Albany International Corp. 10-Q Summary
Business Context and Reporting Period
Form 10-Q for the three months ended March 31, 2013, compared with the first quarter of 2012. Albany operates primarily through Machine Clothing, its cash-generating core business, and Engineered Composites, its higher-growth aerospace and defense business. Results are presented on a continuing-operations basis; Albany Door Systems and PrimaLoft Products were reported as discontinued operations in prior periods.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $186.7 million | $180.1 million | Up 3.7% |
| Gross profit | $72.8 million | $68.3 million | Up 6.6% |
| Gross margin | 39.0% | 37.9% | Up 110 bps |
| Operating income | $22.5 million | $(0.9) million | Improved $23.4 million |
| Income from continuing operations | $11.5 million | $(0.1) million | Improved $11.6 million |
| Diluted EPS from continuing operations | $0.36 | $0.00 | Improved |
| Net income | $11.5 million | $47.0 million | Down 75.5% |
| Operating cash flow | $4.2 million | $(42.7) million | Improved $46.8 million |
| Capital expenditures and software | $13.3 million | $4.3 million | Higher |
| Cash and equivalents | $199.8 million | $140.9 million | Up from Q1 2012 |
| Net debt | $134.6 million | $129.0 million at Dec. 31, 2012 | Up $5.6 million |
Q1 2013 operating margin was approximately 12.1%, compared with a negative margin in Q1 2012. Comprehensive income was $1.7 million, versus $67.3 million in the prior-year quarter, primarily reflecting a $9.8 million after-tax other comprehensive loss, including a $10.6 million pretax foreign-currency translation loss.
Segment Performance and Material Changes
- Machine Clothing: Sales increased 1.9% to $167.4 million, or 2.1% excluding currency effects. Gross margin improved to 44.2% from 41.4%, and operating income rose to $42.9 million from $30.8 million. Improvements reflected stronger Americas performance, productivity gains, restructuring benefits, and favorable currency revaluation.
- Engineered Composites: Sales increased 21.9% to $19.2 million, principally from LEAP engine program activity. Gross profit declined to a loss of $0.2 million from profit of $1.4 million, and operating loss increased to $2.1 million from $0.03 million. Inventory write-offs and other losses associated with a legacy program at the Boerne, Texas facility adversely affected results.
- Selling, general, administrative, technical, engineering, and research expenses declined to $49.6 million from $59.8 million. The prior-year period included a $9.2 million pension settlement charge; Q1 2013 included a $3.8 million gain on the sale of a former Australian manufacturing facility.
- Other expense declined to $0.7 million from $4.5 million, primarily because foreign-currency revaluation losses recorded in 2012 were largely absent in 2013.
- The 2012 comparison included $47.2 million of after-tax discontinued-operation income, including a $58.0 million pretax gain on the sale of Albany Door Systems. No discontinued-operation income was recorded in Q1 2013.
Cash Flow, Debt, and Liquidity
- Operating cash flow was $4.2 million. Working capital used $22.3 million, principally due to payments of year-end accruals.
- Investing cash flow was a use of $7.0 million, including $13.2 million of property, plant, and equipment purchases and $6.3 million of proceeds from an Australian facility sale. Approximately $9.2 million of Q1 capital spending related to Engineered Composites and LEAP expansion.
- Financing cash flow provided $15.4 million. Borrowings increased by $46.9 million, while principal repayments totaled $32.2 million. No dividends were paid in the quarter because two dividend payments were made in Q4 2012.
- On March 26, 2013, the company entered into a new $330 million unsecured five-year revolving credit facility. Borrowings were $176 million at March 31, 2013, with approximately $154 million of additional borrowing capacity under the stated conditions.
- Total debt was $334.4 million, including $55.0 million of current maturities. The company redeemed $28.4 million of remaining 2.25% convertible notes on March 15, 2013, funded with revolver borrowings.
- The $150 million Prudential borrowing carries a fixed 6.84% rate and requires $50 million principal payments in 2013, 2015, and 2017. The company was in compliance with all debt covenants; leverage was 1.36x versus a 3.50x maximum, and interest coverage was 11.16x versus a 3.00x minimum.
- Approximately $173.6 million of cash was held by non-U.S. subsidiaries. Management stated that available cash and credit facilities should provide sufficient capital resources for the foreseeable future.
Outlook, Commentary, Risks, and Unusual Items
- Management views Machine Clothing as a stable, long-term cash generator, despite limited growth in mature paper markets. Growth is expected to be driven primarily by packaging, tissue, Asia, and South America, while paper-industry overcapacity and longer product lives remain pressures.
- Management considers Engineered Composites the company’s greatest growth opportunity, focused on aerospace and defense applications, including the LEAP engine program. Near-term results remain exposed to program execution, development costs, legacy-program losses, and customer concentration.
- The company expected average annual capital spending of approximately $70 million for 2012 through 2016. The filing does not provide a clear consolidated full-year revenue or earnings guidance figure.
- Restructuring expense was $0.6 million, principally related to a strategic realignment in Engineered Composites. Substantially all restructuring liabilities were expected to be paid within one year.
- Albany was defending 4,296 asbestos claims as of April 19, 2013; Brandon Drying Fabrics was defending 7,866 claims. Management could not estimate a meaningful range of possible loss but did not expect material liability beyond insurance coverage or a material adverse effect. Albany reported more than $125 million of confirmed insurance coverage for current and future asbestos claims.
- Mexican customs authorities continued reviewing eight of 36 NAFTA audit files relating to 2006–2008 imports. Management expected only immaterial tariffs and penalties.
- A German tax matter involves $22.3 million of challenged tax benefits; $11.4 million would directly affect income if resolved unfavorably. The company believes it is more likely than not to prevail and has not accrued tax expense for the matter.
- Foreign exchange, paper-industry demand, aerospace program execution, pension obligations, debt refinancing and covenant compliance, tax audits, asbestos litigation, and the availability of foreign cash are key risks.
Important Facts for Investors to Verify
- Whether Engineered Composites can convert strong LEAP-related sales growth into sustainable positive margins after the reported legacy-program write-offs.
- The timing and funding of the $50 million Prudential debt maturity in October 2013 and the company’s ongoing revolver utilization.
- Whether operating cash flow improves after the first-quarter working-capital outflow and supports planned capital spending and dividends.
- The status and potential financial impact of the German tax matter, Mexican NAFTA audits, and asbestos claims.
- The effect of foreign-currency movements and the concentration of cash at non-U.S. subsidiaries, including potential tax costs of repatriation.
- The potential dilution or cash settlement associated with 4.1 million warrants exercisable at an initial $52.25 strike price beginning June 15, 2013.