Albany International Corp. 2018 Form 10-K Summary
Business context and reporting period
Albany International reported for the fiscal year ended December 31, 2018. The company operates through two segments: Machine Clothing (MC), which supplies engineered fabrics and belts primarily for paper and industrial applications, and Albany Engineered Composites (AEC), which supplies advanced composite structures for commercial and defense aerospace programs.
2018 included the adoption of ASC 606 using the modified retrospective method. Prior periods were not restated. The filing also reports revised first-, second-, and third-quarter 2018 amounts after identifying immaterial revenue-recognition implementation errors in MC.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $982.5 million | $863.7 million | 13.8% increase |
| Gross profit | $349.7 million | $296.3 million | 17.9% increase |
| Gross margin | 35.6% | 34.3% | 130 bps increase |
| Operating income | $137.4 million | $78.7 million | 74.6% increase |
| Operating margin | 14.0% | 9.1% | Approximately 490 bps increase |
| Net income attributable to the Company | $82.9 million | $33.1 million | Increase of $49.8 million |
| Diluted EPS | $2.57 | $1.03 | Increase of $1.54 |
| Adjusted EBITDA | $228.9 million | $169.4 million | 35.1% increase |
| Operating cash flow | $132.5 million | $64.2 million | Increase of $68.3 million |
| Capital expenditures and software | $82.9 million | $87.6 million | Decrease of $4.8 million |
MC sales were $611.9 million, up 3.6%, with operating income of $169.8 million versus $154.0 million in 2017. MC gross margin improved to 48.6% from 47.5%, supported by higher packaging and tissue sales, currency effects, and productivity improvements.
AEC sales were $370.6 million, up 35.6%, primarily from growth in LEAP, Boeing 787, F-35, and CH-53K programs. AEC operating income improved to $16.6 million from a $31.7 million operating loss, reflecting higher volume, productivity improvements, lower restructuring expense, and the absence of significant 2017 contract and inventory charges.
At December 31, 2018, cash and cash equivalents were $197.8 million, including $144.2 million held outside the United States. Total debt was $524.9 million and net debt was $327.2 million. The company had borrowed $499 million under its $685 million revolving credit facility and reported $186 million of additional borrowing capacity. Its leverage ratio was 1.96 to 1.00 and interest coverage was 11.59 to 1.00; the company was in compliance with its debt covenants.
Dividends declared were $0.69 per share, compared with $0.68 in 2017. The company paid $21.9 million in dividends during 2018. It estimated 2019 capital expenditures of approximately $80 million to $100 million.
Material changes versus the prior comparable period
- Consolidated sales growth was driven primarily by AEC, whose sales increased 35.6%, while MC grew 3.6%.
- AEC returned to operating profitability after a $15.8 million 2017 charge related to revised profitability estimates for the BR725 and A380 programs and a $2.8 million Bear Claw inventory write-off.
- Restructuring expense increased to $15.6 million from $13.5 million, including $10.7 million related to the planned closure of the MC facility in Sélestat, France, and charges related to discontinued AEC manufacturing processes.
- STG&R expenses declined to $196.8 million from $204.1 million, although corporate costs increased to support AEC growth.
- The effective tax rate declined to 28.0% from 40.4%, partly because of the 2017 U.S. tax reform and related discrete tax items.
- ASC 606 reduced reported 2018 sales by $7.1 million relative to the prior accounting method but increased reported net income attributable to the Company by $2.3 million, or approximately $0.07 per share.
- Backlog increased to $581.9 million at year-end, comprising $204.6 million in MC and $377.3 million in AEC. All MC backlog and approximately 90% of AEC backlog was expected to be invoiced within 12 months.
Guidance, outlook, commentary, risks and unusual items
Management expects modest underlying growth in global paper and paperboard markets, led by packaging and tissue, but continues to face publication-grade declines, industry overcapacity, pricing pressure, and customer consolidation in MC. Management views MC as the company’s primary cash generator and expects productivity and cost-reduction initiatives to support relatively stable earnings.
Management identifies substantial growth potential in AEC from LEAP and other aerospace programs, but emphasizes execution, quality, delivery, manufacturing ramp-up, and contract-profitability risks. AEC’s long-term contracts can be fixed-price or cost-plus and require estimates of future costs, volumes, and margins; changes in those estimates can materially affect reported results.
- Safran represented approximately 50% of AEC sales and approximately 19% of consolidated sales in 2018. The LEAP supply agreement does not require minimum purchase volumes.
- Approximately 25% of AEC sales related to U.S. government contracts or programs, which are subject to appropriations, audits, cancellation, and regulatory risks.
- Fourth-quarter AEC gross profit was reduced by a net $1.5 million from contract-estimate changes, including a $4.0 million charge for ramp-up inefficiencies. Comparable 2017 fourth-quarter ramp-up inefficiencies also resulted in an approximately $4.0 million charge.
- Long-term contract reserves and estimates remain sensitive to program demand, delays, cancellations, production costs, quality issues, and supplier performance.
- The company had 3,684 pending asbestos claims at year-end. Management could not estimate a meaningful range of reasonably possible losses beyond accrued amounts, although it did not currently expect a material adverse effect and reported approximately $140 million of remaining insurance coverage.
- Pension and postretirement obligations were underfunded by $22.5 million and $51.1 million, respectively, at year-end.
- Foreign exchange, raw-material and labor inflation, tariffs, supply constraints, cybersecurity, interest-rate changes, and the phaseout of LIBOR could affect results.
KPMG issued an unqualified opinion on the consolidated financial statements but an adverse opinion on internal control over financial reporting. The material weakness involved ineffective controls over ASC 606 implementation for certain point-in-time MC revenue transactions and ineffective reconciliations of unbilled receivables and inventory. Management initiated remediation, but the weakness was not considered remediated as of the filing date.
Most important facts for investors to verify
- Whether AEC can execute the LEAP, F-35, Boeing 787, CH-53K, and other program ramp-ups while meeting quality, delivery, and cost targets.
- The sustainability of AEC margins after the reversal of significant 2017 charges and the effect of recurring ramp-up inefficiencies and contract-estimate changes.
- Safran and LEAP concentration, purchase-volume protections, program cancellations or delays, and any effects from Boeing 737 MAX production or delivery disruptions.
- Progress in remediating the material weakness in internal control over financial reporting and the effect of future ASC 606 corrections.
- Whether operating cash flow can fund AEC expansion and the expected $80 million to $100 million of 2019 capital expenditures while reducing leverage.
- Exposure to fixed-price contract losses, raw-material supply constraints, foreign exchange, tariffs, pension funding, asbestos claims, and tax audits.
- The effect of the company’s controlled-company structure: the Standish family held approximately 53% of combined voting power as of December 31, 2018.