Albany International Corp. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Albany operates through Machine Clothing (MC), which serves paper, packaging, tissue and industrial markets, and Albany Engineered Composites (AEC), which supplies advanced composite structures primarily to commercial and defense aerospace customers.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $232.4 million | $212.0 million | $689.3 million | $673.8 million |
| Gross profit | $92.0 million | $87.3 million | $282.3 million | $279.8 million |
| Gross margin | 39.6% | 41.2% | 41.0% | 41.5% |
| Operating income | $44.5 million | $38.8 million | $136.3 million | $131.1 million |
| Net income attributable to the Company | $30.9 million | $29.6 million | $89.8 million | $71.1 million |
| Diluted EPS | $0.95 | $0.91 | $2.77 | $2.20 |
| Operating cash flow | $52.9 million | $39.7 million | $148.5 million | $83.7 million |
- MC generated Q3 sales of $154.2 million, up 11.1%, and nine-month sales of $462.3 million, up 7.8%. Q3 operating income increased to $55.5 million from $45.7 million.
- AEC generated Q3 sales of $78.3 million, up 6.9%, but nine-month sales declined 7.3% to $227.0 million. AEC operating income declined to $2.9 million in Q3 and $13.0 million for nine months, versus $6.8 million and $22.7 million, respectively.
- Cash and cash equivalents were $286.2 million at September 30, 2021, including $223.1 million held outside the United States. Capital expenditures were $31.8 million for the first nine months.
- Total debt was $350.0 million, all under the company’s revolving credit facility, compared with $398.0 million at December 31, 2020. Non-GAAP net debt was $63.8 million.
- The company had $350.0 million of additional borrowing capacity under its $700 million unsecured revolving facility. Leverage was 1.07x versus a 3.50x covenant limit, and interest coverage was 14.51x versus a 3.00x minimum. The company was in compliance with all covenants.
- Quarterly dividends were $0.20 per share, compared with $0.19 in Q3 2020.
Material changes versus the prior comparable period
- Consolidated Q3 sales increased 9.6%; excluding currency effects, sales increased 8.8%. Nine-month sales increased 2.3% as reported but only 0.2% excluding currency effects.
- MC benefited from growth in packaging grades and engineered fabrics, while publication-grade demand remained pressured. Its Q3 gross margin held at 51.5%; nine-month margin declined to 52.0% from 53.1% due to higher production and input costs.
- AEC’s Q3 growth was led by LEAP and CH-53K programs but was partly offset by lower Boeing 787 and F-35 sales. AEC margins declined due to lower fixed-cost absorption, unfavorable program mix and smaller favorable contract-estimate adjustments.
- Operating income benefited from lower restructuring costs, which were $0.2 million in Q3 and $0.2 million year-to-date, compared with $0.7 million and $4.2 million in the prior-year periods.
- Other expense improved materially year-to-date because foreign-currency remeasurement losses fell to $0.8 million from $14.7 million in 2020.
- Operating cash flow rose $64.8 million year-to-date, primarily from higher earnings and improved AEC working-capital cash flow. Financing outflows increased because of higher net debt repayments.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide a clear quantitative full-year earnings or revenue guidance figure.
- Management views MC as a stable cash-generating business but cites declining publication-grade demand, pricing pressure and inflation in labor, raw materials, energy and logistics.
- AEC represents longer-term growth potential, but results remain dependent on aerospace production rates, customer inventories, program execution and demand for programs including LEAP, Boeing 787, F-35 and CH-53K.
- The company recognized a $5.8 million AMJP government grant in Q3 and year-to-date 2021, including $2.9 million received in cash during September. The remaining amount was expected in 2022. The company shared a portion of the grant with customers, reducing the benefit to AEC gross profit.
- AEC contract profitability estimates increased operating income by $2.1 million in Q3 and $2.4 million year-to-date, compared with $3.5 million and $9.5 million in the prior-year periods. Future revisions could materially affect revenue and gross profit.
- Remaining performance obligations on contracts with original terms longer than one year totaled $155 million at September 30, 2021. Management expected to recognize approximately $29 million in 2021, $66 million in 2022 and $37 million in 2023.
- Albany was defending 3,625 asbestos claims at quarter-end. The company states that insurance coverage of approximately $140 million remains available and does not currently expect the litigation to materially affect financial position, results or cash flow, although future claims and losses cannot be predicted.
- The Standish family converted and sold most of its Class B shares, reducing its voting interest from approximately 34.5% to less than 1%. On October 25, 2021, the Board authorized a $200 million share-repurchase program; no purchases had been made under the program as of the filing.
Investor verification points
- Assess the sustainability of Q3 earnings after excluding the $5.8 million AMJP grant and other nonrecurring items.
- Monitor AEC contract-margin revisions, program mix, aerospace customer inventory levels and production rates.
- Verify the effect of inflation, supply-chain constraints and pricing actions on MC and consolidated margins.
- Review the location and repatriation limitations of the $223.1 million of cash held by non-U.S. subsidiaries.
- Evaluate refinancing and interest-rate exposure on the $350 million revolving credit balance, including swap coverage and the 2024 maturity.
- Track asbestos claim volumes, insurance coverage and any changes in accruals or expected losses.
- Consider the potential effect of the newly authorized $200 million repurchase program on liquidity, leverage and share count.