Our Common Stock High Low Dividends $44.16 44.00 41.19 39.09 $43.71 44.49 60.64 56.94 $36.18 38.62 34.05 34.98 $35.98 39.67 41.13 42.84 $0.14 0.18 0.18 0.18 $0.18 0.22 0.22 0.22 On February 15, 2008, there were 428 registered holders of our shares of common stock. The information appearing in Part III below regarding common stock issuable under our equity compensation plans is incorporated herein by reference. Issuer Purchases of Equity Securities Period Total Number of Shares Purchased October 1 - October 31, 2007 . . . . . . . . . . . . . . . November 1 - November 30, 2007 . . . . . . . . . . . December 1 - December 31, 2007 . . . . . . . . . . . — 343 — Total Number Of Shares Purchased as Part of Publicly Announced Plans or Programs — — — Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 1,063,556 993,679 938,890 Average Price Paid Per Share — $46.46 — On November 2, 2005, the Board of Directors authorized the purchase of up to $100 million of common stock from time to time in private transactions and on the open market. The share purchase program has no expiration date. The maximum shares that may yet be purchased is calculated based on the dollars remaining under the program and the respective month-end closing share price. We do not have any other share purchase programs. The November 2007 shares purchases related to stock compensation transactions. 16 Comparison of Five-Year Cumulative Total Return Set forth below is a line graph and table comparing the cumulative total returns (assuming reinvestment of dividends) for the five years ended December 31, 2007 of $100 invested on December 31, 2002 in each of Mine Safety Appliances Company’s common stock, the Standard & Poor’s 500 Composite Index, and the Russell 2000 Index. Because our competitors are principally privately held concerns or subsidiaries or divisions of corporations engaged in multiple lines of business, we do not believe it feasible to construct a peer group comparison on an industry or line-of-business basis. The Russell 2000 Index, while including corporations both larger and smaller than MSA in terms of market capitalization, is composed of corporations with an average market capitalization similar to us. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN Among Mine Safety Appliances Company, The S&P 500 Index And The Russell 2000 Index $600 $500 $400 $300 $200 $100 $0 12/02 12/03 12/04 12/05 12/06 12/07 Mine Safety Appliances Company S&P 500 Russell 2000 2002 2003 2004 2005 2006 2007 Value at December 31 MSA . . . . . . . . . . . . . S&P 500 . . . . . . . . . . Russell 2000 . . . . . . . $100.00 100.00 100.00 $268.22 128.68 147.25 $518.92 142.69 174.24 $375.10 149.70 182.18 $386.39 173.34 215.64 $557.23 182.87 212.26 17 Item 6. Selected Financial Data The following selected financial data should be read in conjunction with our consolidated financial statements, including the respective notes thereto, as well as the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this annual report on Form 10-K. 2007 2006 2005 2004 2003 (In thousands, except as noted) Statement of Income Data: Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . Restructuring and other charges . . . . . . . . . . . . . . . . . . . Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency exchange (gains) losses . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . Net income from continuing operations . . . . . . . . . . . . Net income from discontinued operations . . . . . . . . . . . Gain on sale of discontinued operations—after tax . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per Share Data: Basic per common share continuing operations $ 990,252 $913,714 $907,912 $852,509 $696,473 1,724 427,632 174,701 20,897 — 4,564 (3,356) 24,835 48,924 2,685 13,658 65,267 17,396 616,203 241,138 30,196 4,142 9,913 (132) 38,600 67,588 — — 67,588 5,004 518,174 198,714 22,648 — 3,845 264 42,821 71,047 — — 71,047 5,384 568,410 215,663 26,037 6,981 6,228 3,139 28,722 63,918 — — 63,918 4,058 558,921 201,367 21,928 — 5,484 474 42,013 81,783 — — 81,783 (in dollars) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.89 $ 1.76 $ 2.24 $ 1.91 $ 1.33 Diluted per common share continuing operations (in dollars) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid per common share (in dollars) . . . . . . . Weighted average common shares 1.86 .84 1.73 .68 2.19 .52 1.86 .37 1.31 .26 outstanding—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,651 36,366 36,560 37,111 36,730 Balance Sheet Data: Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . Net property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common shareholders’ equity . . . . . . . . . . . . . . . . . . . . Equity per common share (in dollars) . . . . . . . . . . . . . . Note: Cost of products sold, selling, general and administrative expenses, and research and development expenses include noncash pension income. $ 287,861 $289,424 $246,367 $270,593 $207,216 2.8 120,560 643,885 59,915 306,867 8.31 2.4 130,445 1,016,306 103,726 460,604 12.92 2.9 116,209 725,357 45,834 381,470 10.44 3.3 120,651 898,620 112,541 436,926 12.13 3.1 123,716 734,110 54,463 376,679 10.09 Noncash pension income, pre-tax . . . . . . . . . . . . . . . . . $ 4,535 $ 4,147 $ 6,104 $ 7,188 $ 8,845 Working capital at December 31, 2003 excludes assets held for sale. 18 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the historical financial statements and other financial information included elsewhere in this annual report on Form 10-K. This discussion may contain forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions, and projections about our industry, business, and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this annual report entitled “Forward-Looking Statements” and “Risk Factors.” BUSINESS OVERVIEW We are a global leader in the development, manufacture and supply of sophisticated products that protect people’s health and safety. Sophisticated safety products typically integrate any combination of electronics, mechanical systems, and advanced materials to protect users against hazardous or life threatening situations. Our comprehensive lines of safety products are used by workers around the world in the fire service, homeland security, construction, and other industries, as well as the military. In recent years, we have concentrated on specific initiatives intended to help improve our competitive position and profitability, including: • • • • • • identifying and developing promising new markets; focusing on innovation and new product introductions; further strengthening relationships with major distributors; optimizing factory performance and driving operational excellence; positioning international business to capture significant growth opportunities; and pursuing strategic acquisitions. We tailor our product offerings and distribution strategy to satisfy distinct customer preferences that vary across geographic regions. We believe that we best serve these customer preferences by organizing our business into three geographic segments: North America, Europe, and International. Each segment includes a number of operating companies. In 2007, approximately 52%, 24%, and 24% of our net sales were made by our North American, European, and International segments, respectively. North America. Our largest manufacturing and research and development facilities are located in the United States. We serve our North American markets with sales and distribution functions in the U.S., Canada, and Mexico. Europe. Our European segment includes well-established companies in most Western European countries and more recently established operations in a number of Eastern European locations. Our largest European companies, based in Germany and France, develop, manufacture, and sell a wide variety of products. Operations in other European countries focus primarily on sales and distribution in their respective home country markets. While some of these companies may perform limited production, most of their sales are of products that are manufactured in our plants in Germany, France, and the U.S., or are purchased from third party vendors. International. Our International segment includes operating entities located in Abu Dhabi, Argentina, Australia, Brazil, Chile, China, Hong Kong, India, Indonesia, Japan, Malaysia, Peru, Singapore, South Africa, and Thailand, some of which are in developing regions of the world. Principal manufacturing operations are located in Australia, Brazil, South Africa, and China. These companies develop and manufacture products that are sold primarily in each company’s home country and regional markets. The other companies in the International segment focus primarily on sales and distribution in their respective home country markets. While 19 some of these companies may perform limited production, most of their sales are of products that are manufactured in our plants in the U.S., Germany, and France, or are purchased from third party vendors. We believe that our financial performance in recent years is the result of initiatives that have allowed us to anticipate and respond quickly to market requirements, particularly in the North American fire service, homeland security, construction and industrial markets, as well as the military, and reflects our ability to quickly bring to market products that comply with changing industry standards and to create new market demand with innovative products. ACQUISITIONS In December 2007, we acquired TecBOS GmbH of Halstenbek, Germany. TecBOS is a leading developer of software solutions for the fire service and other emergency planning organizations. We believe that this acquisition will strengthen our presence in the European fire service and emergency responder market by adding complementary software solutions used for on-site management and reporting of major incidents such as fires, traffic accidents, industrial plant emergencies and public events. In March 2007, we acquired Acceleron Technologies, LLC, a San Francisco-based developer of advanced technology suitable for personal locator devices. Acceleron has key patents and know-how in the area of compensated inertial navigation sensing as applied to personnel tracking. We believe that this technology is particularly well-suited for personal locator applications inside buildings where GPS is denied. The patented technology and know-how significantly increases data accuracy and minimizes the drift that can occur in conventional systems. We believe that the acquisition of this technology expedites the development of much needed and more reliable systems for use in first responder and soldier location applications. In March 2007, we acquired the outstanding shares of MSA (India) Limited that were previously held by our joint venture partner. As a wholly-owned subsidiary under MSA management, we believe that we are better positioned to take advantage of opportunities in the large and growing Indian market. In September 2006, we acquired Paraclete Armor and Equipment, Inc. of St. Pauls, North Carolina. Paraclete is an innovator and developer of advanced ballistic body armor used by military personnel, including Special Forces units of the U.S. military. We believe that the acquisition of Paraclete strategically positions us to provide a broad range of ballistic protective equipment to both the military and law enforcement markets. In January 2006, we took steps to ensure our compliance with South African Black Economic Empowerment (BEE) requirements by forming a new South African holding company in which Mineworkers Investment Company of Johannesburg, South Africa holds a 25.1% ownership interest. Compliance with BEE, a South African government program similar to Affirmative Action in the United States, is key to achieving meaningful growth in South Africa, particularly in the mining industry. At the same time, we acquired Select Personal Protective Equipment (Select PPE) of South Africa, an established supplier of multi-brand safety equipment and solutions to the South African mining industry. Our existing South African company, MSA Africa, and Select PPE are operating independently under the newly-established South African holding company. We believe that our new South African operating structure significantly improves our market presence and expertise in serving the mining industry and provides significant growth opportunities in the region. In September 2005, we acquired Microsensor Systems, Inc. of Bowling Green, Kentucky. Microsensor Systems is a world leader in surface acoustic wave-based chemical sensing technology used to detect chemical warfare agents. We believe the acquisition of Microsensor Systems significantly strengthens our position as a premier provider of leading edge detection technology, while expanding our product offerings in the homeland security, emergency responder, law enforcement, military and industrial markets. 20 RESULTS OF OPERATIONS Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 Net sales. Net sales for the year ended December 31, 2007 were $990.3 million, an increase of $76.6 million, or 8%, from $913.7 million for the year ended December 31, 2006. North America . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International 2007 2006 (In millions) $515.1 238.3 236.8 $503.4 219.2 191.1 Dollar Increase Percent Increase $11.7 19.1 45.7 2% 9 24 Net sales of our North American segment were $515.1 million for the year ended December 31, 2007, an increase of $11.7 million, or 2%, compared to $503.4 million for the year ended December 31, 2006. North American sales of ballistic vests, including those made by Paraclete, improved $7.1 million in 2007. Shipments of Advanced Combat Helmets and gas masks to the military were up $6.8 million and $6.1 million, respectively. Our sales of fall protection and head protection improved approximately $4.3 million and $6.5 million, respectively, on increased demand in construction and industrial markets. These sales improvements were partially offset by a $4.5 million decrease in instrument shipments, primarily due to lower sales of the SAFESITE monitoring system for the homeland security market, and a $15.7 million decrease in SCBA shipments, primarily due to lower demand from the U.S. fire service market as customers waited for the implementation of the new NFPA standards that all manufacturers had to meet by August 31, 2007. In early September, our next-generation breathing apparatus for firefighters, the FireHawk® M7 Air Mask, was the first device to be certified by the Safety Equipment Institute as compliant to both the new NFPA standards covering breathing apparatus performance and Personal Alert Systems (PASS) performance. Net sales by European operations were $238.3 million for the year ended December 31, 2007, an increase of $19.1 million, or 9%, from $219.2 million for the year ended December 31, 2006. The increase in European sales, when stated in U.S. dollars, includes favorable currency translation effects of $20.7 million, primarily due to a stronger euro in the current year. Local currency sales in Europe for the year ended December 31, 2007 were $1.6 million lower than in the prior year, primarily due to lower fourth quarter shipments in Eastern Europe. In 2006, European segment sales benefited from $8.8 million in shipments of chemical suits to the Slovakian Army and strong shipments of gas masks and self-rescuer canisters to the German Army. The absence of similar orders in 2007 was largely offset by sales improvements in most Western European markets. Net sales by International operations were $236.8 million for the year ended December 31, 2007, an increase of $45.7 million, or 24%, compared to $191.1 million for the year ended December 31, 2006. The increase reflects local currency sales growth in nearly all International segment markets. In South Africa, local currency sales were up $11.4 million, primarily due to growth in business with the mining industry. Local currency sales in China were up $5.9 million, including a large shipment of breathing apparatus to the Beijing Fire Bureau. Local currency sales in Latin America improved $8.5 million, with strong growth in all markets. The International segment sales increase includes a $4.8 million shipment of ballistic vests to the Iraq Joint Contracting Command. The increase in International segment sales, when stated in U.S. dollars, includes favorable currency translation effects of $7.5 million, primarily due to a stronger Australian dollar and Brazilian real, partially offset by a weaker South African rand. Cost of products sold. Cost of products sold was $616.2 million for the year ended December 31, 2007, an increase of $47.8 million, or 8%, from $568.4 million for the year ended December 31, 2006. Cost of products sold and operating expenses include net periodic pension benefit costs and credits. Pension credits, combined with pension costs, resulted in net pension credits for the year ended December 31, 2007 of $4.5 million, of which credits of approximately $5.4 million and $0.8 million were included in cost of products sold and research and development expenses, respectively, and charges of $1.7 million in selling, general and 21 administrative expenses. Excluding $4.8 million in special termination benefits, which were reported in restructuring and other charges, net pension credits for the year ended December 31, 2006 were $4.1 million, of which credits of approximately $4.6 million and $0.7 million were included in cost of products sold and research and development expenses, respectively, and charges of $1.2 million in selling, general and administrative expenses. The recognition of pension income in the years ended December 31, 2007 and 2006 is primarily the result of the exceptional investment performance of the MSA Non-Contributory Pension Plan for the Employees, or the MSA Pension Plan, over the past ten years. During that period, the investment performance of the MSA Pension Plan has ranked among the top 5% of all U.S. pension funds according to a comparison of fund performance as computed by Yanni Partners, an independent investment consulting firm. Future net pension credits can be volatile depending on the future performance 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 amortization levels of actuarial gains and losses, plan amendments 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, our net income would be adversely affected. Gross profit. Gross profit for the year ended December 31, 2007 was $374.0 million, an increase of $28.7 million, or 8%, from $345.3 million for the year ended December 31, 2006. The ratio of gross profit to sales was steady at 37.8% in both 2007 and 2006. Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 2007 were $241.1 million, an increase of $25.4 million, or 12%, from $215.7 million for the year ended December 31, 2006. Selling, general and administrative expenses were 24.4% of sales in 2007 compared to 23.6% of sales in 2006. Local currency selling, general and administrative expenses in the European and International segments were up $2.5 million and $9.9 million, respectively. These increases reflect our ongoing efforts to increase sales in European markets, as well as our continued expansion in China, Southeast Asia, and South Africa. North American segment selling, general and administrative expenses increased $3.8 million, including an increase of $2.4 million in insurance and product liability expense, which was based on the results of our annual actuarial study. Currency exchange effects increased selling, general and administrative expenses, when stated in U.S. dollars, by $7.5 million, primarily due to a stronger euro. Research and development expenses. Research and development expenses were $30.2 million for the year ended December 31, 2007, an increase of $4.2 million, or 16%, from $26.0 million for the year ended December 31, 2006. Research and development expenses were up $3.3 million in North America, reflecting our continued focus on developing innovative new products. The remainder of the increase occurred in the European segment and was primarily related to the translation effects of a stronger euro. Depreciation and amortization expense. Depreciation and amortization expense, which is reported in cost of sales, selling, general and administrative expenses, and research and development expenses, was $24.4 million for the year ended December 31, 2007, an increase of $2.3 million, or 10%, from $22.1 million for the year ended December 31, 2006. Amortization of intangible assets increased $0.9 million in the current year. Currency exchange effects increased depreciation and amortization expense, when stated in U.S. dollars, by $0.6 million, primarily due to a stronger euro. Restructuring and other charges. Restructuring and other charges were $4.1 million for the year ended December 31, 2007, compared to $7.0 million for the year ended December 31, 2006. For the year ended December 31, 2007, these charges were primarily related to reorganization activities. North American segment charges of $2.5 million were primarily severance costs and moving expenses associated with our Project Magellan initiative to move fire helmet manufacturing from Clifton, New Jersey to Jacksonville, 22 North Carolina and to move our Mexican manufacturing operations to a new factory in Queretaro, Mexico. The Clifton plant, which employed about 60 associates, was closed during the fourth quarter of 2007. We expect to complete the move to the new factory in Mexico during 2008. European segment charges of $1.1 million were primarily severance costs associated with the reorganization of our management team. International segment charges of $0.5 million relate to severance costs associated with the workforce reductions in Brazil and Australia. Charges during the year ended December 31, 2006 were primarily related to the North American segment Project Outlook reorganization plan that was completed that year. A significant portion of the charges were for a focused voluntary retirement incentive program (VRIP). In 2006 approximately 60 associates retired under the terms of the VRIP. Project Outlook charges for the year ended December 31, 2006, included $5.3 million for VRIP retirees, primarily non-cash special termination benefits, $0.7 million in severance costs related to other staff reductions, and $0.5 million to relocate various employee work groups within the new organizational structure. The remaining $0.5 million of charges in 2006 were for severance costs related to discontinuing manufacturing operations in Britain. Interest expense. Interest expense for the year ended December 31, 2007 was $9.9 million, an increase of $3.7 million, or 59%, from $6.2 million for the year ended December 31, 2006. The increase was primarily due to higher short-term debt during the current year. Currency exchange adjustments. During the year ended December 31, 2007, we recorded currency exchange gains of $0.1 million compared to losses of $3.1 million for the year ended December 31, 2006. Currency exchange losses during 2006 were primarily due to the weakening of the South African rand. Other income. Other income for the year ended December 31, 2007 was $17.4 million, an increase of $12.0 million, from $5.4 million in 2006. The increase was primarily due to the gains on two property sales that we made in 2007. In July 2007, we sold 83 acres of land in our Cranberry Woods office park to Wells Real Estate Investment Trust II—Cranberry Woods Development, Inc. for $14.6 million. This sale resulted in a pretax gain of $10.6 million ($6.5 million after-tax). In December 2007, we sold property in Clifton, New Jersey for a pretax gain of $1.9 million. We vacated the Clifton property during the fourth quarter as a result of the previously- discussed Project Magellan initiative that moved fire helmet manufacturing to Jacksonville, North Carolina. Income tax provision. Our effective tax rate for the year ended December 31, 2007 was 36.4% compared to 31.0% for the year end December 31, 2006. The provision for income taxes for the year ended December 31, 2007 includes one-time charges of $1.6 million to adjust our net deferred tax assets in Germany due to a reduction in the German statutory income tax rate and $1.3 million for valuation allowances on net operating loss carry-forward deferred tax assets recorded in prior years. In August 2007, the German statutory tax rate was reduced by approximately 9%. The lower rate became effective January 1, 2008. Our European segment results in 2008 and future years should benefit from this rate reduction. The provision for income taxes for the year ended December 31, 2006 included one-time benefits $1.2 million and of $0.8 million related to adjustments to prior year extra-territorial income exclusions and research and development credits, respectively. Excluding these one-time adjustments, the effective tax rate for the year ended December 31, 2007 was 33.6% compared to 33.2% for 2006. The effective tax rate, excluding the one-time adjustments discussed above, was lower than the statutory rate primarily due to the manufacturing deduction, research and development credits, and non-US income. We have not provided deferred U.S. income taxes on undistributed earnings of non-U.S. subsidiaries, which amounted to $156.4 million as of December 31, 2007. These earnings are considered to be reinvested for an indefinite period of time. It is not practicable to determine the deferred tax liability on these undistributed earnings. On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN48). As a result of the adoption of the FIN 48, we recognized a gross increase in the tax liability for unrecognized tax benefits of $5.7 million. Prior to the adoption 23 of FIN 48, we had recognized $1.4 million in unrecognized tax benefits. The gross increase in the tax liability upon the adoption of FIN 48 created additional tax benefits of $1.8 million, resulting in a net increase in the liability for unrecognized tax benefits of $3.9 million, which was accounted for as a reduction in retained earnings at January 1, 2007. These adjustments, if recognized in the provision for income taxes, would have increased our effective income tax rate. A reconciliation of the change in the tax liability for unrecognized tax benefits from January 1, 2007 to December 31, 2007 is as follows: Balance at January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions for tax positions related to the current year . . . . . . . . . . . . . . . . . . . Additions for tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (In thousands) $ 7,083 470 582 (2,407) Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,728 The total amount of unrecognized tax benefits, if recognized, would reduce our future effective tax rate. We have recognized tax benefits associated with these liabilities in the amount of $2.2 million and $1.8 million at December 31, 2007 and January 1, 2007, respectively. We recognize interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. As a result of the adoption of FIN 48, we recognized a $0.9 million increase in the liability for accrued interest and penalties related to uncertain tax positions which were also accounted for as a reduction of retained earnings at January 1, 2007. As a result of the settlements in the table above, we reversed $0.5 million of accrued interest and penalties related to uncertain tax positions during 2007. Our liability for accrued interest and penalties related to uncertain tax positions was $0.4 million at December 31, 2007. We do not expect that the total amount of the unrecognized tax benefit will significantly increase or decrease within 12 months of the reporting date. We file a U.S. federal income tax return along with various state and foreign income tax returns. Examinations of our federal returns have been completed through 2002. The Internal Revenue Service has notified us that an examination of our U.S. federal income tax returns for the years 2003 through 2006 will be conducted during 2008. We also file in various state and foreign jurisdictions that may be subject to tax audits after 2002. Net income. Net income for the year ended December 31, 2007 was $67.6 million, an increase of $3.7 million, or 6%, from net income for the year ended December 31, 2006 of $63.9 million. Basic earnings per share of common stock was $1.89 in 2007 compared to $1.76 in 2006. North American segment net income for the year ended December 31, 2007 was $48.1 million, an increase of $5.4 million, or 13%, from $42.7 million for the year ended December 31, 2006. The increase was primarily related to the previously-discussed gain on the sale of Cranberry Woods property. European segment net income for the year ended December 31, 2007 was $6.8 million, a decrease of $2.1 million, or 23%, from $8.9 million for the year ended December 31, 2006. The decrease was primarily related to the previously-discussed one-time charge of $1.6 million to adjust our net deferred tax assets in Germany due to a reduction in the German statutory income tax rate and severance costs of $0.8 million after-tax associated with the reorganization of our European management team. 24 International segment net income for the year ended December 31, 2007 was $14.4 million, an increase of $1.3 million, or 10%, from $13.1 million for the year ended December 31, 2006. The improvement in International segment net income was primarily related to the previously-discussed sales growth, partially offset by $1.3 million in income tax valuation allowances. Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 Net sales. Net sales for the year ended December 31, 2006 were $913.7 million, an increase of $5.8 million, or 1%, from $907.9 million for the year ended December 31, 2005. North America . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International 2006 2005 (In millions) $503.4 219.2 191.1 $566.5 180.5 160.9 Dollar Increase (Decrease) Percent Increase (Decrease) $(63.1) 38.7 30.2 (11)% 21 19 Net sales of the North American segment were $503.4 million for the year ended December 31, 2006, a decrease of $63.1 million, or 11%, compared to $566.5 million for the year ended December 31, 2005. Our shipments of Advanced Combat Helmets and communications systems to the military were approximately $48.3 million lower than in 2005, reflecting the completion of certain contracts. Gas mask sales were approximately $28.8 million lower in the year ended December 31, 2006, on lower shipments of military masks, as well as commercial masks to the homeland security market. Our 2006 sales of self-contained breathing apparatus and thermal imaging cameras were $11.1 million and $6.6 million lower, respectively, than in 2005 reflecting delays in the release of fire department funding made available through the U.S. Assistance to Firefighters Grant (AFG) program. The first grants under the 2006 AFG program were not announced until early October and less than half of the expected funds were released by year-end. In 2005, AFG grants were announced in August and were mostly completed by the end of the year. Our sales of instruments and head protection improved approximately $18.4 million and $7.5 million, respectively, on increased demand in construction and industrial markets. Sales of ballistic protection products, including those made by Paraclete, which we acquired in September 2006, were $7.0 million higher than in the year ended December 31, 2005. Net sales by European operations were $219.2 million for the year ended December 31, 2006, an increase of $38.7 million, or 21%, from $180.5 million for the year ended December 31, 2005. Local currency sales in Europe for the year ended December 31, 2006 were $35.9 million higher than in 2005. The increase reflects strong shipments of disposable respirators in Germany and France, gas masks and self-rescuer canisters to the German Army, chemical suits to the Slovakian Army, and breathing apparatus and fire helmets in Western European markets. The favorable effect of a stronger euro increased sales when stated in U.S. dollars by approximately $2.8 million. Net sales by International operations were $191.1 million for the year ended December 31, 2006, an increase of $30.2 million, or 19%, compared to $160.9 million for the year ended December 31, 2005. The sales increase was primarily in South Africa, where local currency sales were up $27.2 million, primarily from Select PPE, which we acquired in January 2006. Local currency sales were up approximately $5.8 million in our South American companies, reflecting improved economic conditions and focused sales initiatives. Our sales in the Middle East were approximately $3.6 million lower than in the year ended December 31, 2005. In 2005, our Middle East sales benefited from a large one-time breathing apparatus order. Currency exchange effects on International segment sales when stated in U.S. dollars were not significant. Cost of products sold. Cost of products sold was $568.4 million for the year ended December 31, 2006, an increase of $9.5 million, or 2%, from $558.9 million for the year ended December 31, 2005. 25 Cost of products sold and operating expenses include net periodic pension benefit costs and credits. Excluding $4.8 million in special termination benefits, which is reported in restructuring and other charges, net pension credits for the year ended December 31, 2006 were $4.1 million, of which credits of approximately $4.6 million and $0.7 million were included in cost of products sold and research and development expenses, respectively, and charges of $1.2 million in selling, general and administrative expenses. Net pension credits for the year ended December 31, 2005 were $6.1 million, of which credits of approximately $5.1 million, $0.1 million, and $0.9 million were included in cost of products sold, selling, general and administrative expenses, and research and development expenses, respectively. Gross profit. Gross profit for the year ended December 31, 2006 was $345.3 million, a decrease of $3.7 million, or 1%, from $349.0 million for the year ended December 31, 2005. The ratio of gross profit to sales decreased to 37.8% in 2006 compared to 38.4% in 2005. The lower gross profit ratio in 2006 was primarily related to lower margins in the International and European segments where sales grew significantly. Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 2006 were $215.7 million, an increase of $14.3 million, or 7%, from $201.4 million for the year ended December 31, 2005. Selling, general and administrative expenses were 23.6% of sales in 2006 compared to 22.2% of sales in 2005. The increase in selling, general and administrative expenses includes $2.3 million of incremental stock compensation expense in the North American segment, related to our adoption of FAS No. 123R, Share Based Payment, on January 1, 2006. FAS No. 123R requires the recognition of compensation expense for the estimated fair value of stock option grants and immediate expense recognition for restricted stock awards and stock options that are granted to participants who are eligible for retirement. The incremental stock compensation expense related to restricted stock awards and stock option grants made to officers, key management employees, and non-employee directors in 2006. The fair value of the 2006 stock option grants and restricted stock awards was $4.9 million, of which $2.8 million was expensed during the year ended December 31, 2006. Excluding the incremental stock compensation expense, selling, general and administrative expenses in North America were down $0.8 million, reflecting the absence of depreciation expense in 2006 on computer systems that were fully depreciated during the fourth quarter of 2005, partially offset by higher selling and administrative expenses. Local currency selling, general and administrative expenses in the European and International segments were up $12.2 million, including a $4.9 million increase in South Africa, related to the January 2006 acquisition of Select PPE. The remainder of the selling, general and administrative expense increase in the European and International segments was primarily due to additional selling expenses associated with generating and supporting higher sales and currency exchange rate effects, when stated in U.S. dollars. Research and development expenses. Research and development expenses were $26.0 million for the year ended December 31, 2006, an increase of $4.1 million, or 19%, from $21.9 million for the year ended December 31, 2005. Higher research and development expenses during the year ended December 31, 2006 occurred in North America. Depreciation and amortization expense. Depreciation and amortization expense, which is reported in cost of sales, selling, general and administrative expenses, and research and development expenses, was $22.1 million for the year ended December 31, 2006, a decrease of $2.2 million, or 9%, from $24.3 million for the year ended December 31, 2005. The primary reason for lower depreciation expense was the previously-discussed decrease in depreciation of computer systems. Restructuring and other charges. During the year ended December 31, 2006, we recorded charges of $7.0 million, primarily related to our Project Outlook reorganization in North America. Project Outlook was designed to ensure that our North American management teams, employees, product design processes, and operational functions are fully aligned with our strategic goals and the needs of our customers. The plan, which was completed during 2006, included the reorganization of business and support functions in our North American operations. A significant portion of the Project Outlook cost reductions were realized through a focused voluntary retirement incentive program (VRIP). In February 2006, approximately 60 employees retired 26 under the terms of the VRIP. Project Outlook charges included $5.3 million for VRIP retirees (including $4.8 million in non-cash special termination benefits), $0.7 million in severance costs related to additional staffing reductions, and $0.5 million related to the relocation of various employee work groups within the new organizational structure. The remaining $0.5 million of charges in 2006 was severance costs related to the discontinuation of manufacturing operations in Britain. Interest expense. Interest expense for the year ended December 31, 2006 was $6.2 million, an increase of $0.7 million, or 14%, from $5.5 million for the year ended December 31, 2005. The increase reflects higher borrowings during 2006. Currency exchange adjustments. During the year ended December 31, 2006, we recorded currency exchange losses of $3.1 million compared to losses of $0.5 million for the year ended December 31, 2005. The currency exchange losses during 2006 were primarily related to the South African rand. Currency exchange losses during the year ended December 31, 2005 were primarily due to the weakening of the euro. Other income. Other income for the year ended December 31, 2006 was $5.4 million, an increase of $1.3 million, or 33%, from $4.1 million in 2005. The increase was primarily due to gains on the sale of real property and higher interest income. Income tax provision. Our effective tax rate was 31.0% for the year ended December 31, 2006 compared to 33.9% for the year ended December 31, 2005. Our provision for income taxes for the year ended December 31, 2006 included one-time benefits of $1.2 million and $0.8 million related to adjustments to prior year extra- territorial income exclusions and research and development credits, respectively. Our 2005 provision for income taxes included a one-time benefit of approximately $2.0 million, primarily related to the release of previously- established reserves taken on research and development credits claimed for the years 1995 through 2001. Excluding these one-time adjustments, our effective tax rates for the years ended December 31, 2006 and 2005 were 33.2% and 35.6%, respectively. The effective tax rate in both years was lower than the statutory rate primarily due to research and development credits, extra-territorial income exclusions, and non-U.S. income. Compared to prior years, the 2006 effective tax rate also benefited from a more favorable state income tax apportionment. The American Jobs Creation Act of 2004 provided a limited opportunity through 2005 to repatriate the undistributed earnings of non-U.S. subsidiaries at a U.S. tax cost that could be lower than the normal tax cost on such distributions. During 2005, we repatriated $23.2 million of dividends, $21.0 million of which qualified under these provisions. The resulting impact of these dividends on our income tax expense was not material. Net income. Net income for the year ended December 31, 2006 was $63.9 million, a decrease of $17.9 million, or 22%, from net income for the year ended December 31, 2005 of $81.8 million. Basic earnings per share of common stock was $1.76 in 2006 compared to $2.24 in 2005. North American segment net income for the year ended December 31, 2006 was $42.7 million, a decrease of $21.4 million, or 34%, from $64.1 million for the year ended December 31, 2005. The decrease in North American net income was primarily due to lower sales. European segment net income for the year ended December 31, 2006 was $8.9 million, an increase of $2.6 million, or 40%, from $6.3 million for the year ended December 31, 2005. The increase was primarily related to the previously-discussed sales improvement. International segment net income for the year ended December 31, 2006 was $13.1 million, an increase of $1.4 million, or 12%, from $11.7 million for the year ended December 31, 2005. The improvement in International segment net income was primarily related to the previously-discussed sales growth. 27 LIQUIDITY AND CAPITAL RESOURCES Our main sources of liquidity are cash generated from operations and borrowing capacity. Our principal liquidity requirements are for working capital, capital expenditures, acquisitions, and principal and interest payments on outstanding indebtedness. Cash and cash equivalents increased $13.7 million during 2007 compared to increasing $16.5 million during 2006. Operating activities provided cash of $41.3 million in 2007 compared to providing $62.8 million in 2006. Lower cash provided by operations in 2007 was primarily due to working capital increases. Cash flow from operations during 2006 included $4.8 million in non-cash restructuring and other charges related to special termination benefit costs that were paid by our pension plan. Trade receivables were $205.7 million at December 31, 2007 compared to $174.6 million at December 31, 2006. LIFO inventories were $155.3 million at December 31, 2007 compared to $137.2 million at December 31, 2006. On a FIFO basis, inventories measured against cost of products sold turned 3.1 times in 2007 and 3.2 times in 2006. The increase in trade receivables reflects a higher proportion of government receivables. Higher inventory levels were mainly related to planned increases in conjunction with the move of Clifton, New Jersey manufacturing to Jacksonville, North Carolina. The increases in trade receivables and inventories also include currency translation effects of $7.3 million and $9.5 million, respectively. The $12.2 million increase in prepaids and other current assets during 2007 was primarily due to an increase in income taxes receivable. The increases in other non-current assets and liabilities during 2007 and 2006 of $21.6 million and $17.9 million, respectively, were due primarily to increases in receivables due from insurance carriers. Our investing activities used cash of $22.0 million in 2007, compared with using $50.1 million in 2006. During 2007 and 2006, we used cash of $32.9 million and $22.7 million, respectively, for property additions, primarily for production equipment. Property disposals provided cash of $18.4 million and $3.9 million during 2007 and 2006, respectively. During 2007, we received net cash of $13.9 million related to our sale of Cranberry Woods property. Acquisitions and other investing activities during 2007 and 2006 used cash of $7.5 million and $31.3 million, respectively. In 2007, we used cash of $5.7 million for the acquisition of Acceleron Technologies LLC, $1.1 million to acquire the outstanding shares of MSA (India) Limited that were previously held by our joint venture partner, and $0.7 million to acquire TecBOS GmbH. During 2006, we used cash of $7.9 million and $21.9 million to acquire Select PPE and Paraclete, respectively. Financing activities used cash of $9.8 million in 2007 compared to providing cash of $1.4 million in 2006. During 2007, we made dividend payments of $30.1 million compared to $24.8 million in 2006. Dividends paid on our common stock during 2007 (our 90th consecutive year of dividend payment) were $0.84 per share. Dividends paid on our common stock in 2006 and 2005 were $0.68 and $0.52, per share, respectively. During 2007 and 2006, we used cash of $25.5 million and $29.9 million, respectively, to purchase treasury shares. Our short-term borrowings increased $44.2 million during 2007. Proceeds from short-term borrowings were used primarily to finance treasury share purchases and acquisitions. In 2006, we borrowed $60.0 million in private placement debt, primarily to replace short-term borrowings. In April 2004, we entered into an eight year interest rate swap agreement. Under the terms of the agreement, we receive a fixed interest rate of 8.39% and pay a floating interest rate based on LIBOR. The notional amount of the swap is initially $20.0 million and declines $4.0 million per year beginning in 2008. The interest rate swap has been designated as a fair value hedge of a portion of our fixed rate 8.39% Senior Notes. The fair value of the interest rate swap at December 31, 2007, has been recorded as a liability of $0.2 million that is included in other noncurrent liabilities, with an offsetting reduction in the carrying value of the long-term debt. As a result of entering into the interest rate swap, we have increased our exposure to interest rate fluctuations. Differences between the fixed rate amounts received and the variable rate amount paid are recognized in interest expense on an ongoing basis. This rate difference resulted in an increase in interest expense of approximately $0.4 million and $0.3 million during 2007 and 2006, respectively, and a reduction in interest expense of $0.1 million during 2005. 28 Long-term debt, including the current portion at December 31, 2007 was $113.7 million, or 20% 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. Our long-term debt obligations at December 31, 2007 and 2006 were as follows: 2007 2006 (In thousands) U.S. Industrial development debt issues payable through 2022, 3.94% . . . . . . Senior Notes payable through 2012, 8.39% . . . . . . . . . . . . . . . . . . . . . . . Senior Notes payable through 2022, 5.41% . . . . . . . . . . . . . . . . . . . . . . . Notes payable through 2011, net of unamortized discount of $850 . . . . . $ 6,750 39,826 60,000 7,150 $ 6,750 39,089 60,000 8,694 International Various notes payable through 2008, 5.80% . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 113,734 10,008 103,726 38 114,571 2,030 112,541 Approximate maturities of these obligations are $10.0 million in 2008, $10.8 million in 2009, $12.0 million in 2010, $9.2 million in 2011, $7.8 million in 2012, and $63.9 million thereafter. Some debt agreements require us to maintain certain financial ratios and minimum net worth and contain restrictions on the total amount of debt. We were in compliance with our debt covenants as of December 31, 2007. Short-term bank lines of credit amounted to $82.9 million of which $38.2 million was unused at December 31, 2007. Generally, these short-term lines of credit are renewable annually. There are no significant commitment fees or compensating balance requirements. Short-term borrowings with banks, which exclude the current portion of long-term debt, were $44.7 million and $0.3 million at December 31, 2007 and 2006, respectively. The average month-end balance of total short-term borrowings during 2007 was $24.4 million. The maximum month-end balance of $46.9 million occurred at September 30, 2007. The weighted average interest rates of short-term borrowings at December 31, 2007 and 2006 were 6% and 5%, respectively. We believe our sources of liquidity currently available from our cash reserves on hand, cash flow from operations, and borrowing capacity are sufficient to meet our principal liquidity requirements for at least the next 12 months. CUMULATIVE TRANSLATION ADJUSTMENTS The year-end position of the U.S. dollar relative to international currencies resulted in a translation gain of $16.5 million being credited to the cumulative translation adjustments shareholders’ equity account in 2007, compared to a gain of $10.1 million in 2006 and a loss of $11.1 million in 2005. Translation gains in 2007 and 2006 were primarily related to the strengthening of the euro. Translation losses in 2005 were primarily due to a weakening of the euro. COMMITMENTS AND CONTINGENCIES We are obligated to make future payments under various contracts, including debt and lease agreements. Our significant cash obligations as of December 31, 2007 were as follows: Long-term debt* . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $113.7 30.7 144.4 $10.0 8.8 18.8 $10.8 7.2 18.0 (In millions) $12.0 6.2 18.2 $ 9.2 4.3 13.5 $ 7.8 2.3 10.1 $63.9 1.9 65.8 Total 2008 2009 2010 2011 2012 Thereafter 29 * Future interest payments are not included in the table. The significant obligations table does not include obligations to taxing authorities due to uncertainty surrounding the ultimate settlement of amounts and timing of these obligations. We expect to make net contributions of $2.4 million to our pension plans in 2008. We have purchase commitments for materials, supplies, services, and property, plant and equipment as part of our ordinary conduct of business. In September 2006, we acquired Paraclete Armor and Equipment, Inc. Under the terms of the asset purchase agreement, we issued a $10.0 million note payable to the former owners of Paraclete. The note is non-interest bearing and is payable in five annual installments of $2.0 million beginning September 1, 2007. We recorded the note at a fair value of $8.5 million at the time of issuance. The discount of $1.5 million is being amortized over the term of the note. During 2003, we sold our real property in Berlin, Germany for $25.7 million, resulting in a gain of $13.6 million. At the same time, we entered into an eight year agreement to lease back the portion of the property that we occupy. Under sale-leaseback accounting, $12.1 million of the gain was deferred and is being amortized over the term of the lease. In 2003, we entered into a lease agreement with BASF pertaining to that portion of the Callery Chemical site that is occupied by our Evans City, Pennsylvania manufacturing operations. The initial term of the lease was one year, with a renewal option for five successive one year periods. In September 2007, we exercised our fourth one year renewal option. Various lawsuits and claims arising in the normal course of business are pending against us. These lawsuits are primarily product liability claims. We are presently named as a defendant in approximately 2,600 lawsuits primarily involving respiratory protection products allegedly manufactured and sold by us. Collectively, these lawsuits represent a total of approximately 16,500 plaintiffs. Approximately 90% of these lawsuits involve plaintiffs alleging they suffer from silicosis, with the remainder alleging they suffer from other or combined injuries, including asbestosis. These lawsuits typically allege that these conditions resulted in part from respirators that were negligently designed or manufactured by us. Consistent with the experience of other companies involved in silica and asbestos-related litigation, in recent years there has been an increase in the number of asserted claims that could potentially involve us. We cannot determine our potential maximum liability for such claims, in part because the defendants in these lawsuits are often numerous, and the claims generally do not specify the amount of damages sought. With some limited exceptions, we maintain insurance against product liability claims. We also maintain 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. We evaluate our exposures on an ongoing basis and make adjustments to the reserve as appropriate. Based on information currently available, we believe that the disposition of matters that are pending will not have a materially adverse effect on our financial condition. In the normal course of business, we make payments to settle product liability claims and for related legal fees and record receivables for the amounts covered by insurance. Various factors could affect the timing and amount of recovery of insurance receivables, including: the outcome of negotiations with insurers, legal proceedings with respect to product liability insurance coverage, and the extent to which insurers may become insolvent in the future. We are currently involved in coverage litigation with Century Indemnity Company (Century). Century filed a lawsuit in the Superior Court of New Jersey seeking a declaration of Century’s obligations with respect to 30 certain asbestos, silica and other claims under five insurance policies issued to us by Century. The New Jersey Superior Court issued an order granting our motion to dismiss this case on jurisdictional grounds. Century appealed that order and on February 26, 2008, the Appellate Division of the Superior Court of New Jersey affirmed the decision of the trial court dismissing the case. It is unknown whether Century will seek to appeal that decision. We have sued Century in the Court of Common Pleas of Allegheny County, Pennsylvania, alleging that Century breached the five insurance policies by failing to pay amounts owing to us. The Pennsylvania court has denied a motion by Century to stay or dismiss the Pennsylvania lawsuit in favor of the New Jersey action and the Pennsylvania action is proceeding. We believe that Century’s refusal to indemnify us under the policies is wholly contrary to Pennsylvania law and we are vigorously pursuing the legal actions necessary to collect all amounts. The case is currently in discovery. We regularly evaluate the collectibility of these receivables and record the amounts that we conclude are probable of collection based on our analysis of our various policies, pertinent case law interpreting comparable policies and our experience with similar claims. The net balance of receivables from insurance carriers was $39.1 million and $18.4 million at December 31, 2007 and 2006, respectively. