Albany International Corp. Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2015, compared with the first quarter of 2014. Albany operates through Machine Clothing (MC), its primary cash-generating business serving paper and paperboard manufacturers, and Albany Engineered Composites (AEC), focused primarily on aerospace and defense applications, including LEAP engine components.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $181.3 million | $180.3 million | 0.6% |
| Gross profit | $76.7 million | $74.8 million | 2.5% |
| Gross margin | 42.3% | 41.5% | Up 80 bps |
| Operating income | $20.1 million | $20.6 million | (2.2%) |
| Operating margin | 11.1% | 11.4% | Down 30 bps |
| Net income attributable to the Company | $12.2 million | $10.6 million | 15.0% |
| Diluted EPS | $0.38 | $0.33 | 15.2% |
| Net cash provided by operating activities | $6.4 million | $8.8 million | Down $2.4 million |
- MC sales were $158.5 million, down 3.4% as reported but up 3.5% excluding currency translation effects. MC operating income was $35.7 million versus $36.1 million.
- AEC sales increased 40.8% to $22.8 million, primarily from growth in LEAP program activity. AEC remained loss-making, with an operating loss of $3.8 million versus $3.5 million in the prior-year quarter.
- Foreign currency translation reduced reported sales by approximately $11.7 million. Foreign currency revaluation generated a $2.4 million gain in other income in 2015 versus a $0.5 million gain in 2014.
- Restructuring and other expense increased to $9.0 million from $1.2 million, substantially offsetting gross-profit and expense improvements.
- Other income included a $0.9 million gain from the sale of the Company’s equity investment in an unaffiliated company.
- Cash and cash equivalents were $170.8 million at March 31, 2015, compared with $179.8 million at December 31, 2014. Approximately $158 million was held by non-U.S. subsidiaries.
- Total debt was $282.6 million and net debt was $111.8 million at March 31, 2015. The Company had $182 million outstanding under its $330 million revolving credit facility and approximately $148 million of additional availability, subject to covenant conditions.
- The Company reported a 1.28-to-1 leverage ratio and a 13.94-to-1 interest coverage ratio, versus covenant limits of 3.50-to-1 and 3.00-to-1, respectively. All debt covenants were satisfied.
- Capital expenditures were $12.2 million in the quarter, including $6.2 million for AEC. Full-year capital expenditures were expected to be $65 million to $75 million.
- The quarterly dividend increased to $0.16 per share from $0.15 per share.
Material changes versus the prior comparable period
- Reported revenue was broadly flat because stronger underlying sales were largely offset by currency translation. Excluding currency effects, consolidated sales increased 7.0%.
- Gross margin improved due to higher MC volume, favorable product mix, cost-reduction actions, and higher AEC sales.
- Operating income declined despite the gross-profit improvement because restructuring charges rose by $7.8 million year over year.
- Net income and EPS improved due in part to lower interest expense, favorable currency revaluation, the investment-sale gain, and lower discrete tax charges than in the prior-year quarter.
- Comprehensive income attributable to the Company changed from income of $5.6 million to a loss of $23.6 million, primarily because foreign currency translation losses increased to approximately $35.7 million.
- Operating cash flow declined because accounts receivable used $13.7 million of cash in Q1 2015, compared with a $11.0 million source in Q1 2014.
Guidance, outlook, commentary, risks, and unusual items
- No formal consolidated revenue or earnings guidance is provided in the filing. Management expected annual restructuring-related cost savings of approximately $4 million to $5 million from the German facility closure, substantially realized by the first quarter of 2016.
- MC management described the market as having broadly flat growth potential, with demand shifting toward packaging, tissue, Asia, and South America. Paper-industry overcapacity, declining publication-grade demand, and longer product lives remain pressures.
- AEC is viewed as the Company’s principal growth opportunity. Approximately half of AEC sales were related to LEAP production activities, and the LEAP engine was scheduled to enter service in 2016. AEC’s profitability depends on aerospace production volumes, customer programs, contract execution, and research spending.
- The Company announced the discontinuation of manufacturing operations at its Göppingen, Germany press-fabric facility. Approximately 50 employees were expected to be terminated, operations were scheduled to cease in Q2 2015, and additional asset-impairment charges were considered likely but were not estimable at filing.
- The BR725 program has aggressive pricing. Management stated that it must monitor projected life-of-program profitability; $9.6 million of development costs had been capitalized at March 31, 2015.
- Income taxes included an estimated effective rate of 41.0%, with a 40.0% rate before discrete items. The Company reported a $3.7 million deferred tax liability related to $59.4 million of prior-year non-U.S. earnings targeted for future repatriation.
- Tax authorities continue to challenge approximately $25.3 million of German tax benefits associated with a 1999 reorganization. The filing states that unrecognized tax benefits could change over the next twelve months within a range of a net increase of $8.8 million to a net decrease of $2.4 million.
- Albany was defending 3,813 asbestos claims and Brandon Drying Fabrics was defending 7,730 claims as of March 31, 2015. Management did not believe a meaningful loss range could be estimated, but did not anticipate material liability beyond existing insurance coverage based on currently available information.
- Material risks include paper-industry conditions, further declines in regional paper demand, foreign-exchange movements, aerospace program execution, contract-margin estimates, tax audits, asbestos litigation, and interest-rate and counterparty exposure.
Important facts for investors to verify
- Whether the Göppingen closure produces the expected $4 million to $5 million of annual savings and whether additional impairment charges are recorded.
- Whether AEC converts LEAP and other aerospace growth into sustained positive operating income and whether BR725 contract profitability deteriorates.
- Progress in reducing the $50.0 million debt maturity due October 25, 2015 and the Company’s ability to preserve covenant headroom.
- Underlying sales and margins excluding currency effects, particularly as foreign-exchange translation continues to affect reported results.
- Cash generation, working-capital requirements, and the concentration of cash at non-U.S. subsidiaries.
- Developments in the German tax dispute, uncertain tax benefits, and potential repatriation taxes.
- Asbestos claim activity, insurance coverage availability, and any change in management’s assessment of potential liability.