Business Context and Reporting Period
Company: Albany International Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company operates five segments: Paper Machine Clothing (PMC), Albany Door Systems (ADS), Engineered Fabrics, Engineered Composites, and PrimaLoft® Products. PMC is the primary segment, accounting for approximately 67% of 2008 revenues. The Company is in the final stages of a three-year restructuring and performance improvement plan initiated in 2006 to align capacity with global demand and reduce costs.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|---|---|
| Net Sales | $212,559 | $297,201 | $421,764 | $570,409 |
| Gross Profit | $68,888 | $103,198 | $138,919 | $198,128 |
| Gross Margin % | 32.4% | 34.7% | 32.9% | 34.7% |
| Operating (Loss)/Income | ($29,555) | $14,526 | ($44,322) | $21,706 |
| Net (Loss)/Income | ($12,744) | $5,253 | ($31,641) | $3,157 |
| Diluted EPS (Continuing Ops) | ($0.08) | $0.18 | ($0.71) | $0.10 |
| Diluted EPS (Total) | ($0.41) | $0.17 | ($1.04) | $0.11 |
| Cash and Equivalents | $120,708 (as of June 30, 2009) | |||
| Long-Term Debt | $524,723 (as of June 30, 2009) | |||
| Operating Cash Flow (6mo) | ($3,264) | $22,629 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 28.5% in Q2 2009 and 26.1% for the six months ended June 30, 2009, compared to the prior year. Excluding currency effects, sales declined 23.0% (Q2) and 19.4% (6 months). The global recession significantly impacted the Paper Machine Clothing segment, with sales down 27.0% in Q2.
- Operating Loss: The Company reported an operating loss of $29.6 million in Q2 2009, a reversal from $14.5 million of income in Q2 2008. This was driven by lower sales volumes and significant restructuring charges.
- Restructuring Costs: Restructuring and other charges totaled $33.8 million in Q2 2009 and $51.0 million for the six-month period, compared to $1.7 million and $7.1 million, respectively, in 2008. These costs relate to plant closures, workforce reductions, and performance improvement initiatives.
- Debt Extinguishment Gain: A significant non-operating gain of $36.6 million was recorded in Q2 2009 (and $39.5 million for the six months) due to the early retirement of convertible debt. This gain partially offset the operating losses.
- Discontinued Operations: A $10.0 million charge was recorded in Q2 2009 related to a purchase price adjustment for the 2008 sale of the Filtration Technologies business.
Guidance, Outlook, and Risks
- Outlook: Management observes that end-markets appear to be bottoming, with sequential quarter-to-quarter sales stabilizing in Q2 2009. The Company expects the three-year restructuring program to conclude by the end of 2009. Management projects that cost reduction initiatives will improve Adjusted EBITDA by approximately $3.0 million per quarter by Q4 2009, growing to $7.0 million per quarter by Q2 2010.
- Liquidity: The Company maintains a leverage ratio of 2.40 to 1.00, well below the 3.50 to 1.00 covenant limit. It has approximately $167 million of additional borrowing capacity available under its credit agreement. Cash generated from operations and available resources are deemed sufficient for short and long-term liquidity.
- Asbestos Litigation: The Company faces significant asbestos-related litigation (16,060 claims pending against Albany and 8,139 against subsidiary Brandon Drying Fabrics as of July 23, 2009). While the Company believes it has meritorious defenses and approximately $130 million in confirmed insurance coverage, it cannot predict the timing or outcome of future claims. No material liability is currently anticipated in excess of insurance limits.
- Market Risks: The Company is exposed to foreign currency fluctuations, as over half of its business is conducted outside the U.S. A strengthening U.S. dollar could negatively impact reported sales and operating income. Additionally, the cyclical nature of the paper and paperboard industry poses ongoing demand risks.
Investor Verification Checklist
- Debt Buyback Impact: Verify the sustainability of earnings given the $36.6 million one-time gain from debt extinguishment in Q2 2009, which significantly masked the underlying operating loss.
- Restructuring Completion: Monitor the execution of the final phase of the three-year restructuring plan and the realization of the projected $7.0 million quarterly EBITDA improvement by Q2 2010.
- Asbestos Exposure: Review the status of pending asbestos claims (over 24,000 total) and the adequacy of the $130 million insurance coverage against potential future settlements.
- Currency Sensitivity: Assess the impact of foreign exchange rates on future margins, given the significant portion of sales denominated in Euros and other foreign currencies.
- Segment Performance: Track the recovery of the Paper Machine Clothing segment, which drives the majority of revenue, specifically looking for signs of volume stabilization in the Americas and Europe.