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. We evaluate these estimates and judgments on an on-going basis based on historical experience and various assumptions that we believe to be reasonable under the circumstances. However, different amounts could be reported if we had used different assumptions and in light of different facts and circumstances. Actual amounts could differ from the estimates and judgments reflected in our financial statements. We believe that the following are the more critical judgments and estimates used in preparation of our financial statements. Accounting for contingencies. We accrue for contingencies in accordance with FAS No. 5, Accounting for Contingencies, when we believe that it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies relate to uncertainties that require our judgment both in assessing whether or not a liability or loss has been incurred and in estimating the amount of the probable loss. Significant contingencies affecting our financial statements include pending or threatened litigation, including product liability claims, and product warranties. Product liability. We face an inherent business risk of exposure to product liability claims arising from the alleged failure of our products to prevent the types of personal injury or death against which they are designed to protect. We accrue for our estimates of the probable costs to be incurred in the resolution of product liability claims. These estimates are based on actuarial valuations, past experience, and our judgments regarding the probable outcome of pending and threatened claims. Due to uncertainty as to the ultimate outcome of pending and threatened claims, as well as the incidence of future claims, it is possible that future results could be materially affected by changes in our assumptions and estimates related to product liability matters, including our estimates of amounts receivable from insurance carriers. Our product liability expense averaged less than 1% of net sales during the three years ended December 31, 2007. Product warranties. We accrue for the estimated probable cost of product warranties at the time that sales are recognized. Our estimates are principally based on historical experience. We also accrue for our estimates of the probable costs of corrective action when significant product quality issues are identified. These estimates are principally based on our assumptions regarding the cost of corrective action and the probable number of units to be repaired or replaced. Our product warranty obligation is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Due to the uncertainty and potential volatility of these factors, it is possible that future results could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these matters. Our product warranty expense averaged approximately 1% of net sales during the three years ended December 31, 2007. 31 Income taxes. We account for income taxes in accordance with FAS No. 109, Accounting for Income Taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. FAS No. 109 also requires that deferred tax assets be reduced by valuation allowances if it is more likely than not that some portion of the deferred tax asset will not be realized. We record valuation allowances to reduce deferred tax assets to the amounts that we estimate are probable to be realized. When assessing the need for valuation allowances, we consider projected future taxable income and prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in our judgments about the realizability of deferred tax assets in future years, we would adjust the related valuation allowances in the period that the change in circumstances occurs, along with a corresponding charge or credit to income. We had valuation allowances of $1.8 million at December 31, 2007. There were no valuation allowances at December 31, 2006. We record an estimated income tax liability based on our best judgment of the amounts likely to be paid in the various tax jurisdictions in which we operate. We record tax benefits related to uncertain tax positions taken or expected to be taken on a tax return when such benefits meet a more likely than not threshold. We recognize interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The tax liabilities ultimately paid are dependent 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. Pensions and other postretirement benefits. We account for our pension and postretirement benefit plans as required under FAS No. 87, Employers’ Accounting for Pensions, FAS No. 106, Employers’ Accounting for Postretirement Benefits Other than Pensions, and FAS No. 158, Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans—an Amendment of FASB Statements No. 87, 88, 106, and 132(R). Accounting for the net periodic benefit costs and credits for these plans requires us to estimate the cost of benefits to be provided well into the future and to attribute these costs over the expected work life of the employees participating in these plans. These estimates require our judgment about discount rates used to determine these obligations, expected returns on plan assets, rates of future compensation increases, rates of increase in future health care costs, participant withdrawal and mortality rates, and participant retirement ages. Differences between our estimates and actual results may significantly affect the cost of our obligations under these plans and could cause net periodic benefit costs and credits to change materially from year-to-year. The discount rate assumptions used in determining projected benefit obligations are based on published long-term bond indices. We decreased the assumed discount rates in 2007, reflecting a decrease in long-term bond rates. Goodwill. As required by FAS No. 142, Goodwill and Other Intangible Assets, each year we evaluate for goodwill impairment by comparing the fair value of each of our reporting units with its carrying value. If carrying value exceeds fair value, then a possible impairment of goodwill exists and requires further evaluation. We estimate the fair value of our reporting units using a combination of discounted cash flow analysis and market capitalization based on historical and projected financial information. We apply our best judgment in assessing the reasonableness of the financial projections and other estimates used to determine the fair value of each reporting unit. RECENTLY ISSUED ACCOUNTING STANDARDS In September 2006, the FASB issued FAS No. 157, Fair Value Measurements. FAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements. FAS No. 157 is effective on January 1, 2008. Upon adoption, the provisions of FAS No. 157 are to be applied prospectively with limited exceptions. Relative to FAS No. 157, the FASB issued FASB Staff Positions (FSP) 157-1 and 157-2 and proposed 157-c. FSP 157-1 32 amends FAS No. 157 to exclude FAS No. 13, Accounting for Leases, and its related interpretive accounting pronouncements. FSP 157-2 delays the effective date of FAS No. 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-c clarifies the principles in FAS No. 157 on the fair value measurement of liabilities. Based upon pronouncements issued to date, we do not expect that the adoption of this statement will have a material effect on our consolidated results of operations or financial condition. In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. FAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value and report unrealized gains and losses on these instruments in earnings. FAS No. 159 is effective January 1, 2008. We do not expect that the adoption of this statement will have a material effect on our consolidated results of operations or financial condition. In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations, which replaces FAS No. 141, Business Combinations. FAS No. 141(R) changes a number of significant aspects of the application the acquisition method of accounting for business combinations. Under FAS No. 141(R), acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date will generally affect income tax expense. FAS No. 141(R) is effective on a prospective basis for business combinations with acquisition dates on or after the January 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. Adjustments to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of FAS No. 141(R) would also apply the provisions of FAS No. 141(R). We do not expect that the adoption of this statement, as it relates to past acquisitions, will have a material effect on our consolidated results of operations or financial condition. In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. FAS No. 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. It also amends certain ARB No. 51 consolidation procedures for consistency with the requirements of FAS No. 141(R) and expands disclosure requirements regarding the interests of the parent and its noncontrolling interest. FAS No. 160 is effective January 1, 2009. We do not expect that the adoption of this statement will have a material effect on our consolidated results of operations or financial condition. In December 2007, the Emerging Issues Task Force issued EITF No. 07-1, Accounting for Collaborative Arrangements. EITF No. 07-1 requires that transactions with third parties (i.e., revenue generated and costs incurred by the partners) should be reported in the appropriate line item in each company’s financial statement and includes enhanced disclosure requirements regarding the nature and purpose of the arrangement, rights and obligations under the arrangement, accounting policy, amount and income statement classification of collaboration transactions between the parties. EITF No. 07-1 is effective January 1, 2009 and shall be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. We do not expect that the adoption of this statement will have a material effect on our consolidated results of operations or financial condition. Item 7A. Quantitative and Qualitative Disclosures About 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. We are exposed to market risks related to currency exchange rates and interest rates. 33 Currency exchange rate sensitivity. We are subject to the effects of fluctuations in currency exchange rates on various transactions and on the translation of the reported financial position and operating results of our non-U.S. companies from local currencies to U.S. dollars. A hypothetical 10% strengthening or weakening of the U.S. dollar would increase or decrease our reported sales and net income for the year ended December 31, 2007 by approximately $47.5 million and $2.1 million, respectively. When appropriate, we may attempt to limit our transactional exposure to changes in currency exchange rates through contracts or other actions intended to reduce existing exposures by creating offsetting currency exposures. At December 31, 2007, contracts for the purpose of hedging cash flows were not significant. Interest rate sensitivity. We are exposed to changes in interest rates primarily as a result of borrowing and investing activities used to maintain liquidity and fund business operations. Because of the relatively short maturities of temporary investments and the variable rate nature of industrial development debt, these financial instruments are reported at carrying values which approximate fair values. We hold one interest rate swap agreement, which is used to hedge the fair market value on a portion of our 8.39% fixed rate long-term debt. At December 31, 2007, the swap agreement had a notional amount of $20.0 million and a fair market value in favor of the bank of $0.2 million. The swap will expire in 2012. The notional amount of the swap declines $4.0 million per year beginning in 2008. A hypothetical increase of 10% in market interest rates would result in a decrease of approximately $0.3 million in the fair value of the interest rate swap. We have $100.0 million of fixed rate debt which matures at various dates through 2021. The incremental increase in the fair value of fixed rate long-term debt resulting from a hypothetical 10% decrease in interest rates would be approximately $1.9 million, excluding the impact of outstanding hedge instruments. However, our sensitivity to interest rate declines and the corresponding increase in the fair value of our debt portfolio would unfavorably affect earnings and cash flows only to the extent that we elected to repurchase or retire all or a portion of our fixed rate debt portfolio at prices above carrying values. 34 Item 8. Financial Statements and Supplementary Data Management’s Reports Management’s Report on Responsibility for Financial Reporting Management of Mine Safety Appliances Company (the Company) is responsible for the preparation of the financial statements included in this annual report. The financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on the best estimates and judgments of management. The other financial information contained in this annual report is consistent with the financial statements. Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment and those criteria, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2007. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein. /s/ JOHN T. RYAN III John T. Ryan III Chairman of the Board Chief Executive Officer /s/ DENNIS L. ZEITLER Dennis L. Zeitler Senior Vice President and Treasurer Chief Financial Officer February 29, 2008 35 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Mine Safety Appliances Company: In our opinion, the accompanying consolidated balance sheets and the related consolidated statement of income, cash flows and changes in retained earnings and other comprehensive income present fairly, in all material respects, the financial position of Mine Safety Appliances Company and its subsidiaries (the “Company”) at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in management’s Report on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. As discussed in the notes to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007 in Note 7, stock-based compensation in 2006 in Note 8 and defined benefit pension and postretirement benefit plans in 2006 in Note 11. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PRICEWATERHOUSECOOPERS LLP Pittsburgh, Pennsylvania February 29, 2008 36 MINE SAFETY APPLIANCES COMPANY CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts) Year Ended December 31 2007 2006 2005 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 990,252 17,396 $913,714 5,384 $907,912 4,058 Costs and expenses Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development Restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency exchange (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,007,648 919,098 911,970 616,203 241,138 30,196 4,142 9,913 (132) 568,410 215,663 26,037 6,981 6,228 3,139 558,921 201,367 21,928 — 5,484 474 901,460 826,458 788,174 106,188 38,600 67,588 92,640 28,722 63,918 123,796 42,013 81,783 $ $ 1.89 1.86 $ $ 1.76 1.73 $ $ 2.24 2.19 See notes to consolidated financial statements. 37 December 31 Assets Current Assets Property Other Assets Liabilities Current Liabilities Long-Term Debt Other Liabilities Shareholders’ Equity MINE SAFETY APPLIANCES COMPANY CONSOLIDATED BALANCE SHEET (In thousands, except share amounts) 2007 2006 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Trade receivables, less allowance for doubtful accounts of 74,981 $ 61,296 $6,558 and $5,574 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205,737 155,332 21,821 17,669 21,510 497,050 3,361 87,979 306,455 9,233 407,028 (276,583) 130,445 212,304 24,125 87,011 65,371 1,016,306 174,569 137,230 18,577 6,395 18,792 416,859 4,448 85,269 281,965 7,279 378,961 (258,310) 120,651 211,018 29,676 79,360 41,056 898,620 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and minority interests . . . . . . . . . . . . . . . . . . . . . 