Albany International Corp. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Albany International Corp. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2023. The company operates through Machine Clothing (MC), its primary cash-generating business serving paper and industrial markets, and Albany Engineered Composites (AEC), which serves commercial and defense aerospace programs.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net revenues | $274.1 million, up 4.9% | $543.2 million, up 7.5% |
| Gross profit | $102.7 million; 37.5% margin | $202.0 million; 37.2% margin |
| Operating income | $45.5 million; 16.6% margin | $86.0 million; 15.8% margin |
| Net income attributable to the Company | $26.7 million | $53.6 million |
| Diluted EPS | $0.85 | $1.71 |
| Operating cash flow | Not separately disclosed for the quarter | $14.7 million |
| Capital expenditures | Not separately disclosed for the quarter | $34.9 million |
MC generated second-quarter revenue of $159.2 million, up 5.0%, while AEC revenue was $114.9 million, up 4.7%. For the first six months, MC revenue increased 2.2% to $312.4 million and AEC revenue increased 15.5% to $230.8 million.
Cash and cash equivalents were $300.9 million at June 30, 2023, compared with $291.8 million at December 31, 2022. Long-term debt was $487.0 million, up from $439.0 million. Available borrowings under the $700 million revolving credit agreement were $213.0 million, producing reported total liquidity of approximately $514 million. Net debt was $186.1 million and the reported net leverage ratio was 0.74.
The company paid $15.6 million in dividends during the first six months and made no share repurchases. The quarterly dividend declared was $0.25 per Class A share.
Material changes versus the prior comparable period
- Second-quarter net income attributable to the Company declined 31.9% from $39.2 million to $26.7 million; diluted EPS declined from $1.25 to $0.85.
- First-half net income attributable to the Company declined 20.0% from $66.9 million to $53.6 million; diluted EPS declined from $2.11 to $1.71.
- Gross margin declined to 37.5% in the quarter from 38.5% and to 37.2% year to date from 38.0%, primarily reflecting higher input costs and lower absorption in MC and an unfavorable AEC program mix in the quarter.
- Operating income declined 10.3% in the quarter and 3.8% year to date. Corporate expenses increased materially, including higher professional fees, personnel costs, software costs and acquisition-related expenses.
- MC second-quarter operating income declined to $53.7 million from $54.9 million despite higher revenue, as increased input costs and higher selling, general and administrative expenses more than offset gross-profit growth.
- AEC second-quarter operating income declined to $8.7 million from $9.5 million, while first-half operating income increased to $18.1 million from $10.7 million due to growth in LEAP, CH-53K and JSF programs.
- Operating cash flow fell to $14.7 million from $37.7 million, primarily because AEC invested in working capital, including inventory and receivables, to support CH-53K and LEAP demand.
- The effective tax rate increased to 42.8% in the quarter from 26.9% and to 36.3% year to date from 27.4%, mainly due to unfavorable discrete tax items, including a $3.0 million withholding tax related to internal restructuring.
Guidance, outlook, risks and unusual items
The filing does not provide a specific financial outlook or quantified earnings guidance. Management expects cash flows from operations and available credit capacity to meet operating and business needs over the next twelve months.
On June 14, 2023, Albany agreed to acquire Heimbach GmbH, a German manufacturer of paper machine clothing and technical textiles, for approximately €153 million, including approximately €21 million of net debt. The transaction is subject to regulatory approvals and customary closing conditions and is expected to be funded with cash on hand. Risks include failure to close, transaction costs, integration challenges and delayed or unrealized synergies.
AEC remaining performance obligations on contracts with original durations greater than one year totaled $792 million at June 30, 2023, compared with $579 million a year earlier. The company expects to recognize approximately $78 million in 2023, $131 million in 2024 and $148 million in 2025, with the remainder thereafter.
Changes in estimated profitability of long-term AEC contracts reduced operating income by $1.9 million in the second quarter and $4.0 million in the first half. The company also remains exposed to aerospace program delays, supply-chain constraints, inflation, labor and raw-material costs, paper-market declines, pricing pressure and foreign-exchange volatility.
The company was defending 3,601 asbestos claims at June 30, 2023. It reported approximately $140 million of remaining insurance coverage and does not currently expect the litigation to have a material adverse effect, but stated that a meaningful range of reasonably possible losses cannot be estimated.
The revolving credit agreement was amended to replace LIBOR-based provisions with Term SOFR provisions. The company was in compliance with its debt covenants, including a 1.49-to-1.00 leverage ratio versus a maximum of 3.50-to-1.00.
Important facts for investors to verify
- Completion timing, funding and integration progress for the proposed Heimbach acquisition.
- Whether AEC revenue growth converts into sustainable operating-margin improvement after the second-quarter contract-estimate reductions.
- Working-capital requirements and operating cash conversion as CH-53K and LEAP production expands.
- Impact of inflation, pricing, foreign exchange and aerospace supply-chain conditions on gross margins.
- Future discrete tax items and the sustainability of the higher effective tax rate.
- Debt refinancing or repayment requirements when the revolving credit agreement becomes due in 2024.
- Development of asbestos claims, insurance coverage and any changes to accrued or reasonably possible liabilities.