Mine Safety Appliances Co. Q4 2007 Earnings Call Transcript

Mar. 3.08 | About: MSA Safety (MSA)

Mine Safety Appliances Co. (NYSE:MSA)

Q4 2007 Earnings Call

February 29, 2008 10:00 am ET

Executives

John Ryan III - Chairman and CEO

Dennis Zeitler - SVP and CFO

Bill Lambert - President and COO

Joe Bigler - President of MSA North America

Rob Canizares - EVP and President of MSA International

Analysts

Brian Ruttenbur - Morgan Keegan

Jack Hain - Barrington Research

Richard Eastman - Robert Baird

Brian Butler - Friedman, Billings, Ramsey & Co.

Jason Rogers - Great Lakes Review

Jim Hollister - Analyst

Operator

Good morning, ladies and gentlemen and welcome to the MSA fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note this conference is being recorded. I would now like to turn the call over to your host Mr. Mark Deasy. Mr. Deasy, you may begin.

Mark Deasy

Thank you, Gretchen, and good morning everyone, and welcome to the MSA fourth quarter and yearend conference call for 2007. As Gretchen said, I'm Mark Deasy, Communications Director, and with me today are John Ryan III, Chairman and Chief Executive Officer, Dennis Zeitler, Senior Vice President and Chief Financial Officer; Bill Lambert, President and Chief Operating Officer; Joe Bigler, President of MSA North America; and Rob Canizares, Executive Vice President and President of MSA International.

Our fourth quarter earnings release was issued this morning at 8:30 am and we hope everyone has had an opportunity to review it. It is accessible on the homepage of MSA's website.

We will begin today's call with John Ryan, who will provide commentary on our fourth quarter and yearend results. John will be followed by Dennis, who will review our financials. We will then open up the call for questions and plan to adjourn by approximately 10:45.

At this point, I would like to remind everyone that the matters discussed on this call, with the exception of historical information, are forward-looking statements within the meaning of Section 27 A of the Securities Act of 1933 as amended, and Section 21 E of the Securities Exchange Act of 1934 as amended. Forward-looking statements including, without limitation, all projections and anticipated levels of future performance, involve risks, uncertainties, and other factors that may cause our actual results to differ materially from those discussed here.

These risks, uncertainties and other factors are detailed from time-to-time in our filings with the SEC, including our most recent Form 10Q, which was filed on November 2, 2007. We strongly urge you to review all such filings for a more detailed discussion of such risks and uncertainties. Our SEC filings can be easily obtained at no charge at www.sec.gov, MSA's own website and a number of other commercial websites.

That concludes our forward-looking statement. So at this point, I would like to turn the call over to John Ryan III for his comments. John?

John Ryan III

Thank you, Mark. Good morning. Before I get into details of financials performance I did want to comment on things that are going particularly well with the Company. I'm pleased with how are new global organization is working out. Many people are new with their responsibilities but they're getting a good grasp for them and our leaders are working together as an effective global team, which is crucial for this organization to work.

I'm pleased with the fine increase in international sales of 2007, a 19% increase in sales on local currency plus another 4.5% from the fall of the dollar. Our North American hardhat line with the ubiquitous V-gard helmet continues to chug right along and fall protection made a nice jump. We've got more business in homeland security respirators, thermal imaging cameras, the advanced combat helmet, and made our sales goals in Mexico.

In Europe, we made fine advances in hearing protection and permanent instruments and got a very large order for breathing apparatus from Bundeswehr, the Germany military. Project Magellan is providing positive impact on our product cost. And Bill Lambert and I were pleased in December to go Queretaro, Mexico and inaugurate our new facilities there.

We passed a milestone last year in that our sales outside of the U.S. and Canada are now greater than that within the U.S. and Canada. And I hope they stay together for a while and give some good competition for two sides there. There were a lot of complicated matters in both the fourth quarter and the year, and we tried to fully inform you of this in our press release this morning. Was long because there is a lot of important unusual information to help you evaluate our business. I won't review them all here but there are few major items impacting on our results.

European sales in euros were flat to slightly down for the year 2007 as compared to 2006. Annual sales as translated in dollars were up and this followed a very strong growth a year before. In 2006 in Europe there was enormous buildup of backlog throughout most of the year and then a substantial liquidation of that backlog in the fourth quarter 2006.

In 2007, we got a better handle on shipping out our European orders throughout the year and thus could not leave as much backlog for our fourth quarter liquidation. Thus in the fourth quarter 2007 versus 2006, our European invoicing was down. Nevertheless, versus our expectations, MSA Europe did fairly well in the fourth quarter 2007 and our incoming orders in Europe increased in last quarter versus equivalent quarter 2006.

The next major item was that our net profit lines in several areas where hit by unusual tax charges particularly in Japan in the fourth quarter on their deferred tax asset and in Germany in third quarter due to reduction in the statutory tax rate. The latter of which is good in the medium and long-term but in the year 2007 made us write-off deferred tax asset in Germany.

