Albany International Corp. — Q2 2013 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. Albany operates through Machine Clothing (MC), its primary cash-generating business serving paper and paperboard manufacturers, and Engineered Composites (AEC), focused largely on aerospace and defense applications, including the LEAP engine program.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $198.0 million | $191.9 million | $384.6 million | $372.0 million |
| Gross profit | $77.4 million | $78.5 million | $150.2 million | $146.8 million |
| Gross margin | 39.1% | 40.9% | 39.1% | 39.5% |
| Operating income/(loss) | $(3.5) million | $(86.0) million | $19.0 million | $(86.9) million |
| Income/(loss) from continuing operations | $(7.0) million | $(57.8) million | $4.5 million | $(57.9) million |
| Net income/(loss) | $(7.4) million | $(33.7) million | $4.1 million | $13.3 million |
| Diluted EPS | $(0.23) | $(1.08) | $0.13 | $0.42 |
| Operating cash flow | $28.1 million | $(10.8) million | $32.3 million | $(53.4) million |
Q2 sales increased 3.1%; six-month sales increased 3.4%. AEC sales rose 37.9% in Q2 and 29.7% year to date, principally from LEAP program activity. MC sales were essentially flat in Q2 and increased 1.0% year to date.
Q2 operating results included $24.3 million of restructuring expense, primarily related to France. AEC gross profit was reduced by a $0.9 million inventory write-off related to a legacy program. Q2 adjusted EBITDA, as defined by the company, was $36.1 million versus $40.5 million in Q2 2012. Six-month adjusted EBITDA was $69.9 million versus $66.1 million in 2012.
At June 30, 2013, cash and cash equivalents were $197.3 million, total debt was $321.0 million, and net debt was $123.7 million. Total assets were $1.16 billion and shareholders’ equity was $480.3 million. The company had $164.0 million outstanding under its $330 million revolving credit facility and reported approximately $166 million of additional borrowing capacity.
Material changes versus the prior comparable period
- Operating income improved substantially year over year because 2012 included $110.6 million of Q2 pension settlement expense; no comparable pension settlement expense was recorded in 2013.
- The improvement was partly offset by Q2 2013 restructuring expense of $24.3 million, compared with $3.2 million in Q2 2012.
- MC Q2 operating income declined to $20.7 million from $45.0 million, principally because of higher restructuring charges and slightly lower gross margin.
- AEC revenue increased materially, but operating loss widened to $1.8 million from $0.4 million because of lower margins and inventory write-offs.
- Operating cash flow improved to $32.3 million for the first six months, compared with a $53.4 million use in 2012, when cash was affected by significant pension funding and settlement activity.
- Interest expense declined to $7.6 million for the first six months from $8.6 million, primarily because of lower borrowing rates.
- Discontinued operations generated a $0.4 million loss in the first six months of 2013 versus $71.2 million of income in 2012, which included gains from the sales of Albany Door Systems and PrimaLoft Products.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects the France restructuring to reduce approximately 200 positions, mostly during Q3 2013. Additional training, outplacement, and related costs are expected to total $6 million to $8 million.
- Annual savings from the France restructuring are estimated at approximately $10 million, but management expects the full benefit primarily in the second half of 2014. A pension curtailment gain is expected in the second half of 2013, but the amount was not determined.
- Management expects average annual capital spending of approximately $70 million for 2012–2016. Six-month 2013 capital spending was $28.5 million, including $16.8 million for AEC and LEAP-related expansion.
- The company expects approximately $25 million of cash taxes for full-year 2013; cash taxes paid through June were $14.6 million.
- Debt agreements require a leverage ratio no greater than 3.50 to 1.00 and minimum interest coverage of 3.00 to 1.00. Reported June 30 ratios were 1.75 to 1.00 and 8.57 to 1.00, respectively, and the company was in compliance with all covenants.
- Approximately $183.1 million of cash was held by non-U.S. subsidiaries. Repatriation could create additional U.S. tax costs if existing accruals are insufficient.
- The company had 4,295 asbestos claims pending as of July 19, 2013, with more than $125 million of confirmed insurance coverage. Management stated that a meaningful loss range cannot be estimated but does not currently expect a material adverse effect.
- A German tax matter involves $22.7 million of challenged tax benefits; $11.6 million would directly affect earnings if resolved unfavorably. The company has not accrued expense because it believes its position is more likely than not to prevail.
- The company issued 4.1 million warrants with a $52.25 strike price, expiring by September 10, 2013. Exercise could result in cash payments or share dilution, depending on settlement.
Most important facts for investors to verify
- Whether France restructuring costs remain within the expected $6 million to $8 million of additional spending and whether the projected $10 million annual savings materialize.
- Progress, profitability, and capital requirements of the AEC LEAP program, including resolution of legacy-program inventory issues.
- Cash generation after restructuring-related payments, capital expenditures, taxes, dividends, and debt maturities.
- Refinancing or repayment capacity for the $50 million mandatory Prudential debt payment due October 2013.
- Potential dilution or cash settlement associated with the 4.1 million outstanding warrants.
- Developments in the German tax audit and asbestos litigation, including insurance coverage and any change in the company’s assessment of material exposure.
- Underlying MC demand, especially in mature markets, Asia, and paper packaging and tissue grades.