Albany International Corp. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Albany operates through Machine Clothing (MC), which serves paper and paperboard manufacturers, and Albany Engineered Composites (AEC), which serves aerospace and defense customers. The company adopted ASC 606 revenue recognition effective January 1, 2018 using the modified retrospective method; prior periods were not restated.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $230.0 million | $199.3 million | 15.4% increase |
| Gross profit | $81.7 million | $76.0 million | 7.4% increase |
| Gross margin | 35.5% | 38.2% | Down 270 basis points |
| Operating income | $20.8 million | $22.7 million | 8.1% decrease |
| Operating margin | 9.1% | 11.4% | Down approximately 230 basis points |
| Net income attributable to the Company | $10.2 million | $10.8 million | 5.5% decrease |
| Diluted EPS | $0.32 | $0.34 | Decrease |
| Adjusted EBITDA | $50.9 million | $43.5 million | 17.1% increase |
| Operating cash flow | $(18.9) million | $(4.6) million | Greater use of cash |
| Capital expenditures | $15.8 million | $25.1 million | Decrease |
MC sales were $148.2 million, up 3.7% as reported, but down 4.0% excluding ASC 606 and currency translation effects. AEC sales were $81.8 million, up 45.0% as reported and 33.4% excluding those effects. MC operating income declined to $30.8 million from $38.3 million, while AEC improved to $2.3 million from an operating loss of $5.1 million.
Cash and cash equivalents were $151.4 million at March 31, 2018, compared with $183.7 million at December 31, 2017. Total debt was $520.7 million, resulting in reported net debt of $369.3 million. The company had approximately $179 million of additional borrowing capacity under its revolving credit facility.
The company declared dividends of $0.17 per share and paid $5.5 million of dividends during the quarter. The effective tax rate was 30.5%, compared with 37.4% in the prior-year quarter.
Material changes versus the prior comparable period
- Reported sales benefited by $8.4 million from ASC 606 adoption and by $9.1 million from currency translation. Excluding both effects, sales increased 6.6%.
- AEC growth was driven principally by the LEAP, Boeing 787, and F-35 programs, along with improved labor productivity.
- MC remained affected by declining publication-grade paper demand and weaker tissue and packaging sales in North America.
- Restructuring expense increased to $8.6 million from $2.7 million, primarily because the French Labor Ministry approved closure of the Sélestat, France MC facility. The plan is expected to eliminate approximately 50 positions.
- Net income and operating income declined despite higher sales, primarily because of increased restructuring costs, lower MC profitability, and higher other expense.
- Working capital absorbed cash as AEC programs ramped. Accounts receivable increased to $248.5 million from $202.7 million at year-end, while contract assets were $42.9 million.
- ASC 606 increased reported Q1 2018 net income attributable to the Company by approximately $1.2 million, or $0.04 per share. Excluding the adoption effect, reported sales would have been $221.5 million and net income attributable to the Company would have been $9.1 million.
Outlook, commentary, risks, contingencies, and unusual items
Management’s disclosed 2018 MC outlook included adjusted EBITDA of approximately $180 million to $195 million. The filing does not provide a consolidated full-year revenue or earnings guidance range. Management stated that it could not project 2018 restructuring expense or foreign-currency revaluation gains and losses because of uncertainty.
- MC is expected to face continuing pricing pressure, industry overcapacity, and declining publication-grade demand, partially offset by growth in packaging and tissue grades and prior capacity reductions.
- AEC offers significant growth potential, but results depend on aerospace production rates, program execution, customer demand, and the timing of LEAP and other aircraft programs.
- Revenue and margins on long-term AEC contracts require significant estimates of costs, progress, transaction prices, and expected profitability. Changes in estimates may materially affect reported results in the period of change.
- The company’s $685 million unsecured revolving facility matures in 2022. It had $506 million outstanding, an applicable spread of 1.500% at the latest borrowing, and interest-rate swaps fixing the LIBOR component on $350 million at 2.11% through October 2022.
- Leverage was 2.55 to 1.00 and interest coverage was 9.50 to 1.00 at March 31, 2018. The company reported compliance with all debt covenants.
- The company was defending 3,662 asbestos claims as of March 31, 2018. It reported approximately $140 million of remaining insurance coverage and did not expect the litigation to have a material adverse effect, although future claim volume and losses cannot be predicted.
- The Tax Cuts and Jobs Act created provisional tax accounting, including estimated GILTI and FDII effects. Management continued evaluating the provisions, and the final impact could differ materially from current estimates.
- The company stated that it had sufficient capital resources for the foreseeable future, although substantially all cash was held by non-U.S. subsidiaries.
Important facts for investors to verify
- Assess underlying revenue growth excluding the $8.4 million ASC 606 benefit and $9.1 million currency benefit.
- Monitor MC demand trends, the Sélestat closure, remaining restructuring charges, and expected cost savings.
- Verify AEC production ramps, LEAP program economics, contract estimates, and customer concentration, particularly exposure to Safran.
- Evaluate cash conversion and working-capital requirements as AEC programs expand.
- Track leverage, covenant headroom, borrowing capacity, interest rates, and refinancing requirements before the 2022 maturity.
- Review the effect of ASC 606 on comparability, contract assets and liabilities, retained earnings, and future revenue timing.
- Monitor asbestos claims, insurance availability, tax audits, and the unresolved effects of the Tax Cuts and Jobs Act.