Please note that for the Company as a whole, our total profit before taxes in the fourth quarter 2007 were up 16% from the equivalent quarter 2006 but net income for the fourth quarter 2006 and 2007 declined entirely due to the tax situation. First the Japanese tax write-off in 2007 and additionally the comparison to the fourth quarter 2006 in which we had a number of positive tax issue resolutions in U.S., which as expected did not reoccur in 2007.

For the year, if we could exclude the one-time German tax charges and the restructuring over plan in Europe, mostly due to management changes, we would have had a percent improvement in earnings in Europe in 2007 over 2006 for the full year approximately equal to our increase in reported sales there. Likewise in international except for the Japanese tax charges, our earnings would have been up roughly proportional to sales increase.

Overall, for the company, there were a number of special items outside of normal operations during the year, but the negative of taxes and other one-time charges roughly offset the positive of the two major real estate sales one of which was related to the Project Magellan. So while we made record sales in 2007, we missed record earnings. The GAAP for the year was entirely due to two things, invoicing the U.S. Fire Service, which I will discuss in detail and the tax charges in Germany and Japan that we have recently mentioned.

To take the easier part of our 2007 results first, our military business that took a large and expected drop in 2006, giving us the objective that we wanted to get back on the up slope in this business in 2007. We were successful in getting more invoicing from the North American Military in 2007 than we did in 2006, and we also beat our internal plans for this segment. We wish we could have done better in shipments in this area, but supply issues on two projects and FDA approval complications on a third pushed some major military invoicing into 2008.

We've long said that we would be disappointed if our commercial business couldn't, over the medium term, growth better than 10% per year. I'm pleased to report that outside the two volatile areas of the U.S. Fire Service and, of course, outside the U.S. Military, North American Military, once more we accomplished a 10% growth in 2007 helped by major contributions from international hard hats, fall protection and permanent instruments in Europe and also assisted a little by currency exchange movement.

We usually hope for a couple percentage point gain every year from selective acquisitions in the commercial area, but our major 2007 acquisition impact was from Paraclete, whose impact is mostly in the military deals.

Moving to Fire Service. In preparing these remarks, I found it was very useful to look at what I said in the Chairman's letter of Annual Report last year about this market and review how things happened. We had problems with the U.S. Federal Government Assistance to Firefighter Grants, AFG, in the calendar year 2006. We had hoped that this would be resolved in 2007 and maybe even give us a year and a half worth of AFG funding in one calendar year.

We didn't quite make that but the overall flow of AFG funding was a lot better in 2007. We think in the end the AFG program will have releases of a year and half's worth funding within a year and a quarter. That is full year 2007 and first quarter 2008.

We had some concern of the percentage going to personal protective equipment in the 2006 releases, but that returned to normal in 2007. MSA's share of the orders of those who did purchase equipment is, of course, a critical item for us. I am pleased with the measured results that we have from those customers, who utilized and spent their AFG funding.

We ask at this time last year, the market would go more of a stocking up on the old NFPA standard devices or go to the new standard. The result was they went strongly for the new standards, even though we had a half decent second quarter finishing out the old standard. We have said all along, that the new NFPA standard is good for our business in the medium-term and more importantly it's good for the firefighters in the America. But the new standard could be disruptive to our business in the short-term as customer evaluate a new generation of equipment and try to get enough samples to make an informed decision.

In the fourth quarter, we did fairly well though not ideally in ramping up our production. I gave priority to getting samples into the marketplace because this is the seed point of our getting more business. We have some lingering NFPA certification issues on a model representing about 15% of our total sales and a major military contract. We recently passed a key test on this and expect to get approval for that in the next 30 days. The approval agency has just [gain] to accept our approval application for our upgrade kits to the new NFPA standards and we hope to get that done within the year.

With our getting certification of most of our breathing apparatus lines to NFPA standards in September, we had been accounting our dramatic recovery in the U.S. Fire Service in the fourth quarter of 2007 in order to make our year's goals. Unfortunately, the clock ran out on us in 2007, primarily because the marketplace decided to wait to evaluate new equipment.

We feel that there was a major backup of unspent AFG funding, some of which has been released relatively recently. People want to be able to see, touch and test their alternatives under fire ground conditions. In the last month and a half of 2007, we were there in terms of getting samples out in the marketplace. Our competition was not. Some of them hadn't gotten NFPA certifications and the others did not have many samples in the marketplace until holiday time.

If we would have been on the other side of such a situation in almost all of our other markets such as hard hats, instruments, fall protection and respirators, we know that we would have been zapped in our market share. And so for this reason, we have over the years worked very hard and mostly successfully to avoid ever being in such a situation.

However, this market, the Fire Service, where we were ahead of the curve is one that has a more long term outlook. Not so many customers were prepared to wait a number of months on what for them might be a 10-year decision. Thus our competitor's travails in getting NFPA certification were of modest help to us in the fourth quarter and in many cases may have been an impediment by delaying evaluation.

Additionally, new administrative procedures were put into the specific utilization of individual AFG grants to an individual fire department. End users had to spend quite a bit of time learning about all these new procedures and then figuring how to work with them in order to get the product their firefighters really needed.

In some cases customers had to go and get additional funding from their municipalities. In many cases fire departments decided to wait and see how their buddies in the next town handle the situation, see what works and what doesn't. All this gawking around for money put us against the holidays and as I said the clock ran out on us.

