Albany International Corp. 2020 Form 10-K Summary
Business context and reporting period
Albany International reported fiscal-year results for the year ended December 31, 2020. The company operates through two segments: Machine Clothing (MC), which supplies engineered fabrics and belts used in papermaking and other industrial applications, and Albany Engineered Composites (AEC), which supplies advanced composite structures for commercial and defense aerospace programs.
MC generated approximately 64% of consolidated revenue and remained the company’s primary cash generator. AEC provides longer-term growth potential but is exposed to aerospace production cycles, program execution, and customer concentration. Safran accounted for approximately 11% of consolidated sales and approximately 30% of AEC sales in 2020.
Financial performance and position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $900.6 million | $1,054.1 million | Down 14.6% |
| Gross profit | $371.1 million | $397.7 million | Down 6.7% |
| Gross margin | 41.2% | 37.7% | Up 350 basis points |
| Operating income | $166.1 million | $193.6 million | Down 14.2% |
| Net income attributable to the company | $98.6 million | $132.4 million | Down 25.5% |
| Diluted EPS | $3.05 | $4.10 | Down 25.6% |
| Adjusted EPS | $3.72 | $4.11 | Down 9.5% |
| Operating cash flow | $140.3 million | $200.4 million | Down 30.0% |
| Capital expenditures, including software | $42.4 million | $68.0 million | Down 37.6% |
MC sales declined 4.7% to $573.0 million, primarily because of lower demand for publication paper grades. MC operating income was $190.8 million, compared with $192.0 million in 2019, while gross margin increased to 52.6% from 51.5%.
AEC sales declined 27.7% to $327.7 million, principally because of lower LEAP program sales following the Boeing 737 MAX grounding and the COVID-19 impact on commercial aerospace. AEC operating income fell to $31.5 million from $55.5 million, although gross margin improved to 21.3% from 19.4%. Favorable changes in estimated long-term contract profitability increased AEC gross profit by $9.9 million in 2020.
The consolidated effective tax rate increased to 30.1% from 25.2%, including a $3.8 million tax charge related to a nondeductible foreign-exchange loss on an intercompany loan. Other expense included $13.6 million of foreign-currency revaluation losses, partially offset by a $2.6 million foreign sales-tax rebate gain.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $241.3 million at December 31, 2020, including $201.4 million held by non-U.S. subsidiaries.
- Total debt was $398.0 million and net debt was $156.7 million, compared with $228.5 million of net debt at December 31, 2019.
- The company had $302 million of additional borrowing capacity under its $700 million unsecured revolving credit facility, which matures in 2024.
- The leverage ratio was 1.34 to 1.00, compared with a maximum covenant of 3.50 to 1.00; interest coverage was 14.39 to 1.00 versus a minimum covenant of 3.00 to 1.00. The company was in compliance with all debt covenants.
- Operating cash flow was pressured by a $72.8 million use of cash for AEC contract assets and inventories, principally related to aerospace program delays.
- The company paid $24.6 million in dividends and declared dividends of $0.77 per share for 2020. No shares were repurchased under the existing authorization.
Material changes versus the prior comparable period
- Consolidated revenue fell $153.5 million, driven primarily by the $125.2 million decline in AEC sales and, to a lesser extent, lower MC sales.
- LEAP-related sales declined to less than $95 million in 2020 from more than $210 million in 2019.
- AEC backlog declined to $242 million from $288 million, while MC backlog increased to $190 million from $166 million. Substantially all backlog was expected to be invoiced within the following 12 months.
- Gross margin improved despite lower revenue, reflecting favorable product mix, foreign-exchange effects, manufacturing efficiencies, and improved AEC program mix.
- Restructuring expense increased to $5.7 million from $2.9 million, including $2.8 million for AEC workforce reductions.
- The company adopted the current expected credit loss standard in 2020, reducing retained earnings by approximately $1.4 million after tax and increasing credit-loss allowances as COVID-19 heightened customer credit risk.
- Net income was also affected by $2.7 million of former CEO termination costs, $1.3 million of acquisition and integration costs, and significant foreign-currency losses.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide specific quantitative 2021 revenue or earnings guidance. Management characterized MC as having potential for relatively stable future earnings and identified AEC as the principal long-term growth opportunity, supported by 3D-woven composite technology and aerospace growth programs.
Management expects available cash, operating cash flow, and borrowing capacity to be sufficient for foreseeable operating needs, capital expenditures, debt service, and other obligations. However, AEC may require substantial cash investment to support growth and remains dependent on MC’s cash generation until it consistently generates positive cash flow.
- COVID-19 may continue to reduce demand for publication paper, packaging and tissue-related products, nonwovens, construction-related products, and commercial aerospace components.
- Commercial aerospace recovery may be delayed by aircraft inventory levels, reduced air travel, further Boeing 737 MAX delays, program cancellations, or reduced customer orders.
- AEC’s long-term fixed-price contracts require estimates of costs and margins. Changes in estimated profitability can materially affect revenue and earnings in the period recorded. The auditor identified estimated total contract costs for certain AEC contracts as a critical audit matter.
- AEC faces quality, delivery, manufacturing ramp-up, product liability, recall, and warranty risks for components incorporated into aircraft and engines.
- Customer and program concentration is significant, particularly Safran and the LEAP program. The LEAP supply agreement contains events of default that could permit termination.
- Other material exposures include raw-material and supply-chain constraints, foreign-exchange volatility, LIBOR transition risk, pension and postretirement obligations, tax audits, cybersecurity, asbestos litigation, and U.S. government funding and procurement risks.
- Asbestos litigation involved 3,615 claims against the company at year-end. The company paid $57,000 to settle or resolve claims in 2020 and reported approximately $140 million of remaining insurance coverage. Management did not expect the proceedings to have a material adverse effect based on available information.
Important facts for investors to verify
- Whether commercial aerospace demand and LEAP production recover sufficiently to reduce AEC’s contract assets, inventories, and working-capital requirements.
- Whether AEC contract-margin estimates remain favorable and whether additional loss provisions or write-offs emerge.
- The pace and durability of MC demand recovery, particularly in publication grades, packaging, tissue, and other engineered-fabric markets.
- Compliance with leverage and interest-coverage covenants as debt matures in 2024 and interest-rate benchmarks transition away from LIBOR.
- The location and availability of cash held by foreign subsidiaries and the potential tax cost of repatriating indefinitely reinvested foreign earnings.
- Potential changes in asbestos claims, insurance coverage, tax audits, pension liabilities, and other contingencies.
- The effect of foreign-currency movements, especially the Mexican peso, on reported earnings and cash flow.