54,676 $ 50,648 24,920 15,192 7,199 56,554 209,189 103,726 126,790 100,934 13,129 1,007 554,775 2,340 39,441 20,931 15,588 8,654 40,481 127,435 112,541 110,966 100,969 7,956 900 460,767 Preferred stock, 4 1⁄ 2% cumulative, $50 par value (callable at $52.50) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock, no par value (shares outstanding: 2007—35,661,776 and 2006—36,015,416) . . . . . . . . . . . . . . . . Stock compensation trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury shares, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . Earnings retained in the business . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,569 3,569 63,303 (13,208) (256,846) 36,233 628,480 461,531 1,016,306 55,990 (14,350) (231,299) 28,090 595,853 437,853 898,620 See notes to consolidated financial statements. 38 MINE SAFETY APPLIANCES COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) Year Ended December 31 Operating Activities 2007 2006 2005 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sale of investments and assets . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noncurrent assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,588 24,363 (4,535) (13,008) 4,791 5,661 (21,623) (4) $ 63,918 22,147 696 (2,081) 3,934 (1,932) (17,883) 898 $ 81,783 24,345 (6,104) (408) 1,356 2,294 (1,674) 3,973 Operating cash flow before changes in working capital . . . . . . . . . . . . 63,233 69,697 105,565 Trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . (22,965) (8,285) 21,593 (12,231) 4,176 (5,374) (6,362) 699 (17,080) (1,348) 5,057 (6,190) Increase in working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,888) (6,861) (19,561) Cash Flow From Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,345 62,836 86,004 Investing Activities Property additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions, net of cash acquired and other investing . . . . . . . . . . . . . . . . (32,884) 18,412 (7,492) (22,734) 3,887 (31,301) (21,664) 1,320 (16,955) Cash Flow From Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,964) (50,148) (37,299) Financing Activities Proceeds from (payments on) short-term debt, net . . . . . . . . . . . . . . . . . . . Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company stock purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax benefit related to stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,233 (2,000) — (30,139) (25,547) 2,134 1,530 Cash Flow From Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,789) Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . Beginning cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,093 13,685 61,296 74,981 Supplemental cash flow information: (230) (8,134) 59,819 (24,774) (29,893) 1,900 2,710 1,398 2,413 16,499 44,797 61,296 (1,473) (4,120) — (19,053) (58,012) 4,707 — (77,951) (2,502) (31,748) 76,545 44,797 Interest payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,130 42,344 $ 5,684 27,809 $ 5,315 34,060 See notes to consolidated financial statements. 39 MINE SAFETY APPLIANCES COMPANY CONSOLIDATED STATEMENT OF CHANGES IN RETAINED EARNINGS AND OTHER COMPREHENSIVE INCOME (In thousands) Balances January 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . . Minimum pension liability adjustments, net of tax of $189 . . . . . Accumulated Other Comprehensive Income $ 1,793 — (11,070) (294) Retained Earnings $493,979 81,783 — — Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Common dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,011) (42) Balances December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . . Minimum pension liability adjustments, net of tax of $260 . . . . . 556,709 63,918 — — Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Adoption of FAS No. 158, net of tax of $16,932 . . . . . . . . . . . . . Common dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balances December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . . Pension and post-retirement plan adjustments, net of tax of $4,836 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (24,732) (42) 595,853 67,588 — — — Adoption of FASB Interpretation No. 48 . . . . . . . . . . . . . . . . . . . Common dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,822) (30,097) (42) — — — (9,571) — 10,083 1,027 — 26,551 — — 28,090 — 16,463 (8,320) — — — — Balances December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 628,480 36,233 Comprehensive Income $ 81,783 (11,070) (294) 70,419 $ 63,918 10,083 1,027 75,028 $ 67,588 16,463 (8,320) 75,731 Components of accumulated other comprehensive income are as follows: Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minimum pension liability adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension and post-retirement plan adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,486 — 16,747 $ 3,023 — 25,067 $(7,060) (2,511) — Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,233 28,090 (9,571) 2007 2006 2005 See notes to consolidated financial statements. 40 MINE SAFETY APPLIANCES COMPANY 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 liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation—The consolidated financial statements include the accounts of the company and all subsidiaries. Intercompany accounts and transactions are eliminated. Certain prior year amounts have been reclassified to conform with the current year presentation. Minority Interests—Minority interests reflect minority shareholders’ original investments in certain consolidated subsidiaries and their proportional share of the income of those subsidiaries. Minority interest expense is reported in other income. Currency Translation—The functional currency of all significant non-U.S. subsidiaries is the local currency. Assets and liabilities of those operations are translated at year-end exchange rates. Income statement accounts are translated using the average exchange rates for the reporting period. 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 reporting 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—Goodwill and intangible assets with indefinite lives are not amortized, but are subject to impairment write-down tests. We test the goodwill of each of our reporting units for impairment at least annually. For this purpose, we consider our reportable business segments to be our reporting units. Fair value is estimated using discounted cash flow methodologies and market comparable information. 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 the risk of loss have transferred to the customer, which generally occurs either when product is shipped to the customer or, in the case of most U.S. distributor customers, when product is delivered to the customer’s delivery site. We establish our shipping terms according to local practice and market characteristics. We do not ship product unless we have an order or other documentation authorizing shipment to our customers. We make appropriate provisions for uncollectible accounts receivable and product returns, both of which have historically been insignificant in relation to our net sales. Certain distributor customers receive price rebates based on their level of purchases and other performance criteria that are documented in established distributor programs. These rebates are accrued as a reduction of net sales as they are earned by the customer. 41 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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. Product Warranties—Estimated expenses related to product warranties and additional service actions are charged to cost of products sold in the period in which the related revenue is recognized or when significant product quality issues are identified. 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 recovered 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. We record tax benefits related to uncertain tax positions taken or expected to be taken on a tax return when such benefits meet a more likely than not threshold. We recognize interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. No provision is made for possible U.S. taxes on the undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely. Stock-Based Compensation Plans—On January 1, 2006, we adopted Statement of FAS No. 123R, Share- Based Payment, which requires that we recognize compensation expense for employee and non-employee director stock-based compensation based on the grant date fair value. Except for retirement-eligible participants, for whom there is no requisite service period, this expense is recognized ratably over the requisite service periods following the date of grant. For retirement-eligible participants, this expense is recognized at the grant date. We elected the modified prospective application method for adoption and prior period financial statements have not been restated. Prior to January 1, 2006, we accounted for stock-based compensation in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, using the intrinsic value method, which resulted in no compensation expense for stock options. Derivative Instruments—We use 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. We do not enter into derivative transactions for speculative purposes and do not hold derivative instruments for trading purposes. Changes in the fair value of derivative instruments designated as fair value hedges are recorded in the balance sheet as adjustments to the underlying hedged asset or liability. Changes in the fair value of derivative instruments that do not qualify for hedge accounting treatment are recognized in the income statement in the current period. Note 2—Restructuring and Other Charges During the year ended December 31, 2007, we recorded charges of $4.1 million ($2.6 million after tax), primarily related to reorganization activities. North American charges of $2.5 million were primarily stay bonuses and severance costs associated with our Project Magellan initiative to move fire helmet manufacturing from Clifton, New Jersey to Jacksonville, North Carolina and to move our Mexican manufacturing operations to a new factory in Queretaro, Mexico. The Clifton plant, which employed about 60 associates, was closed during the fourth quarter of 2007. We expect to complete the move to the new factory in Mexico during 2008. European charges of $1.1 million were primarily severance costs associated with the reorganization of our management team. International charges of $0.5 million relate to severance costs associated with the workforce reductions in Brazil and Australia. 42 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) During the year ended December 31, 2006, we recorded charges of $7.0 million ($4.4 million after tax), primarily related to the Project Outlook reorganization plan in North America. In 2006, approximately 60 employees elected to retire under the terms of a focused voluntary retirement incentive program (VRIP). Project Outlook charges during 2006 included $5.3 million for VRIP retirees, $0.7 million in severance costs related to additional staffing reductions, and $0.5 million to relocate various work groups within the new organizational structure. The remaining $0.5 million of charges in 2006 were for severance costs related to discontinuing manufacturing operations in Britain. Note 3—Inventories Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Raw materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total LIFO inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess of FIFO costs over LIFO costs . . . . . . . . . . . . . . . . . . . . . . . Total FIFO inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31 2007 2006 (In thousands) $ 64,513 28,582 62,237 155,332 42,431 197,763 $ 55,764 24,203 57,263 137,230 42,514 179,744 Inventories stated on the LIFO basis represent 35% and 36% of the total inventories at December 31, 2007 and 2006, respectively. Reductions in certain inventory quantities during 2007 and 2006 resulted in liquidations of LIFO inventories carried at lower costs prevailing in prior years. The effect of these liquidations on cost of sales and net income was not significant in either year. Note 4—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. 4 1⁄ 2% cumulative preferred nonvoting stock, $50 par value—100,000 shares authorized; 71,373 shares issued and 52,841 shares ($1.8 million) held in treasury. There were no treasury share purchases in 2007 or 2006. Treasury share purchases in 2005 of 105 shares, $5 (share purchase dollars in thousands). 43 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Common stock activity is summarized as follows: Shares Stock Compensation Trust Issued Dollars (In thousands) Treasury Common Stock Stock Compensation Trust Balances January 1, 2005 . . . . . . . . 61,740,327 42,440 Restricted stock awards . . . . . . . . . — Restricted stock expense . . . . . . . . Restricted stock forfeitures . . . . . . — 298,624 Stock options exercised . . . . . . . . . Tax benefit related to stock plans . . . . . . . . . . . . . . . . . . . . . . Treasury shares purchased . . . . . . . — — Balances December 31, 2005 . . . . . 62,081,391 — Restricted stock awards . . . . . . . . . — Restricted stock expense . . . . . . . . — Restricted stock forfeitures . . . . . . — Stock options exercised . . . . . . . . . Stock option expense . . . . . . . . . . . — Tax benefit related to stock plans . . . . . . . . . . . . . . . . . . . . . . Treasury shares purchased . . . . . . . — — Balances December 31, 2006 . . . . . 62,081,391 — Restricted stock awards . . . . . . . . . — Restricted stock expense . . . . . . . . — Stock options exercised . . . . . . . . . — Stock option expense . . . . . . . . . . . Tax benefit related to stock plans . . . . . . . . . . . . . . . . . . . . . . Treasury shares purchased . . . . . . . — — (3,146,222) 10,438 — — 134,659 (21,252,719) $38,001 (54) 1,356 6 3,992 — — (161) — $(16,436) 54 — — 715 — — — (1,281,402) 5,368 — (3,001,125) 47,738 — — 204,375 — (22,534,282) 48,669 (249) 2,204 94 832 1,730 — — (2,346) — — — — — (780,335) 2,710 — (2,749,012) 94,932 — 123,874 — (23,316,963) 55,990 (495) 2,691 1,487 2,100 — — — — — — (15,667) 249 — — 1,068 — — — (14,350) 495 — 647 — Treasury Cost $(141,549) — — (6) — — (58,007) (199,562) — — (94) — — — (29,893) (229,549) — — — — — — — (572,446) 1,530 — — — — (25,547) Balances December 31, 2007 . . . . . 62,081,391 (2,530,206) (23,889,409) 63,303 (13,208) (255,096) The Mine Safety Appliances Company Stock Compensation Trust was established to fund certain benefit plans, including employee and non-employee directors stock options and restricted stock 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. In 2007, we changed our presentation of the nonvested value of restricted stock awards. Prior to 2007, we credited common stock for the fair value of the awards on the grant date, with a corresponding charge to deferred stock compensation. At December 31, 2007, we eliminated the deferred stock compensation balance against common stock as required by FAS 123(R), Share—Based Payment. We have reclassified prior year balances to conform with the current year presentation. This change in presentation had no impact on total shareholders’ equity. The Shareholder Rights Plan, under which each outstanding share of common stock was granted one-ninth of a preferred share purchase right, expired on February 21, 2007. Under the terms of the Plan, the rights were exercisable for a fraction of a share of preferred stock, only if a person or group acquired or commenced a tender offer for 15% or more of our common stock. 44 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Note 5—Segment Information We are organized into three geographic operating segments: North America, Europe, and International. We are engaged in the manufacture and sale of safety equipment, including respiratory protective equipment, head protection, eye and face protection, hearing protection, fall protection, ballistic body armor, thermal imaging cameras, and monitoring instruments. Reportable segment information is presented in the following table: 2007 2006 2005 Sales to external customers . . . . . . . . . . . . . . Intercompany sales . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . Noncash items: Depreciation and amortization . . . . . . . . . . . . . . . . . Pension income (expense) Equity in earnings of affiliates . . . . . . . . . . . Income tax provision . . . . . . . . . . . . . . . . . . Property additions . . . . . . . . . . . . . . . . . . . . . Net property . . . . . . . . . . . . . . . . . . . . . . . . . Sales to external customers . . . . . . . . . . . . . . Intercompany sales . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . Net property . . . . . . . . . . . . . . . . . . . . . . . . . Sales to external customers . . . . . . . . . . . . . . Intercompany sales . