Albany International Corp. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Albany International reported unaudited results for the three months ended March 31, 2019. The company operates through Machine Clothing (MC), which serves paper and industrial markets, and Albany Engineered Composites (AEC), which supplies advanced composite components primarily to commercial and defense aerospace customers.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $251.4 million | $223.6 million | 12.4% |
| Gross profit | $91.8 million | $77.8 million | 18.0% |
| Gross margin | 36.5% | 34.8% | +170 bps |
| Operating income | $40.1 million | $17.0 million | 135.8% |
| Operating margin | 15.9% | 7.6% | +830 bps |
| Net income attributable to the company | $29.2 million | $7.7 million | 281.0% |
| Diluted EPS | $0.90 | $0.24 | +$0.66 |
| Adjusted EPS | $0.87 | $0.47 | 85.1% |
| Net cash from operating activities | $24.6 million | $(18.9) million | +$43.5 million |
MC sales were $144.3 million, up 1.8% reported and 4.8% excluding currency effects. AEC sales were $107.0 million, up 30.8% reported and 33.1% excluding currency effects, primarily from the LEAP and CH-53K programs. AEC sales to Safran were $56.0 million versus $40.8 million in the prior-year quarter.
Net income benefited from lower restructuring expense, a $2.0 million foreign-currency transaction gain versus a $0.7 million loss in Q1 2018, and discrete tax benefits. The effective tax rate was 20.3%, compared with 29.9% in the prior-year quarter; the estimated annual rate before discrete items was 29.4%.
Cash and cash equivalents were $187.4 million at March 31, 2019, compared with $197.8 million at December 31, 2018. Capital expenditures were $20.8 million. Total debt was $491.0 million and reported net debt was $303.7 million. Excluding the $25.9 million reduction resulting from the adoption of lease accounting, net debt increased $2.4 million during the quarter. The company had $194 million of additional borrowing capacity, leverage of 1.79x, interest coverage of 12.08x, and was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue growth accelerated, led by AEC, while MC benefited from tissue, packaging, and North American demand.
- Gross margin improved to 36.5%, reflecting higher sales and improved labor productivity in both segments.
- Restructuring expense declined to $0.5 million from $8.6 million, primarily because the major Sélestat, France workforce restructuring charge occurred in Q1 2018.
- Operating income increased to $40.1 million from $17.0 million; MC operating income rose to $44.2 million from $26.9 million and AEC operating income rose to $9.5 million from $2.3 million.
- Operating cash flow improved from an $18.9 million use to $24.6 million provided, reflecting higher profitability and improved working-capital management.
- ASC 842 lease accounting was adopted January 1, 2019, adding right-of-use assets and lease liabilities and changing the classification of the Salt Lake City lease. Prior periods were not restated.
Guidance, outlook, risks and unusual items
Management forecast full-year 2019 Adjusted EBITDA of $225 million to $240 million and adjusted basic EPS of $3.05 to $3.35. The comparable GAAP EPS forecast was $3.08 to $3.38. The filing does not provide broader consolidated revenue guidance.
Management expects MC to remain a significant cash generator despite declining publication-paper demand, pricing pressure, industry overcapacity, and product-life extensions. Growth is expected from packaging, tissue, and emerging markets. AEC is expected to grow through aerospace programs including LEAP, GE9X, F-35, Boeing 787, and CH-53K.
The grounding of Boeing 737 MAX aircraft could reduce LEAP engine demand and AEC sales; however, based on communications from Boeing and Safran, management had not changed its production forecast as of the filing. AEC contract estimates can materially affect revenue and gross profit; contract-estimate changes increased Q1 2019 gross profit by $0.6 million versus a $0.7 million reduction in Q1 2018.
Other items requiring attention include the $2.2 million discrete tax benefit from Canadian tax-audit settlements, a $1.3 million out-of-period adjustment related to a German valuation allowance, and potential future restructuring charges related to the Sélestat facility. The company had 3,688 Albany asbestos claims outstanding at March 31, 2019 and stated that insurance coverage of approximately $140 million remained available; management did not expect a material adverse effect based on available information.
The company disclosed a material weakness in internal control over financial reporting related to systems, risk assessment, and reconciliation controls for certain MC point-in-time revenue transactions following ASC 606 adoption. Remediation was underway, with management targeting completion by the end of 2019, subject to effective operation and testing of the controls.
Key facts investors should verify
- Whether AEC growth, especially LEAP-related demand, continues despite Boeing 737 MAX production and delivery disruptions.
- Whether the company achieves the full-year Adjusted EBITDA and adjusted EPS guidance ranges.
- The sustainability of MC margins amid paper-industry declines, pricing pressure, and overcapacity.
- Working-capital trends, capital expenditures, cash held outside the United States, and the company’s ability to reduce net debt.
- Progress in remediating the material weakness and the effect of future control testing.
- Potential additional Sélestat restructuring charges and the ultimate cost and insurance coverage of asbestos claims.
- The effect of discrete tax items and AEC contract-estimate changes on future reported earnings.