In 2007, however, we see a more positive outlook now. Normally, we do not comment on interim activities in the quarter except for extraordinary orders. However, in the case of this fourth quarter release, we do have two months of 2008 activity less one day under our belt as opposed to one month in the other quarters' release.

We do think that activity in the Fire Service in North America in the first two months of 2008 shows considerable movement in spending the fire service funding. For MSA, our January and February in both the U.S. and North American Fire Service, our incoming orders have been quite good and nicely over our average month plan for the year, above our seasonal expectations for January and February, and well above the previous year's results for the equivalent months.

Quotations have increased significantly beginning in late 2007 and our sales people and our distributors are very upbeat about the situation. Our production is getting geared up and we think that we can turn these incoming orders into shipments reasonably soon. Once we get certification, the NFPA standards, on those models with telemetry in the next month, we hope also to be able to start shipping this backlog business out to our customers.

AFG money to an individuals department must be spent within 12 months or the Fire Department loses their money. We don't think many departments are going to get into this bind. So there is an outer limit of the evaluation phase of the outstanding AFG funding.

Our outlook is that our sales to the U.S Fire Service should have a good start to this year. If the new year's AFG funding goes through the political process in the way that it has been in the past, that is the administration low balls, congress high balls and congress gets their way. And if the AFG funding flows in the new program here as well as its done in this program here, we should do well in the U.S Fire Service in 2008.

The new NFPA standard will provide a motivation for fire departments to upgrade their equipment to provide the best protection for their firefighters, which their firefighters deserve. When the approval agencies finally [dane] to proceed with our application for the upgrade kits, then sometime during this year we should be able to shift these kits, which provide an economical way for current MSA users to give their firefighters the latest and the greatest protection compliant with the new NFPA standards.

With the backlog we have, we expect at this point that the North American military element of our business should be up in 2008 over 2007. We have initially gotten some good military orders in Europe. And the rest of MSA's business outside of all the U.S. Fire Service and North America Military, we continue to pursue our long-term goal of a 10% annual sales growth. Now, there is a long way to go for a successful 2008, both for the U.S. Fire Service and overall. As I told people here, these are one or two nice months. Now, we just have to do it 10 more times in order to have a good year.

The monsoon recession is out there in many things we read. We fortunately are not exposed to some of the most venerable parts of the U.S. economy, but we cannot and should not say that the recession won't come to effect us. What we can say as of this date, is that so far we have not seen it in any significant way. Some of our markets like oil and gas and energy, and like non-residential construction working on infrastructure projects maybe marching to their own different drummers. MSA also has a fine diversification of markets and geographies, which means that localized recession would affect us but not total.

If we do not have a major external disruption of the types I've just been discussing, we are hoping we have the conditions to have a good year in 2008. When results are better, we don't have to explain ourselves so much and issue such long press releases.

As has been announced last year, I am planning to retire as CEO and as an active employee of the Company. I would turn the title over to Bill Lambert at the end of the shareholders meeting in May. I will have an office here but not use it regularly. I plan to maintain my life time deep interest in this wonderful Company and to be very active as a Director and as a major shareholder of MSA.

I will have Bill take most of the load at the next quarterly call along with Dennis and he will give me a few minutes for valedictory dance. I have seen my relationship with the Company moving from a role comparable to that of a parent to the role of that of the grandparents. I have done both of these things in my personal life and I know the difference.

Now, I'll turn program over to Dennis to talk about financial details.

Dennis Zeitler

Thank you, John. Good morning, everyone. I'd like to give you some further insight into our fourth quarter performance and comment on the balance sheet and cash flow statements. Additional information will be available later today when we file our Form 10-K with the Securities and Exchange Commission.

As John mentioned sales in the quarter of 2007 were a record $268 million compared to the fourth quarter of 2006 sales increased 5% with all of that increase being growth in our international segments, which was up $15 million. For the full year, sales were a record $990 million, an increase of 8% with sales increases in each of our three geographic segments.

Our global sales were also higher in each of our three market categories. The core industrial market, which is approximately 60% of our total sales, is up 5% this quarter with strength in gas detection instruments, head protection and fall protection products. The 28% of our sales to the Fire Service is up 6% with increase sales of fire helmets and thermal imaging cameras. And our military business is up 2% over last year due to our Paraclete Body Armor acquisition.

As we have often discussed in the past, the two most volatile pieces of our total sales are the United States Fire Service and United States Military. Volatility in the U.S. Fire Service is due to the new NFPA standards and past federal funding issues. And then, there is inherent volatility as a supplier to the U.S. Military.

Our U.S. Fire Service sales decreased 10% in calendar year 2007 and U.S. Military sales increased 12%. When we look at our globally diversified sales that comprise nearly 80% of our total sales in 2007, aside from these two specific U.S. markets, revenue grew 5% this quarter and 12% year-to-date. As John has said, we are disappointed that our U.S. Fire Service sales did not increase dramatically in this fourth quarter as the new NFPA standard is now effective, our product has been approved to the new standards and federal funding is flowing.