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . Net property . . . . . . . . . . . . . . . . . . . . . . . . . North America Europe International (In thousands) Reconciling Items Consolidated Totals $515,142 44,471 48,104 669,113 1,961 9,154 $238,294 87,496 6,829 282,538 651 202 $236,816 7,361 14,444 141,273 1,061 87 $ (139,328) (1,789) (76,618) 573 470 — $ 990,252 — 67,588 1,016,306 4,246 9,913 5,995 (5,199) — 6,127 6,365 27,937 219,241 82,936 8,851 249,073 458 88 5,456 (4,569) — 4,908 — 6,791 24,358 180,493 70,099 6,321 200,611 301 74 5,286 (3,762) — 7,138 — 5,924 20,464 3,074 (941) (39) 8,170 7,262 18,221 191,116 5,676 13,087 109,027 937 141 2,491 (824) 109 5,111 410 4,209 12,753 160,918 4,831 11,659 87,513 526 115 1,921 (676) 78 4,663 301 2,976 10,509 — — — (64) — — — (128,500) (678) (69,393) 231 1 — — — 859 — — — — (114,013) (346) (55,731) 566 — — — — (366) — — — 24,363 4,535 (39) 38,600 32,884 130,445 913,714 — 63,918 898,620 3,062 6,228 22,147 (696) 168 28,722 631 22,734 120,651 907,912 — 81,783 725,357 2,460 5,484 24,345 6,104 (132) 42,013 645 21,664 116,209 15,294 10,675 — 24,367 19,257 84,287 503,357 39,888 42,658 609,913 1,436 5,998 14,200 4,697 (277) 17,844 221 11,734 83,540 566,501 39,083 64,149 492,964 1,067 5,295 17,138 10,542 (210) 30,578 344 12,764 85,236 45 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Reconciling items consist primarily of intercompany eliminations and items reported at the corporate level. Geographic information for sales to external customers, based on country of origin: United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $507,520 96,535 386,197 (In thousands) $500,398 99,955 313,361 $560,107 73,903 273,902 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 990,252 913,714 907,912 2007 2006 2005 Note 6—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. 2007 2006 2005 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . (In thousands, except per share amounts) $63,918 (42) $67,588 (42) $81,783 (42) Income available to common shareholders . . . . . . . . . . . . 67,546 63,876 81,741 Basic earnings per common share . . . . . . . . . . . . . . . . . . . Diluted earnings per common share . . . . . . . . . . . . . . . . . . Basic shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 1.89 1.86 35,651 589 36,240 Antidilutive stock options . . . . . . . . . . . . . . . . . . . . . . . . . 2 $ $ 1.76 1.73 $ $ 2.24 2.19 36,366 562 36,928 376 36,560 741 37,301 195 46 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Note 7—Income Taxes Components of income before income taxes U.S. income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-U.S. income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency translation gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,275 55,495 487 (13,069) $53,488 42,527 2,880 (6,255) $112,731 40,764 106 (29,805) Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,188 92,640 123,796 2007 2006 2005 (In thousands) Provision for income taxes Current Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,357 1,607 11,975 13,653 2,663 14,338 Total current provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,939 30,654 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (482) 850 5,293 391 (1,161) (1,162) Total deferred provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,661 (1,932) 23,259 6,352 10,108 39,719 461 219 1,614 2,294 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,600 28,722 42,013 Reconciliation of the U.S. federal income tax rates to our effective tax rate. U.S. federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State income taxes—U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on non-U.S. income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustment of prior years income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Extra-territorial income exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statutory rate changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 2006 2005 35.0% 1.7 (0.6) (0.7) (0.3) (0.8) — 1.2 1.5 (0.6) 36.4% 35.0% 1.3 (0.5) (1.0) (2.2) (0.5) (0.6) — — (0.5) 31.0% 35.0% 3.4 (1.0) (0.9) (1.6) (0.6) (0.4) — — — 33.9% 47 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31 2007 2006 (In thousands) Components of deferred tax assets and liabilities Deferred tax assets Postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vacation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net operating losses and tax credit carryforwards . . . . . . . . . . . . . . . . . Post employment benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign tax credit carryforwards (expiring between 2009 and 2017) . . Liability insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basis of capital assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,325 7,332 1,840 2,161 682 3,717 4,344 3,453 1,819 2,852 5,657 49,182 (1,846) 47,336 $ 17,112 8,180 1,408 1,154 2,150 2,789 4,318 4,197 1,424 2,607 3,968 49,307 — 49,307 Deferred tax liabilities Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,152) (78,939) (2,612) (20,229) (80,365) (1,946) Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (102,703) (102,540) Net deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55,367) (53,233) At December 31, 2007, we had net operating loss carryforwards of approximately $5.3 million, all in non-U.S. tax jurisdictions and substantially all expiring in 2013. No deferred U.S. income taxes have been provided on undistributed earnings of non-U.S. subsidiaries, which amounted to $156.4 million as of December 31, 2007. These earnings are considered to be reinvested for an indefinite period of time. It is not practicable to determine the deferred tax liability on these undistributed earnings. On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48). The application of income tax law is inherently complex. Tax statutes and regulations are often ambiguous and subject to various interpretations. As a result, we are required to evaluate all relevant facts and make subjective judgments regarding our tax positions. As a result of the adoption of the FIN 48, we recognized a gross increase in the tax liability for unrecognized tax benefits of $5.7 million. Prior to the adoption of FIN 48, we had recognized $1.4 million in unrecognized tax benefits. The gross increase in the tax liability upon the adoption of FIN 48 created additional tax benefits of $1.8 million, resulting in a net increase in the liability for unrecognized tax benefits of $3.9 million, which was accounted for as a reduction in retained earnings at January 1, 2007. These adjustments, if recognized in the provision for income taxes, would have increased our effective income tax rate. 48 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) A reconciliation of the change in the tax liability for unrecognized tax benefits from January 1, 2007 to December 31, 2007 is as follows: Balance at January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions for tax positions related to the current year Additions for tax positions related to prior years . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (In thousands) $ 7,083 470 582 (2,407) Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,728 The total amount of unrecognized tax benefits, if recognized, would reduce our future effective tax rate. We have recognized tax benefits associated with these liabilities in the amount of $2.2 million and $1.8 million at December 31, 2007 and January 1, 2007, respectively. We recognize interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. As a result of the adoption of FIN 48, we recognized a $0.9 million increase in the liability for accrued interest and penalties related to uncertain tax positions, which were also accounted for as a reduction of retained earnings at January 1, 2007. As a result of the settlements in the table above, we reversed $0.5 million of accrued interest and penalties related to uncertain tax positions during 2007. Our liability for accrued interest and penalties related to uncertain tax positions was $0.4 million at December 31, 2007. We do not expect that the total amount of the unrecognized tax benefit will significantly increase or decrease within 12 months of the reporting date. We file a U.S. federal income tax return along with various state and foreign income tax returns. Examinations of our federal returns have been completed through 2002. The Internal Revenue Service has notified us that an examination of our U.S. federal income tax returns for the years 2003 through 2006 will be conducted during 2008. We also file in various state and foreign jurisdictions that may be subject to tax audits after 2002. Note 8—Stock Plans The 1998 Management Share Incentive Plan provides for grants of stock options and restricted stock awards to eligible key employees through March 2008. The 1990 Non-Employee Directors’ Stock Option Plan, as amended April 29, 2004, provides for annual grants of stock options and restricted stock awards to eligible non-employee directors. Stock options are 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 2007 and 2006 are exercisable beginning three years after the grant date. Stock options granted in 2005 and earlier years were fully vested as of December 31, 2005. Restricted stock awards are granted without payment to the company and generally vest three years after the grant date. Certain restricted stock awards for management retention vest in three equal tranches four, five, and six years after the grant date. Unvested restricted stock awards for management retention are forfeited if the grantee’s employment with the company terminates for any reason other than death or disability. Restricted stock awards are valued at the market value of the stock on the award date. As of December 31, 2007, there were 642,877 shares and 89,599 shares, respectively, reserved for future grants under the management and non-employee directors’ plans. We issue Stock Compensation Trust shares or new shares for stock option exercises and restricted stock awards. 49 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) On January 1, 2006, we adopted Statement of FAS No. 123R, Share-Based Payment, which requires that we recognize compensation expense for stock-based compensation based on the grant date fair value. Except for retirement-eligible employees and non-employee directors, for whom there is no requisite service period, this expense is recognized ratably over the requisite service periods following the date of grant. For retirement- eligible employees and non-employee directors, this expense is recognized at the grant date. We elected the modified prospective application method for adoption and prior periods financial statements have not been restated. Prior to January 1, 2006, we accounted for stock-based compensation in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, using the intrinsic value method, which resulted in no compensation expense for stock options. Stock-based compensation expense was as follows: 2007 2006 2005 Restricted stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock option grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total compensation expense before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit Total compensation expense, net of income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . (In thousands) $2,204 1,730 $1,356 — $2,691 2,100 4,791 1,711 3,080 3,934 1,434 2,500 1,356 529 827 We did not capitalize any stock-based compensation expense in 2007, 2006, or 2005. Prior to January 1, 2006, we did not recognize stock-based compensation expense for stock options. If we had elected to recognize compensation cost based on the fair value of the options at the grant date as prescribed by FAS No. 123, Accounting for Stock-Based Compensation, net income and earnings per share for 2005 would have been reduced to the pro forma amounts shown below. Net income as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of stock options granted, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 (In thousands) $81,783 (2,565) Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,218 Basic earnings per share: As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share: As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2.24 2.17 2.19 2.12 Stock option expense for 2007 and 2006 and the pro forma effect as if FAS No. 123 had been applied for 2005 are based on the fair value of stock option grants estimated on the grant dates using the Black-Scholes option pricing model and the following weighted average assumptions for options granted in 2007, 2006, and 2005. Fair value per option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected life (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 2006 2005 $15.46 $16.38 $16.58 4.6% 1.9% 40% 6.0 4.6% 1.4% 41% 5.7 4.3% 2.0% 34% 9.9 50 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The risk-free interest rate is based on the U.S. Treasury Constant Maturity rates as of the grant date converted into an implied spot rate yield curve. Expected dividend yield is based on the most recent annualized dividend divided by the one year average closing share price. Expected volatility is based on the ten year historical volatility using daily stock prices. Expected life in years for 2007 and 2006 is based on historical stock option exercise data. Prior to 2006, expected life approximated contractual life. A summary of option activity under the two plans follows: Outstanding at January 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares 1,792,704 194,786 (433,283) 1,554,207 181,527 (204,375) 1,531,359 199,292 (123,874) (44,372) Outstanding December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,562,405 Weighted Average Exercise Price Exercisable at Year-end $12.55 45.68 10.86 17.17 40.20 9.29 20.95 40.32 17.22 42.00 23.12 1,554,207 1,349,832 1,210,746 For various exercise price ranges, characteristics of outstanding and exercisable stock options at December 31, 2007 were as follows: Range of Exercise Prices $ 7.07 – $ 9.03 $10.65 – $13.57 $25.07 – $28.06 $40.08 – $50.25 $ 7.07 – $50.25 Range of Exercise Prices $ 7.07 – $ 9.03 $10.65 – $13.57 $25.07 – $28.06 $40.08 – $50.25 $ 7.07 – $50.25 Stock Options Outstanding Weighted-Average Exercise Price Remaining Life $ 7.83 11.32 25.19 42.11 23.12 3.1 years 4.8 6.2 8.2 5.9 Stock Options Exercisable Weighted-Average Exercise Price Remaining Life $ 7.83 11.32 25.19 45.68 18.13 3.1 years 4.8 6.2 6.9 5.0 Shares 261,713 553,701 215,758 531,233 1,562,405 Shares 261,713 553,701 215,758 179,574 1,210,746 The aggregate intrinsic values of stock options outstanding and stock options exercisable at December 31, 2007 were $44.9 million and $40.8 million, respectively. 51 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) A summary of restricted stock award activity follows: Unvested at January 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unvested at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unvested at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares 179,183 52,878 (62,009) (161) 169,891 47,738 (76,813) (2,346) 138,470 95,976 (51,113) Unvested at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,333 Weighted Average Grant Date Fair Value $15.57 44.27 13.83 39.16 25.10 40.29 12.18 40.08 37.26 41.60 28.44 42.00 During the years ended December 31, 2007, 2006, and 2005, the total intrinsic value of stock options exercised (i.e. the difference between the market price at exercise and the option price paid to exercise the option) was $3.8 million, $6.3 million, and $14.5 million, respectively. The fair values of restricted stock awards vested during the years ended December 31, 2007, 2006, and 2005 were $2.1 million, $2.9 million, and $2.1 million, respectively. As of December 31, 2007, there was $4.9 million of total future unvested stock-based compensation expense, and the weighted average period over which this expense is expected to be recognized was approximately 2.0 years. Note 9—Long-Term Debt December 31 2007 2006 (In thousands) U.S. Industrial development debt issues payable through 2022, 3.94% . . . . . . . . . . . . . . . . Senior Notes payable through 2012, 8.39% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Notes payable through 2021, 5.41% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note payable through 2011, net of unamortized discount of $850 . . . . . . . . . . . . . . . . $ 6,750 39,826 60,000 7,150 $ 6,750 39,089 60,000 8,694 International Various notes payable through 2008, 5.80% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 38 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts due in one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,734 10,008 114,571 2,030 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,726 112,541 Approximate maturities of these obligations over the next five years are $10.0 million in 2008, $10.8 million in 2009, $12.0 million in 2010, $9.2 million in 2011, $7.8 million in 2012, and $63.9 million thereafter. Some debt agreements require us to maintain certain financial ratios and minimum net worth and contain restrictions on the total amount of debt. We were in compliance with our debt covenants as of December 31, 2007. 