Albany International Corp. — Q2 2016 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. Albany operates through Machine Clothing (MC) and Albany Engineered Composites (AEC). MC remains the primary cash-generating business, while AEC is focused on aerospace and defense composites, including the LEAP engine program.
On April 8, 2016, Albany acquired Harris Corporation’s composite aerostructures business for $187.0 million in cash plus assumed liabilities. The acquired business, renamed Albany Aerostructures Composites LLC (AAC), is included in AEC from the acquisition date.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $203.2 million | $172.3 million | $375.5 million | $353.6 million |
| Gross profit | $78.3 million | $54.6 million | $150.8 million | $131.3 million |
| Gross margin | 38.5% | 31.7% | 40.2% | 37.1% |
| Operating income | $17.9 million | $3.0 million | $40.1 million | $23.2 million |
| Net income attributable to the Company | $10.4 million | $(2.2) million | $23.9 million | $10.0 million |
| Diluted EPS | $0.32 | $(0.07) | $0.74 | $0.31 |
| Operating cash flow | $18.6 million | $10.9 million | $22.7 million | $17.4 million |
Q2 sales increased 17.9% year over year; six-month sales increased 6.2%. Q2 operating margin was approximately 8.8%, versus 1.8% in 2015; the six-month margin was approximately 10.7%, versus 6.6%. Q2 net income attributable to the Company represented approximately 5.1% of sales, compared with a loss in the prior-year quarter.
- MC Q2 sales declined 1.1% to $148.9 million, while six-month sales declined 4.8% to $294.2 million. MC operating income increased to $35.4 million in Q2 and $72.5 million for the first six months.
- AEC Q2 sales increased 149.7% to $54.3 million, including $25.6 million from AAC. Six-month AEC sales increased 82.5% to $81.3 million. AEC operating loss improved to $5.8 million in Q2 and $9.6 million for the first six months.
- Cash and cash equivalents were $176.0 million at June 30, 2016, compared with $185.1 million at December 31, 2015. Working capital used $31.1 million of cash during the first six months.
- Investing cash outflow was $214.0 million, including the $187.0 million AAC acquisition and $28.1 million of property, plant and equipment purchases.
- Total debt was $486.3 million, including $412.0 million drawn under the revolving credit facility and a $23.7 million capital lease obligation. Net debt was $310.3 million.
- The company had a $550 million unsecured five-year revolving facility, with approximately $138 million of additional borrowing capacity based on the disclosed leverage conditions. The leverage ratio was 2.31 to 1.00, interest coverage was 14.18 to 1.00, and all debt covenants were satisfied.
- The quarterly dividend was $0.17 per share; $10.9 million of dividends were paid during the first six months.
Material changes versus the prior comparable period
- Results benefited substantially from the AAC acquisition and higher LEAP program sales. AAC contributed $25.6 million of Q2 sales and $1.7 million of operating income after closing.
- AEC gross profit improved to $7.7 million from a $13.1 million loss. The 2015 comparison included a $14.0 million charge related to revised profitability estimates for the BR 725 program.
- MC gross margin improved to 47.6% in Q2 from 45.2% and to 47.8% for the six months from 46.4%, principally due to improved capacity utilization.
- Interest expense increased because of acquisition-related borrowings and AAC’s capital lease. Long-term debt increased from $265.1 million at year-end 2015 to $485.8 million at June 30, 2016.
- Restructuring expense was $6.6 million in Q2 and $7.3 million year to date, compared with $1.2 million and $10.2 million, respectively, in 2015. Six-month acquisition-related expenses totaled $5.4 million.
- Foreign currency effects shifted from losses in 2015 to gains in Q2 2016, contributing $2.0 million of other income for the quarter. The six-month period included $2.0 million of currency gains.
Guidance, outlook, risks, contingencies, and unusual items
- Management estimated 2016 capital expenditures of $75 million to $85 million, including spending for the acquired business.
- MC faces continuing pricing pressure, industry overcapacity, declining publication-grade demand, and longer product lives. Management expects potential for relatively flat future earnings while emphasizing cost control and restructuring benefits.
- AEC’s growth depends on execution and production ramp-up for the LEAP program, including facilities in Rochester, Commercy, and the planned Queretaro facility targeted to come online in 2017. Integration of AAC may divert management attention and create operational and systems risks.
- AEC’s customer disputed Albany’s pricing calculation for the Rolls-Royce BR 725 contract. If the customer’s position prevails, future operating results could be materially affected.
- AEC long-term contracts are subject to changes in estimated profitability, which can materially affect revenue and gross profit in the period of revision.
- Approximately 25 positions are expected to be terminated as R&D activities at the Sélestat, France, MC facility are discontinued in Q3 2016. Restructuring liabilities were approximately $10.2 million expected to be paid within one year and $2.0 million in the following year.
- Albany was defending 3,814 asbestos claims and Brandon Drying Fabrics was defending 7,707 claims at June 30, 2016. Management could not estimate a meaningful range of potential loss, but did not anticipate material liability beyond available insurance coverage.
- Cash held outside the United States totaled $153.4 million. The company stated that most foreign cash was intended for indefinite use by non-U.S. operations; repatriation could result in additional U.S. taxes.
- Albany terminated prior interest-rate swaps for $5.2 million and entered into hedging fixing the LIBOR component on $300 million of debt at 1.245% through March 2021, plus the applicable credit spread.
Important facts for investors to verify
- Whether AAC integration, provisional purchase accounting, and expected synergies develop as planned; acquired asset and liability valuations remained subject to adjustment.
- The sustainability of AEC’s improved profitability after excluding the prior-year BR 725 charge and including AAC acquisition effects.
- LEAP production ramp-up, customer demand, program execution, and the timing of the Queretaro facility.
- The outcome and potential financial impact of the BR 725 pricing dispute and other long-term contract estimates.
- Debt reduction capacity, interest-rate exposure, covenant headroom, and the October 2017 maturity of the $50 million private placement.
- Actual capital expenditures versus the $75 million–$85 million estimate and the effect of working-capital investment on operating cash flow.
- Developments in asbestos litigation, insurance coverage, tax audits, and the planned Sélestat restructuring.