For MSA Safety (NYSE:MSA), 2015 has been a blustery year.
On the plus side, the company has enjoyed quite a tailwind from very strong sales of its revolutionary G1 SCBA. Those have helped it mitigate some of the headwinds from foreign exchange fluctuations and weak product sales to both energy-related customers as well as some of its emerging market customers.
That's the backdrop investors need to keep in mind when the company reports its third-quarter results after markets close on Wednesday. If those headwinds strengthened, its report or outlook might be weaker than the market had hoped to see.
First, let's review
Before we look ahead, let's briefly look back at the second quarter. MSA Safety's results last quarter were a bit better than expected after the company was buoyed by strong sales of the aforementioned G1 SCBA. Because of that, revenue was up 2% year over year to $287 million, which was $5 million more than analysts expected. Furthermore, sales would have been up 11% if we strip out foreign currency fluctuations. Earnings were also stronger than analysts' consensus estimate, with MSA Safety turning in earnings of $0.67 per share, which beat by $0.08 per share.
Can MSA Safety blow past analysts's expectations again?
For the third quarter, analysts don't think sales will continue at quite the same pace. As such, the average revenue estimate is just $270.8 million, which is not only lower sequentially but 1.8% lower than the year-ago quarter. Earnings are also expected to be lower, with the current consensus estimate at $0.60 per share for the third quarter, which is $0.03 per share lower than the third quarter of last year.
Given these estimates, one thing investors will want to keep an eye on is how close MSA Safety's numbers were to what analysts forecasted. If it manages to beat estimates again, it is likely that the tailwinds from G1 SCBA sales remained strong while the headwinds facing the company did not pick up speed.
Was the G1 SCBA tailwind still strong?
Last quarter, sales in the company's breathing apparatus segment surged 41% worldwide and 90% in North America as a result of strong G1 SCBA sales. There is an expectation that sales from that segment will continue to be robust in the third quarter due to the fact that the company ended last quarter with a backlog of $77 million, which was almost double that of the year-ago period.
Having said that, if there was one concern, it's the fact that the backlog did drop $5 million sequentially, which suggests that sales growth was decelerating. If sales growth decelerated further in the third quarter, which would be evident by another sequential drop in the company's backlog, it could be a sign that this tailwind isn't as strong as it had been.
Did the headwinds pick up speed?
Last quarter, CEO William Lambert warned that "headwinds associated with lower commodity prices, economic conditions in certain emerging markets, and weakness in foreign currencies weighed on our results," and that "looking ahead, I expect these challenges to persist into the second half of 2015." So, if MSA Safety does miss analysts estimates this quarter, it's likely due to the strengthening of one or more of these headwinds
Last quarter, for example, sales in its portable gas detection and industrial head protection businesses were down 5% and 9% year over year, respectively, due to weakness in the energy markets. Sales were down even further in North America, which has been particularly hard hit by the oil market downturn. It's a market that didn't see much improvement in the third quarter as oil prices fell another 24%, which took industry activity levels lower as well. As such, investors will want to keep an eye on how much this had an impact on MSA Safety's energy market-related sales in those two segments during the quarter.
As things currently stand, MSA Safety is expected to report a solid, though clearly not robust, quarter. The company is facing some stiff headwinds that will mute some of the impact from expected strong sales from its new G1 SCBA product line. The tug and pull between the two could mean the difference between the company missing estimates or delivering another surprising beat.