52 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Note 10—Goodwill and Intangible Assets Changes in goodwill and intangible assets, net of accumulated amortization, during the year ended December 31, 2007 were as follows: Goodwill Intangibles (In thousands) Net balances at January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill and intangibles acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to purchase price allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency translation and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $79,360 2,102 3,984 — 1,565 $17,096 5,130 (3,984) (2,690) 81 Net balances at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,011 15,633 At December 31, 2007, goodwill of approximately $64.8 million, $18.4 million, and $3.8 million related to the North American, European, and International operating segments, respectively. Approximately $1.3 million and $0.6 million of the goodwill acquired during 2007 related to the Acceleron and India acquisitions, respectively. During 2007, we finalized the allocation of the purchase price related to the September 2006 acquisition of Paraclete Armor and Equipment Inc. The final allocation resulted in a $4.0 million adjustment between intangibles and goodwill. Intangible assets include patents, license agreements, copyrights, and trademarks. These items are included in other noncurrent assets. At December 31, 2007, intangible assets totaled $15.6 million, net of accumulated amortization of $8.9 million. Intangible asset amortization expense over the next five years is expected to be approximately $2.7 million in 2008, $2.0 million in 2009, $2.0 million in 2010, $1.9 million in 2011, and $0.9 million in 2012. Note 11—Pensions and Other Postretirement Benefits We maintain various defined benefit and defined contribution plans covering the majority of our employees. Our principal U.S. plan is funded in compliance with the Employee Retirement Income Security Act (ERISA). It is our 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. We provide health care benefits and limited life insurance for certain retired employees who are covered by our principal U.S. defined benefit pension plan until they become Medicare-eligible. We adopted FAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, effective December 31, 2006. FAS No. 158 requires an employer to recognize the funded status of each of its defined benefit pension and postretirement benefit plans as a net asset or liability in its statement of financial position with an offsetting amount in accumulated other comprehensive income, and to recognize changes in that funded status through comprehensive income in the year in which changes occur. Upon the adoption of FAS No. 158, additional minimum pension liabilities and related intangible assets were no longer recognized. The provisions of FAS No. 158 were applied on a prospective basis. The adoption of FAS No. 158 resulted in the following impacts at December 31, 2006: an increase of $67.5 million in prepaid pension costs, an increase of $23.4 million in accrued pension and other postretirement benefit liabilities, and an increase of $43.5 million ($26.6 million after-tax) in accumulated other comprehensive income. Additionally, FAS No. 158 requires that we measure the funded status of each of our plans as of year-end beginning December 31, 2008. 53 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) We use a January 1 measurement date for our plans. Information pertaining to defined benefit pension plans and other postretirement benefits plans is provided in the following table. Change in Benefit Obligations Pension Benefits Other Benefits 2007 2006 2007 2006 (In thousands) Benefit obligations at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . $315,337 $294,304 $ 24,906 $ 28,518 614 Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,399 Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Participant contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,310) Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,832) Actuarial losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,483) Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Curtailments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Termination benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Currency translation effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,940 16,437 346 220 (1,168) (18,360) (22) (393) 4,843 9,190 10,236 17,733 438 578 447 (16,362) — — — 10,535 635 1,484 — — 1,526 (2,497) — — — — Benefit obligations at December 31 . . . . . . . . . . . . . . . . . . . . . . . 338,942 315,337 26,054 24,906 Change in Plan Assets Fair value of plan assets at January 1 . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Participant contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 420 transfer to retiree medical plan . . . . . . . . . . . . . . . . . Reimbursement of German benefits . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency translation effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442,334 24,522 3,074 438 (13,807) (2,000) (2,555) — 3,590 402,745 54,911 2,791 346 (15,790) (1,900) (2,570) (520) 2,321 — — 497 — (2,497) 2,000 — — — — — 583 — (2,483) 1,900 — — — Fair value of plan assets at December 31 . . . . . . . . . . . . . . . . . . . 455,596 442,334 — — Funded Status Funded status at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized transition losses . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized net actuarial (gains) losses . . . . . . . . . . . . . . . . . . . 116,654 123 1,306 (37,585) 126,997 264 690 (49,160) (26,054) — (2,169) 10,398 (24,906) — (2,527) 9,650 Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,498 78,791 (17,825) (17,783) Amounts Recognized in the Balance Sheet Noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,304 (3,979) (91,671) 211,018 (3,724) (80,297) — (1,615) (24,439) — (1,637) (23,269) Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,654 126,997 (26,054) (24,906) Amounts Recognized in Accumulated Other Comprehensive Income Net actuarial (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prior service cost (credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized net initial obligation . . . . . . . . . . . . . . . . . . . . . . . . (37,585) 1,306 123 (49,160) 690 264 10,398 (2,169) — 9,650 (2,527) — Total (before tax effects) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Benefit Obligations for all Defined Benefit Plans . . . (36,156) (48,206) 8,229 7,123 282,080 262,678 — — 54 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Pension Benefits Other Benefits 2007 2006 2005 2007 2006 2005 (In thousands) Components of Net Periodic Benefit (Credit) Cost Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . Amortization of transition amounts . . . . . . . . Amortization of prior service cost . . . . . . . . . . Recognized net actuarial losses . . . . . . . . . . . . Settlement loss . . . . . . . . . . . . . . . . . . . . . . . . Curtailment loss . . . . . . . . . . . . . . . . . . . . . . . Termination benefits . . . . . . . . . . . . . . . . . . . . $ 10,236 17,733 (33,980) 44 190 1,125 — 117 — $ 9,597 16,066 (31,287) 44 198 1,089 146 — 4,843 $ 635 $ 7,843 14,985 1,484 (30,001) — — (358) 778 — — — 43 270 496 260 — — $ 614 1,399 — — (227) 820 — — — $ 543 1,609 — — (227) 984 — — — Net periodic benefit (credit) cost . . . . . . . . . . . (4,535) 696 (6,104) 2,539 2,606 2,909 Pension Benefits Other Benefits 2007 2006 2007 2006 Assumptions used to determine benefit obligations Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0% 5.7% 6.3% 6.0% 4.4% 4.4% — — Assumptions used to determine net periodic benefit cost Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate of compensation increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6% 5.5% 6.0% 5.8% 8.4% 8.4% — — 4.4% 4.4% — — The expected return on assets for the 2007 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. Plan Assets at December 31 2007 2006 Asset Category Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash/other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82.9% 78.8% 12.4% 17.9% 0.3% 0.2% 3.0% 4.5% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 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 and encouraged, with shifts of emphasis among equities, fixed income securities, and cash equivalents at the discretion of each manager. No target asset allocations are set forth in the investment policy. We expect to make net contributions of $2.4 million to our pension plans in 2008. 55 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) For measurement purposes, a 9.5% increase in the costs of covered health care benefits was assumed for the year 2007, decreasing by 1.0% for each successive year to 4.5% in 2013 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 $1.6 million and $0.2 million, respectively. Expense for defined contribution pension plans was $3.1 million in 2007, $4.0 million in 2006, and $3.9 million in 2005. Estimated pension benefits to be paid under our defined benefit pension plans during the next five years are $15.5 million in 2008, $15.9 million in 2009, $16.9 million in 2010, $17.6 million in 2011, $19.5 million in 2012 and are expected to aggregate $111.9 million for the five years thereafter. Estimated other postretirement benefits to be paid during the next five years are $1.6 million in 2008, $1.8 million in 2009, $1.9 million in 2010, $2.1 million in 2011, $2.2 million in 2012 and are expected to aggregate $12.4 million for the five years thereafter. Note 12—Other Income Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on asset dispositions, net . . . . . . . . . . . . . . . . . . . . . . . . Minority interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net 2007 2006 2005 $ 4,246 13,973 (253) (570) (In thousands) $3,062 2,865 (32) (511) $2,460 1,604 (195) 189 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,396 5,384 4,058 The 2007 gain on asset dispositions includes a $10.6 million gain on the sale of 83 acres of property in our Cranberry Woods office park to Wells Real Estate Investment Trust II—Cranberry Woods Development Inc. Note 13—Leases We lease office space, manufacturing and warehouse facilities, automobiles, and other equipment under operating lease arrangements. Rent expense was $12.6 million in 2007, $11.2 million in 2006, and $10.9 million in 2005. Minimum rent commitments under noncancelable leases are $8.8 million in 2008, $7.2 million in 2009, $6.2 million in 2010, $4.3 million in 2011, $2.3 million in 2012, and $1.9 million thereafter. Note 14—Short-Term Debt Short-term bank lines of credit amounted to $82.9 million, of which $38.2 million was unused at December 31, 2007. Generally, these short-term lines of credit are renewable annually. There are no significant commitment fees or compensating balance requirements. Short-term borrowings with banks, which exclude the current portion of long-term debt, were $44.7 million and $0.3 million at December 31, 2007 and 2006, respectively. The average month-end balance of total short-term borrowings during 2007 was $24.4 million, while the maximum month-end balance of $46.9 million occurred at September 30, 2007. The weighted average interest rates on short-term borrowings at December 31, 2007 and 2006 were 6% and 5%, respectively. Note 15—Derivative Financial Instruments In April 2004, we entered into an eight year interest rate swap agreement. Under the terms of the agreement, we receive a fixed interest rate of 8.39% and pay a floating interest rate based on LIBOR. The notional amount of the swap is initially $20.0 million and declines $4.0 million per year beginning in 2008. The interest rate swap has been designated as a fair value hedge of a portion of our fixed rate 8.39% Senior Notes. 56 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In order to account for these derivatives as hedges, the interest rate swap must be highly effective at offsetting changes in the fair value of the hedged debt. We have assumed that there is no ineffectiveness in the hedge, since all of the critical terms of the hedge match the underlying terms of the hedged debt. The fair value of the interest rate swap at December 31, 2007, has been recorded as a liability of $0.2 million that is included in other noncurrent liabilities, with an offsetting reduction in the carrying value of the long-term debt. As a result of entering into the interest rate swap, we have increased our exposure to interest rate fluctuations. Differences between the fixed rate amounts received and the variable rate amount paid are recognized in interest expense on an ongoing basis. This rate difference resulted in an increase in interest expense of $0.4 million and $0.3 million during the years 2007 and 2006, respectively, and a reduction in interest expense of $0.1 million during 2005. Note 16—Acquisitions In December 2007, we acquired TecBOS GmbH of Halstenbek, Germany, a leading developer of software solutions for the fire service and other emergency planning organizations. A purchase price of $0.7 million was paid in cash to the previous owners. The following table summarizes the estimated fair value of the TecBOS assets acquired and liabilities assumed at the date of acquisition: Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 2007 (In thousands) $ 441 165 464 1,070 339 731 In March 2007, we acquired Acceleron Technologies, LLC, a San Francisco-based developer of advanced technology suitable for personal locator devices. We believe that the acquisition of this technology significantly expedites the development of reliable systems for first responder and soldier location applications. The purchase price of $5.7 million included amounts paid to the previous owners and other direct costs associated with the acquisition. The acquisition agreement provides for additional consideration of up to $4.9 million to be paid to the former owners of Acceleron based on the achievement of specific technology development milestones by September 28, 2008. The following table summarizes the estimated fair value of the Acceleron assets acquired at the date of acquisition: Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill March 2007 (In thousands) $4,413 1,289 Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,702 57 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In March 2007, we acquired the outstanding shares of MSA (India) Limited that were previously held by our joint venture partner. As a wholly-owned subsidiary under MSA management, we believe that we are better positioned to take advantage of opportunities in the large and growing Indian market. We allocated $0.6 million of the $1.1 million purchase price to goodwill. In September 2006, we acquired Paraclete Armor and Equipment, Inc. of St. Pauls, North Carolina. Paraclete is an innovator and developer of advanced ballistic body armor used by military personnel, including Special Forces units of the U.S. military. The purchase price of $30.4 million included a note payable and cash paid to the previous owners and other direct external costs associated with the acquisition. The note is non-interest bearing and is payable in five annual installments of $2.0 million beginning September 1, 2007. We recorded the note at a fair value of $8.5 million at the time of issuance. The note discount of $1.5 million is being recognized as interest expense over its term. Goodwill related to the Paraclete acquisition, which is included in the North American segment, is expected to be deductible for tax purposes. During 2007, we finalized the allocation of the Paraclete purchase price, resulting in a $4.0 million adjustment between intangibles and goodwill. The following table summarizes the final estimated fair values of the Paraclete assets acquired and liabilities assumed at the date of acquisition: Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill September 2006 (In thousands) $ 2,640 2,414 2,696 22,675 Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,425 In January 2006, we acquired Select Personal Protective Equipment (Select PPE) of South Africa, an established supplier of multi-brand safety equipment and solutions to the South African mining industry. The purchase price of $7.9 million in cash included amounts paid to the previous owners and other direct costs associated with the acquisition. Goodwill related to Select PPE, which is included in the International segment, is not expected to be deductible for tax purposes. At the same time, we took steps to ensure our compliance with South African Black Economic Empowerment (BEE) requirements by contributing our existing South African company, MSA Africa, and Select PPE to a newly-formed South African holding company in exchange for 74.9% common ownership interest in the holding company, preferred stock and interest bearing notes receivable. The new South African holding company issued 37,650 common shares, the remaining 25.1% ownership interest, to Mineworkers Investment Company of Johannesburg, South Africa at a price of $0.7 million. The carrying value of these shares was $0.8 million on the transaction date. Accordingly, we recognized a loss of $0.1 million, net of tax benefit, in connection with this transaction. We elected to account for the $0.1 million loss on the sale of stock by a subsidiary in net income and have applied this method consistently. In September 2005, we acquired Microsensor Systems, Inc. of Bowling Green, Kentucky. Microsensor Systems is a world leader in surface acoustic wave based chemical sensing technology used to detect chemical warfare agents. The initial purchase price of $12.8 million in cash included amounts paid to the previous owners and other direct external costs associated with the acquisition. Goodwill related to the Microsensor Systems acquisition, which is included in the North American segment, is expected to be deductible for tax purposes. The acquisition agreement provides for additional consideration of up to $2.3 million to be paid to the former owners based on sales of certain Microsensor Systems products during the five year period from September 1, 2005 through August 31, 2010. Additional consideration will be charged to goodwill. Through December 31, 2007, no additional consideration has been paid under the terms of Microsensor Systems acquisition agreement. 