Fire department continues to evaluate product offerings based upon both the number of quotation requests that we have been receiving for SCBA over the past five months and actual orders received so far in 2008. We are confident that SCBA sales will be increasing. We're also confident that our U.S. Military sales will be comparatively stronger based upon the ACH orders that we have already announced and we will soon begin shipping our new Air Force SCBA.

Our gross profit rate for this quarter was 38%, 4% above the fourth quarter of 2006. For the full year of 2007 our gross profit rate was also 38%, as it was for the full year of 2006. Our gross profit rate in the fourth quarter of 2006 was suppressed by a large military order in Eastern Europe.

Selling and administrative costs in the fourth quarter were 24% of sales, up 2% from the prior year. For the full year of 2007, SG&A expense was slightly over 24% of sales, up from slightly less than 24% of sales in 2006. Our R&D expenses are up 44% this quarter as we recognized some of the significant costs at the NFPA approval process and we continue to invest in new technology and products that will grow our organic sales in the years to come. R&D cost increased 16% in 2007 over 2006.

The resulting operating income excluding restructuring charges and currency fluctuations represents an operating margin rate of 10% this quarter, equal to the rates for the full year of 2007 and 1% higher than the fourth quarter of 2006. It should also be noted that EBIT, earnings before interest and taxes for the full year of 2007 increased 15% over 2006, primarily due to the real estate transactions we successfully concluded in 2007, which generated over $200 million of other income. This quarter we sold our Clifton, New Jersey factory resulting in a pretax gain of $1.9 million.

Our tax rate for this quarter was 35% versus 16% in the fourth quarter of last year. The higher rate this quarter is due to out decision to establish a reserve of $1.7 million due to the uncertainty of utilizing our deferred tax asset in Japan. The unusually low rate in the fourth quarter of 2006 was due to the full year recognition of the then restated, our reinstated R&D tax credit in the United States.

The bottomline in the fourth quarter is net income of $17.5 million, $0.49 per basic share outstanding versus $0.54 per share last year. For the full year, net income was $68 million versus $64 million last year, and earnings per share increased 8% to $1.89.

Just a few comments on the balance sheet and cash flow statement. Our cash position decreased $9 million this quarter to $75 million. Our net working capital increased 5% during this quarter as sales increased 8% over the third quarter. Our cash outflows for the year in descending order of important, for our capital equipment, dividends and stock repurchases. Our capital expenditure plans for 2008 are high as in 2007, due to the new Chinese factory that is under construction as well as major improvements that are underway at our Australian and Brazilian factories.

Those are my comments. At this point, John Ryan and Bill Lambert, Rob Canizares, Joe Bigler and I are more than glad to answer whatever questions you may have. Please remember that MSA does not give what is referred to as guidance and that precludes most discussions related to our expectation for future sales and earnings. Having said that, we will now own the call to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Brian Ruttenbur. Brian your line is open, please go ahead.

Brian Ruttenbur - Morgan Keegan

Thank you very much. A couple of questions. Let me start up with the easy ones first. Stock-based comp in the quarter, D&A, and your diluted share count?

Dennis Zeitler

You're look to the specific numbers, Brian?

Brian Ruttenbur - Morgan Keegan

Yeah. If you can, if not, we can deal with that later?

Dennis Zeitler

I mean we can just see that most of that in the 10-K this afternoon or if you want to.

Brian Ruttenbur - Morgan Keegan

Then I'll just get it this afternoon. I didn't know if you had it handy. Okay, so those were the softball questions. Are you ready for the hard ones?

Dennis Zeitler

We are. I mean yeah.

Brian Ruttenbur - Morgan Keegan

Okay. First quarter '08 versus fourth quarter '07, I know you don't give a specific guidance, but can you talk in generality, do you expect the first quarter to be similar to the fourth quarter because we've got so much traction on the AFG side?

Dennis Zeitler

I don't think, Brian that we're going to give any particular guidance as to how we think the quarter is going to wind up. We are…

Brian Ruttenbur - Morgan Keegan

How about the first half versus the second half of the year?

Dennis Zeitler

Well, we are saying is that the U.S Fire Service has been particularly strong in the first two months of this year as regards incoming orders.

Brian Ruttenbur - Morgan Keegan

Okay. The rest of the business is seasonally weaker during the first quarter, is that right?

John Ryan III

It's not. No, I don't think it's seasonally a whole lot different than any other quarter. And as I've said in my remarks here is that we have not seen movements in our non-fire service, non-military business that might be indicative of some sort of recession been out there.

Brian Ruttenbur - Morgan Keegan

Okay.

John Ryan III

And we are reasonably happy.

Brian Ruttenbur - Morgan Keegan

Okay. And then the last question is the goal for '08 is to have up revenue and up earnings versus '07 or versus record?

John Ryan III

Well, we figured that for a number of years we had record earnings without having said anything about before and we just went out and did it. In the last two years, we told -- we said our goal is record earnings, we didn't make it. So it's like a little bit of sports superstition. You do some things didn't work, well, you do something different this time. What we'll do different is not comment as to how much of an improvement our earnings might be this year. We'll just go out and work real hard to come up with real nice results.

