Albany International Corp. Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2015. The filing is unaudited and covers the Machine Clothing (MC) and Albany Engineered Composites (AEC) segments.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $178.8 million | $179.9 million | $532.4 million | $553.7 million |
| Gross profit | $75.7 million | $68.6 million | $207.0 million | $218.8 million |
| Gross margin | 42.4% | 38.2% | 38.9% | 39.5% |
| Operating income | $25.8 million | $19.2 million | $49.0 million | $58.7 million |
| Net income attributable to the Company | $19.7 million | $33.7 million | $19.7 million | $33.7 million |
| Diluted EPS | $0.30 | $0.37 | $0.62 | $1.05 |
| Operating cash flow | $41.9 million | $22.5 million | $59.2 million | $64.0 million |
The company reported a Q3 operating margin of approximately 14.5%, compared with 10.7% in the prior-year quarter. Nine-month operating margin was approximately 9.2%, compared with 10.6% in 2014. Comprehensive loss attributable to the Company was $23.6 million for the nine months, primarily reflecting foreign currency translation losses.
- Segment sales: MC sales were $154.5 million in Q3 and $463.6 million for the nine months; AEC sales were $24.3 million and $68.8 million, respectively.
- Segment profitability: MC operating income increased to $42.0 million in Q3 and $111.0 million year to date. AEC generated operating losses of $4.2 million in Q3 and $26.6 million year to date.
- Cash and liquidity: Cash and equivalents were $171.8 million at September 30, 2015, versus $179.8 million at December 31, 2014. Approximately $148.8 million was held by non-U.S. subsidiaries.
- Capital expenditures: Property, plant and equipment and software purchases totaled $40.3 million for the first nine months, including a $9.0 million Rochester headquarters building lease buyout.
- Debt: Total debt was $270.5 million, consisting principally of $170.0 million outstanding under a new $400 million revolving credit facility and $100.0 million of private-placement notes. Net debt was $98.7 million.
- Debt capacity and covenants: Approximately $230 million remained available under the revolving facility, subject to conditions. Leverage was 1.29x and interest coverage was 13.00x, versus covenant limits of 3.50x and 3.00x, respectively. The company was in compliance with all covenants.
- Dividends: Dividends paid during the first nine months were $15.6 million; dividends declared were $0.50 per share year to date.
Material Changes Versus the Prior Comparable Period
- Q3 sales declined 0.6% reported, but increased 4.7% excluding currency translation effects. Nine-month sales declined 3.8% reported and increased 1.9% excluding currency effects.
- Currency translation reduced sales by approximately $9.5 million in Q3 and $31.6 million for the first nine months.
- MC performance improved materially: Q3 gross margin rose to 48.4% from 41.9%, and nine-month gross margin rose to 47.0% from 43.1%, driven by capacity utilization, cost reductions and restructuring benefits.
- AEC sales increased 10.5% in Q3 and 16.9% year to date, principally from the LEAP aerospace program, but profitability remained weak.
- Nine-month AEC results included a $14.0 million charge related to a revised profitability estimate for the BR 725 long-term contract. The charge included a $10.9 million deferred-cost write-off and a $3.1 million provision for anticipated contract losses.
- Restructuring expense increased to $3.7 million in Q3 and $13.9 million year to date, compared with $0.9 million and $4.1 million, respectively, in 2014.
- Net income was affected by higher tax charges. The Q3 effective tax rate was 55.8%, including a $4.5 million discrete tax expense related to tax audits and contingencies. The nine-month effective tax rate was 50.7%.
- Other expense was $1.2 million in Q3, compared with other income of $1.9 million in the prior-year quarter, largely because of foreign-currency revaluation losses versus gains.
Outlook, Commentary, Risks and Unusual Items
- Management described MC as a mature, largely flat-growth business and continued to emphasize cash generation, productivity and alignment of manufacturing capacity with demand. Packaging, pulp, tissue and growth markets in Asia and South America were viewed more favorably than publication grades and certain mature markets.
- AEC was identified as the company’s principal growth opportunity, particularly through LEAP engine production and other aerospace and defense applications. LEAP was scheduled to enter service in 2016.
- The Germany press-fabric facility closure involved approximately 50 employee terminations. Management expected annual cost savings of approximately $4 million to $5 million, substantially realized by the end of 2015.
- The former German facility was classified as held for sale and written down by $3.2 million in Q3 based on preliminary market offers.
- AEC long-term contracts involve significant estimates of future costs and margins. Changes in estimated profitability can materially affect revenue and gross profit in the period of revision.
- The company had $50.0 million of private-placement debt scheduled for mandatory payment on October 25, 2015. The filing indicates adequate liquidity and borrowing capacity, but the timing of this payment should be monitored.
- Albany was defending 3,773 asbestos claims at September 30, 2015; Brandon Drying Fabrics was defending 7,713 claims. Management could not estimate a meaningful loss range but did not anticipate material liability beyond available insurance coverage.
- Tax audits and the German tax matter remain contingencies. Management estimated that unrecognized tax benefits could change over the following twelve months by a net increase of $4.4 million to a net decrease of $3.0 million.
- No formal consolidated revenue or earnings guidance was provided in the filing. Forward-looking results remain subject to paper-industry demand, aerospace program execution, contract estimates, currency movements, tax outcomes and general economic conditions.
Investor Verification Items
- Verify the timing and funding of the $50 million debt maturity due October 25, 2015 and subsequent debt refinancing or repayment activity.
- Assess whether AEC can improve profitability after the BR 725 contract charge and whether LEAP volume growth offsets weakness in legacy programs.
- Track realization of the projected $4 million to $5 million annual savings from the Germany restructuring.
- Review tax-audit developments, including the German tax dispute and potential changes in unrecognized tax benefits.
- Monitor foreign-exchange effects, especially the impact of currency translation on reported sales and accumulated other comprehensive income.
- Evaluate asbestos claim trends, insurance limits and any changes in management’s assessment of potential liability.
- Reconcile non-GAAP measures, including adjusted EBITDA and adjusted EPS, to GAAP results before relying on them for valuation or performance comparisons.