Albany International Corp. — 2019 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2019, compared with the same periods in 2018. Albany operates through Machine Clothing (MC), which serves paper and paperboard manufacturers, and Albany Engineered Composites (AEC), which supplies advanced composite components primarily to commercial and defense aerospace customers.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $273.9 million | $255.4 million | $525.3 million | $479.0 million |
| Gross profit | $105.2 million | $91.6 million | $197.0 million | $169.4 million |
| Gross margin | 38.4% | 35.9% | 37.5% | 35.4% |
| Operating income | $54.2 million | $42.2 million | $94.3 million | $59.2 million |
| Net income attributable to the Company | $34.1 million | $29.9 million | $63.2 million | $37.6 million |
| Diluted EPS | $1.05 | $0.93 | $1.96 | $1.16 |
| Operating cash flow | $58.5 million | $35.7 million | $83.1 million | $16.7 million |
Q2 net sales increased 7.3% and first-half sales increased 9.7%. Excluding currency translation, sales increased 8.8% in Q2 and 11.8% for the first half. AEC sales grew 27.1% in Q2 and 28.8% year to date, while MC sales declined 4.2% and 1.4%, respectively, on a reported basis.
At June 30, 2019, cash and cash equivalents were $215.2 million, including $157.7 million held outside the United States. Total debt was $482.0 million and reported net debt was $266.8 million. The company had $203 million of additional borrowing capacity under its $685 million revolving credit facility. Its leverage ratio was 1.70x versus a 3.75x covenant limit, and interest coverage was 12.39x versus a 3.00x minimum. The company was in compliance with all debt covenants.
First-half capital expenditures were $35.5 million, compared with $39.2 million in 2018. Cash dividends declared were $0.18 per share per quarter, compared with $0.17 in the prior-year quarter.
Material changes versus the prior comparable period
- AEC acceleration: First-half AEC sales increased $50.6 million, and operating income increased $20.9 million, primarily from LEAP, F-35, Boeing 787 fuselage-frame and CH-53K programs.
- MC pressure but improved profitability: MC sales declined in Q2, primarily from publication-grade weakness, but first-half operating income rose to $93.8 million from $77.3 million due to productivity improvements, lower depreciation and sharply lower restructuring costs.
- Margin expansion: Consolidated gross margin increased 250 basis points in Q2 and 210 basis points for the first half. AEC gross margin increased to 20.9% in Q2 from 13.5%.
- Improved cash generation: First-half operating cash flow increased by $66.4 million, reflecting higher profitability and improved working-capital management.
- Restructuring declined: First-half restructuring expense fell to $1.4 million from $11.2 million, primarily because 2018 included significant severance and outplacement costs related to the Sélestat, France facility closure.
- ASC 842 adoption: Lease accounting adoption on January 1, 2019 added recognized right-of-use assets and lease liabilities and reduced reported debt through reclassification of the prior finance obligation; it had no cash-flow impact.
- Ownership and governance change: A Standish Family secondary offering converted approximately 1.6 million Class B shares into Class A shares. The family’s voting interest declined from approximately 52.7% to 34.5%, and the company ceased to qualify as an NYSE “controlled company.”
Guidance, outlook, risks and unusual items
Management forecast full-year 2019 Adjusted EBITDA of $225 million to $240 million and adjusted EPS of $3.05 to $3.35. The forecast implies GAAP net income attributable to the Company of $98 million to $108 million and GAAP EPS of $3.04 to $3.34. The filing does not provide a separate full-year revenue forecast.
Management views MC as a stable, cash-generating business, although paper-industry overcapacity, pricing pressure and continued declines in publication grades remain risks. AEC is expected to provide growth, but depends on successful execution and continued demand under aerospace programs.
- AEC long-term contract estimates increased second-quarter 2019 operating income by $5.0 million, including an immaterial $1.8 million favorable out-of-period adjustment that should have been recorded in the first quarter. The filing highlights the sensitivity of results to contract-cost and profitability estimates.
- The Boeing 737 MAX grounding could delay or reduce LEAP 1B production and adversely affect AEC sales and earnings.
- Approximately 50% of AEC revenue in the first six months came from cost-plus fee arrangements, and long-term contract accounting requires significant estimates.
- The company is defending 3,691 asbestos claims as of June 30, 2019. It reports approximately $140 million of remaining insurance coverage and does not currently expect a material adverse effect, but cannot estimate a meaningful range of potential loss.
- The company identified a material weakness in internal control over financial reporting related to systems, risk assessment and reconciliations for certain MC point-in-time revenue transactions. Management expects remediation by the end of 2019, subject to operating effectiveness testing.
- Effective tax rates were 29.6% in Q2 2019 versus 18.9% in Q2 2018 and 25.6% versus 21.5% for the first half, partly because prior-year periods benefited from larger discrete tax benefits.
Important facts for investors to verify
- Whether AEC growth, productivity and contract margins are sustainable after the $5.0 million second-quarter contract estimate benefit.
- The impact and duration of Boeing 737 MAX production disruptions on LEAP-related volumes.
- Progress in remediating the material weakness in internal control over financial reporting.
- Cash availability and repatriation constraints, given that most cash was held by non-U.S. subsidiaries.
- Compliance with leverage and interest-coverage covenants as debt maturities and interest rates evolve.
- Future asbestos claim activity, insurance coverage and any changes to the company’s assessment of potential exposure.
- Whether the full-year Adjusted EBITDA and adjusted EPS guidance remains achievable amid currency, aerospace, paper-industry and contract-estimate risks.