Albany International Corp. 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Albany International operates through two segments: Machine Clothing (MC), which supplies fabrics and process felts for paper and industrial products, and Albany Engineered Composites (AEC), which supplies advanced composite components for commercial and defense aerospace applications. The report covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $271.1 million | $251.9 million | $796.5 million | $730.9 million |
| Gross profit | $104.1 million | $92.4 million | $301.1 million | $261.8 million |
| Gross margin | 38.4% | 36.7% | 37.8% | 35.8% |
| Operating income | $55.7 million | $40.8 million | $150.0 million | $100.0 million |
| Net income attributable to the Company | $40.0 million | $27.7 million | $103.3 million | $65.3 million |
| Diluted EPS | $1.24 | $0.86 | $3.20 | $2.02 |
| Net cash provided by operating activities | $43.5 million | $44.7 million | $126.6 million | $61.5 million |
Calculated operating margins were approximately 20.5% for Q3 and 18.8% for the first nine months, compared with 16.2% and 13.7%, respectively, in the prior-year periods. Calculated net margins attributable to the Company were approximately 14.8% for Q3 and 13.0% for the first nine months.
- MC revenue declined 4.0% in Q3 and 2.3% year to date; AEC revenue increased 27.1% in Q3 and 28.2% year to date.
- AEC operating income increased to $17.3 million in Q3 and $44.6 million year to date, from $3.6 million and $10.0 million, respectively.
- MC operating income increased to $51.9 million in Q3 and $145.7 million year to date, supported by lower depreciation, improved productivity, lower restructuring costs, and lower selling, technical, general and research expenses.
- Adjusted EBITDA was $71.4 million in Q3 and $201.5 million year to date, compared with $62.7 million and $171.2 million in the comparable 2018 periods.
Financial Position, Debt and Liquidity
- Cash and cash equivalents were $173.7 million at September 30, 2019, down from $197.8 million at December 31, 2018. Approximately $134.7 million was held by non-U.S. subsidiaries.
- Total debt was $424.0 million, compared with $524.9 million at year-end 2018. Net debt was $250.3 million versus $327.2 million at December 31, 2018.
- The company had $424.0 million outstanding under its $685 million unsecured revolving credit facility and reported approximately $261 million of additional borrowing capacity, subject to facility conditions.
- The leverage ratio was 1.42 to 1.00, compared with a maximum covenant of 3.50 to 1.00; interest coverage was 13.03 to 1.00 versus a minimum covenant of 3.00 to 1.00. The company was in compliance with all debt covenants.
- Capital expenditures were $48.8 million in the first nine months, compared with $60.6 million in 2018. Dividends paid were $17.4 million, and the quarterly dividend was $0.18 per share.
- Management stated that cash on hand and available credit facilities should provide sufficient capital resources for the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Consolidated sales increased 7.6% in Q3 and 9.0% year to date. Excluding currency translation effects, sales increased 9.0% and 10.8%, respectively.
- AEC growth was driven principally by the LEAP, F-35 and Boeing 787 fuselage-frame programs. AEC sales to Safran were $175.2 million in the first nine months, compared with $136.9 million in 2018.
- MC sales were pressured by declining publication-grade paper demand, partially offset by other paper grades. Currency translation reduced reported sales by $3.3 million in Q3 and $13.4 million year to date.
- Restructuring expense declined to $1.1 million year to date from $13.7 million in 2018, principally reflecting the completion of significant MC restructuring activity in France.
- Operating cash flow more than doubled year to date, primarily due to increased profitability and improved working-capital management.
- The company adopted ASC 842, Leases, on January 1, 2019, recognizing operating and finance lease right-of-use assets and liabilities. The adoption increased total assets by approximately $7.1 million at transition and had no impact on cash flow statements.
Guidance, Outlook, Commentary and Risks
- Management forecast full-year 2019 Adjusted EBITDA of $250 million to $260 million and Adjusted EPS of $3.75 to $3.95. The comparable GAAP EPS forecast was $3.81 to $4.01.
- MC is expected to remain a significant cash generator, although publication-grade declines, pricing pressure, industry overcapacity and product-life improvements continue to pressure revenue.
- AEC provides significant growth potential, but results depend on successful execution of aerospace programs and anticipated production volumes.
- Because of the Boeing 737 MAX grounding, the company reduced LEAP component production plans for the second half of 2019 while maintaining production above delivery rates to retain its workforce and learning curve. The filing states that some revenue and gross profit were pulled forward into 2019, creating potential revenue impacts in 2020 and later periods.
- Changes in estimated profitability on long-term contracts increased AEC gross profit by $8.8 million in the first nine months of 2019, compared with $0.5 million in 2018. Future estimate changes could materially affect reported results.
- Long-term contracts with original durations exceeding one year had remaining performance obligations of $81 million at September 30, 2019; approximately $25 million was expected to be recognized during 2019 and the remainder during 2020 and 2021.
- The company was defending 3,701 asbestos claims as of September 30, 2019 and stated that it cannot estimate a meaningful range of possible loss. Insurance coverage of approximately $140 million remained available, and management did not expect the proceedings to have a material adverse effect based on currently available information.
- A material weakness in internal control over financial reporting related to certain MC revenue transactions, system-development risk assessment, and reconciliation controls remained under remediation. Management expected remediation by year-end 2019, subject to operating effectiveness and testing.
- Other risks include global economic and industry conditions, foreign currency movements, aerospace program delays or cancellations, customer concentration, debt and dividend restrictions, tax audits and contingencies, and continued influence of the Standish Family, which held approximately 34.5% of combined voting power after its 2019 share offering.
Most Important Facts for Investors to Verify
- Whether LEAP production, Boeing 737 MAX developments and the stated revenue pull-forward materially affect 2020 and later AEC results.
- The sustainability of AEC contract margins, including the impact of future changes in estimated contract profitability.
- Whether MC revenue stabilizes despite publication-grade declines, pricing pressure and industry overcapacity.
- Achievement of the $250 million to $260 million full-year Adjusted EBITDA and $3.75 to $3.95 Adjusted EPS guidance ranges.
- Progress in remediating the material weakness in internal control over financial reporting.
- Debt reduction, available revolving-credit capacity, covenant compliance and the concentration of cash outside the United States.
- Developments in asbestos litigation, insurance coverage and any potential uninsured exposure.
- The effect of foreign currency translation, tax audits, valuation allowances and other discrete tax items on future earnings.