Albany International Corp. — 2018 Q2 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2018, filed August 7, 2018. Albany operates through Machine Clothing (MC), serving paper and paperboard manufacturers, and Albany Engineered Composites (AEC), serving aerospace and defense markets.
The company adopted ASC 606, Revenue from Contracts with Customers, effective January 1, 2018, using the modified retrospective method. Prior-year periods were not restated, which affects comparability.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $256.2 million | $215.6 million | $486.2 million | $414.8 million |
| Gross profit | $92.2 million | $63.2 million | $173.8 million | $139.2 million |
| Gross margin | 36.0% | 29.3% | 35.8% | 33.6% |
| Operating income | $42.7 million | $9.9 million | $63.5 million | $32.5 million |
| Operating margin | 16.7% | 4.6% | 13.1% | 7.8% |
| Net income attributable to the company | $30.4 million | $1.1 million | $40.6 million | $12.0 million |
| Diluted EPS | $0.94 | $0.03 | $1.26 | $0.37 |
| Cash flow from operations | $35.7 million | $8.4 million | $16.7 million | $3.8 million |
Q2 adjusted EBITDA was $61.9 million, compared with $30.6 million in the prior-year quarter. Six-month adjusted EBITDA was $112.9 million, compared with $74.1 million in 2017. These are non-GAAP measures.
At June 30, 2018, cash and cash equivalents were $154.7 million, including $129.7 million held by non-U.S. subsidiaries. Total debt was $525.1 million and net debt was $370.3 million, compared with $332.5 million at December 31, 2017. The company had $511.0 million outstanding under its $685 million revolving credit facility and estimated $174 million of additional borrowing capacity. The leverage ratio was 2.23 to 1.00 and interest coverage was 10.73 to 1.00; all debt covenants were satisfied.
Capital expenditures were $39.1 million for the first six months, compared with $46.4 million in 2017. Cash declined by $29.0 million from year-end, ending at $154.7 million. Dividends paid during the first six months were $11.0 million.
Material changes versus the prior comparable period
- Q2 sales increased 18.9%; six-month sales increased 17.2%. Excluding currency effects and the incremental ASC 606 impact, underlying sales growth was 17.0% in Q2 and 12.0% year to date.
- MC Q2 sales increased 11.0% to $162.6 million, or 8.2% excluding ASC 606 and currency effects. Growth was primarily attributed to packaging and tissue grades. Six-month sales increased 7.4%.
- AEC Q2 sales increased 35.6% to $93.6 million, or 35.7% excluding ASC 606 and currency effects. Six-month sales increased 39.8%, driven primarily by LEAP, Boeing 787, F-35, and CH-53K programs.
- AEC returned to profitability: Q2 operating income was $4.1 million versus a $17.8 million loss in 2017; six-month operating income was $6.4 million versus a $22.9 million loss. The 2017 results included a $15.8 million charge for revised profitability estimates on two AEC contracts.
- Q2 gross margin improved to 36.0%, partly because the prior-year period included the AEC contract charge. MC operating income benefited from higher sales, capacity utilization, and lower selling, technical, general, and research expenses.
- Restructuring expense increased to $11.2 million for the first six months from $4.7 million. The company recorded $8.6 million in 2018 related to the planned closure of its Sélestat, France, Machine Clothing facility, including severance and outplacement costs for approximately 50 positions.
- ASC 606 increased reported six-month revenue by $8.0 million and operating income by $3.8 million. Excluding the standard, six-month company net income attributable to the company would have been approximately $38.0 million rather than $40.6 million.
- Net income benefited from discrete tax items, including a $5.0 million valuation-allowance reversal and a $1.1 million benefit related to mandatory repatriation. These benefits were partly offset by a $2.4 million charge for uncertain tax positions.
Guidance, outlook, commentary, and risks
Management projected full-year 2018 MC adjusted EBITDA of $180 million to $195 million. The filing does not provide a consolidated full-year revenue or earnings forecast. Management stated that it expects sufficient capital resources to operate for the foreseeable future.
MC remains the primary cash generator but faces pricing pressure, industry overcapacity, and declining publication-grade paper demand. Management expects modest global paper and paperboard growth, led by packaging and tissue.
AEC is the principal growth platform, with significant exposure to aerospace programs, particularly LEAP. AEC contract accounting requires estimates of costs, margins, demand, modifications, and program profitability; changes in estimates can materially affect reported revenue and profit.
Key risks include reduced demand, delays, technical difficulties, or cancellations in aerospace programs; failure to achieve profitable AEC growth; macroeconomic and industry conditions; foreign-currency movements; higher interest costs; and the company’s substantial reliance on its revolving credit facility.
The company was defending 3,677 asbestos claims as of June 30, 2018. Management could not estimate a meaningful range of potential loss but stated that available insurance, including approximately $140 million of remaining coverage, was expected to mitigate the matter and that no material adverse effect was currently anticipated.
The company continues to evaluate provisional effects of the 2017 Tax Cuts and Jobs Act, including GILTI, FDII, and repatriation tax calculations. Final tax effects could differ materially from current estimates.
Most important facts for investors to verify
- Reconcile reported growth with the effects of ASC 606 and foreign-currency translation.
- Assess whether AEC’s improved profitability is sustainable after excluding the $15.8 million prior-year contract charge and considering the $1.6 million unfavorable contract-estimate revisions recorded in 2018.
- Monitor AEC program volumes, contract margins, customer concentration, and LEAP-related execution.
- Track restructuring costs and potential additional charges associated with the Sélestat facility closure.
- Evaluate cash conversion and working-capital requirements as AEC programs ramp; year-to-date operating cash flow was only $16.7 million despite substantially higher earnings.
- Review leverage, interest-rate exposure, credit-facility covenants, and the $174 million estimated remaining borrowing capacity.
- Confirm the ultimate tax impact of the Tax Cuts and Jobs Act and ongoing tax audits.
- Monitor asbestos claims, insurance coverage, and any changes in the company’s assessment of potential liability.