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Strong Headwinds Push Back MSA Safety Inc’s Earnings

By Matthew DiLallo - Feb 24, 2016 at 9:00AM

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The leading global manufacturer of safety products sees these headwinds continuing in 2016.

G1 SCBA. Image Source: MSA Safety.

Troubling global economic headwinds blew fiercely in the fourth quarter, with the strong dollar and weak oil prices hampering growth in the energy sector and emerging markets like China and Brazil. This had a noticeable impact on MSA Safety's(MSA -0.11%) fourth-quarter results, which were released after the market closed on Tuesday. While the headline numbers were pretty weak, the company showed a lot of positives amid the storm.

MSA Safety's results: The raw numbers

 

Q4 2015 Actuals

Q4 2014 Actuals

Growth (YOY)

Revenue

$313.3 million

$311.2 million

0.7%

Adjusted Earnings

$32 million

$35.3 million

-7.7%

Adjusted EPS

$0.84

$0.93

-9.7%

Source: MSA Safety.

What happened with MSA Safety this quarter?
The headline numbers masked MSA Safety's underlying strength.

  • While revenue was up less than 1% on a reported basis, on a constant-currency basis, revenue would have been up 8%. Four percent of that revenue growth was due to the company's recent acquisition of Latchways.
  • In addition to the boost from Latchways, the other big driver of revenue was sales within the breathing apparatus segment, with worldwide revenue up 57% year over year on a constant-currency basis, driven by a 130% sales increase in North America. The big seller continues to be the company's new G1 SCBA.
  • Outside of the fall protection segment, which benefited from the addition of Latchways, and the breathing apparatus segment, which enjoyed strong sales of the G1 SCBA, the rest of MSA Safety's segments experienced year-over-year revenue declines due to soft sales to energy customers, and in emerging markets.
  • These weaker sales put pressure on earnings, which is why MSA Safety undertook a restructuring initiative that's expected to generate $10 million in savings in 2016.

What management had to say
CEO William Lambert, commenting on the quarter in the company's earnings press release, said that:

Our fourth quarter results reflected strong execution of our strategy in a very challenging environment...Despite the weakness we are seeing in the energy market and in key emerging market geographies, our full-year revenue finished at the high end of our mid-single digit local currency growth range target, and we continued to see strong returns from the organic investments we've made in R&D over the past several years.

We truly live in a global economy, which has both benefits and drawbacks. One of the drawbacks is how a slowdown in one country can quickly spread across the globe, impacting companies like MSA Safety.

The current slowdown can largely be blamed on slowing growth in China, which then had a domino effect on commodity prices, pushing down the price of oil and iron ore. That's having an impact on sales of MSA Safety products not only to China, but to energy customers in Brazil. Brazil has been hurt because it produces a lot of oil and iron ore.

The company has been able to mute some of this weakness thanks to advancements in R&D, with the G1 SCBA a prime example. Sales of that new product have really helped keep the company's sales from being pushed back too far by the headwinds that it's currently facing.

Looking forward
Lambert sees 2016 shaping up very similar to last year, with strong headwinds continuing to blow against the company, while it pushes back with restructuring gains and new products. Further, he noted that the company has the financial capacity to invest in new-product development and other strategic initiatives, which could include more acquisitions like Latchways. Because of that, he sees MSA positioned for "profitable growth and value creation in 2016 and beyond."

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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