Albany International Corp. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Albany operates through Machine Clothing (MC), which serves paper, packaging, tissue and industrial markets, and Albany Engineered Composites (AEC), which supplies advanced composite structures primarily to commercial and defense aerospace customers.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $234.5 million | $226.0 million | $456.9 million | $461.8 million |
| Gross profit | $101.7 million | $103.0 million | $190.3 million | $192.5 million |
| Gross margin | 43.4% | 45.6% | 41.6% | 41.7% |
| Operating income | $50.0 million | $52.7 million | $91.8 million | $92.3 million |
| Net income attributable to the Company | $31.4 million | $32.4 million | $59.0 million | $41.5 million |
| Diluted EPS | $0.97 | $1.00 | $1.82 | $1.28 |
| Operating cash flow | $62.0 million | $50.7 million | $95.6 million | $44.0 million |
Q2 operating margin was approximately 21.3%, versus 23.3% in the prior-year quarter. Six-month operating margin was approximately 20.1%, versus 20.0%. Adjusted EBITDA was $69.4 million in Q2 and $130.1 million for the first half, compared with $73.7 million and $132.8 million, respectively, in the prior-year periods. Adjusted EPS was $1.01 in Q2 and $1.88 for the first half, versus $1.09 and $1.87.
MC generated six-month sales of $308.1 million, up 6.2% reported and 2.7% excluding currency effects. AEC sales were $148.8 million, down 13.4% reported and 14.7% excluding currency effects. MC represented approximately 68% of consolidated first-half revenue.
At June 30, 2021, cash and equivalents were $253.3 million, total debt was $350.0 million and non-GAAP net debt was $96.7 million. The Company had $350.0 million of additional borrowing capacity under its $700.0 million unsecured revolving credit facility. The leverage ratio was 1.08 to 1.00 versus a maximum of 3.50 to 1.00, and the interest coverage ratio was 15.02 to 1.00 versus a minimum of 3.00 to 1.00. The Company was in compliance with its covenants.
Capital expenditures were $23.1 million in the first half. Financing cash outflows were $62.5 million, including $56.0 million of debt repayments and $12.9 million of dividends paid. The quarterly dividend was $0.20 per share, compared with $0.19 in Q2 2020.
Material changes versus the prior comparable period
- Q2 revenue increased 3.8%, primarily reflecting favorable currency translation; underlying revenue increased approximately 1.0%.
- First-half revenue declined 1.1% reported and 3.7% excluding currency effects, primarily because of lower AEC sales on the Boeing 787 program.
- MC operating income increased to $106.3 million for the first half from $103.7 million, despite lower gross margins caused by higher production costs and weaker cost absorption.
- AEC first-half operating income declined to $10.1 million from $15.9 million. AEC gross margin fell to 19.7% from 21.1%, partly because estimated long-term contract profitability contributed $3.7 million to first-half 2021 gross profit versus $6.4 million in 2020.
- Net income increased substantially for the first half primarily because 2020 included $14.9 million of foreign-currency remeasurement losses, compared with $0.3 million in 2021, as well as significant 2020 tax and restructuring items.
- Operating cash flow more than doubled year over year, benefiting from improved AEC working-capital cash flows and higher net income. Contract assets declined by $26.1 million to $113.2 million.
- Restructuring expense was immaterial in the first half of 2021, compared with $3.5 million in the prior-year period. No share repurchases were made during Q2 2021.
Outlook, commentary, risks and unusual items
No specific quantitative full-year revenue or earnings guidance is provided in the filing. Management expects MC to remain a stable cash generator but cites low market growth, pricing pressure, declining publication-paper demand, input-cost inflation and changing paper-product mix. AEC is positioned for longer-term aerospace growth, but results remain exposed to aerospace inventory levels, program delays, technical issues, cancellations and the pace of recovery in commercial aerospace.
Remaining performance obligations on contracts with original durations exceeding one year were $149 million at June 30, 2021, primarily in AEC. The Company expects to recognize approximately $48 million in 2021, $62 million in 2022, $24 million in 2023 and the remainder in 2024 or later.
AEC revenue and profit depend materially on percentage-of-completion estimates and revisions to contract profitability. Such estimate changes increased operating income by $4.3 million in Q2 and $3.7 million in the first half of 2021. The filing also identifies COVID-19 effects, aerospace demand, supply-chain factors, foreign exchange, interest rates and LIBOR transition as relevant risks.
The Company entered into swaps covering $350 million of debt, fixing the LIBOR component at 0.838% from October 2022 through October 2024. Approximately $215.2 million of cash was held by non-U.S. subsidiaries at quarter-end.
The Company was defending 3,617 asbestos claims as of June 30, 2021. Management cannot estimate a range of potential loss but states that insurance coverage of approximately $140 million remains available and does not currently expect the litigation to materially affect financial position, results or cash flows.
Important facts for investors to verify
- Whether AEC aerospace volumes, particularly Boeing 787, LEAP and CH-53K programs, recover as expected and whether contract estimates produce additional gains or losses.
- Whether MC pricing, publication-paper declines, inflation and production costs place further pressure on gross margins.
- The sustainability of the improved operating cash flow and the effect of contract-asset conversion and inventory levels.
- Debt repayment plans, interest expense, covenant compliance and exposure to LIBOR transition and interest-rate changes.
- The extent and timing of future asbestos claims, available insurance coverage and any changes to accrued liabilities.
- The effect of currency movements and the concentration of cash held outside the United States.