Albany International Corp. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2020. Albany operates through Machine Clothing (MC), which serves paper, packaging, tissue, nonwoven and industrial markets, and Albany Engineered Composites (AEC), which serves commercial and defense aerospace markets. The filing reflects the emerging effects of COVID-19, the Boeing 737 MAX grounding and weaker foreign currencies.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $235.8 million | $251.4 million | Down 6.2% |
| Gross profit | $89.5 million | $91.8 million | Down 2.5% |
| Gross margin | 37.9% | 36.5% | Up 140 bps |
| Operating income | $39.6 million | $40.1 million | Down 1.2% |
| Income before taxes | $20.0 million | $36.9 million | Down 45.6% |
| Net income attributable to Albany | $9.1 million | $29.2 million | Down 68.8% |
| Diluted EPS | $0.28 | $0.90 | Down $0.62 |
| Operating cash flow | $(6.6) million | $24.6 million | Decrease of $31.2 million |
| Capital expenditures | $12.8 million | $20.8 million | Down $8.0 million |
MC revenue was $136.6 million, down 5.4%, while operating income increased to $47.2 million from $44.2 million. AEC revenue was $99.2 million, down 7.4%, and operating income declined to $7.6 million from $9.5 million. Consolidated operating margin was approximately 16.8%, compared with 15.9% in the prior-year quarter. Adjusted EPS, a non-GAAP measure, was $0.78 versus $0.87.
Cash and cash equivalents totaled $222.7 million at March 31, 2020, including $152.6 million held outside the United States. Total debt was $491.0 million and net debt was $268.3 million, compared with $228.5 million at December 31, 2019. The company had $194 million of additional borrowing capacity under its revolving credit facility, was in compliance with its covenants, and reported a leverage ratio of 1.69:1.00 against a maximum of 3.50:1.00.
The company declared dividends of $0.19 per share, compared with $0.18 in Q1 2019. It made no share repurchases during the quarter.
Material changes versus the prior comparable period
- Sales declined in both segments. Excluding currency translation, consolidated sales decreased 5.4%; MC declined 4.3% and AEC declined 6.8%.
- AEC revenue was pressured primarily by lower LEAP program sales. Sales to Safran were $38.0 million, compared with $56.0 million in Q1 2019.
- Other expense increased to $15.6 million from other income of $1.2 million, principally due to a $14.8 million foreign-currency remeasurement loss related largely to a Mexican subsidiary’s U.S.-dollar intercompany loan.
- The effective tax rate rose to 62.1% from 20.3%, driven by foreign losses in jurisdictions unable to recognize tax benefits, a $1.8 million out-of-period deferred-tax adjustment and a $3.7 million tax charge on the nondeductible foreign-exchange loss.
- Operating cash flow turned negative, primarily reflecting working-capital uses, including increases in inventories and contract assets.
- Goodwill declined to $179.4 million from $180.9 million, largely due to currency translation and acquisition-accounting adjustments. Management concluded that no goodwill impairment was required at March 31, 2020.
- The company adopted CECL on January 1, 2020, reducing retained earnings by $1.4 million after tax and increasing credit-loss allowances.
Guidance, outlook, risks and unusual items
In April 2020, Albany temporarily closed all three LEAP production facilities because of depressed demand related to the Boeing 737 MAX grounding and a pause in Airbus A320neo production. Management expected closures to continue through much of the second quarter and, in some cases, into the third quarter. Full-year LEAP program revenue was expected to be less than half of 2019 levels, although some recovery was anticipated later in the year. The filing does not provide broad consolidated earnings or revenue guidance.
Principal risks include prolonged COVID-19 effects, lower demand for publication and other paper grades, commercial aerospace weakness, further Boeing 737 MAX delays, possible delays or cancellations of defense programs, supply-chain disruption, foreign-exchange volatility, customer credit deterioration and potential impairment of goodwill or other long-lived assets.
Other notable items included $2.7 million of former-CEO termination costs, $0.3 million of CirComp integration costs, $0.6 million of restructuring expense and a $1.5 million loss attributable to the Safran noncontrolling interest. The company continued to face asbestos claims, including 3,691 claims against Albany and 7,710 against its Brandon subsidiary at March 31, 2020. Management stated that available insurance and indemnification are expected to prevent a material adverse effect, but no meaningful loss range could be estimated.
Important facts for investors to verify
- Whether LEAP production closures, Boeing 737 MAX delays and Airbus A320neo conditions caused results materially below the filing’s stated expectations.
- Whether operating cash flow and working-capital requirements normalized or required additional borrowing.
- Subsequent changes in debt levels, borrowing capacity, leverage-covenant compliance and interest rates.
- Whether COVID-19-related demand weakness resulted in additional credit-loss provisions, inventory charges, restructuring costs or goodwill impairment.
- The sustainability of MC margins, including the effect of paper-industry demand, pricing pressure and restructuring benefits.
- Progress and final accounting for the CirComp acquisition and integration.
- Developments in asbestos litigation, insurance coverage and indemnification arrangements.