58 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The operating results of all acquisitions have been included in our consolidated financial statements from their respective acquisition dates. Pro forma consolidated results, as if the acquisitions had occurred at the beginning of 2005, would not be materially different from the results reported. Note 17—Contingencies Various lawsuits and claims arising in the normal course of business are pending against us. These lawsuits are primarily product liability claims. We are presently named as a defendant in approximately 2,600 lawsuits primarily involving respiratory protection products allegedly manufactured and sold by us. Collectively, these lawsuits represent a total of approximately 16,500 plaintiffs. Approximately 90% of these lawsuits involve plaintiffs alleging they suffer from silicosis, with the remainder alleging they suffer from other or combined injuries, including asbestosis. These lawsuits typically allege that these conditions resulted in part from respirators that were negligently designed or manufactured by us. Consistent with the experience of other companies involved in silica and asbestos-related litigation, in recent years there has been an increase in the number of asserted claims that could potentially involve us. We cannot determine our potential maximum liability for such claims, in part because the defendants in these lawsuits are often numerous, and the claims generally do not specify the amount of damages sought. With some limited exceptions, we maintain insurance against product liability claims. We also maintain 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. We evaluate our exposures on an ongoing basis and make adjustments to the reserve as appropriate. Based on information currently available, we believe that the disposition of matters that are pending will not have a materially adverse effect on our financial condition. In the normal course of business, we make payments to settle product liability claims and for related legal fees and record receivables for the amounts covered by insurance. Various factors could affect the timing and amount of recovery of insurance receivables, including: the outcome of negotiations with insurers, legal proceedings with respect to product liability insurance coverage, and the extent to which insurers may become insolvent in the future. We are currently involved in coverage litigation with Century Indemnity Company (Century). Century filed a lawsuit in the Superior Court of New Jersey seeking a declaration of Century’s obligations with respect to certain asbestos, silica and other claims under five insurance policies issued to us by Century. The New Jersey Superior Court issued an order granting our motion to dismiss this case on jurisdictional grounds. Century appealed that order and on February 26, 2008, the Appellate Division of the Superior Court of New Jersey affirmed the decision of the trial court dismissing the case. It is unknown whether Century will seek to appeal that decision. We have sued Century in the Court of Common Pleas of Allegheny County, Pennsylvania, alleging that Century breached the five insurance policies by failing to pay amounts owing to us. The Pennsylvania court has denied a motion by Century to stay or dismiss the Pennsylvania lawsuit in favor of the New Jersey action and the Pennsylvania action is proceeding. We believe that Century’s refusal to indemnify us under the policies is wholly contrary to Pennsylvania law and we are vigorously pursuing the legal actions necessary to collect all amounts. The case is currently in discovery. We regularly evaluate the collectibility of these receivables and record the amounts that we conclude are probable of collection based on our analysis of our various policies, pertinent case law interpreting comparable policies and our experience with similar claims. The net balance of receivables from insurance carriers was $39.1 million and $18.4 million at December 31, 2007 and 2006, respectively. 59 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Note 18—Recently Issued Accounting Standards In September 2006, the FASB issued FAS No. 157, Fair Value Measurements. FAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements. FAS No. 157 is effective on January 1, 2008. Upon adoption, the provisions of FAS No. 157 are to be applied prospectively with limited exceptions. Relative to FAS No. 157, the FASB issued FASB Staff Positions (FSP) 157-1 and 157-2, and proposed 157-c. FSP 157-1 amends FAS No. 157 to exclude FAS No. 13, Accounting for Leases, and its related interpretive accounting pronouncements. FSP 157-2 delays the effective date of FAS No. 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-c clarifies the principles in FAS No. 157 on the fair value measurement of liabilities. Based upon pronouncements issued to date, we do not expect that the adoption of this statement will have a material effect on our consolidated results of operations or financial condition. In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. FAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value and report unrealized gains and losses on these instruments in earnings. FAS No. 159 is effective January 1, 2008. We do not expect that the adoption of this statement will have a material effect on our consolidated results of operations or financial condition. In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations, which replaces FAS No. 141, Business Combinations. FAS No. 141(R) changes a number of significant aspects of the application the acquisition method of accounting for business combinations. Under FAS No. 141(R), acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date will generally affect income tax expense. FAS No. 141(R) is effective on a prospective basis for business combinations with acquisition dates on or after the January 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. Adjustments to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of FAS No. 141(R) would also apply the provisions of FAS No. 141(R). We do not expect that the adoption of this statement, as it relates to past acquisitions, will have a material effect on our consolidated results of operations or financial condition. In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. FAS No. 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. It also amends certain ARB No. 51 consolidation procedures for consistency with the requirements of FAS No. 141(R) and expands disclosure requirements regarding the interests of the parent and its noncontrolling interest. FAS No. 160 is effective January 1, 2009. We do not expect that the adoption of this statement will have a material effect on our consolidated results of operations or financial condition. In December 2007, the Emerging Issues Task Force issued EITF No. 07-1, Accounting for Collaborative Arrangements. EITF No. 07-1 requires that transactions with third parties (i.e., revenue generated and costs incurred by the partners) should be reported in the appropriate line item in each company’s financial statement and includes enhanced disclosure requirements regarding the nature and purpose of the arrangement, rights and 60 MINE SAFETY APPLIANCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) obligations under the arrangement, accounting policy, amount and income statement classification of collaboration transactions between the parties. EITF No. 07-1 is effective January 1, 2009 and shall be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. We do not expect that the adoption of this statement will have a material effect on our consolidated results of operations or financial condition. Note 19—Quarterly Financial Information (Unaudited) 2007 Quarters 1st 2nd 3rd 4th Year Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . $225,939 89,169 16,068 .45 .44 (In thousands, except earnings per share) $267,539 $247,675 $249,099 100,816 90,268 93,796 17,457 16,735 17,328 .49 .47 .49 .48 .46 .48 $990,252 374,049 67,588 1.89 1.86 2006 Quarters 1st 2nd 3rd 4th Year Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . $228,350 92,574 15,738 .43 .42 (In thousands, except earnings per share) $256,939 $209,802 $218,623 87,291 78,150 87,289 19,498 12,601 16,081 .54 .35 .44 .53 .34 .43 $913,714 345,304 63,918 1.76 1.73 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Based on their evaluation as of the end of the period covered by this Form 10-K, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) Changes in internal control. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. See Item 8. Financial Statements and Supplementary Data—“Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm.” Item 9B. Other Information None. 61 Item 10. Directors, Executive Officers and Corporate Governance PART III Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services Incorporated by reference herein pursuant to Rule 12b—23 are (1) “Election of Directors,” (2) “Executive Compensation,” (3) “Other Information Concerning the Board of Directors,” (4) “Stock Ownership,” and (5) “Selection of Independent Registered Public Accounting Firm,” appearing in the Proxy Statement filed pursuant to Regulation 14A in connection with the registrant’s Annual Meeting of Shareholders to be held on May 13, 2008. The information appearing in such Proxy Statement under the caption “Audit Committee Report” and the other information appearing in such Proxy Statement and not specifically incorporated by reference herein is not incorporated herein. As to Item 10 above, also see the information reported in Part I of this Form 10-K, under the caption “Executive Officers of the Registrant,” which is incorporated herein by reference. As to Item 10 above, the Company has adopted a Code of Ethics applicable to its principal executive officer, principal financial officer and principal accounting officer and other Company officials. The text of the Code of Ethics is available on the Company’s Internet site at www.MSANet.com. Any amendment to, or waiver of, a required provision of the Code of Ethics that applies to the Company’s principal executive, financial or accounting officer will also be posted on the Company’s Internet site at that address. As to Item 12 above, following table sets forth information as of December 31, 2007 concerning common stock issuable under the Company’s equity compensation plans. Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by security holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,562,405 Equity compensation plans not approved by security holders . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None 1,562,405 $23.12 — $23.12 732,476* None 732,476 * Includes 642,877 shares available for issuance under the Company’s 1998 Management Share Incentive Plan (MSIP) and 89,599 shares available for issuance under the Company’s 1990 Non-Employee Directors’ Stock Option Plan (DSOP). In addition to stock options, the DSOP authorizes the issuance of restricted stock awards, and the MSIP authorizes the issuance of stock appreciation rights, restricted stock, performance awards and other stock and stock-based awards. 62 PART IV Item 15. Exhibits and Financial Statement Schedules (a) 1. Financial Statements and Report of Independent Registered Public Accounting Firm (see Part II, Item 8 of this Form 10-K). The following information is filed as part of this Form 10-K. Management’s Report on Responsibility for Financial Reporting and Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statement of Income—three years ended December 31, 2007 . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheet—December 31, 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statement of Cash Flows—three years ended December 31, 2007 . . . . . . . . . . . . . . . . . Consolidated Statement of Changes in Retained Earnings and Other Comprehensive Income— three years ended December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 35 36 37 38 39 40 41 (a) 2. The following additional financial information for the three years ended December 31, 2007 is filed with the report and should be read in conjunction with the above financial statements: Report of Independent Registered Public Accounting Firm on Financial Statement Schedule Schedule II—Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, not material or the required information is shown in the consolidated financial statements and consolidated notes to the financial statements listed above. (a) 3. Exhibits (3)(i) Restated Articles of Incorporation as amended to January 16, 2004, filed as Exhibit 3(i) to Form 10-K on March 15, 2004, is incorporated herein by reference. (3)(ii) By-laws of the registrant, as amended on October 26, 2004, filed as Exhibit 3.1 to Form 8-K on October 27, 2004, is incorporated herein by reference. (10)(a)* 1998 Management Share Incentive Plan, as amended March 10, 1999, filed as Exhibit 10(a) to Form 10-Q on May 9, 2007, is incorporated herein by reference. (10)(b)* Retirement Plan for Directors, as amended effective April 1, 2001, filed as Exhibit 10(a) to Form 10-Q on May 10, 2006, is incorporated herein by reference. (10)(c)* Supplemental Pension Plan as of May 5, 1998, filed as Exhibit 10(d) to Form 10-Q on August 12, 2003, is incorporated herein by reference. (10)(d)* 1990 Non-Employee Directors’ Stock Option Plan as amended May 15, 2007, filed as Exhibit 10(b) to Form 10-Q on August 7, 2007, is incorporated herein by reference. (10)(e)* Executive Insurance Program as Amended and Restated as of January 1, 2006, filed as Exhibit 10(a) to Form 10-Q on August 7, 2007, is incorporated herein by reference. (10)(f)* Annual Incentive Bonus Plan as of May 5, 1998, filed as Exhibit 10(g) to Form 10-Q on August 12, 2003, is incorporated herein by reference. (10)(g)* Form of Severance Agreement as of May 20, 1998 between the registrant and John T. Ryan III, filed as Exhibit 10(h) to Form 10-Q on August 12, 2003, is incorporated herein by reference. 63 (10)(h)* Form of Severance Agreement between the registrant and the other executive officers filed as Exhibit 10(i) to Form 10-Q on August 12, 2003, is incorporated herein by reference. (10)(i)* First Amendment to the 1998 Management Share Incentive Plan as of March 10, 1999, filed as Exhibit 10(i) to Form 10-Q on August 6, 2004, is incorporated herein by reference. (10)(j) Trust Agreement as of June 1, 1996 between the registrant and PNC Bank, N.A. re the Mine Safety Appliances Company Stock Compensation Trust filed as Exhibit 10(k) to Form 10-K on March 28, 2003, is incorporated herein by reference. (10)(k)* MSA Supplemental Savings Plan, as amended and restated effective January 1, 2003, filed as Exhibit 10(l) to Form 10-K on March 28, 2003, is incorporated herein by reference. (10)(l)* CEO Annual Incentive Award Plan filed as Appendix A to the registrant’s definitive proxy statement (21) (23) dated March 29, 2005, is incorporated herein by reference. Affiliates of the registrant is filed herewith. Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm is filed herewith. (31)(1) Certification of J. T. Ryan III pursuant to Rule 13a-14(a) is filed herewith. (31)(2) Certification of D. L. Zeitler pursuant to Rule 13a-14(a) is filed herewith. (32) Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.(S)1350 is filed herewith. * The exhibits marked by an asterisk are management contracts or compensatory plans or arrangements. The registrant agrees to furnish to the Commission upon request copies of all instruments with respect to long-term debt referred to in Note 9 of the Notes to Consolidated Financial Statements filed as part of Item 8 of this annual report which have not been previously filed or are not filed herewith. 64 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MINE SAFETY APPLIANCES COMPANY February 29, 2008 (Date) By /s/ JOHN T. RYAN III John T. Ryan III Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ JOHN T. RYAN III John T. Ryan III Director; Chairman of the Board and February 29, 2008 Chief Executive Officer /s/ WILLIAM M. LAMBERT Director; President and Chief Operating February 29, 2008 William M. Lambert Officer /s/ DENNIS L. ZEITLER Senior Vice President—Finance; February 29, 2008 Dennis L. Zeitler Principal Financial and Accounting Officer /s/ ROBERT A. BRUGGEWORTH Director February 29, 2008 Robert A. Bruggeworth /s/ JAMES A. CEDERNA James A. Cederna Director February 29, 2008 /s/ THOMAS B. HOTOPP Director February 29, 2008 Thomas B. Hotopp /s/ DIANE M. PEARSE Director February 29, 2008 Diane M. Pearse /s/ L. EDWARD SHAW, JR. L. Edward Shaw, Jr. /s/ JOHN C. UNKOVIC John C. Unkovic Director Director February 29, 2008 February 29, 2008 /s/ THOMAS H. WITMER Director February 29, 2008 Thomas H. Witmer 65 Report of Independent Registered Public Accounting Firm on Financial Statement Schedule To the Shareholders and Board of Directors of Mine Safety Appliances Company: Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February 29, 2008 appearing in the 2007 Annual Report to Shareholders of Mine Safety Appliances Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP Pittsburgh, Pennsylvania February 29, 2008 F-1 MINE SAFETY APPLIANCES COMPANY AND AFFILIATES VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 2007 SCHEDULE II Allowance for doubtful accounts: Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions— 2007 2006 2005 (In thousands) $5,574 $6,041 $7,548 Charged to costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,673 1,063 474 Deductions— Deductions from reserves (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689 Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,558 Income tax valuation allowance: Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions— — Charged to costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,846 Deductions— Deductions from reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,846 1,530 5,574 1,981 6,041 — — — — — — — — (1) Bad debts written off, net of recoveries. F-2 

Continue reading text version or see original annual report in PDF format above