Despite a number of headwinds, MSA Safety had a pretty solid year in 2015, at least through the first three quarters. That's largely due to strong sales of its revolutionary new product the G1 SCBA. That product will also be key to its fourth-quarter results, which are expected to be announced Tuesday evening. Investors, however, would do well to keep an eye on more than just sales numbers in its upcoming report.
First, let's reviewBefore we look ahead, let's quickly look back at the third quarter. Here's a snapshot of MSA Safety's financials from last quarter:
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Data source: MSA Safety.
While revenue was down 1% year over year, that actually doesn't tell the full story. One of the big headwinds facing the company is foreign currency fluctuations, and if we make adjustments to revenue to compare it on a constant currency basis, it would have actually increased 8% year over year. The big driver of this constant currency revenue growth as well as adjusted earnings growth was the aforementioned sales growth of the G1 SCBA product. Last quarter, sales of that product drove revenue in MSA Safety's breathing apparatus segment up 83% year over year on a constant currency basis.
How were G1 SCBA sales during the quarter?Suffice it to say, sales of that product are vitally important to the company right now. The good news is that heading into the fourth quarter MSA Safety had a backlog of future sales totaling $68 million, which was only $9 million less than where the backlog stood heading into the third quarter. Converting that backlog into sales and booking additional sales are key areas to watch when reviewing MSA Safety's fourth-quarter results.
Likewise, maintaining a strong backlog in the SCBA segment heading into 2016 is also important to see. As mentioned, last quarter the backlog did slip a bit, which, suffice it to say, is not the preferred direction for a backlog.
Was it able to overcome strengthening headwinds?Aside from foreign currency fluctuations, the other major headwinds facing MSA Safety were "softer business conditions in emerging markets, and continued weakness in the energy market," according to CEO William Lambert. Those headwinds more than likely grew stronger during the quarter and will likely have put additional pressure on business segments directly exposed to those weaker markets.
In order to combat these headwinds, the company has taken steps to reduce its cost structure. Its ability to keep its costs in check last quarter will be key to muting some of the impact from softening business conditions.
What's the outlook for 2016?Last quarter, Lambert said that "the impacts of lower commodity prices, economic challenges in emerging markets like Brazil and China, and continued weakness of foreign currencies are all challenges we foresee lasting into 2016." So far, those words have been prophetic because conditions have worsened with oil prices in particular slumping in 2016, which is affecting Brazil's economy. Meanwhile, China's growth continues to slow, which is hurting not just oil but other commodity prices. This backdrop will likely have a big impact on what MSA Safety expects to see in 2016.
There are two things investors should look for in the company's 2016 outlook. First, Lambert noted last quarter that its restructuring program was expected to generate $10 million in cost savings in 2016. However, given that conditions are worsening, see if that number will now go up in response. Second, the fire service market has been a big driver, with Lambert noting last quarter that it "provide[s] a sense of optimism in an otherwise challenging macro environment." Note if this optimism is carrying over into 2016 or if that market is also starting to weaken.
Investor takeawayMSA Safety has been able to overcome three big headwinds thanks to robust sales of a revolutionary new product. That product is key not just to its fourth-quarter results but its outlook for the future as well. If those sales start to slow down and its headwinds gain strength, the company could be in for a tough year in 2016.
The article Will New Product Sales Boost MSA Safety Incorporated's Earnings Again? originally appeared on Fool.com.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends MSA Safety. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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