Albany International Corp. — Q3 2013 Form 10-Q Summary
Business context and reporting period
Albany International Corp. filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The company operates primarily through Machine Clothing (MC), its core cash-generating business serving paper and paperboard manufacturers, and Engineered Composites (AEC), which develops advanced composite structures for aerospace and defense applications, including the LEAP engine program.
Previously divested Albany Door Systems and PrimaLoft Products activities are presented as discontinued operations. The filing states that there were no material changes in risk factors from December 31, 2012.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $183.1 million | $194.6 million | $567.8 million | $566.6 million |
| Gross profit | $68.0 million | $79.7 million | $218.2 million | $226.4 million |
| Gross margin | 37.1% | 40.9% | 38.4% | 40.0% |
| Operating income | $13.3 million | $23.1 million | $32.3 million | $(63.8) million |
| Income from continuing operations | $4.7 million | $9.1 million | $9.2 million | $(48.8) million |
| Net income | $4.7 million | $9.5 million | $8.8 million | $22.8 million |
| Diluted EPS | $0.15 | $0.30 | $0.28 | $0.72 |
| Operating cash flow | $30.7 million | $43.2 million | $63.1 million | $(10.3) million |
| Adjusted EBITDA | $31.9 million | $41.9 million | $101.8 million | $107.7 million |
Q3 2013 operating margin was approximately 7.2%, compared with 11.9% in Q3 2012. The nine-month operating margin was approximately 5.7%, compared with negative 11.3% in the prior-year period, which included significant pension settlement charges.
- Machine Clothing: Q3 sales declined 8.2% to $162.9 million and nine-month sales declined 2.1% to $507.8 million. Q3 operating income decreased to $33.2 million from $44.9 million.
- Engineered Composites: Q3 sales increased 18.5% to $20.3 million and nine-month sales increased 25.6% to $60.0 million, principally due to LEAP program activity. The segment remained unprofitable, with operating losses of $0.6 million in Q3 and $4.5 million for nine months.
- Cash and liquidity: Cash and cash equivalents were $212.8 million at September 30, 2013, up from $190.7 million at December 31, 2012. Approximately $198.4 million was held by non-U.S. subsidiaries.
- Debt: Total debt was $307.7 million, including $55.0 million of current maturities and $252.1 million of long-term debt. Net debt was $94.9 million, compared with $129.0 million at year-end 2012.
- Credit capacity: The company had a $330 million unsecured revolving credit facility, with $152 million drawn and approximately $178 million of additional borrowing capacity at September 30, 2013, subject to applicable conditions.
- Covenants: The leverage ratio was 1.77-to-1.00 versus a maximum of 3.50-to-1.00, and interest coverage was 8.30-to-1.00 versus a minimum of 3.00-to-1.00. The company reported compliance with all debt covenants.
- Capital spending: Nine-month purchases of property, plant and equipment and software totaled $47.6 million, including $30.3 million for AEC and LEAP-related expansion.
- Dividends: Dividends declared were $0.44 per share for the first nine months, compared with $0.41 per share in the prior-year period.
Material changes versus the prior comparable period
- Q3 sales decreased 5.9%, principally because of weaker MC demand, more severe-than-expected summer slowdowns, and soft Asian customer operating rates. Q3 2012 also benefited from an $8.0 million favorable change in a North American MC customer contract.
- Q3 gross margin declined to 37.1% from 40.9%. MC gross margin fell to 41.6% from 44.6% because of geographic mix, lower sales, and production inefficiencies.
- Nine-month operating income improved substantially from a $63.8 million loss to $32.3 million of income because 2012 included $119.7 million of pension settlement expense. Excluding that unusual item, underlying operating performance was weaker.
- Restructuring expense increased to $27.2 million for the first nine months from $6.1 million. Most of the 2013 charges relate to French MC facilities.
- Nine-month cash flow from operations improved to $63.1 million from a $10.3 million use of cash, primarily because 2012 included substantial pension funding and settlement-related cash outflows.
- AEC sales grew materially, but profitability deteriorated. Inventory write-offs and legacy-program profitability adjustments at the Boerne, Texas facility reduced AEC gross profit by $2.9 million for the first nine months, including $0.6 million in Q3.
- The 2013 nine-month period included only a $0.4 million loss from discontinued operations, compared with $71.6 million of income in 2012, when the company recorded gains on the sales of Albany Door Systems and PrimaLoft Products.
Guidance, outlook, commentary, risks and unusual items
- Management describes MC as having limited growth potential but significant long-term cash-generation prospects. Global paper and paperboard demand is expected to grow, particularly in packaging, tissue, Asia, and South America, while mature-market overcapacity and longer product lives remain headwinds.
- Management identifies AEC as the company’s greatest growth opportunity, with growth dependent on aerospace and defense applications, including the LEAP engine program. The segment remains exposed to program execution, customer concentration, government-contract activity, and development timing.
- The French restructuring is expected to reduce approximately 200 employees, with about half expected to leave during Q4 2013. Remaining net costs were estimated at $4 million to $6 million over the next several quarters. Most savings are not expected until 2014, and future pension curtailment gains were expected as employees terminate.
- Management expected approximately $27 million of cash taxes for full-year 2013. It projected average annual capital spending of $50 million to $55 million for 2014 through 2016, increasing to approximately $70 million on average for the remainder of the decade.
- Q3 2013 included $0.5 million of organizational costs related to creating Albany Safran Composites and $2.0 million of MC restructuring expense. The quarter also benefited from postretirement plan changes and remeasurement that reduced plan liabilities by $22.4 million in aggregate; the benefit-plan change reduced Q3 expense by approximately $0.2 million.
- The company faces asbestos litigation. Albany was defending 4,299 claims as of October 11, 2013, while subsidiary Brandon Drying Fabrics was defending 7,816 claims. Management stated that a meaningful loss range could not be estimated, but did not anticipate material liability beyond existing insurance coverage or a material adverse effect based on available information.
- A German tax matter involves $23.0 million of challenged tax benefits, of which $11.7 million could affect income if resolved unfavorably. The company had paid approximately $13.1 million of tax and interest to continue pursuing the position and had not accrued the potential expense because management believed the position was more likely than not to prevail.
- Foreign currency revaluation losses were $3.3 million in Q3 and $4.0 million for the first nine months. Interest-rate swaps hedged portions of revolving-credit borrowings, and the company remained exposed to currency, interest-rate, economic, paper-industry, and aerospace-program risks.
Important facts for investors to verify
- Whether MC demand, especially in Asia and mature markets, stabilizes and whether margins recover from the Q3 decline.
- The timing, cash cost, pension curtailment gains, and realized savings from the French restructuring program.
- AEC’s ability to convert LEAP-related sales growth and substantial capital investment into sustainable profitability.
- The availability and geographic location of cash, particularly the extent to which foreign cash can fund U.S. obligations without additional tax costs.
- Debt maturities, revolving-credit availability, covenant compliance, and the effect of interest rates and currency movements on future results.
- The outcome of the German tax dispute and the potential range of future tax adjustments.
- Developments in asbestos claims, insurance coverage, and any change in management’s assessment of potential liability.
- The effect of discontinued-operation comparisons and unusual 2012 pension and divestiture items when evaluating year-over-year performance.