Albany International Corp. 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2020. Albany operates through Machine Clothing (MC), which serves paper, paperboard, tissue, nonwovens and other industrial markets, and Albany Engineered Composites (AEC), which serves commercial and defense aerospace programs. Results were materially affected by COVID-19, reduced commercial aerospace activity, Boeing 737 MAX and Airbus A320neo production disruptions, and foreign-currency volatility.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Net sales | $212.0 million | $271.1 million | $673.8 million | $796.5 million |
| Gross profit | $87.3 million | $104.1 million | $279.8 million | $301.1 million |
| Gross margin | 41.2% | 38.4% | 41.5% | 37.8% |
| Operating income | $38.8 million | $55.7 million | $131.1 million | $150.0 million |
| Net income attributable to Company | $29.6 million | $40.0 million | $71.1 million | $103.3 million |
| Diluted EPS | $0.91 | $1.24 | $2.20 | $3.20 |
| Operating cash flow | $39.7 million | $43.5 million | $83.7 million | $126.6 million |
Q3 operating margin was 18.3%, compared with 20.5% in the prior-year quarter. Nine-month operating margin was 19.5%, compared with 18.8% in 2019. Q3 adjusted EBITDA was $61.8 million, versus $71.4 million; nine-month adjusted EBITDA was $194.6 million, versus $201.5 million. Adjusted EPS was $0.96 in Q3 and $2.83 for the nine months, compared with $1.17 and $3.14, respectively.
Segment performance and material changes
- Machine Clothing: Q3 sales decreased 8.3% to $138.7 million and nine-month sales decreased 4.9% to $428.8 million. Excluding currency effects, decreases were 9.5% and 4.6%, respectively. Q3 operating income declined to $45.7 million from $51.9 million, while nine-month operating income increased to $149.4 million from $145.7 million.
- Albany Engineered Composites: Q3 sales declined 38.9% to $73.3 million and nine-month sales declined 29.2% to $245.0 million. The primary drivers were lower LEAP and Boeing 787 program activity, partially offset by growth in F-35 and CH-53K programs. Nine-month operating income fell to $22.7 million from $44.6 million.
- Margins: Consolidated gross margin improved despite lower sales. MC’s nine-month gross margin increased to 53.1% from 51.9%; AEC’s increased to 21.2% from 19.4%, principally due to program mix and contract-estimate adjustments.
- Contract estimates: Revisions to estimated profitability of long-term contracts increased gross profit by $3.5 million in Q3 and $9.5 million year-to-date, compared with $3.2 million and $8.8 million in the corresponding 2019 periods.
- Unusual items: Nine-month results included $4.2 million of restructuring charges, $2.7 million of former CEO termination costs, $0.9 million of acquisition and integration costs, and $13.9 million of foreign-currency revaluation losses. Q3 included $2.6 million of income from a successful foreign sales-tax rebate claim.
Cash flow, liquidity and debt
- Cash and cash equivalents were $215.3 million at September 30, 2020, compared with $195.5 million at December 31, 2019. Approximately $180.1 million was held by non-U.S. subsidiaries.
- Nine-month capital expenditures were $31.3 million, and net cash used in investing activities was $31.5 million. Dividends paid were $18.4 million.
- Total debt was $418.0 million, producing reported net debt of $202.7 million. Debt decreased from $424.0 million at December 31, 2019.
- As of September 30, the Company had a 1.50-to-1.00 leverage ratio, 14.62-to-1.00 interest coverage ratio, and approximately $267 million of additional borrowing capacity under the prior facility. The Company was in compliance with all debt covenants.
- On October 27, 2020, after quarter-end, Albany entered into a $700 million unsecured four-year revolving credit facility maturing October 27, 2024. This replaced the prior $685 million facility and increased the applicable borrowing spread by 25 basis points, to a range of 1.50% to 2.00% based on leverage.
Guidance, outlook and risks
The filing does not provide a specific full-year revenue or EPS guidance range. Management expects continued pressure from COVID-19, weaker publication-paper demand, commercial aerospace weakness, the 737 MAX grounding and uncertain production ramp-up, and potential delays or cancellations in other aerospace programs. Management stated that available cash and credit facilities should provide sufficient capital resources for the foreseeable future.
- All three LEAP production facilities were temporarily closed in April 2020 because of depressed demand and the Airbus A320neo production pause. Fourth-quarter LEAP revenue comparisons were expected to remain unfavorable.
- AEC’s cost-plus arrangements may mitigate the effect of lower volumes on gross-margin rates, but fixed-price contracts remain exposed to changes in estimated costs and profitability.
- COVID-19 may increase customer credit risk, supply-chain constraints, foreign-exchange losses, and potential impairment risk for goodwill and other long-lived assets.
- Asbestos litigation involved 3,616 claims against Albany at September 30, 2020. The Company reported approximately $140 million of remaining insurance coverage and does not currently expect a material adverse effect, but cannot estimate a reasonably possible loss range beyond accrued amounts.
- The Company adopted the current expected credit loss standard on January 1, 2020, reducing retained earnings by $1.4 million after tax and increasing credit-loss reserves. Allowances also increased due partly to COVID-19-related credit uncertainty.
Investor verification checklist
- Verify the sustainability of AEC revenue and profitability as LEAP, 737 MAX and A320neo production programs recover or remain constrained.
- Assess whether the improved gross margins depend on favorable contract-estimate adjustments, program mix, currency movements or other nonrecurring factors.
- Monitor cash conversion, contract assets, inventories and customer-credit allowances; contract assets increased to $104.9 million from $79.1 million at year-end 2019.
- Review debt maturity, borrowing spreads, covenant headroom and the effect of the October 2020 refinancing.
- Evaluate exposure to foreign-currency remeasurement, particularly Mexican peso movements and intercompany loans.
- Track restructuring savings, remaining restructuring payments, asbestos claims and available insurance coverage.