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
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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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.
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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.
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•
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.
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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