Albany International Corp. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Albany operated five reportable segments: Paper Machine Clothing (PMC), Albany Door Systems (ADS), Engineered Fabrics (EF), Engineered Composites (AEC), and PrimaLoft Products.
During the quarter, the company announced plans to combine EF with PMC beginning in 2012 and, after quarter-end, agreed to sell ADS to Assa Abloy AB for $130 million, subject to regulatory approval and expected to close in the first quarter of 2012. ADS is expected to be reported as a discontinued operation in future filings.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $250.0 million | $228.4 million | $745.9 million | $669.7 million |
| Gross profit | $95.8 million | $86.5 million | $295.7 million | $249.6 million |
| Gross margin | 38.3% | 37.9% | 39.6% | 37.3% |
| Operating income | $30.5 million | $18.2 million | $81.5 million | $51.7 million |
| Operating margin | 12.2% | 8.0% | 10.9% | 7.7% |
| Net income | $16.7 million | $3.6 million | $42.2 million | $17.1 million |
| Diluted EPS | $0.53 | $0.12 | $1.34 | $0.55 |
| EBITDA | $46.8 million | $27.7 million | $125.5 million | $98.0 million |
- Q3 sales increased 9.5%; nine-month sales increased 11.4%. Excluding currency translation, growth was 5.1% in Q3 and 7.7% year to date.
- Q3 operating income increased 68.2%, while nine-month operating income increased 57.7%. Management attributed the improvement primarily to higher sales, lower structural costs, prior restructuring benefits, and favorable currency effects.
- Q3 net income increased substantially from the prior year, partly because 2010 included a $5.9 million other-expense charge, while 2011 benefited from a $6.5 million foreign-currency revaluation gain.
- Cash provided by operating activities was $74.3 million for the first nine months, compared with $70.1 million in 2010. Capital expenditures and purchased software totaled $20.3 million.
- Cash was $129.8 million at September 30, 2011, versus $122.3 million at December 31, 2010. Net debt declined to $260.3 million from $302.9 million.
- Total debt was $390.1 million, including $202.0 million drawn under the revolving credit facility, $150.0 million of fixed-rate private-placement debt, and $28.4 million of convertible notes. The company reported $139.0 million of additional borrowing capacity and compliance with all debt covenants.
- The leverage ratio was 1.77-to-1.00 against a maximum of 3.50-to-1.00; interest coverage was 9.01-to-1.00 against a minimum of 3.00-to-1.00.
- Quarterly dividends were $0.13 per share; nine-month dividends were $0.38 per share.
Material changes versus the prior comparable period
- All segments reported higher nine-month sales: PMC rose 8.0%, ADS 28.9%, EF 4.8%, AEC 12.6%, and PrimaLoft 14.8%.
- PMC remained the largest segment and primary cash generator. Its nine-month operating income rose to $128.5 million from $106.4 million.
- AEC remained loss-making but improved: nine-month operating loss narrowed to $3.6 million from $6.9 million. Growth was driven by LEAP engine and Joint Strike Fighter programs, partly offset by delays in Boeing 787 brace production.
- Restructuring expense increased to $4.98 million from $2.92 million for the first nine months, primarily from PMC/EF integration and completion of the SAP conversion. The remaining restructuring accrual was $4.4 million, expected to be paid within one year.
- The company adopted new revenue-recognition guidance for multiple-element ADS contracts, accelerating $1.5 million of nine-month sales and $0.8 million of operating income. The Q3 effect was a $0.3 million sales decrease and $0.2 million operating-income decrease.
- Foreign-currency translation increased reported nine-month sales by $24.6 million. Currency movements also produced a $48.6 million pre-tax Q3 translation loss in other comprehensive income.
Guidance, outlook, risks, and unusual items
- Management expected year-over-year improvement in the short term, excluding currency effects and assuming continued success in offsetting inflation, driven by stable-to-lower PMC performance and growth in other segments.
- PMC was expected to experience a seasonal slowdown in late Q4 2011 and Q1 2012; the outlook beyond early Q1 was uncertain and dependent on economic growth.
- Management expected EF performance to improve and anticipated additional PMC integration synergies over the following quarters.
- AEC was expected to deliver strong sales growth, but Boeing 787 program delays, accelerated hiring, and organizational development were expected to postpone break-even operating income by several quarters. The company no longer expected to reach a $60 million annual sales run rate by Q2 2012.
- The company expected 2011 depreciation and amortization of approximately $65 million, capital spending of approximately $40 million, and income-tax payments of approximately $15 million excluding discrete items. It expected pension contributions of approximately $21 million for 2011, with possible additional fourth-quarter contributions of $5 million to $10 million.
- Significant tax matters included a $62.2 million Canadian tax reassessment supported by $49.0 million of letters of credit and a disputed German tax matter involving approximately $24.5 million of tax benefits. The company also expected to record a valuation allowance against an approximately $22.2 million German deferred tax asset in Q4 because of the planned ADS sale.
- Asbestos litigation involved 4,446 claims against Albany and 7,877 claims against Brandon as of October 26, 2011. Management could not estimate a meaningful loss range but expected insurance coverage to substantially mitigate exposure and did not anticipate a material adverse effect based on available information.
- Mexican NAFTA-related customs claims were approximately $2.5 million to date, with potential duties of $8 million to $10 million for all affected shipments and possible additional penalties; management considered an adverse outcome unlikely.
- The filing states that there were no material changes in risk factors from December 31, 2010. Results remain sensitive to paper-industry demand, pricing, foreign exchange, economic conditions, program timing, tax audits, litigation, and customer concentration in aerospace programs.
Important facts for investors to verify
- Completion, purchase-price adjustments, regulatory approval, tax consequences, and accounting treatment of the $130 million ADS divestiture.
- The timing and realized benefits of combining EF with PMC, including restructuring costs and plant-consolidation execution.
- Progress of AEC programs, particularly LEAP engine production and the delayed Boeing 787 brace program, and the timing of AEC profitability.
- Cash conversion, working-capital investment, capital spending, pension contributions, and the pace of further debt reduction.
- Outcomes of the Canadian and German tax matters, including the $49.0 million letter of credit and potential deferred-tax valuation allowance.
- Developments in asbestos claims, insurance recoveries, and the Mexican NAFTA customs appeals.
- The sustainability of reported margins after excluding currency gains, restructuring charges, revenue-recognition timing effects, and other unusual items.