Albany International Corp. — FY2016 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2016; the filing also provides unaudited fourth-quarter data. Albany operates through two segments: Machine Clothing (MC), supplying engineered fabrics and belts primarily to paper and industrial customers, and Albany Engineered Composites (AEC), supplying advanced composite structures to aerospace and defense customers.
On April 8, 2016, Albany acquired Harris Corporation’s composite aerostructures business for $187 million in cash plus assumed liabilities. The acquired operations contributed $67.0 million of 2016 revenue from April 8 through December 31, 2016.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $779.8 million | $709.9 million | +9.9% |
| Gross profit | $300.6 million | $278.7 million | +7.9% |
| Gross margin | 38.5% | 39.3% | Down 80 bps |
| Operating income | $91.8 million | $63.9 million | +43.6% |
| Net income attributable to Albany | $52.7 million | $57.3 million | Down 7.9% |
| Diluted EPS | $1.64 | $1.79 | Down $0.15 |
| Adjusted EBITDA | $168.9 million | $141.0 million | +19.8% |
| Operating cash flow | $79.5 million | $95.9 million | Down $16.4 million |
| Capital expenditures, including software | $78.5 million | $50.6 million | +55.2% |
- MC revenue was $582.2 million, down 4.3%, while operating income increased to $152.5 million from $141.3 million. MC represented approximately 75% of consolidated revenue.
- AEC revenue increased 95.1% to $197.6 million. Its operating loss narrowed to $15.4 million from $28.5 million, but the segment remained unprofitable.
- Fourth-quarter 2016 revenue was $213.0 million, gross profit was $77.4 million, net income attributable to Albany was $15.8 million, and diluted EPS was $0.49.
- Cash and cash equivalents were $181.7 million at year-end, including $134.4 million held outside the United States.
- Total debt was $484.9 million and net debt was $303.2 million, compared with $265.7 million and $80.6 million, respectively, at December 31, 2015.
- The company had $418 million drawn under its $550 million revolving credit facility and approximately $132 million of additional borrowing capacity. Leverage was 2.30x and interest coverage was 11.52x; Albany reported compliance with its debt covenants.
- Quarterly cash dividends totaled $0.68 per share in 2016, compared with $0.67 in 2015.
Material changes versus the prior comparable period
- Consolidated growth was driven primarily by the Harris acquisition and higher LEAP program sales in AEC. Excluding currency effects, consolidated sales increased 10.3%.
- MC sales declined because of continuing weakness in publication-grade paper and economic weakness in South America. Lower restructuring costs and lower selling, technical, general and research expenses more than offset the MC gross-profit decline, improving operating income.
- AEC gross profit improved from a $6.6 million loss in 2015 to $25.1 million in 2016. The comparison benefited from the absence of the $14.0 million BR725 contract-profitability charge recorded in 2015, acquired-business gross profit of $9.4 million, and LEAP growth.
- Interest expense increased by $3.5 million due primarily to acquisition-related borrowings and the assumed capital lease obligation.
- Operating cash flow declined because AEC ramp-up activity consumed working capital, including approximately $42.8 million related to accounts receivable, inventories, contract receivables and other assets.
- Backlog was $163.8 million for MC, down from $171.0 million, and $128.4 million for AEC, up from $34.0 million, largely reflecting the acquisition. The backlog in both segments was generally expected to be invoiced within 12 months.
Guidance, outlook, risks and unusual items
- Management expects MC earnings to remain broadly stable over time, but identified continuing pricing pressure, paper-industry overcapacity, declining publication grades and shorter order cycles as headwinds.
- Management views AEC as the primary growth opportunity, supported by LEAP, GE9X, F-35, Boeing 787 and CH-53K programs. AEC’s Mexico LEAP facility was scheduled to begin manufacturing operations in 2017.
- Management estimated 2017 capital spending of $95 million to $105 million. The filing states that cash from operations and available credit resources were expected to support operations and foreseeable obligations.
- AEC faces substantial execution and ramp-up risk, customer concentration and program cancellation or delay risk. Safran represented approximately 45% of AEC revenue and approximately 11% of consolidated revenue in 2016; the LEAP agreement does not require minimum purchase quantities.
- The BR725 program generated a $2.6 million loss in 2016 and was expected to generate additional short-term losses. Management expected eventual profitability, but additional losses remained possible.
- Restructuring expense was $8.4 million in 2016, including actions affecting MC research and development in France and AEC legacy-program consolidation. A $2.5 million charge was recorded for cash theft at the Japan subsidiary.
- The company reported material weaknesses in internal control over financial reporting. The weaknesses involved foreign-location oversight and banking authorities, third-party transaction controls, and management review of a potential loss-contract reserve. Management stated that the weaknesses did not result in material misstatements, but KPMG issued an adverse opinion on internal control effectiveness.
- Asbestos litigation involved 3,745 claims against Albany and 7,706 claims against its Brandon subsidiary at year-end. The company stated that a meaningful loss range could not be estimated and did not anticipate a material adverse effect based on available insurance and defenses.
- Pension plans were underfunded by $30.2 million and other postretirement benefit liabilities were $57.5 million at year-end. The company also faces foreign exchange, raw-material, cybersecurity, tax, regulatory and customer-credit risks.
Most important facts for investors to verify
- Whether AEC achieves planned LEAP and acquired-program production ramps while improving profitability and cash generation.
- The sustainability of MC operating margins and cash flow amid paper-industry volume declines and pricing pressure.
- Debt refinancing and repayment capacity, particularly the $50 million private placement due in October 2017 and substantial 2021 maturities.
- Progress and independent validation of remediation of the reported material weaknesses, including controls over foreign subsidiaries and loss-contract estimates.
- Working-capital requirements and the cash conversion profile of AEC’s long-term contracts.
- Potential additional BR725 losses, asbestos-related costs, tax audit outcomes and any impairment risk associated with acquisition goodwill and intangibles.
- Customer concentration, purchase-order requirements and cancellation or funding risk for major aerospace and defense programs.