Albany International Corp. 10-Q Summary
Business context and reporting period
Filed November 4, 2014, for the quarter and nine months ended September 30, 2014. Albany operates through Machine Clothing (MC), its primary cash-generating business serving paper and paperboard manufacturers, and Albany Engineered Composites (AEC), which serves aerospace and defense customers. The financial statements are unaudited.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $179.9 million | $183.1 million | $553.7 million | $567.8 million |
| Gross profit | $68.6 million | $68.0 million | $218.8 million | $218.2 million |
| Gross margin | 38.2% | 37.1% | 39.5% | 38.4% |
| Operating income | $19.2 million | $13.3 million | $58.7 million | $32.3 million |
| Operating margin | 10.7% | 7.2% | 10.6% | 5.7% |
| Net income attributable to the Company | $11.8 million | $4.7 million | $33.7 million | $8.8 million |
| Diluted EPS | $0.37 | $0.15 | $1.05 | $0.28 |
| Operating cash flow | $22.5 million | $30.7 million | $64.0 million | $63.1 million |
Q3 net margin was approximately 6.6%, compared with 2.6% in the prior-year quarter; nine-month net margin was approximately 6.1%, compared with 1.6%.
- MC sales declined 3.1% in Q3 and 2.6% for nine months, primarily because of lower Americas sales. MC operating income increased to $33.3 million in Q3 and $103.3 million for nine months.
- AEC sales increased 8.3% in Q3, driven by LEAP and JSF LiftFan programs, but declined 1.8% for nine months because of a first-quarter invoicing transition and temporary inventory build-up. AEC operating loss improved to $2.8 million in Q3 and $9.8 million for nine months.
- Adjusted EBITDA was $33.5 million in Q3 and $108.5 million for nine months, compared with $31.9 million and $101.8 million, respectively, in the comparable periods.
- Cash and cash equivalents were $195.5 million at September 30, 2014, down from $222.7 million at December 31, 2013. Approximately $173 million was held outside the United States.
- Total debt was $283.7 million and net debt was $88.2 million at September 30, compared with $304.5 million and $81.8 million, respectively, at year-end 2013.
- The company had $147 million of additional availability under its $330 million revolving credit facility, subject to conditions. Leverage was 1.46x and interest coverage was 12.10x; all debt covenants were satisfied.
- Capital expenditures were $46.6 million through September 30, including $24.1 million for AEC. Full-year capital expenditures were expected to be $60 million to $70 million.
Material changes versus the prior comparable period
- Operating income increased 44.5% in Q3 and 82.0% for nine months, despite lower sales, primarily reflecting substantially lower restructuring expense, MC cost savings, favorable currency revaluation, and improved AEC profitability.
- Restructuring expense fell to $0.9 million in Q3 and $4.1 million for nine months, versus $2.3 million and $27.2 million, respectively, in 2013. Approximately 190 of the targeted 200 French MC positions had been eliminated, and substantially all of the expected $10 million of annual savings were being realized.
- AEC gross margin improved to 13.0% in Q3 and 11.0% for nine months, versus 5.2% and 2.6%, respectively, principally because of improved profitability at the Boerne, Texas operation.
- Interest expense declined to $2.5 million in Q3 and $8.1 million for nine months, from $3.5 million and $11.1 million, respectively, due mainly to lower average interest rates and debt reduction.
- Other income was $1.9 million in Q3 and $4.5 million for nine months, compared with other expense of $2.7 million and $5.6 million in the prior periods. The improvement primarily reflected foreign-currency revaluation gains.
- The first nine months included a $1.6 million charge to correct an inventory valuation error originating from prior ERP-system transitions.
- Comprehensive income attributable to the Company was a loss of $15.3 million in Q3 and income of $4.7 million for nine months, largely affected by foreign-currency translation adjustments.
Guidance, outlook, commentary, risks, and unusual items
- Management described MC market growth as broadly flat, with pressure from paper-industry overcapacity and changing geographic and product-grade demand, but expects continued cash generation from lower-cost operations and restructuring savings.
- Management identified AEC as the company’s greatest growth opportunity, particularly through aerospace programs including LEAP. The filing does not provide quantitative revenue or earnings guidance.
- Remaining MC restructuring costs were expected to be $1 million to $2 million over the next several quarters. A limited-time pension lump-sum election was expected to produce a non-cash settlement charge of approximately $5 million to $10 million in 2014.
- The company is involved in German tax audits and disputes. It paid approximately $13 million of tax and interest to preserve its appeal position and recorded a $6 million downward adjustment in the third quarter. A disputed German tax benefit of approximately $24 million was not included in the company’s estimated range of potential changes to unrecognized tax benefits.
- Albany was defending 3,925 asbestos claims and Brandon Drying Fabrics was defending 7,731 claims at September 30, 2014. Management could not estimate a meaningful range of potential loss but did not anticipate material liability beyond insurance limits. Available coverage included approximately $3 million under remaining primary policies and $140 million under excess umbrella policies.
- Key operating risks include paper-industry conditions, economic downturns, competition, currency movements, execution and profitability of AEC programs, long-term contract estimates, tax-contingency outcomes, pension costs, and asbestos litigation.
- The company stated that there were no material changes in previously disclosed risk factors, no material changes to internal control over financial reporting, and no reportable off-balance-sheet arrangements.
Important facts for investors to verify
- Whether MC demand in the Americas stabilizes and whether restructuring savings remain sustainable as the French program concludes.
- The pace, margins, cash requirements, and customer concentration associated with AEC’s LEAP and other aerospace programs.
- The timing and financial impact of the expected $5 million to $10 million pension settlement charge.
- The ultimate resolution of the German tax dispute and the potential impact of additional tax payments or benefits.
- Cash availability in the United States versus foreign subsidiaries and the tax cost of repatriating foreign cash.
- Future asbestos claim trends, insurance coverage availability, and any change in management’s assessment of potential liability.
- Execution of the projected $60 million to $70 million of full-year capital expenditures and its effect on free cash flow and net debt.