Albany International Corp. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2017, compared with the first quarter of 2016. Albany operates through Machine Clothing (MC) and Albany Engineered Composites (AEC). The April 2016 acquisition of Harris Corporation’s composite aerostructures business contributed to AEC results for the full quarter in 2017 but not the comparable 2016 period.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $199.3 million | $172.3 million | 15.6% increase |
| Gross profit | $75.9 million | $72.5 million | 4.7% increase |
| Gross margin | 38.1% | 42.1% | Down 4.0 points |
| Operating income | $22.1 million | $22.3 million | 1.0% decrease |
| Operating margin | 11.1% | 12.9% | Down approximately 1.8 points |
| Net income attributable to the Company | $10.8 million | $13.5 million | 19.7% decrease |
| Diluted EPS | $0.34 | $0.42 | Decrease of $0.08 |
| Adjusted EPS, non-GAAP | $0.46 | $0.46 | Flat |
| Net cash from operating activities | $(4.6) million | $5.4 million | Unfavorable change |
| Capital expenditures | $25.1 million | $8.1 million | Increase |
| Cash and cash equivalents | $143.3 million | $169.6 million | Down from prior-year quarter-end |
| Total debt | $480.5 million | $255.7 million | Increase, principally acquisition-related |
| Net debt | $337.1 million | $86.1 million | Increase |
MC generated $142.8 million of sales and $38.3 million of operating income. AEC generated $56.5 million of sales and an operating loss of $5.1 million. AEC sales increased 108.6%, principally from the Salt Lake City acquisition and LEAP program growth, but the acquired business produced a $2.6 million operating loss.
Material changes versus the prior comparable period
- Sales growth was concentrated in AEC; MC sales declined 1.7% on a reported basis, reflecting lower publication-grade sales partly offset by higher tissue and packaging sales.
- Currency translation reduced reported sales by approximately $2.4 million.
- Gross margin declined as sales growth came primarily from lower-margin AEC activities.
- Interest expense increased by $2.1 million to $4.3 million due mainly to acquisition financing and the capital lease assumed in the acquisition.
- Restructuring expense increased to $2.7 million from $0.7 million, including $2.6 million related principally to personnel reductions at Salt Lake City.
- Working capital absorbed cash, particularly through a $14.9 million increase in inventory cash usage and higher AEC contract receivables. Operating cash flow changed from a $5.4 million source to a $4.6 million use.
- Capital expenditures increased substantially to support the ramp-up of AEC programs.
Liquidity, debt, outlook, and risks
At March 31, 2017, Albany had $143.3 million of cash and $480.5 million of total debt. The company had $414.0 million outstanding under its $550 million unsecured revolving credit facility and stated that approximately $136 million remained available, subject to covenant and other conditions. A $50 million private-placement obligation matures in October 2017. The leverage ratio was 2.30 to 1.00 versus a maximum of 3.50 to 1.00; interest coverage was 10.25 to 1.00 versus a minimum of 3.00 to 1.00. The company reported compliance with all debt covenants.
Management expects restructuring actions to generate approximately $4 million to $5 million of annual savings beginning in the third quarter of 2017, principally in AEC selling, technical, general and research expenses. No formal consolidated revenue or earnings guidance is provided in the filing.
Management views MC as a continuing cash generator but expects ongoing pressure from paper-industry overcapacity, pricing, declining publication-grade demand, and shifting regional demand. AEC growth depends on aerospace programs, including LEAP, GE9X, F-35, Boeing 787, and other programs; risks include program delays, technical difficulties, cancellations, lower demand, and failure to achieve profitable growth. AEC fixed-price contracts are sensitive to changes in estimated profitability; contract estimate changes reduced first-quarter 2017 gross profit by $0.7 million.
The company was defending 3,752 asbestos claims as of March 31, 2017 and stated that it cannot meaningfully estimate potential losses. It reported approximately $2 million of remaining primary insurance coverage and $140 million of excess umbrella coverage, and did not currently anticipate material liability beyond insurance limits.
Disclosure controls and procedures were reported ineffective because of previously identified material weaknesses involving financial reporting controls, banking authorities at certain foreign locations, and management review of potential loss-contract reserves. Management expects remediation by the end of 2017, subject to sufficient operating and testing periods. The Salt Lake City operation was excluded from the assessment under the SEC’s one-year acquisition guidance.
Facts investors should verify
- Whether AEC achieves the projected $4 million to $5 million annual restructuring savings beginning in the third quarter of 2017.
- The pace and profitability of LEAP and other aerospace program ramp-ups, including the Salt Lake City operation.
- Inventory, contract receivables, and operating cash-flow conversion as AEC expands.
- Refinancing or repayment plans for the $50 million debt maturity due October 2017 and continued covenant headroom.
- Progress in remediating material weaknesses in internal control over financial reporting.
- Potential changes in AEC fixed-price contract estimates and their effect on reported gross profit.
- Developments in asbestos claims, insurance coverage, and any resulting liability exposure.