Albany International Corp. 2019 Form 10-K Summary
Business Context and Reporting Period
This filing is an annual report for the fiscal year ended December 31, 2019; the source does not present a standalone quarterly filing, although fourth-quarter data are included. Albany operates through two segments: Machine Clothing (MC), which supplies engineered fabrics and belts for paper, packaging, tissue and industrial applications, and Albany Engineered Composites (AEC), which supplies advanced composite components for commercial and defense aerospace programs.
AEC’s largest program is the CFM LEAP engine, for which Albany is an exclusive supplier of composite fan blades and cases through Albany Safran Composites. Safran represented approximately 22% of consolidated 2019 sales and approximately 50% of AEC sales. The Boeing 737 MAX grounding affected AEC deliveries and backlog.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $1,054.1 million | $982.5 million | +7.3% |
| Gross profit | $397.7 million | $349.7 million | +13.7% |
| Gross margin | 37.7% | 35.6% | +210 basis points |
| Operating income | $193.6 million | $137.4 million | +40.9% |
| Operating margin | 18.4% | 14.0% | +440 basis points |
| Net income attributable to the Company | $132.4 million | $82.9 million | +59.7% |
| Basic and diluted EPS | $4.10 | $2.57 | +59.5% |
| Net cash from operating activities | $200.4 million | $132.5 million | +51.2% |
| Capital expenditures, including software | $68.0 million | $82.9 million | -18.0% |
Net margin was approximately 12.6%, compared with approximately 8.4% in 2018. Adjusted EBITDA was $265.4 million, compared with $228.9 million, and adjusted EPS was $4.11, compared with $2.94. These are non-GAAP measures and should be reconciled to GAAP results.
- MC: Sales were $601.3 million, down 1.7%; operating income was $192.0 million, up from $169.8 million. Sales growth in tissue and packaging grades was offset by declining publication-grade demand. MC gross margin increased to 51.5% from 48.6%, primarily due to lower depreciation and productivity improvements.
- AEC: Sales were $452.9 million, up 22.2%; operating income was $55.5 million, compared with $16.6 million. Results benefited from growth in LEAP, F-35, CH-53K and Boeing 787 programs, productivity improvements and a $10.8 million favorable adjustment to estimated long-term contract profitability.
- Liquidity and debt: Cash was $195.5 million, compared with $197.8 million. Total debt was approximately $424.0 million, down from $524.9 million, producing net debt of $228.5 million versus $327.2 million. The Company had $261 million of additional borrowing capacity under its $685 million revolving facility.
- Leverage and covenants: The leverage ratio was 1.35-to-1.00 versus a maximum of 3.50-to-1.00, and interest coverage was 14.21-to-1.00. The Company was in compliance with its debt covenants.
- Cash deployment: Cash flow was used for $98.7 million of investing activities, including $30.8 million for the CirComp acquisition and $68.0 million of capital expenditures, and $100.3 million of financing outflows, including $75.0 million of net debt repayment and $23.3 million of dividends.
Material Changes Versus the Prior Comparable Period
- Consolidated sales increased 7.3%, with currency translation reducing reported sales by $14.8 million. Excluding currency, sales increased 8.8%.
- AEC continued its growth trajectory, with sales up 23.4% excluding currency, while MC sales were flat excluding currency.
- Operating income improved by $56.2 million, supported by higher AEC sales and productivity, lower MC depreciation, and reduced restructuring charges.
- Restructuring expense declined to $2.9 million from $15.6 million, primarily reflecting the completion of significant MC and AEC restructuring actions.
- Operating cash flow increased by $67.9 million, although contract assets and inventories used $28.1 million of cash, principally because of the Boeing 737 MAX production slowdown.
- AEC backlog declined to $288.1 million from $393.3 million due to the 737 MAX grounding. MC backlog declined to $165.6 million from $170.5 million. Approximately 95% of AEC backlog and all MC backlog were expected to be invoiced within 12 months.
- On November 20, 2019, Albany acquired CirComp GmbH for $32.4 million, with $5.5 million of additional deferred payments tied to post-closing obligations. The acquisition contributed $0.5 million of sales and a $0.2 million operating loss in the reporting period.
- The Company adopted ASC 842, Leases, in 2019, resulting in recognition of operating and finance lease right-of-use assets and liabilities. Prior periods were not restated.
- A prior-year material weakness involving certain MC point-in-time revenue controls was reported as remediated. Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2019, excluding CirComp from management’s assessment.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management estimated 2020 capital expenditures of $75 million to $85 million and stated that cash from operations and available borrowing capacity should fund foreseeable operating and capital requirements.
- Management views MC as a stable cash-generating business despite structural declines in newsprint and printing and writing papers. Packaging, tissue and emerging-market demand are expected to support modest industry growth, but pricing pressure and paper-industry overcapacity remain significant.
- AEC is expected to provide significant growth potential through aerospace programs and advanced composite technologies, but management emphasized execution requirements during program ramp-ups.
- The Boeing 737 MAX grounding could reduce LEAP-related demand, revenue, profitability and cash flow. AEC’s long-term supply agreement also contains events of default that could permit customer termination.
- AEC’s results depend materially on estimates of long-term contract costs and profitability. Changes in those estimates are recorded in the period identified and can create significant earnings volatility. The 2019 favorable adjustment was $10.8 million.
- Other material risks include aerospace quality or delivery failures, customer concentration, fixed-price contract losses, dependence on limited raw-material suppliers, foreign currency and interest-rate exposure, tariffs and trade restrictions, cybersecurity, restructuring execution, tax audits, pension and postretirement obligations, and asbestos litigation.
- The Company was defending 3,708 asbestos claims at year-end. It could not estimate a meaningful range of reasonably possible loss beyond accrued amounts, but reported approximately $140 million of remaining insurance coverage and did not expect the proceedings to have a material adverse effect based on available information.
- Unusual 2019 items included a $0.5 million U.K. pension curtailment charge, $3.2 million of net foreign-currency gains, $2.9 million of restructuring expense and $0.5 million of acquisition-related expense.
- Effective January 20, 2020, A. William Higgins became CEO, succeeding Olivier M. Jarrault, who resigned by mutual agreement. The Company expected to record approximately $3.0 million of termination-related charges in 2020.
Most Important Facts for Investors to Verify
- Whether the Boeing 737 MAX returns to service on the expected timetable and how that affects LEAP production, AEC backlog, contract assets, inventory and cash flow.
- Whether AEC can execute the F-35, Boeing 787, CH-53K, LEAP and other program ramp-ups while maintaining quality, delivery performance and contract margins.
- The sustainability of AEC’s 2019 profitability improvement, including the $10.8 million favorable long-term contract estimate adjustment.
- MC demand trends by product category, particularly whether packaging and tissue growth offsets continued publication-grade declines and pricing pressure.
- Debt refinancing and interest-rate exposure as the $424 million revolving-credit borrowing matures in 2022, including the planned transition away from LIBOR.
- CirComp’s post-acquisition performance, final purchase-price accounting and the additional facility purchase expected in 2020.
- The adequacy of insurance and reserves for asbestos claims, product liability, tax contingencies, pensions and postretirement benefits.
- The availability and location of cash, since $156.9 million of the $195.5 million cash balance was held by non-U.S. subsidiaries and some foreign earnings are intended to remain indefinitely invested abroad.