Albany International Corp. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2012. Albany operates through Machine Clothing (MC), its primary cash-generating business serving paper and related industries, and Albany Engineered Composites (AEC), focused primarily on aerospace and defense applications. Beginning in 2012, Paper Machine Clothing and Engineered Fabrics were combined into the MC segment.
The results reflect the sale of Albany Door Systems in January 2012 and the sale of the PrimaLoft Products business on June 29, 2012. Both businesses are presented as discontinued operations.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $191.9 million | $189.7 million | $372.0 million | $389.6 million |
| Gross profit | $78.5 million | $73.9 million | $146.8 million | $159.1 million |
| Gross margin | 40.9% | 39.0% | 39.5% | 40.8% |
| Operating income/(loss) | $(86.0) million | $12.5 million | $(86.9) million | $37.6 million |
| Income/(loss) from continuing operations | $(57.8) million | $4.5 million | $(57.9) million | $16.8 million |
| Net income/(loss) | $(33.7) million | $8.8 million | $13.3 million | $25.5 million |
| Diluted EPS | $(1.08) | $0.28 | $0.42 | $0.81 |
| Adjusted EBITDA from continuing operations | $40.5 million | $31.1 million | $66.1 million | $72.4 million |
Q2 MC sales declined 1.1% to $177.1 million, while AEC sales increased 41.1% to $14.8 million. For the six-month period, MC sales declined 7.1% to $341.4 million and AEC sales increased 39.3% to $30.6 million.
Cash and cash equivalents were $164.6 million at June 30, 2012, compared with $118.9 million at December 31, 2011. Total debt was $344.3 million and net debt was $179.8 million, compared with $374.8 million and $255.9 million, respectively, at year-end 2011. The company reported leverage of 1.11x and interest coverage of 13.82x, versus covenant limits of 3.50x and a minimum of 3.00x. It reported $234 million of additional borrowing capacity under its revolving credit facility.
Six-month operating cash flow was $(53.4) million, compared with $51.8 million in the prior-year period, primarily because of pension funding and settlement payments. Investing cash flow was $136.5 million, including $150.7 million of proceeds from discontinued-business sales. Capital expenditures were $14.2 million. Financing cash flow was $(38.9) million, including $69.2 million of debt repayments and $8.1 million of dividends. The quarterly dividend was $0.14 per share.
Material changes versus the prior comparable period
- Operating results were materially affected by pension settlement charges of $110.6 million in Q2 and $119.7 million year to date. These charges drove the reported operating loss despite improved operating performance in MC and AEC.
- MC Q2 gross margin increased to 44.2% from 41.8%, supported by higher utilization in the Americas and favorable product mix. Six-month MC margin declined to 42.8% from 43.9% because of weaker first-quarter sales and utilization.
- AEC improved substantially, with Q2 operating loss reduced to $0.4 million from $1.1 million and six-month operating loss reduced to $0.3 million from $2.2 million.
- Income from discontinued operations increased to $24.0 million in Q2 and $71.2 million year to date, including a $35.0 million pretax gain on the PrimaLoft sale and a $58.0 million pretax gain on the Albany Door Systems sale.
- Net debt declined by $76.2 million from December 31, 2011, reflecting sale proceeds, debt repayment, and cash management actions.
- The company recorded $3.2 million of Q2 restructuring expense and $3.4 million year to date, principally related to workforce reductions in Sweden and manufacturing curtailments in New York and Wisconsin.
Guidance, outlook, risks, and unusual items
Management expects second-half 2012 total-company Adjusted EBITDA to be comparable with the second half of 2011, assuming the paper industry remains firm in the Americas and Asia and deteriorates somewhat further in Europe. MC is expected to remain a steady long-term cash generator, while AEC is expected to improve incrementally through the anticipated LEAP program inflection point in 2016 and ramp toward full production by 2019.
Management identified European economic conditions and price uncertainty as the primary near-term risks. Other risks include paper-industry overcapacity, foreign-currency movements, aerospace-program execution and customer concentration, tax audits, debt refinancing requirements, and the timing of future cash flows from asset sales.
The company expects 2012 depreciation and amortization of approximately $65 million, capital expenditures of approximately $35 million to $40 million, and cash taxes of approximately $13 million to $15 million.
Pension funding and settlements reduced the combined unfunded pension liability from $101.2 million at December 31, 2011 to $26.9 million at June 30, 2012. Management expects the completed settlements to reduce annual pension expense by approximately $7 million to $8 million.
Albany was defending 4,426 asbestos claims as of July 20, 2012. The company stated that it could not estimate a meaningful range of potential loss, but does not currently anticipate material liability beyond available insurance coverage. Mexican NAFTA audits remain unresolved for certain 2006–2008 shipments; management expects any duties or penalties to be immaterial.
Important facts for investors to verify
- Confirm the effect of the $119.7 million pension settlement charge on reported earnings, cash flow, pension liabilities, and future annual expense.
- Reconcile reported net income with continuing operations, discontinued operations, and the two business-sale gains.
- Assess MC demand trends by geography, particularly continued weakness in Western Europe versus stronger performance in the Americas and Asia.
- Evaluate AEC’s LEAP program milestones, customer orders, required investment, and path to sustained profitability.
- Review debt maturities, including $50 million payments due in 2013 and 2015 under the Prudential agreement, and the company’s access to revolving-credit capacity.
- Monitor asbestos litigation, insurance coverage, Mexican NAFTA audits, German tax matters, and other uncertain tax positions.
- Verify management’s second-half Adjusted EBITDA outlook, planned capital expenditures, cash-tax expectations, and dividend capacity.