Albany International Corp. — FY2014 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2014, with quarterly data included for the fourth quarter. Albany operates through two segments: Machine Clothing (MC), which supplies engineered fabrics and belts primarily to paper, packaging, nonwovens and industrial customers; and Albany Engineered Composites (AEC), which supplies advanced composite structures to aerospace and defense customers.
MC generated 88% of 2014 consolidated revenue and remains the primary cash generator. AEC is the principal growth initiative, led by its exclusive supply role for composite fan blades and cases for CFM International’s LEAP engine, scheduled to enter service in 2016. Safran owns a 10% noncontrolling interest in Albany Safran Composites.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $745.3 million | $757.4 million | Down 1.6% |
| Gross profit | $291.6 million | $290.6 million | Up 0.4% |
| Gross margin | 39.1% | 38.4% | Up 70 basis points |
| Operating income | $71.4 million | $52.1 million | Up 37.0% |
| Income from continuing operations | $41.7 million | $17.7 million | Up 136% |
| Net income attributable to Albany | $41.6 million | $17.5 million | Up 137% |
| Diluted EPS from continuing operations | $1.30 | $0.55 | Up $0.75 |
| Adjusted EBITDA | $144.8 million | $135.4 million | Up 7% |
| Cash flow from operations | $84.2 million | $62.6 million | Up $21.6 million |
| Capital expenditures, including software | $58.9 million | $64.5 million | Down $5.6 million |
Fourth-quarter 2014 net sales were $191.6 million, gross profit was $72.9 million, and net income attributable to the Company was $8.0 million, or diluted EPS of $0.25.
- MC sales were $655.0 million, down 2.9%; operating income was $136.5 million, up from $114.4 million.
- AEC sales were $90.3 million, up 9.3%; gross margin improved to 11.9% from 5.8%, but the segment remained unprofitable with a $10.5 million operating loss.
- Net debt was $93.0 million at year-end, compared with $81.8 million in 2013.
- Cash and equivalents were $179.8 million, including $161.1 million held by non-U.S. subsidiaries.
- Total debt was $272.8 million, including $50.0 million of current maturities and $222.1 million of long-term debt.
- The company paid $19.7 million of dividends and declared $0.63 per share for the year.
Material changes versus the prior comparable period
- Consolidated revenue declined primarily because of lower MC sales in the Americas, including customer mill closures. Currency translation reduced reported sales by $3.6 million.
- AEC revenue increased due to higher LEAP and JSF LiftFan program activity. AEC gross profitability improved, principally from better performance at the Boerne, Texas operation.
- MC operating income benefited from lower restructuring charges, which declined to $4.8 million from $24.6 million, favorable currency revaluation effects, restructuring-related cost savings and productivity improvements.
- Total restructuring expense declined to $5.8 million from $25.1 million. The French MC restructuring reduced employment by approximately 200 positions and generated approximately $10 million of annual cost savings, substantially realized in 2014.
- A noncash pension settlement charge of $8.2 million was recorded in 2014; no comparable charge was recorded in 2013.
- Other income included $6.4 million of foreign-currency revaluation gains and a $1.1 million insurance recovery related to a damaged German facility.
- Research and development expense increased to $32.4 million from $30.2 million, including $11.0 million in AEC.
- Operating cash flow increased despite a $21.4 million working-capital use, including an $11.0 million decrease in accrued liabilities related principally to French restructuring activities.
- Backlog declined in MC to $195.5 million from $225.6 million, reflecting shorter order-to-delivery times. AEC backlog increased to $22.8 million from $21.7 million.
- Reported balance sheets for prior periods were revised for immaterial deferred-tax presentation and property, plant and equipment classification errors; there was no impact on equity, income or cash flows.
Guidance, outlook, management commentary, risks and unusual items
- Management views MC as having generally flat growth potential but expects continued cash generation from low-cost operations, productivity, technology and exposure to packaging, tissue and growth markets in Asia and South America.
- AEC is expected to provide the company’s greatest long-term growth opportunity. Management identified LEAP production ramp-up, facility readiness and execution against program milestones as critical.
- The company estimated 2015 capital spending of $65 million to $75 million and approximately $70 million annually for the balance of the decade, subject to business requirements.
- On February 20, 2015, Albany announced plans to discontinue manufacturing at its Goppingen, Germany press-fabric facility. The company had not determined the associated restructuring cost.
- AEC contracts include cost-plus arrangements and long-term fixed-price contracts. Changes in estimated costs or profitability can materially affect revenue and gross profit in the period of revision. Contract estimates reduced 2014 gross profit by $0.6 million.
- Key risks include continuing paper-industry contraction and price competition; customer mill closures; LEAP execution and production ramp risk; program cancellations or delays; fixed-price contract losses; dependence on limited suppliers of carbon fiber, resin and other materials; foreign exchange volatility; and global economic weakness.
- The company had $50.0 million of debt due in 2015, including a $50.0 million mandatory payment under its private-placement notes. It reported a leverage ratio of 1.30-to-1.00 and interest coverage of 13.01-to-1.00, compared with covenant limits of 3.50-to-1.00 and 3.00-to-1.00, respectively.
- Management stated that cash, operating cash flow and available credit facilities should be sufficient for foreseeable requirements and that all debt covenants were satisfied at December 31, 2014. Approximately $158 million of additional borrowing capacity was available under the revolving facility based on disclosed covenant calculations.
- Pension plans were underfunded by $29.9 million and other postretirement benefit liabilities totaled $65.0 million. Management estimated 2015 pension contributions and direct retiree payments of $5.3 million and other postretirement benefit payments of $4.8 million.
- The company was defending 3,821 asbestos claims at year-end. Management could not estimate a meaningful loss range but did not expect liabilities beyond insurance coverage to be material based on current information.
- The German tax authorities challenged tax benefits related to a 1999 reorganization. Albany paid approximately $14.5 million of tax and interest to pursue its appeal position and disclosed approximately $8.8 million of tax benefits that remained subject to challenge.
- The Standish family controlled approximately 53% of combined voting power, making Albany a controlled company under NYSE rules and allowing reliance on certain exemptions from independent-committee and board-composition requirements.
Investor verification points
- Verify the sustainability of MC cash generation despite declining paper-related demand, customer mill closures and persistent pricing pressure.
- Track AEC’s LEAP production ramp, contract execution, capacity investment, margin progression and conversion of backlog into revenue and cash flow.
- Assess the effect of the Goppingen closure, additional restructuring costs and future European capacity rationalization.
- Review the timing and funding sources for the $50 million 2015 debt maturity, dividends and planned capital expenditures.
- Evaluate foreign cash accessibility, potential repatriation taxes and the concentration of cash outside the United States.
- Monitor fixed-price contract estimates, capitalized AEC costs and the risk of future contract-loss charges or write-offs.
- Review pension, postretirement, asbestos and German tax contingencies, including insurance coverage and potential changes in assumptions or legal outcomes.
- Consider the impact of foreign exchange movements, commodity and labor costs, interest rates and the company’s controlled-company governance structure.