Albany International Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The filing was dated October 31, 2018. Albany operates through Machine Clothing (MC) and Albany Engineered Composites (AEC), serving paper, packaging, tissue, aerospace and defense markets.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $253.3 million | $222.1 million | $739.5 million | $637.0 million |
| Gross profit | $93.0 million | $79.6 million | $266.9 million | $218.8 million |
| Gross margin | 36.7% | 35.8% | 36.1% | 34.3% |
| Operating income | $41.4 million | $22.9 million | $105.0 million | $55.5 million |
| Net income attributable to the Company | $28.2 million | $15.3 million | $68.8 million | $27.2 million |
| Diluted EPS | $0.87 | $0.47 | $2.13 | $0.85 |
| Operating cash flow | $44.7 million | $17.9 million | $61.5 million | $21.7 million |
Q3 operating margin was approximately 16.4%, versus 10.3% in the prior-year quarter; nine-month operating margin was approximately 14.2%, versus 8.7%. Q3 net margin attributable to the Company was approximately 11.1%, versus 6.9%.
- MC Q3 sales increased 5.5% to $159.0 million; nine-month sales increased 6.7% to $469.8 million. MC Q3 and nine-month operating income were $50.3 million and $131.9 million.
- AEC Q3 sales increased 32.0% to $94.3 million; nine-month sales increased 37.0% to $269.7 million. AEC operating income was $3.6 million in Q3 and $10.0 million for nine months, compared with losses in the comparable 2017 periods.
- Cash and cash equivalents were $160.6 million at September 30, 2018, including $139.2 million held outside the United States. Net debt was $369.6 million.
- Total debt was $530.2 million, including $504.0 million outstanding under the revolving credit facility. Approximately $181 million of additional borrowing capacity was available, subject to conditions and covenants.
- The company paid $16.4 million of dividends during the first nine months and declared quarterly dividends of $0.17 per share. Capital expenditures were $60.7 million.
Material changes versus the prior comparable period
- Growth was led by AEC programs, particularly LEAP, Boeing 787, F-35 and CH-53K. Excluding currency and ASC 606 effects, Q3 consolidated sales increased 15.5% and nine-month sales increased 13.2%.
- AEC profitability improved substantially because of higher sales, productivity improvements, lower restructuring costs and the absence of 2017 charges, including a $15.8 million contract-profitability revision and a $3.2 million discontinued-product inventory write-off.
- ASC 606 revenue recognition, adopted January 1, 2018, increased reported nine-month sales by $6.3 million and operating income by $5.0 million. It increased nine-month net income attributable to the Company by $3.3 million, or $0.10 per share.
- Restructuring expense increased to $13.7 million for the first nine months from $10.2 million. MC recorded $10.5 million, principally related to the planned closure of the Sélestat, France facility; AEC recorded $3.0 million.
- Operating cash flow increased by $39.7 million year over year, although working capital consumed $64.0 million, primarily due to AEC program ramp-up.
- A September 2018 lease modification for the Salt Lake City facility added $12.7 million to property, plant and equipment and long-term debt as a non-cash transaction.
Guidance, outlook, risks and unusual items
- Management expects MC to remain a significant cash generator but faces pricing pressure, industry overcapacity and declining publication-grade paper demand. Packaging and tissue markets are expected to provide growth.
- AEC is the principal growth platform, but results depend on aircraft production, LEAP and other aerospace programs, contract execution, productivity and estimated contract margins. Changes in long-term contract estimates can materially affect revenue and profit.
- Management provided a Q4 MC projected Adjusted EBITDA range of $47 million to $51 million. The filing does not provide a consolidated full-year earnings or revenue forecast.
- The company contributed $5 million voluntarily to its U.S. pension plan during Q3 and stated that the plan was close to fully funded.
- Tax accounting remains subject to estimates related to the 2017 Tax Cuts and Jobs Act, including GILTI, FDII and mandatory repatriation. The estimated GILTI inclusion was $22 million; the final impact could differ materially.
- Albany was defending 3,673 asbestos claims at September 30, 2018. The company could not estimate a meaningful range of potential losses, but stated that insurance coverage of approximately $140 million remained and that it did not expect a material adverse impact.
- The company was in compliance with all debt covenants. Leverage was 2.05-to-1.00 versus a 3.75-to-1.00 covenant threshold applicable before September 30, 2019; interest coverage was 11.50-to-1.00.
- Currency movements, aerospace program delays or cancellations, customer demand changes, contract-margin revisions, restructuring costs and additional facility-related charges remain significant risks.
Investor verification points
- Reconcile reported results with results excluding ASC 606 and currency effects, particularly for AEC.
- Monitor AEC contract estimates, LEAP production volumes, customer concentration and the $95 million of remaining performance obligations under contracts originally exceeding one year.
- Assess cash conversion as AEC growth increases receivables, contract assets and other working-capital requirements.
- Review debt maturity, interest-rate exposure, available revolver capacity and covenant headroom.
- Track costs and potential additional charges from the Sélestat closure and AEC process discontinuations.
- Evaluate potential changes in tax liabilities, uncertain tax positions and the final effects of the TCJA.
- Review asbestos claim trends, insurance coverage and indemnification arrangements despite management’s assessment that the matters are not expected to be material.