Brian Ruttenbur - Morgan Keegan

Okay. And maybe we can just add on to that cash flow, are you looking for any kind of cash flow numbers that we can relate to our balance sheet issues by the end of '08 where you want to be?

John Ryan III

I won't give you a little bit of color on that, Brian. I think we had a couple of accounts receivable issues at the end of 2007. And we're still working on extended terms with our fire service distributors and so our business really hasn't picked up yet. I think you'll see some improvement in our receivables as their business improves. We also had a little bit of a glitch with our U.S. military invoicing because the government switched over to a more -- to a new and improved invoicing system, which is electronic and we got delayed and about $8 million worth of U.S. military invoicing in December that got pushed into, as far as being received as cash, into 2008.

I did mention on the capital expenditure side, we actually have maybe $5million to $10 million greater capital expenditures in 2008 than we had in 2007. So we've got a couple of positives and one negative on the cash flow.

Brian Ruttenbur - Morgan Keegan

Okay. Thank you very much. That helps.

Dennis Zeitler

You're welcome, Brian

Operator

Our next question comes from Jack Hain. Jack, your line is open Please go ahead.

Jack Hain - Barrington Research

Good morning, gentlemen. I am sitting in for Walt this morning. I had two questions for you. First related to sales in Europe, I know in the release and at the start of the call you discussed the fact that there was some lack of comparability in Q4 sales to Europe because of the slower backlog liquidation, aside from that do you see any sort of a slowdown in Europe and if so, where in and in what products?

Rob Canizares

This is Rob Canizares. Jack, just to put a perspective on one of the factors that affected our sales in Europe, we had a shortage of a key chemical component that we use for one of our products. And what happens is that the global orders of MSA, both North America and the rest of the world exceeded the capacity of our supplier. So we ended up with backlog that we couldn't ship and that was one of the factors that affected us in the quarter.

In terms of global slowdown in Europe, we're sort of in a similar boat to what John referred to in North America. The beginning of the year looks for the moment not affected by any recession. Incoming orders are coming in at a healthy base and so far we don't see a slowdown.

Jack Hain - Barrington Research

Okay. Great. Second question was to regards the SCBA's. I was just wondering as far as price competition goes, how much about is the Firehawk M7 and is it competitive pricing? And also, is profitability better on the Firehawk than on than on previous SCBA products?

Joe Bigler

This is Joe Bigler. Let's see, your first question in terms of profitability, we do expect to see improved margins on the new NSPA 2007 M7 product. We've commented on that previously and we are seeing that. And your second question is it's a very competitive product in terms of average selling price, the products vary anywhere from about $4,800 to as high as $6,200 depending upon various accessories that departments will add on to it, but we remain, what we've seen in the market so far and with our quotation activity, which really has almost doubled in the first two months of this year versus the last six months of last year. We find our pricing to be very competitive and we're seeing quite a bit of very positive activity.

Jack Hain - Barrington Research

Okay. Thanks a lot.

John Ryan III

I would that in discussing Europe, we did have a very large government order in 2006 that we're hoping to get maybe with a different product in 2007 and didn't get it in 2007. That was a factor. Europe had a wonderful job between '05 and 06. So then it was flat '06 and '07, but over two years, the increase is real nice.

Jack Hain - Barrington Research

Okay. Thanks for that. I have no questions.

John Ryan III

Yeah.

Operator

Thank you. Our next question comes from Richard Eastman. Richard, your line is open. Please go ahead.

Richard Eastman - Robert Baird

Yes. Good morning.

John Ryan III

Hi. Greets.

Richard Eastman - Robert Baird

Just a couple of things. John, you had mentioned in your commentary when you looked at the fourth quarter and I believe you, you made a similar suggestion about '07 that invoicing in the U.S. Fire Service and this Japan, German tax credit in the fourth quarter were really the two disappointments, yet I'm looking at the expense lines, SG&A and your R&D -- I'm going to just take you at your comments, was your SG&A and your R&D in the fourth quarter at plan or was it well above plan?

John Ryan III

Well, in terms of the fourth quarter, we knew that there was a lot of backed up R&D relating to NFPA approvals and we knew a lot of those bills were coming in and that were some major factor in why the R&D in fourth quarter was up. In some parts of the world, I think we did real good job at adjusting our SG&A expenses to the way sales were tracking and some other parts of the world, we could have done little better job in that. Do we have details here Bill Lambert, perhaps?

Bill Lambert

Hi, Rich. It's Bill. If we take a look at the full year, John commented on the fourth quarter, but if we look at the full year for SG&A and we are up $25.4 million, $7.5 million of that is just due to the FX rate. So the foreign exchange rate accounts for $7.5 million of that. So that leaves us with about $17.5 million and when we take a look at the -- there were some one items in North America with related to insurance and that sort of thing and we take that out, we're really then looking at about 7% increase in SG&A for the full year and a lot of that is coming from international, where we grew business for the year, as you know, about 24%.

