Albany International Corp. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Albany operates through Machine Clothing (MC), its primary cash-generating business serving paper and industrial markets, and Albany Engineered Composites (AEC), which serves commercial and defense aerospace customers.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $222.4 million | $235.8 million | (5.7%) |
| Gross profit | $88.5 million | $89.5 million | (1.0%) |
| Gross margin | 39.8% | 37.9% | +190 bps |
| Operating income | $41.8 million | $39.6 million | +5.6% |
| Operating margin | 18.8% | 16.8% | +200 bps |
| Net income attributable to Company | $27.6 million | $9.1 million | +202.8% |
| Diluted EPS | $0.85 | $0.28 | +$0.57 |
| Adjusted EPS | $0.87 | $0.78 | +$0.09 |
| Operating cash flow | $33.7 million | $(6.6) million | +$40.3 million |
| Capital expenditures | $12.5 million | $12.8 million | $(0.3) million |
- MC sales increased 8.5% to $148.2 million, or 4.9% excluding currency effects. MC operating income increased to $50.4 million from $47.2 million, while its gross margin declined to 51.5% from 53.2% because of higher production costs and lower cost absorption.
- AEC sales declined 25.2% to $74.2 million, or 26.4% excluding currency effects, primarily because of lower LEAP and Boeing 787 program sales. AEC operating income decreased to $2.9 million from $7.6 million.
- Net income benefited substantially from other expense falling to $0.6 million from $15.6 million in the prior-year quarter. The 2020 amount principally reflected a $14.8 million foreign-currency revaluation loss related to an intercompany loan.
- The effective tax rate was 26.7%, compared with 62.1% in Q1 2020. Q1 2021 included a $1.4 million benefit from an adjustment to prior-period tax liabilities and a $0.3 million expense related to a foreign uncertain tax position.
- Cash and cash equivalents were $237.9 million at March 31, 2021, compared with $241.3 million at December 31, 2020. Approximately $209.0 million was held by non-U.S. subsidiaries.
- Total debt was $384.0 million, down from $398.0 million at year-end 2020 and $491.0 million at March 31, 2020. Net debt was $146.1 million, compared with $156.7 million at December 31, 2020.
- The company had $316 million of additional borrowing capacity under its $700 million revolving credit facility. It was in compliance with all debt covenants; leverage was 1.20x versus a 3.50x maximum, and interest coverage was 15.72x versus a 3.00x minimum.
- The quarterly dividend was $0.20 per share, compared with $0.19 in Q1 2020.
Material changes versus the prior comparable period
- Consolidated revenue declined because AEC aerospace demand was weaker, more than offsetting MC growth. Currency translation increased reported sales by approximately $6.0 million.
- Operating income improved despite lower sales, supported by lower corporate expenses, substantially lower foreign-currency losses, and reduced restructuring expense.
- Operating cash flow shifted from a $6.6 million use to a $33.7 million source, primarily reflecting improved AEC working-capital cash flows and higher net income.
- Restructuring expense declined to $0.1 million from $0.6 million. Q1 2020 also included former CEO termination costs and significant foreign-exchange-related tax effects.
- Accumulated other comprehensive income deteriorated from $(132.4) million at December 31, 2020 to $(147.1) million at March 31, 2021, principally due to foreign-currency translation losses.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear quantitative full-year earnings or revenue guidance range. Management describes MC as positioned to maintain stable earnings and cash generation despite declining publication-paper demand, pricing pressure and low-growth markets. AEC is viewed as the principal longer-term growth opportunity, but near-term results remain exposed to aerospace inventory levels, program delays, technical issues, cancellations and demand reductions.
- AEC remaining performance obligations on contracts with original terms exceeding one year totaled $76 million at March 31, 2021; approximately $51 million was expected to be recognized during 2021 and the remainder during 2022.
- AEC long-term contract accounting requires estimates of total revenue, costs and profitability. Changes in those estimates can materially affect revenue and gross profit in the period recognized.
- COVID-19 effects, aerospace industry recovery timing, publication-grade paper declines, pricing pressure, foreign exchange and macroeconomic conditions are identified risks.
- The company expects to perform its annual goodwill impairment test in Q2 2021; no impairment was recorded in the 2020 annual test.
- The company was defending 3,617 asbestos claims at March 31, 2021. Management does not currently expect the litigation to have a material adverse effect, and reported approximately $140 million of remaining insurance coverage. The company cannot estimate a meaningful range of reasonably possible loss beyond amounts accrued.
- LIBOR transition may affect the company’s revolving credit facility and interest-rate derivatives. The company was assessing the accounting impact of related guidance.
- No material changes to previously disclosed risk factors, no share repurchases during the quarter, and no material changes to internal control over financial reporting were reported.
Investor verification priorities
- Verify the sustainability of MC revenue growth and whether production-cost pressure continues to compress its gross margin.
- Monitor AEC recovery, particularly LEAP and Boeing 787 volumes, aerospace customer inventories and contract-margin revisions.
- Reconcile reported EPS with adjusted EPS and isolate the impact of foreign-currency revaluation, tax adjustments and acquisition-related costs.
- Track operating cash conversion, contract assets, inventories and the concentration of cash held outside the United States.
- Review debt maturities, LIBOR transition effects, interest-rate swap exposure and compliance with revolving-credit covenants.
- Assess potential changes in asbestos claims, insurance coverage and tax audit contingencies.