Albany International Corp. 2015 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2015, with fourth-quarter data included. Albany operates through two segments: Machine Clothing (MC), which supplies engineered fabrics and belts primarily to paper and industrial customers, and Albany Engineered Composites (AEC), which supplies advanced composite structures to aerospace and defense customers.
MC generated 86% of 2015 consolidated revenue and remained the primary cash generator. AEC is the principal growth platform, led by LEAP engine components supplied through Albany Safran Composites, in which Safran owns a 10% noncontrolling interest.
Key financial metrics
<>| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $709.9 million | $745.3 million | -4.8% |
| Gross profit | $278.7 million | $291.6 million | -4.4% |
| Gross margin | 39.3% | 39.1% | +0.2 points |
| Operating income | $63.9 million | $71.4 million | -10.5% |
| Operating margin | 9.0% | 9.6% | Down |
| Net income attributable to Albany | $57.3 million | $41.6 million | +37.8% |
| Diluted EPS | $1.79 | $1.30 | +$0.49 |
| Adjusted EPS, excluding disclosed adjustments | $1.49 | $1.44 | +$0.05 |
| Operating cash flow | $95.9 million | $84.2 million | +14.0% |
| Capital expenditures, including software | $50.6 million | $58.9 million | -14.1% |
| Cash and cash equivalents | $185.1 million | $179.8 million | +$5.3 million |
| Net debt | $80.6 million | $93.0 million | -13.3% |
2015 net income benefited substantially from a $28.6 million tax benefit related to a worthless-stock deduction for the Company's German subsidiary. The reported effective tax rate was negative 11.2%, compared with 38.1% in 2014; the filing states that the 2015 rate excluding discrete items was approximately 32%.
Segment performance and material changes
- Machine Clothing: Sales were $608.6 million, down 7.1% as reported and down 1.3% excluding currency effects, primarily due to weakness in North American printing and writing markets. Operating income increased to $141.3 million from $136.5 million, aided by lower raw-material and freight costs, lower selling and technical expenses, and restructuring savings.
- Albany Engineered Composites: Sales increased 12.1% to $101.3 million, driven by higher LEAP and GE9X program sales. The segment recorded a $28.5 million operating loss, compared with a $10.5 million loss in 2014. Results included a $14.0 million charge related to revised profitability estimates for the BR 725 program, including a $10.9 million deferred-cost write-off and a $3.1 million anticipated-loss provision.
- Currency: Foreign-currency translation reduced reported 2015 sales by $39.6 million. Currency revaluation produced a $3.6 million gain in 2015, compared with a $10.3 million gain in 2014.
- Restructuring: Charges increased to $23.8 million from $5.8 million. The company discontinued production at its Göppingen, Germany press-fabric facility, terminated approximately 50 employees, and recorded an $11.4 million charge. A U.S. early-retirement program generated an additional $8.1 million charge; expected annual savings are $5 million to $6 million, mostly beginning in 2016.
- Backlog: MC backlog declined to $171.0 million from $195.5 million, while AEC backlog rose to $34.0 million from $22.8 million. The filing generally expects backlog to be invoiced within 12 months.
Fourth-quarter results
| Metric | Q4 2015 | Q4 2014 |
|---|---|---|
| Net sales | $177.5 million | $191.6 million |
| Gross profit | $71.7 million | $72.9 million |
| Net income attributable to Albany | $37.6 million | $8.0 million |
| Basic EPS | $1.18 | $0.26 |
Fourth-quarter earnings included a $0.85-per-share benefit from discrete tax adjustments, principally the German worthless-stock deduction, partially offset by $0.21 per share of restructuring charges.
Liquidity, debt and cash flow
- Cash provided by operations was $95.9 million. Investing cash use was $47.8 million, principally capital expenditures; financing cash use was $27.3 million, including $21.1 million of dividends.
- Total debt was $265.7 million, consisting principally of $215.0 million outstanding under a $400 million unsecured revolving credit facility and $50.0 million of private-placement debt due in 2017. Approximately $185 million remained available under the revolver at year-end, subject to conditions.
- The company reported a 1.27-to-1.00 leverage ratio and a 13.39-to-1.00 interest-coverage ratio, compared with covenant limits of 3.50-to-1.00 and 3.00-to-1.00, respectively. Management stated that all debt covenants were satisfied.
- Cash held outside the United States was $141.8 million. Management stated that sufficient capital resources were available for foreseeable operations, but most foreign cash was intended for continued use abroad.
- Management estimated 2016 capital spending of $75 million to $85 million and an average of approximately $70 million for the balance of the decade.
Outlook, commentary, risks and unusual items
Management described MC as a mature, cash-generating business with potential for approximately flat future earnings, despite continuing paper-industry overcapacity, pricing pressure and declining publication-grade demand. AEC was presented as the major long-term growth opportunity, with LEAP scheduled to enter service in 2016 and additional opportunities in GE9X, Joint Strike Fighter and other aerospace applications. The filing does not provide a formal consolidated revenue or earnings forecast.
- AEC faces material execution and production-ramp risks on the LEAP program, including facility readiness, qualification, supply-chain constraints and the planned Mexico facility.
- Long-term and fixed-price contracts expose AEC to program cancellations, delayed orders, pricing disputes, cost overruns and future loss provisions. In February 2016, the BR 725 customer disputed Albany's pricing calculation for 2016 parts; an unfavorable resolution could materially affect future results.
- Customer concentration is significant: the top ten MC customers represented 36% of 2015 company sales, while Safran represented approximately 57% of AEC sales. Approximately 50% of AEC sales were under the exclusive LEAP supply agreement, which does not require minimum purchase quantities.
- Asbestos litigation remained material in volume, with 3,791 claims pending against Albany and 7,713 against its Brandon subsidiary at year-end. The company reported substantial insurance coverage and did not expect a material adverse effect based on available information, but stated that a meaningful loss range could not be estimated.
- Pension and postretirement obligations remained significant: pension plans were underfunded by $28.5 million and postretirement liabilities totaled $60.0 million. Estimated 2016 pension contributions and direct payments were approximately $5.0 million, with other postretirement benefit payments of approximately $4.7 million.
- The Standish family controlled approximately 53% of combined voting power, making Albany a controlled company and allowing reliance on certain NYSE governance exemptions.
Investor verification items
- Verify the sustainability of earnings excluding the $28.6 million discrete tax benefit and the impact of 2015 restructuring charges and the $14.0 million BR 725 contract charge.
- Track AEC's LEAP production ramp, capital spending, backlog conversion, customer concentration and contract profitability.
- Review the outcome of the BR 725 pricing dispute and any additional provisions or write-offs.
- Assess whether MC demand, pricing and backlog stabilize amid continued paper-industry declines and currency volatility.
- Reconcile the company's cash availability with the location of foreign cash, debt maturities, planned capital spending and dividend requirements.
- Monitor asbestos claims, insurance recoveries, tax audits, deferred-tax-asset realizability and pension funding requirements.