Albany International Corp. — 2015 Second-Quarter Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Albany operates through Machine Clothing (MC), its established paper-industry business and primary cash generator, and Albany Engineered Composites (AEC), which serves aerospace and defense markets, including the LEAP engine program.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $172.3 million | $193.5 million | $353.6 million | $373.8 million |
| Gross profit | $54.6 million | $75.3 million | $131.3 million | $150.2 million |
| Gross margin | 31.7% | 38.9% | 37.1% | 40.2% |
| Operating income | $3.0 million | $19.0 million | $23.2 million | $39.6 million |
| Operating margin | 1.8% | 9.8% | 6.6% | 10.6% |
| Net income attributable to the Company | $(2.2) million | $11.2 million | $10.0 million | $21.8 million |
| Diluted EPS | $(0.07) | $0.35 | $0.31 | $0.68 |
| Operating cash flow | $10.9 million | $32.7 million | $17.4 million | $41.5 million |
- MC sales declined 12.9% in Q2 and 8.3% year to date; AEC sales increased 4.9% in Q2 and 20.7% year to date.
- MC operating income was $33.3 million in Q2 and $69.0 million year to date. AEC reported operating losses of $18.6 million and $22.4 million, respectively.
- Adjusted EBITDA was $18.8 million in Q2 and $60.3 million year to date, compared with $37.3 million and $75.0 million in the comparable 2014 periods.
- Cash and cash equivalents were $182.5 million at June 30, 2015, versus $179.8 million at December 31, 2014. Approximately $165.0 million was held by non-U.S. subsidiaries.
- Total debt was $302.6 million and net debt was $120.2 million at June 30, compared with $272.8 million and $93.0 million, respectively, at December 31, 2014.
- Capital expenditures and software purchases totaled $31.0 million year to date. Dividends paid were $10.2 million, and the quarterly dividend was $0.17 per share.
Material changes versus the prior comparable period
- Reported sales decreased 11.0% in Q2 and 5.4% year to date. Currency translation reduced Q2 sales by approximately $10.4 million and first-half sales by approximately $22.0 million. Excluding currency, Q2 sales declined 5.6%, while first-half sales increased 0.5%.
- MC sales were pressured by weaker publication-grade demand and lower volumes in North America and Europe. MC first-half gross margin improved to 46.4% from 43.7%, reflecting restructuring, currency effects and the absence of a prior-year inventory correction.
- AEC sales benefited from LEAP program growth, but profitability deteriorated substantially. AEC gross profit was $(13.1) million in Q2 versus $2.4 million in 2014, and $(11.3) million for the first six months versus $3.7 million.
- Operating cash flow fell by $24.2 million year to date, primarily because working capital used $16.9 million and accounts receivable increased in connection with LEAP program activity.
- Debt increased following borrowings under a new $400 million unsecured five-year revolving credit facility, which replaced the prior $330 million facility.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide clear formal company-wide earnings or revenue guidance. Management expects the MC market to have generally flat growth potential, with packaging, tissue and towel grades and emerging markets providing relative opportunities.
- Management views AEC as the principal long-term growth opportunity, especially through aerospace applications and the LEAP program. The LEAP engine was scheduled to enter service in 2016, but AEC’s performance remains exposed to program execution, production volumes and contract estimates.
- AEC recorded a $14.0 million Q2 charge in cost of goods sold for the BR 725 contract: approximately $10.9 million of deferred contract costs were written off and approximately $3.1 million was accrued for anticipated losses. The contract has aggressive pricing and is expected to run for more than 20 years.
- MC recorded $10.2 million of restructuring expense year to date related principally to closing the Goppingen, Germany, press-fabric facility and terminating approximately 50 employees. Management expects annual savings of approximately $4 million to $5 million by the first quarter of 2016, but additional property impairment charges remain possible.
- The Q2 effective tax rate was unusually low at 14.7%, principally because the AEC contract charge changed the geographic mix of income and losses. The first-half effective tax rate was 44.6%, versus 41.2% in 2014.
- The company was in compliance with debt covenants. Its leverage ratio was 1.55 to 1.00 versus a maximum of 3.50 to 1.00, and interest coverage was 12.59 to 1.00 versus a minimum of 3.00 to 1.00. The $100 million private-placement debt includes a mandatory $50 million payment due October 25, 2015.
- Asbestos litigation remained outstanding, with 3,817 claims against Albany and 7,718 claims against subsidiary Brandon as of June 30, 2015. Management could not estimate a meaningful loss range but did not anticipate material liability beyond existing insurance coverage.
- Key risks include continued weakness in paper-industry demand, foreign currency volatility, failure to achieve profitable growth in AEC, unfavorable changes in long-term contract estimates, aerospace production assumptions, debt refinancing and tax audits, including German tax matters.
Investor verification points
- Verify whether the BR 725 contract has generated further losses, cash requirements or revisions to estimated profitability after June 30, 2015.
- Assess AEC’s progress toward profitability, LEAP production ramp-up and other aerospace program milestones.
- Review the timing and funding sources for the $50 million October 2015 debt maturity and subsequent debt reduction.
- Track whether Goppingen restructuring savings are realized and whether additional impairment or restructuring charges are recorded.
- Monitor working-capital conversion, particularly receivables and inventory associated with LEAP activity, and the concentration of cash held outside the United States.
- Review developments in asbestos claims, insurance coverage and the German tax audit or appeal, for which the filing does not provide a clear probable-loss estimate.