| MINE SAFETY APPLIANCES CO 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 US 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 and fueled the demand for many of our products such as SCBAs, gas masks and Advanced Combat Helmets |
| Approximately 15prca of our net sales for the year ended December 31, 2005 were made directly to US 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 |
| 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 material 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 could have a material 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 8 ______________________________________________________________________ [35]Table of Contents 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 material 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 |
| 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 |
| 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 2005, approximately 38prca 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; • 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 US 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 9 ______________________________________________________________________ [36]Table of Contents material adverse effect on our business, results of operations and financial condition |
| While we attempt to minimize volatility in component and material pricing primarily by negotiating longer-term supply agreements with fixed prices or fixed price ranges and maintaining multiple sources of key materials, 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 material 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 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 material 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 material 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 10 ______________________________________________________________________ [37]Table of Contents 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, 2005, our operations in our Europe and International segments accounted for 21prca and 16prca of our net sales, respectively |
| The results of our foreign operations are reported in the local currency and then translated into US dollars at the applicable exchange rates for inclusion in our consolidated financial statements |
| The exchange rates between some of these currencies and the US 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 US 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 material 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 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 |