Albany International Corp. 2022 Q3 Form 10-Q Summary
Business context and reporting period
Albany International Corp. reported results for the three and nine months ended September 30, 2022. The company operates through two segments: Machine Clothing (MC), which serves paper, packaging, tissue, nonwovens, and other industrial markets, and Albany Engineered Composites (AEC), which supplies advanced composite structures primarily to commercial and defense aerospace programs.
The filing was unaudited. Interim results are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $260.6 million | $232.4 million | $766.1 million | $689.3 million |
| Gross profit | $100.5 million | $92.0 million | $292.7 million | $282.3 million |
| Gross margin | 38.6% | 39.6% | 38.2% | 41.0% |
| Operating income | $53.6 million | $44.5 million | $143.1 million | $136.3 million |
| Net income attributable to the Company | $10.7 million | $30.9 million | $77.6 million | $89.8 million |
| Diluted EPS | $0.34 | $0.95 | $2.46 | $2.77 |
| Operating cash flow | $29.6 million | $52.9 million | $67.3 million | $148.5 million |
Q3 net sales increased 12.1% year over year, while nine-month sales increased 11.1%. Excluding currency translation effects, sales increased 16.5% in Q3 and 14.1% year to date.
- Machine Clothing: Q3 sales were $153.4 million, down 0.5% reported but up 3.8% excluding currency effects. Nine-month sales were $459.1 million, down 0.7% reported but up 2.5% excluding currency effects. Q3 operating income was $57.2 million versus $55.5 million.
- Albany Engineered Composites: Q3 sales were $107.2 million, up 36.9% reported and 41.6% excluding currency effects. Nine-month sales were $307.0 million, up 35.2% reported and 37.7% excluding currency effects. Q3 operating income increased to $10.0 million from $2.9 million.
- Adjusted EBITDA: $68.1 million in Q3 versus $60.2 million in the prior-year quarter, and $195.1 million for the first nine months versus $190.3 million.
- Adjusted EPS: $1.15 in Q3 versus $0.83 in the prior-year quarter, and $3.13 year to date versus $2.72. These are non-GAAP measures.
Liquidity, debt, cash flow, and capital allocation
- Cash and cash equivalents were $276.5 million at September 30, 2022, compared with $302.0 million at December 31, 2021.
- Long-term debt was $447.0 million, up from $350.0 million at year-end 2021. The debt consisted of borrowings under a $700 million unsecured revolving credit facility, which matures in 2024.
- Available borrowing capacity was approximately $253 million. Management reported total liquidity of approximately $529 million, including cash.
- Net debt was $170.5 million, compared with $48.0 million at December 31, 2021. Reported net leverage was 0.67 times trailing twelve-month adjusted EBITDA.
- The company was in compliance with its debt covenants. The leverage covenant was 3.50 times and the minimum interest coverage covenant was 3.00 times; reported ratios were 1.22 times and 15.79 times, respectively.
- Capital expenditures were $50.9 million in the first nine months, compared with $31.8 million in the prior-year period.
- The company repurchased 1.0 million shares for approximately $85.1 million during the first nine months and paid $19.9 million in dividends. Approximately $90.6 million remained available under the $200 million repurchase authorization.
Material changes versus the prior comparable period
- Revenue growth was led by AEC, particularly the CH-53K and LEAP programs. AEC gross margin improved to 19.8% in Q3 from 16.1%, while nine-month AEC gross margin declined to 18.0% from 18.5% because of a damaged-inventory reserve recorded earlier in the year.
- Consolidated gross margin declined because of currency effects and higher input costs, particularly energy, raw materials, and logistics.
- Q3 net income declined sharply because the company recorded a $49.1 million pension settlement charge. The settlement reduced unfunded pension liabilities by approximately $6.2 million and generated a $5.2 million discrete tax benefit.
- Q3 2021 included a $5.8 million Aviation Manufacturing Jobs Protection grant; no comparable grant was received in 2022.
- Foreign-currency gains were $6.6 million in Q3 and $17.7 million year to date in 2022, compared with foreign-currency losses in the corresponding 2021 periods.
- Operating cash flow declined by $81.2 million year to date, primarily because of working-capital investment, increased contract assets, customer and vendor payment timing, higher incentive compensation, and pension contributions.
- The company ceased doing business in Russia and began exiting a Russian joint venture. It recorded approximately $2.4 million of related year-to-date charges and expects approximately $10 million of lower future annual MC sales.
Guidance, outlook, commentary, and risks
- Management expects inflationary pressure to continue through the balance of 2022. It estimates a net increase in MC input costs of $8 million to $10 million for full-year 2022, potentially reducing MC gross margin by up to 140 basis points.
- AEC is expected to benefit from continued growth in CH-53K and LEAP programs, but performance remains dependent on aerospace production rates, customer inventories, program execution, contract estimates, and supply-chain conditions.
- Remaining performance obligations on contracts with original durations greater than one year totaled $600 million at September 30, 2022. The company expected to recognize approximately $46 million in 2022, $124 million in 2023, and $107 million in 2024, with the remainder thereafter.
- Management stated that operating cash flow and credit availability should be adequate for operations and business needs over the next twelve months.
- Key risks include inflation, energy and logistics costs, supply-chain constraints, foreign-exchange volatility, COVID-19 disruptions, the Russia-Ukraine conflict and sanctions, weaker paper-market demand, aerospace program delays or cancellations, and the ability to pass cost increases to customers.
- The company has approximately $140 million of remaining insurance coverage for current and future asbestos claims. It was defending 3,603 Albany-related claims at September 30, 2022, but stated that it could not estimate a meaningful range of potential losses beyond amounts accrued.
- The company’s credit facility and certain derivatives reference one-month U.S. LIBOR, which was scheduled to discontinue after June 30, 2023. Management did not expect the transition to have a significant effect but continues to monitor it.
Most important facts for investors to verify
- Whether AEC growth on the LEAP and CH-53K programs continues and translates into sustainable margins and cash generation.
- Whether MC can offset the projected $8 million to $10 million of 2022 input-cost pressure through pricing and productivity improvements.
- The recurrence or nonrecurrence of the $49.1 million pension settlement charge and the effect of pension funding on future cash flow.
- Working-capital trends, particularly the $148.7 million of net contract assets and the decline in operating cash flow.
- Debt repayment capacity, borrowing availability, covenant compliance, and exposure to rising interest rates after the LIBOR transition.
- The ultimate financial impact of the Russia exit, supply-chain disruption, aerospace program execution, and foreign-currency movements.
- Potential asbestos liabilities beyond available insurance coverage; the filing does not provide a clear estimate of reasonably possible excess loss.