And so as we put in the selling organization in other parts of the world and we put feet on the street, it is causing us to spend more money in that area. As a percent of sales total SG&A was about 24.5% versus 23.5%, the year earlier. We're making some fairly significant investments in international as we know and we're seeing some of the sales growth that we want to see.

Richard Eastman - Robert Baird

And again, when I look at the combination whether it's just the SG&A line or whether it's R&D. As you roll into '08, are these absolute levels? Are you planning on growing off of kind of an annualized fourth quarter level?

John Ryan III

I don't think we'd say -- I mean I'm not even thinking in my mind what the annualized fourth level, we're thinking of the full year. In international, there will continue to be selling expense growth as we put in new companies, expand existing companies and such, but we are very aware that in some cases in 2007, we could have done better in expense control and we'll be watching how our sales are going and watching how our expenses are going, and also, hopefully not have a couple of oddball items that hit us in [2007].

Richard Eastman - Robert Baird

Well, in the R&D line, I mean some of the stuff you said there was some catch up there in terms of the expenses. Does R&D run at a $10 million quarterly rate or does that fall back -- does that drop back down now that we have some of these approvals?

Bill Lambert

Well, Rich, it's going to drop back down. That was running at about 3.7% of sales for the fourth quarter, which is higher than what our normal run rate is. So the fourth quarter was a fairly significant catch up quarter from an R&D expense perspective. So I think you're sense there is right that that was a high quarter.

Dennis Zeitler

Hi, Rich. It's Dennis. Let me give you a high level -- some higher level numbers. You're looking for improved operating margin as a percentage of sales right, I think our expectation is that SG&A including or excluding R&D will be a smaller percent of sales in 2008 than it was in 2007. But we actually expect to get more of an improvement in the gross profit line…

Richard Eastman - Robert Baird

Right.

Dennis Zeitler

…than we do in the operating expense line. So we're looking for improvement in both as a percentage of sales. The larger improvement is in the factory as opposed to the operating expenses.

Dennis Zeitler

And one of the big reasons for that is the expectation on the SCBA sales, which are high gross profit sales.

Richard Eastman - Robert Baird

Okay.

John Ryan III

Yeah. I have had a chance to look at the numbers while the others were talking. And yes, clearly, R&D in the fourth quarter was extraordinarily high and doesn't reflect -- we are planning on increasing R&D sales but that quarterly rate is average and a lot of them or all of those bills for the approvals of the NFPA devices, which we knew we had to have and didn't get sent to us until the fourth quarter

Richard Eastman - Robert Baird

And then can I -- and again, just to carry that expense question maybe into the geographies when I look at the net income both in Europe and international, Europe I guess would be impacted by the German tax charge?

John Ryan III

Yes

Richard Eastman - Robert Baird

And so would an international by the Japan tax charge.

John Ryan III

Yes

Dennis Zeitler

Yes.

Richard Eastman - Robert Baird

Okay. Because, again, I'm looking at the sales growth there and some of the excitement on the international sales growth, kind of, fades when I look at the profit contribution being so minimal on that sales growth.

John Ryan III

Yeah. Basically, as I mentioned in my comments here, Europe profit growth would have been up equivalent in percent to their sales growth, if it wasn't for those tax charges and also one-time over plan over expectation restructuring charge in Europe. And international would have been over except for the Japanese tax.

Now, we would hope overtime, that you get a nice increase in percentage of sales like you get international. We'd like to see our profit go up by a higher percentage. But one must realize as you're doing missionary work and as you're working in a less mature economy, sometimes you do have to roll up the sales equivalent to, I mean, the cost equivalent, selling costs equivalent as much as your sales go up. But as they mature that will change and we would hope in all of our parts of the world that our profitability would go up a greater percentage then our sales went up, but we did have a couple of these things happening this year. A few other things that we'll do a better job in 2008.

Richard Eastman - Robert Baird

And then, just one last question. Within the AFG program and the process itself, what exactly is this new administrative procedure, was this something that it just occurred in the fourth quarter? Or why is that something different or a change once the grants have already been made?

Joe Bigler

Well, what they've done -- this is Joe Bigler. What they've done as they came out during the fourth quarter and where there was some confusion created is, they're going back that once the grants are actually awarded, the municipalities need to go out and really seek three bids from three different manufacturers. And then, the AFG will look at that and they will give them enough money to pay for the lowest bid. Then the municipality has to go back to their city council to try to find out, if there can be some additional money.

So there was some real confusion about once the award was made going out and getting three bids, how do we choose, do we have to choose the least expensive bid. This isn't the product that we want? So as John said in his opening comments that really created some confusion. It was there but I don't think many of the municipalities really understood till the fourth quarter, as they really started to dig into it and some of them started to make decisions.

It's even got more complicated. But in the last week or so, FEMA has put out a notice to all of the awardees saying now that they look at the pricing of 2007 compliance devices, that if the department will go out again and get three bids and submit the lowest bid, they could get an additional $400 to $500 above and beyond what has already been granted.

So now we're seeing some of the department saying, gee, let me hold off here and I think I'm going to go back and I'm going to ask for three additions bids, submit the necessary paperwork, and we'll be able to get an addition $400 to $500. So there are certainly some changes that seem to be coming back or coming out of the agency that certainly created a lot of confusion and indecision in the fourth quarter. And although we're seeing that tide really break open and people really making decisions and users making decisions now, there still seems to be some confusion as to the pricing and how many dollars they can really get for SCBA.

