Business Context and Reporting Period
Albany International Corp. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The Company operates through Machine Clothing (MC), which supplies industrial and paper-machine fabrics, and Albany Engineered Composites (AEC), which supplies advanced composite structures primarily to aerospace and defense customers.
Results reflect the COVID-19 pandemic, commercial aerospace weakness, the Boeing 737 MAX grounding, the pause in Airbus A320neo production, foreign-currency volatility, and the November 2019 acquisition of CirComp GmbH.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Net sales | $226.0 million | $273.9 million | $461.8 million | $525.3 million |
| Gross profit | $103.0 million | $105.2 million | $192.5 million | $197.0 million |
| Gross margin | 45.6% | 38.4% | 41.7% | 37.5% |
| Operating income | $52.7 million | $54.2 million | $92.3 million | $94.3 million |
| Net income attributable to the Company | $32.4 million | $34.1 million | $41.5 million | $63.2 million |
| Diluted EPS | $1.00 | $1.05 | $1.28 | $1.96 |
| Operating cash flow | $50.7 million | $58.5 million | $44.0 million | $83.1 million |
Q2 gross margin increased despite lower sales, primarily because of favorable segment mix, foreign-currency effects, efficiency gains, reduced depreciation, and favorable long-term contract estimate adjustments. The six-month gross margin also benefited from these factors.
- MC: Q2 sales were $153.4 million, down 1.0%; operating income was $56.5 million, up from $49.5 million. Six-month sales were $290.0 million, down 3.1%, while operating income increased to $103.7 million from $93.8 million.
- AEC: Q2 sales were $72.6 million, down 39.0%; operating income was $8.3 million, down from $17.7 million. Six-month sales were $171.7 million, down 24.0%, and operating income declined to $15.9 million from $27.3 million.
- Q2 adjusted EBITDA was $73.7 million, compared with $72.4 million in the prior-year quarter. Six-month adjusted EBITDA was $132.8 million, compared with $130.0 million.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $204.0 million at June 30, 2020, including $160.2 million held by non-U.S. subsidiaries.
- Total debt was $435.0 million and net debt was $231.0 million, compared with $228.5 million at December 31, 2019.
- The $685 million unsecured revolving credit facility matures in 2022. Approximately $250 million of additional borrowing capacity was available at June 30, 2020, subject to covenant conditions.
- The leverage ratio was 1.48 to 1.00 versus a maximum of 3.50 to 1.00; interest coverage was 14.51 to 1.00 versus a minimum of 3.00 to 1.00. The Company was in compliance with all debt covenants.
- Capital expenditures were $22.0 million in the first six months, compared with $35.5 million in 2019. Dividends paid were $12.3 million, and the quarterly dividend was $0.19 per share.
Material Changes Versus the Prior Comparable Period
- Consolidated Q2 sales declined 17.5%, and six-month sales declined 12.1%. Excluding currency translation, the declines were 16.9% and 11.4%, respectively.
- AEC sales declined primarily because of lower LEAP program activity. MC sales were approximately flat in Q2 excluding currency effects, as growth in tissue, pulp and packaging grades largely offset publication-grade and engineered-fabric declines.
- Six-month operating cash flow fell $39.1 million, primarily because of lower AEC profitability and unfavorable working-capital changes, including increased inventories and contract assets.
- Other expense was $16.7 million for the first six months versus income of $0.3 million in 2019, primarily because of a $14.9 million foreign-currency revaluation loss related largely to a Mexican subsidiary intercompany loan.
- The effective tax rate increased to 32.1% in Q2 from 29.6% and to 41.0% for the first six months from 25.6%, reflecting jurisdictional mix, foreign losses, and discrete tax items.
- Restructuring expense increased to $3.5 million for the first six months from $1.4 million, including $2.2 million for AEC workforce reductions. Former CEO termination costs were $2.7 million.
Guidance, Outlook, Risks and Unusual Items
- Management expects Q3 LEAP revenue comparisons to be very unfavorable. Although some recovery was expected later in 2020, full-year LEAP program revenue was expected to be less than half of 2019 levels.
- All three LEAP production facilities were temporarily closed in April 2020 because of depressed demand related to the 737 MAX situation and the Airbus A320neo production pause.
- AEC long-term contract estimate adjustments increased gross profit by $7.4 million in Q2 and $6.4 million for the first six months. These estimates are judgmental and may reverse or change materially.
- The Company adopted CECL on January 1, 2020, reducing retained earnings by $1.4 million and increasing credit-loss reserves. COVID-19-related economic uncertainty increased expected credit-loss provisions.
- Management concluded that no goodwill impairment was required as of June 30, 2020.
- Asbestos litigation remained outstanding, with 3,693 Albany claims and 7,710 Brandon claims being defended. The Company reported approximately $140 million of remaining insurance coverage and did not expect the proceedings to have a material adverse effect based on currently available information.
- Principal risks include prolonged COVID-19 effects, weaker paper and aerospace demand, further 737 MAX or other program delays, supply-chain disruptions, foreign-currency movements, customer credit risk, potential asset impairments, and changes to government defense spending.
Important Facts for Investors to Verify
- Whether LEAP production and revenue recover in line with management’s expectations after the 2020 facility closures.
- The sustainability of AEC gross margins, including the effect of contract-estimate adjustments and program mix.
- MC demand trends by paper grade, particularly publication, packaging and tissue grades.
- Working-capital conversion, credit-loss reserves and the effect of contract-asset growth on cash flow.
- Debt repayment capacity, covenant headroom and the availability of the revolving credit facility.
- Potential changes in goodwill or other asset valuations if aerospace and broader economic conditions deteriorate.
- Developments in asbestos claims, insurance coverage and tax audits or contingencies.