Albany International Corp. 2021 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2021, filed February 25, 2022. Albany operates through two segments: Machine Clothing (MC), which supplies engineered belts and fabrics for paper, packaging, tissue, pulp and other industrial applications; and Albany Engineered Composites (AEC), which supplies advanced composite structures for commercial and defense aerospace programs.
MC generated 67% of consolidated revenue and remains the Company’s primary cash generator. AEC provides longer-term growth potential but is exposed to aerospace production cycles and contract execution. The Company employed approximately 4,100 people and generated 46% of consolidated sales through non-U.S. subsidiaries.
Financial performance and key metrics
<>| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $929.2 million | $900.6 million | 3.2% increase |
| Gross profit | $378.4 million | $371.1 million | 2.0% increase |
| Gross margin | 40.7% | 41.2% | Down 50 basis points |
| Operating income | $178.0 million | $166.1 million | 7.2% increase |
| Operating margin | 19.2% | 18.4% | Up 80 basis points |
| Net income attributable to the Company | $118.5 million | $98.6 million | 20.2% increase |
| Diluted EPS | $3.65 | $3.05 | 19.7% increase |
| Adjusted EPS | $3.57 | $3.72 | 3.?% decrease |
| Cash flow from operations | $217.5 million | $140.3 million | 55.1% increase |
| Capital expenditures, including software | $53.7 million | $42.4 million | 26.7% increase |
The filing’s stated adjusted EPS values imply a decrease from $3.72 to $3.57; the percentage decrease is approximately 4.0%.
MC sales increased 8.0% to $619.0 million, or 6.1% excluding currency translation, driven primarily by packaging grades and engineered fabrics. MC operating income increased to $215.7 million from $190.8 million, although gross margin declined to 52.1% from 52.6% because of higher production, freight, wage and supply costs.
AEC sales decreased 5.3% to $310.2 million, or 5.9% excluding currency translation, primarily because of lower Boeing 787 fuselage-frame sales, partly offset by improving LEAP program sales. AEC operating income fell to $16.2 million from $31.5 million, and gross margin declined to 18.0% from 21.3% due to program mix and lower favorable contract-estimate adjustments.
Cash and cash equivalents were $302.0 million at year-end, compared with $241.3 million in 2020. Total debt was $350.0 million, down from $398.0 million, resulting in net debt of $48.0 million versus $156.7 million. The Company had approximately $350.0 million of unused capacity under its $700.0 million revolving credit facility, for total stated liquidity of approximately $652.0 million. The leverage ratio was 1.04, interest coverage was 14.69, and all debt covenants were satisfied.
Shareholders received $25.9 million of dividends, with declared dividends per share increasing to $0.81 from $0.77. The Company repurchased 285,286 shares for $24.4 million under a $200.0 million authorization.
Material changes versus the prior comparable period
- Consolidated revenue improved modestly, with MC growth more than offsetting continued AEC weakness.
- Operating income and GAAP EPS increased despite lower consolidated gross margin, helped by higher MC profit, lower restructuring costs, and substantially improved foreign-currency results.
- Cash generation improved significantly as AEC contract assets declined by $26.7 million following deliveries of LEAP components that had been delayed in 2020.
- Contract assets decreased to $112.5 million from $139.3 million, while AEC backlog increased to $347 million from $242 million. MC backlog remained $190 million.
- Restructuring expense declined to $1.3 million from $5.7 million.
- Research and development expense increased to $29.6 million from $25.8 million, principally due to higher AEC research spending.
- The Company recognized a $5.8 million Aviation Manufacturing Jobs Protection grant related to COVID-19 impacts.
- Other expense improved to $3.0 million from $13.4 million, primarily because 2021 included a foreign-currency gain compared with a substantial 2020 loss.
Outlook, commentary, risks and unusual items
Management did not provide a specific consolidated earnings or revenue forecast in the filing. Management expects MC to maintain relatively stable earnings and cash generation despite declining publication-paper demand, pricing pressure and inflation. AEC is expected to offer longer-term growth through aerospace programs and proprietary 3D-woven composite technology, but its performance depends on successful program execution, production ramps and commercial-aircraft recovery.
- COVID-19, aerospace production delays, Boeing 737 MAX and Airbus A320neo delivery levels, and customer inventory destocking may affect AEC revenue.
- Supply-chain constraints and inflation are increasing labor, raw-material, energy, freight and logistics costs. The Company may not fully offset these costs through pricing or productivity.
- Safran represented approximately 36% of AEC sales and approximately 12% of consolidated sales. The LEAP agreement does not require minimum purchase quantities and contains events of default that could permit termination.
- AEC long-term contracts require significant estimates of total revenue, costs, margins, variable consideration and completion status. Changes in estimates can materially affect revenue and profit in the period of change. This was also the critical audit matter.
- Approximately 47% of AEC sales related to U.S. government contracts or programs, creating exposure to appropriations, audits, contract changes, cybersecurity requirements and potential sanctions.
- The Company is exposed to cybersecurity, CMMC compliance, product quality, product liability, customer concentration, foreign-exchange, interest-rate and supplier-concentration risks.
- The Company was defending 3,609 asbestos-related claims at year-end. Management stated that available insurance, including approximately $140 million of remaining primary and excess coverage, is expected to mitigate the risk and that no material adverse effect is currently anticipated.
- USD LIBOR-based debt and derivatives are expected to transition to alternative reference rates after LIBOR cessation. The Company does not currently expect a significant impact but continues to monitor the transition.
Most important facts for investors to verify
- Whether AEC revenue, margins and backlog continue to recover, particularly on the LEAP, Boeing 787, F-35 and CH-53K programs.
- Whether MC pricing, productivity and cost actions offset inflation, supply-chain disruption and declining publication-paper demand.
- The assumptions supporting AEC contract-cost estimates and the potential for future favorable or unfavorable contract adjustments.
- Customer concentration and the absence of minimum purchase commitments under the Safran/LEAP arrangements.
- Debt maturity and refinancing risk associated with the $350 million revolving-credit borrowing due in 2024.
- The sustainability of strong operating cash flow after capital expenditures, working-capital movements, dividends and share repurchases.
- Potential changes in asbestos claims, insurance coverage, pension obligations, tax audits and cybersecurity/CMMC compliance costs.
- The filing reports unqualified audit opinions and effective internal control over financial reporting as of December 31, 2021.