John Ryan III

And we could be here for another hour or so going through all of these complications. There was the concept that they had a ceiling price and if you kept within the ceiling price, all right, but let's take bottomline. They are not required to take the low bid and our percentage of orders gained of the major the part of the areas we've been tracking has been quite satisfactory.

We see the impact of all of these administrative burden not so much in terms of our market share, but in terms of people just waiting and figuring it out and trying to see what the other guy did and not wanting to make a mistake and things like that. It's going through all process that has been somewhat of difficulty to us, particularly in the fourth quarter when this was all new and nobody knew what worked and what didn't worked. And so -- but we're still getting good share of our market.

Richard Eastman - Robert Baird

Yeah. Thank you.

Operator

Thank you. Our next question comes from Brian Butler. Brian, your line is open. Please go ahead.

Brian Butler - Friedman, Billings, Ramsey & Co.

Good morning, guys. Thanks for taking my questions.

John Ryan III

Great. Thanks.

Brian Butler - Friedman, Billings, Ramsey & Co.

First one just kind of on thought of just on the SCBA's again. I guess a simple way to ask it is what percentage of the SCBAs are typically purchased with AFG funds versus money is coming from the actual fire department budget. Because it seems like they might under a little bit of pressure in '08?

Dennis Zeitler

Well. That's a really a tough one to really come up with any type of quantifiable percentage. We certainly have tried to follow it over the last few years as to what spot was municipal dollars and what's purchased out of AFG. The bottomline is the fire departments are trying to provide the best level of protection to the firefighters. And they seem to able somehow, someway between AFG money and municipal help or those departments that are not getting AFG money, they seem to be finding the money through the municipalities and obviously because the pressure from the IAFF, the union, to get the money to update the devices and to provide the best protection with the newest SCBA. But as far as what the exact breakdown is, Brain, that's a tough one.

Brian Butler - Friedman, Billings, Ramsey & Co.

Well, not so much necessarily the exact breakdown, but just kind of your sense is -- are the SCBA purchases relatively resistant to budgetary pressures in the fire departments?

Dennis Zeitler

Hard to say. In some departments, obviously, providing the highest level and the best protection to the firefighters, fire departments for the most part are pretty dug on successful in getting the dollars that they need to assure that the firefighters are getting the right protection. Of course you have liability, you have insurance, city councils looking at that. So I would say generally speaking, the whole PPE market be it helmets, instruments, SCBA, thermal imaging cameras is somewhat sensitive to municipal budgets, but for the most part, I would say, typically with the SCBA, the municipalities and the fire departments generally speaking get what they want.

Brian Butler - Friedman, Billings, Ramsey & Co.

Okay. That’s helpful. And then on the military side, just any visibility on some of the body opportunities, I know you have the Paraclete out there and recently I think the Marines have said that the MTV, they're currently purchasing a little too heavy. I know there's a big XSAPI/ESAPI award coming up in August. Is that something you're looking to participate? So any kind of visibility on some of the contract awards that are pending that you guys are working on and kind of how you feel competitive it was?

Rob Canizares

You bet. We're excited about it. I mean first of all to comment on Paraclete, if you take a look at our fourth quarter sales of 2007 versus 2006, our Paraclete sales were up about 17%. And if you look at the full year 2006 and 2007, our Paraclete sales were up nearly 40%. And I'm looking at the full year of 2006. We had acquired them in September, but looking at their full year 2006 versus 2007 Paraclete sales were up 40%. So we're pleased with the progress that we're making there.

We're even more exited about the opportunities. You mentioned ESAPI and XSAPI. They are tremendous multimillion dollar opportunities. Since you are aware, both of those quotations were due I believe on February 7th. We had to get in our samples. We had to get in our quotations. Now, we expect, we've heard varying dates but we would expect, perhaps, the XSAPI will be decided sometime in June, between June and August. It just depends on the government going through the testing. They have a new laboratory that they've set up down in Aberdeen and they're really trying to get that lab set up to actually do all of the testing on the plates.

So we're exited about both the ESAPI and XSAPI opportunities. As I said, I think each of them were worth something about $1.2 million sets and each one of those sets have two plates in it and the numbers are just staggering. So what we have been working diligently throughout all of 2007, particularly in the fourth quarter in technology and we're exited about the opportunities there.

Brian Butler - Friedman, Billings, Ramsey & Co.

Do you have any -- on the offering you guys have for, let's say, those the XSAPI, I mean is there anything that kind of puts you in a better competitive position? I mean this has just been a market has been very dominated by one or two key players. And I'm just trying to get your sense of how you feel you fit in competitively or if there is some other measures that the military is using that you might be doing better than your competitors?

