Albany International Corp. 2023 Q3 Form 10-Q Summary
Business context and reporting period
Albany International Corp. reported unaudited results for the three and nine months ended September 30, 2023. The company operates through Machine Clothing (MC), which supplies paper-machine clothing and technical textiles, and Albany Engineered Composites (AEC), which supplies advanced composite structures for commercial and defense aerospace programs.
On August 31, 2023, Albany acquired Heimbach GmbH, a privately held paper-machine-clothing manufacturer. Heimbach was included in consolidated results for September 2023 and contributed $15.6 million of third-quarter revenue and a $0.5 million operating loss.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net revenues | $281.1 million | $260.6 million | $824.3 million | $766.1 million |
| Gross profit | $101.8 million | $100.5 million | $303.9 million | $292.7 million |
| Gross margin | 36.2% | 38.6% | 36.9% | 38.2% |
| Operating income | $40.1 million | $53.6 million | $126.1 million | $143.1 million |
| Net income attributable to the Company | $27.1 million | $10.7 million | $80.7 million | $77.6 million |
| Diluted EPS | $0.87 | $0.34 | $2.58 | $2.46 |
| Dividends declared per Class A share | $0.25 | $0.21 | $0.75 | $0.63 |
Q3 revenue increased 7.9%, while nine-month revenue increased 7.6%. Excluding currency effects, revenue growth was 7.1% in the quarter and 8.0% year to date.
- Machine Clothing: Q3 revenue increased 8.6% to $166.6 million, including $15.6 million from Heimbach. Segment operating income declined to $50.7 million from $57.2 million. Q3 gross margin fell to 47.6% from 51.7% because of Heimbach’s lower margins, inflationary input costs and lower overhead absorption.
- AEC: Q3 revenue increased 6.9% to $114.5 million, primarily from LEAP, Boeing Frames and other commercial programs. Segment operating income decreased slightly to $9.4 million from $10.0 million. Nine-month revenue increased 12.5% and operating income increased to $27.5 million from $20.7 million.
- Cash flow: Nine-month operating cash flow was $73.8 million, compared with $67.3 million in 2022. Capital expenditures were approximately $49.1 million, and net cash used for the Heimbach acquisition was $133.5 million.
- Liquidity: Cash and cash equivalents were $171.5 million at September 30, 2023, down from $291.8 million at year-end 2022. The company reported approximately $339.0 million of available borrowing capacity and total liquidity of approximately $510.5 million.
- Debt: Total debt was $490.6 million, including $461.0 million under the revolving credit facility and $29.6 million of assumed Heimbach debt. Net debt was $319.1 million versus $147.2 million at December 31, 2022. The reported non-GAAP net leverage ratio was 1.28x.
- Working capital: Accounts receivable increased to $270.5 million, contract assets to $165.8 million and inventories to $181.0 million, partly reflecting the Heimbach acquisition.
- Adjusted results: Adjusted EBITDA was $64.7 million in Q3 and $190.1 million for the first nine months, compared with $68.1 million and $195.1 million, respectively, in the comparable 2022 periods. Adjusted EPS was $1.02 in Q3 and $2.83 year to date.
Material changes versus the prior comparable period
- Revenue growth was led by AEC aerospace programs and MC growth in tissue and packaging grades, supplemented by the Heimbach acquisition.
- Operating income declined 25.3% in Q3 and 11.9% for the first nine months. Higher corporate and segment selling, general and administrative expenses, acquisition costs, CEO transition costs and inflationary pressures more than offset revenue growth.
- Q3 net income and EPS benefited from the absence of the $49.1 million pretax pension settlement charge recorded in Q3 2022.
- Q3 2023 included $0.5 million of foreign-currency expense, compared with $6.6 million of foreign-currency income in Q3 2022. Year-to-date foreign-currency income was $3.6 million versus $17.7 million in 2022.
- The effective tax rate was 25.3% in Q3 and 33.0% for the first nine months, compared with a 2022 Q3 tax benefit rate of 41.6% and a nine-month rate of 22.2%. The prior-year period included favorable discrete tax items related to the pension settlement.
- The company did not repurchase shares during the first nine months of 2023. Approximately $90.6 million remained authorized under the repurchase program.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear quantitative full-year revenue, earnings or cash-flow guidance figure. Management expects operating cash flow and available credit under the amended facility to be adequate for operations and business needs over the next twelve months and anticipates continued compliance with debt covenants under current assumptions.
- MC is expected to remain a significant cash generator, but faces declining publication-paper demand, pricing pressure, inflation, input-cost increases and lower overhead absorption. Heimbach integration and realization of expected synergies are important near-term considerations.
- AEC offers longer-term growth potential through LEAP and other commercial and defense aerospace programs, but remains exposed to aircraft production rates, customer inventory levels, supply-chain constraints, program delays, technical issues and cancellations.
- Remaining performance obligations on contracts with original terms exceeding one year were $759 million at September 30, 2023. Management expected to recognize approximately $38 million in 2023, $146 million in 2024 and $146 million in 2025, with the remainder thereafter.
- Changes in estimated profitability of long-term contracts increased Q3 operating income by $0.9 million but reduced nine-month operating income by $4.1 million.
- The amended $800 million revolving credit facility matures in August 2028. The company was in compliance with its leverage and interest-coverage covenants at quarter-end.
- Approximately $27.2 million of assumed Heimbach debt was classified as current and may be callable upon certain change-in-control notifications. Management stated that it has sufficient liquidity to settle this debt if required.
- Asbestos litigation involved 3,604 claims against Albany at September 30, 2023. The company believes insurance coverage and existing defenses make a material adverse impact unlikely, but it cannot estimate a reasonably possible loss range beyond accrued amounts.
- Foreign-currency and interest-rate risks remain material. A hypothetical 10% adverse currency movement could affect the fair value of non-U.S. net assets by approximately $68.3 million, while a one-percentage-point increase in applicable variable-rate debt costs would increase annual interest expense by approximately $1.1 million.
- Management stated that disclosure controls were effective. Heimbach was excluded from the current-quarter assessment of internal control over financial reporting while integration proceeds.
Important facts for investors to verify
- Progress integrating Heimbach, including margin improvement, synergies, control integration and any additional liabilities or purchase-price adjustments.
- Whether MC margins recover from the Q3 decline and whether inflation, pricing and paper-market weakness continue.
- AEC production rates and profitability for LEAP, Boeing, defense and other aerospace programs, including contract-estimate revisions.
- Cash conversion and working-capital trends, particularly accounts receivable, contract assets and inventories.
- Debt reduction plans, refinancing or repayment of callable Heimbach debt, interest-rate exposure and covenant headroom.
- The sustainability of reported earnings after excluding pension, foreign-currency, acquisition, CEO transition and other unusual items.
- Developments in asbestos claims, insurance coverage and any other commitments or contingencies.