Albany International Corp. — FY2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing includes unaudited fourth-quarter data, but it is an annual Form 10-K rather than a quarterly filing. Albany operates through Machine Clothing and Engineered Composites (AEC).
Business context
- Machine Clothing: Paper-machine clothing and engineered fabrics for paper, nonwovens, building products, pulp, tannery, and textile applications. It generated approximately 91% of 2012 consolidated revenue and remained the primary cash generator.
- Engineered Composites: Advanced composite structures for aerospace and defense, with significant development and production activity for the LEAP aircraft engine program.
- Operations are globally diversified; 57.3% of consolidated sales were generated by non-U.S. subsidiaries.
Financial performance
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $760.9 million | $787.3 million | Down 3.3% |
| Gross profit | $305.4 million | $314.2 million | Down 2.8% |
| Gross margin | 40.1% | 39.9% | Up 20 bps |
| Operating income/(loss) | $(44.1) million | $74.6 million | Declined primarily due to pension settlement charges |
| Income/(loss) from continuing operations | $(40.8) million | $21.3 million | Turned to a loss |
| Net income | $31.0 million | $34.9 million | Down 11.3% |
| Diluted EPS | $0.97 | $1.11 | Down 12.6% |
| Adjusted EBITDA from continuing operations | $145.4 million | $141.3 million | Up 2.9% |
Reported results were significantly affected by $119.7 million of pension settlement expense, $7.1 million of restructuring and other charges, and $7.4 million of foreign-currency revaluation losses. The 2012 net income also included $71.8 million of income from discontinued operations, including a $92.3 million pretax gain from selling Albany Door Systems and PrimaLoft.
Segment results and material changes
- Machine Clothing: Revenue declined to $693.2 million from $739.2 million, primarily because Western European sales fell approximately 15% amid economic weakness and customer overcapacity. Operating income declined to $163.9 million from $176.8 million, while gross margin improved to 43.8% from 43.0% due to utilization, mix, and restructuring benefits.
- AEC: Revenue increased 41.0% to $67.8 million, principally from LEAP program activity. Gross profit improved to $5.6 million from $0.5 million, and operating loss narrowed to $0.8 million from $4.2 million.
- Machine Clothing backlog fell to $267.8 million from $342.9 million, reflecting European market weakness and shorter order-to-delivery times. AEC backlog increased to $33.2 million from $28.8 million.
- Gross profit margin increased modestly despite lower sales, but consolidated operating results deteriorated because of the pension settlement charge and restructuring costs.
- 2012 sales excluding currency effects declined 1.4%; Machine Clothing declined 4.1%, while AEC increased 41.0%.
Cash flow, liquidity, debt, and balance sheet
- Net cash provided by operating activities was $34.5 million, down from $105.3 million in 2011. Pension funding and settlement payments were the principal drag.
- Cash and cash equivalents increased to $190.7 million from $118.9 million. However, $178.2 million was held outside the United States and was generally intended for indefinite reinvestment in foreign operations.
- Investing activities provided $113.4 million, largely reflecting $150.7 million of proceeds from discontinued-business sales.
- Capital expenditures were $37.2 million, including $19.0 million for AEC. Management expected average annual capital expenditures of approximately $70 million during 2012–2016 to support LEAP production requirements.
- Total debt was $319.7 million, compared with $374.8 million in 2011; net debt was $129.0 million versus $255.9 million. Current maturities increased to $83.3 million, principally due to scheduled 2013 debt payments.
- The company had $132.0 million outstanding under its $390 million revolving credit facility and indicated approximately $258 million of additional borrowing capacity, subject to covenant and other conditions.
- Debt covenants were satisfied at year-end. Leverage was 1.06x against a maximum of 3.50x, and interest coverage was 13.29x against a minimum of 3.00x.
- Shareholders’ equity increased to $493.5 million from $415.9 million, reflecting comprehensive income and pension-related changes in accumulated other comprehensive income.
Guidance, outlook, and management commentary
- Management viewed Machine Clothing as having limited structural growth but significant long-term cash-generation potential. It expected approximately flat year-over-year Adjusted EBITDA and a weak, though not as weak as first-quarter 2012, first quarter of 2013.
- Management expected continued strong year-over-year growth in AEC during 2013. Proposed LEAP production accelerations could also accelerate AEC capital spending.
- AEC’s growth depends on completing design and testing milestones, expanding supply-chain capabilities, completing additional production capacity, and hiring and training employees.
- In 2013, the company planned to begin construction of a $15 million Wisconsin Machine Clothing facility for full-scale product prototypes.
Risks, contingencies, and unusual items
- Paper-industry consolidation, digital-media substitution, European weakness, customer overcapacity, product-life extension, and intense price competition could pressure Machine Clothing revenue and margins.
- AEC is exposed to LEAP program execution, production timing, customer cancellations or delays, contract termination, and potential write-offs of capitalized development costs.
- Remaining pension and postretirement liabilities were $45.1 million and $84.4 million, respectively. Future expense and funding requirements depend on discount rates, investment returns, actuarial assumptions, and plan experience.
- The company was defending 4,463 asbestos claims as of January 30, 2013; Brandon Drying Fabrics was defending 7,867 claims. Management did not believe a meaningful loss range could be estimated, but stated that existing insurance coverage exceeding $125 million should be available for Albany claims and that a material adverse effect was not currently expected.
- NAFTA-related customs audits in Mexico remained open for certain 2006–2008 shipments. Management expected most shipments to qualify for duty-free treatment and did not expect a material loss.
- The Standish family controlled approximately 53% of combined voting power, making Albany a controlled company and allowing reliance on certain NYSE governance exemptions.
- The company reported a U.S. deferred tax asset of approximately $88.7 million and $24.4 million of unrecognized tax benefits. Tax audits and challenges, including a German matter, could affect future earnings or cash taxes.
- On January 25, 2013, Albany announced redemption of all remaining 2.25% convertible senior notes, with a December 31, 2012 current liability of approximately $28.3 million.
Most important facts to verify
- Reconcile reported net income and EPS with continuing operations, discontinued-business gains, pension settlement charges, restructuring, currency losses, and discrete tax benefits.
- Review the liquidity impact and timing of the $83.3 million of 2013 debt maturities, including the $50 million Prudential payment.
- Assess whether AEC can achieve the projected LEAP ramp while funding planned capital expenditures and working-capital growth.
- Monitor Machine Clothing backlog, European demand, pricing pressure, and the company’s ability to sustain its improved gross margin.
- Evaluate the location and repatriation restrictions of cash held by foreign subsidiaries.
- Track pension and postretirement funding requirements, actuarial assumptions, and potential future settlement or remeasurement charges.
- Follow asbestos litigation, insurance recoveries, NAFTA audits, tax examinations, and the German tax matter for changes in expected exposure.