Rob Canizares

Well, I think our whole core of product leadership is really where we feel have an advantage. If you take look at their requirements on XSAPI, that is a very difficult specification to me. It really takes some advanced technology and ever since our acquisition apparently combined when we acquired Gallet a number of years ago with the advanced combat helmet, we really think in terms of advance technology and our capability and know how from an R&D standpoint, we think we have come up with some innovative, creative ways of meeting that XSAPI requirement. So, I would say, from a product leadership and technology standpoint that that certainly is what we feel we have an edge on. And hopefully, it will work out for us.

Bill Lambert

Brian, this is Bill. I'll just comment on Joe's areas of commentary. And certainly we're going up against some very established, very big and somewhat technology-driven companies as well. But we feel like we've really look at this hard, we feel like we've done a lot of the right R&D, and we hope that we can get a piece of this business. Certainly, these established competitors aren't going to give anything up easy.

But then, prior to 2003 MSA had zero share of the military helmet, ballistic helmet business and then became a very large and, in fact, major provider for the ACH Helmet. And we've done a lot of work in this area. We hope we've done all the right work, at the right cost point. We're gone up against some big players. But as Joe said, I think we've done the right things and we'll just have to see how this unfolds.

Brian Butler - Friedman, Billings, Ramsey & Co.

All right. That's great. Thank you very much. I hope the best of luck on the contract awards for sure.

John Ryan III

Thank you.

Dennis Zeitler

Thanks, Brain.

Operator

Thank you. Our next question comes from Jason Rogers. Jason, your line is open. Please go ahead.

Jason Rogers - Great Lakes Review

Good morning.

John Ryan III

Hi.

Dennis Zeitler

Hi, Jason.

Jason Rogers - Great Lakes Review

Did you give out the CapEx number for 2007?

Dennis Zeitler

I'm sure we did. $33 million.

Jason Rogers - Great Lakes Review

Okay. And what about cash flow from operations either for the quarter or the year?

Dennis Zeitler

Cash flow from operations for the year. It's $41.3 million.

John Ryan III

This is all be in the 10-K. It's coming out this afternoon.

Jason Rogers - Great Lakes Review

Okay. And then looking at SCBAs, how many of your competitors now have products on the market?

Dennis Zeitler

As far as those that actually have approval under 2007 version?

Jason Rogers - Great Lakes Review

Right. That would compete right with the Firehawk?

Dennis Zeitler

I believe right now we are sitting with four.

Jason Rogers - Great Lakes Review

Okay.

Dennis Zeitler

The only -- I'm sorry three. The only manufacturer we do have Scott Bacu, Interspiro has a version of the 2007 unit to the best of our understanding approved and ISI, I believe those are the three that have approval and then including ourselves.

Jason Rogers - Great Lakes Review

Okay. So then, given the fact you are receiving good orders for the Firehawk it seems now, but with these new AFG procedures, I don't know, the possibility is fire departments waiting for these other competitors to come out with the new product and so forth. Is there a risk that these delays that you've experienced in the Firehawk could extend beyond the first half of '08?

Rob Canizares

Well, as John said, keep in the mind the money that is awarded under the grant program, these departments have one-year to spend the money. So the clock is really ticking. So I think with some of the major manufacturers having units out there and samples getting out there, in many situations that's really helping us because departments are making decisions we think we're very competitive with the M7 and it's really pushing the evaluations along.

So I think what you'll see is, several years ago when you looked at AFG money I think the manufacturers benefited to some extent with some very high volume months of SCBA sales and we tend to think what will happen this year is it will be some very steady goods solid business that will come through over the next six/seven months. And if the AFG funding for 2008 goes smoothly, it should be some good steady month business monthly throughout the whole year as opposed to these peaks and surges, I think that we saw a number of years ago in some cases.

Jason Rogers - Great Lakes Review

And what is the deadline for the fiscal '07 funding to be used by?

Rob Canizares

Well, the funding started to get released in June of 2007. So, again, this is where we said that we always thought that we would get our fair share of business by June 2008 from the 2007 grant money. So most of that money really needs to be spent coming up here by the end of June beginning of July. And then, hopefully, the new funding will start to roll out in June has it did in 2007.

Jason Rogers - Great Lakes Review

Okay. Thank you.

Operator

Thank you. And our last question comes from [Jim Hollister]. Jim, your line is open. Please go ahead.

Jim Hollister - Analyst

Good morning, gentlemen.

John Ryan III

Hi Jim

Jim Hollister - Analyst

Do you got into the area that I was interested in the body armor. I note that one of your competitors has announced the reward of about $100 million contract in the ESAPI. Would you care to comment on that?

John Ryan III

Bill?

Bill Lambert

Well, on the ESAPI, the plate we were talking about earlier was the XSAPI plate. The ESAPI plate is a plate that's been around for a quite sometime and there are a number of established competitors and suppliers in that area. And we bid on that particular contract that you're referring to Jim and we were unsuccessful. The XSAPI is a higher protected plate against some advance ballistics and that's the plate that we were talking about earlier.

Jim Hollister - Analyst

Thank you.

Operator

Thank you. We show no further questions at this time.

Mark Deasy

Okay, Gretchen. Thank you everybody for joining us. Again, we always appreciate your interest in MSA and until next time, we will talk to you again and hope everybody has a great day. Thanks again.

Operator

Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation and you may all disconnect.

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