Albany International Corp. 10-Q Summary
Business context and reporting period
Albany International Corp. reported unaudited results for the three and six months ended June 30, 2022. The company operates through Machine Clothing (MC), its established paper-industry business and primary cash generator, and Albany Engineered Composites (AEC), which serves commercial and defense aerospace programs including LEAP, CH-53K, F-35, JASSM, and Boeing 787.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $261.4 million | $234.5 million | $505.5 million | $456.9 million |
| Gross profit | $100.6 million | $101.7 million | $192.2 million | $190.3 million |
| Gross margin | 38.5% | 43.4% | 38.0% | 41.6% |
| Operating income | $50.7 million | $50.0 million | $89.5 million | $91.8 million |
| Net income attributable to the Company | $39.2 million | $31.4 million | $66.9 million | $59.0 million |
| Diluted EPS | $1.25 | $0.97 | $2.11 | $1.82 |
| Cash flow from operations | $43.1 million | $62.0 million | $37.7 million | $95.6 million |
Q2 sales increased 11.4%, while six-month sales increased 10.7%. Excluding currency translation, sales increased 14.6% in Q2 and 13.1% year to date. AEC sales grew 47.1% in Q2 and 34.3% year to date, while MC sales declined 5.2% and 0.8%, respectively, on a reported basis.
At June 30, 2022, cash and cash equivalents were $320.9 million, compared with $302.0 million at December 31, 2021. Total debt was $485.0 million, up from $350.0 million, resulting in reported net debt of $164.1 million. The company had approximately $215 million of additional borrowing capacity and total liquidity of approximately $536 million. Its leverage ratio was 1.43 to 1.00 versus a 3.50 maximum covenant, and its interest coverage ratio was 15.19 to 1.00 versus a 3.00 minimum.
Capital expenditures were $36.0 million in the first six months, compared with $23.1 million in the prior-year period. The company paid $13.4 million in dividends and repurchased 1,022,717 shares for approximately $84.8 million during the first half.
Material changes versus the prior comparable period
- AEC growth, primarily from CH-53K and LEAP programs, drove consolidated sales growth and increased AEC operating income to $9.5 million in Q2 from $7.2 million.
- MC operating income declined to $54.9 million in Q2 from $55.9 million, reflecting lower sales and higher raw material, energy, and logistics costs.
- Consolidated gross margin fell to 38.5% in Q2 from 43.4%, and to 38.0% for the first half from 41.6%. MC margins declined because of input-cost inflation; AEC margins were affected by less favorable contract-estimate changes and inventory damage reserves.
- Foreign-currency transaction gains were $7.3 million in Q2 and $11.0 million year to date, compared with losses in the prior-year periods. These gains materially benefited pretax and net income.
- Operating cash flow declined to $37.7 million year to date from $95.6 million, primarily because of working-capital investment, including higher contract assets, receivables, and inventories, as AEC prepared for expanded CH-53K work.
- The company ceased doing business in Russia and is winding down a related joint venture. It recorded $2.6 million of first-half charges, including $1.8 million for receivable and inventory reserves and $0.8 million for the joint-venture impairment.
Guidance, outlook, risks, and unusual items
Management expects MC input costs to increase by approximately $8 million to $10 million in 2022 after considering price increases and productivity actions, potentially reducing MC gross margin by up to 140 basis points. The company expects approximately $10 million of future annual MC sales to be lost because of the Russia exit. It expects AEC to pass through a majority of its cost increases under applicable customer contracts.
Key risks include inflation in labor, raw materials, energy, and logistics; supply-chain disruption; the Russia-Ukraine conflict and related sanctions; COVID-19 effects; declining publication-grade paper demand; aerospace program delays, cancellations, technical issues, and customer inventory levels; and execution risk associated with profitable AEC growth.
Remaining performance obligations on contracts with original durations exceeding one year totaled $579 million at June 30, 2022, primarily in AEC. Management expects to recognize approximately $77 million in 2022, $96 million in 2023, and $71 million in 2024.
The company had $485 million outstanding under its $700 million revolving credit facility. Interest-rate swaps hedge $350 million of borrowings. The facility and certain derivatives reference LIBOR, which is expected to cease after June 30, 2023; management does not currently expect a material transition impact. The company was in compliance with all debt covenants.
Albany was defending 3,614 asbestos claims at June 30, 2022. The company cannot estimate a meaningful range of potential loss but reported approximately $140 million of remaining insurance coverage and does not currently expect a material adverse effect from the litigation.
Important facts for investors to verify
- Whether AEC growth and the $579 million performance-obligation balance convert into revenue and cash flow as expected.
- Whether MC pricing and productivity actions offset the projected $8 million to $10 million of 2022 input-cost increases.
- The sustainability of reported earnings after removing $11.0 million of year-to-date foreign-currency gains and other unusual items.
- Progress in collecting elevated AEC contract assets and receivables and the effect of working-capital investment on operating cash flow.
- Debt reduction, interest costs, covenant headroom, and the transition from LIBOR to an alternative benchmark.
- Potential financial effects of the Russia exit, supply-chain disruption, aerospace program concentration, and asbestos claims.