Albany International Corp. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2016, compared with the same period in 2015. Albany operates through Machine Clothing (MC), its established paper-industry business and primary cash generator, and Albany Engineered Composites (AEC), focused primarily on aerospace and defense applications, including the LEAP engine program.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $172.3 million | $181.3 million | (5.0%) |
| Gross profit | $72.5 million | $76.7 million | (5.5%) |
| Gross margin | 42.1% | 42.3% | (20 bps) |
| Operating income | $22.3 million | $20.1 million | +10.5% |
| Operating margin | 12.9% | 11.1% | +180 bps |
| Net income attributable to Company | $13.5 million | $12.2 million | +10.6% |
| Diluted EPS | $0.42 | $0.38 | +10.5% |
| Operating cash flow | $4.0 million | $6.4 million | $(2.4) million |
| Adjusted EBITDA | $41.3 million | $41.5 million | $(0.2) million |
MC sales declined 8.3% to $145.3 million, primarily from continued weakness in publication-grade paper demand; currency translation reduced MC sales by approximately $1.8 million. MC operating income increased to $37.1 million from $35.7 million, supported by lower restructuring costs and a higher gross margin of 47.9% versus 47.5%.
AEC sales increased 18.6% to $27.1 million, driven by higher LEAP program sales. AEC gross profit rose to $3.1 million from $1.8 million, but the segment remained unprofitable, with an operating loss of $3.7 million versus $3.8 million. AEC included $1.6 million of acquisition-related costs.
Cash and cash equivalents were $169.6 million at March 31, 2016, compared with $185.1 million at December 31, 2015. Total debt was $255.7 million and net debt was $86.1 million, compared with $80.6 million at year-end. The Company had $149.1 million of cash held by non-U.S. subsidiaries. It reported a leverage ratio of 2.57:1 and interest coverage of 13.59:1, versus covenant limits of 3.50:1 and 3.00:1, respectively, and was in compliance with its debt covenants.
Capital expenditures were $10.9 million in the quarter. Management estimated full-year capital expenditures of $85 million to $95 million, including spending for the acquired business. The quarterly dividend increased to $0.17 per share from $0.16.
Material changes versus the prior comparable period
- Revenue decreased 5.0%, while operating income and Company-attributable net income increased because Q1 2015 included $9.0 million of restructuring expense versus $0.7 million in Q1 2016.
- Foreign-currency revaluation shifted from a $5.4 million gain in Q1 2015 to a $1.4 million loss in Q1 2016, partially offsetting the restructuring benefit.
- Other income declined to $0.3 million from $3.3 million, reflecting lower currency gains and the absence of the $0.9 million gain on an investment sale recognized in 2015.
- The effective tax rate declined to 34.6% from 41.0%, aided by approximately $1.0 million of net discrete tax benefits, including a benefit related to the German tax settlement.
- Operating cash flow declined because working capital used $25.4 million, compared with $20.3 million in Q1 2015.
Guidance, outlook, risks, contingencies, and unusual items
On April 8, 2016, after quarter-end, Albany completed the $210 million acquisition of Harris Corporation’s composite aerostructures business, including assumption of a capital lease. The business was renamed Albany Aerostructures Composites LLC and assigned to AEC. Purchase-price allocation remained subject to valuation activities and a post-closing working-capital adjustment.
Management expects MC earnings to remain broadly stable over time but continues to face paper-industry overcapacity, pricing pressure, declining publication-grade demand, and longer product lives. AEC offers substantial growth potential through LEAP, GE9X, Joint Strike Fighter, and other aerospace programs, but profitability depends on production ramp-up, contract execution, and customer demand.
Management announced consultations regarding a proposal to discontinue R&D activities at the Sélestat, France, MC facility, potentially eliminating 25 positions and affecting 22 employees. The Company could not yet estimate the related restructuring cost.
AEC reported a pricing dispute with a customer regarding parts for the Rolls-Royce BR725 engine. If the customer’s position prevails, future contract profitability could be materially affected. Long-term contract estimates can also cause significant period-to-period changes in revenue and gross profit.
The Company was defending 3,785 asbestos claims and Brandon Drying Fabrics was defending 7,707 claims at March 31, 2016. Management could not reasonably estimate a loss range, but did not anticipate material liability beyond available insurance coverage or a material adverse effect based on current information.
Important facts for investors to verify
- Post-quarter-end financing and acquisition effects, including the new $550 million revolving credit facility and the $210 million AAC acquisition.
- AEC’s LEAP production ramp, contract margins, acquisition integration, and resolution of the BR725 pricing dispute.
- MC demand trends, pricing pressure, restructuring progress, and the potential Sélestat R&D closure costs.
- Conversion of earnings into operating cash flow, working-capital requirements, and the $85 million to $95 million capital-expenditure outlook.
- Availability and geographic location of cash, particularly the $149.1 million held outside the United States and potential tax costs of repatriation.
- Debt maturity and refinancing requirements, including the $50 million private-placement payment due in October 2017, covenant compliance, and interest-rate exposure.
- Asbestos claim volumes, insurance coverage, and any change in management’s assessment of potential liability.