Albany International Corp. — Q1 2011 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 31, 2011, compared with the three months ended March 31, 2010. Albany operates in Paper Machine Clothing, Albany Door Systems, Engineered Fabrics, Engineered Composites, and PrimaLoft Products. Paper Machine Clothing remained the primary revenue and cash-generating business, while management identified Engineered Composites as the principal long-term growth opportunity.
Segment reporting was revised to move Fiber Preparation from Engineered Fabrics to Paper Machine Clothing; prior-period information was conformed to the revised presentation.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $251.9 million | $213.9 million | 17.8% increase |
| Gross profit | $105.0 million | $77.2 million | 36.0% increase |
| Gross margin | 41.7% | 36.1% | Up 5.6 points |
| Operating income | $31.9 million | $9.8 million | Increase of $22.1 million |
| Operating margin | 12.7% | 4.6% | Up 8.1 points |
| Net income | $16.7 million | $5.6 million | 198.9% increase |
| Diluted EPS | $0.53 | $0.18 | Increase of $0.35 |
| EBITDA | $43.1 million | $27.9 million | 54.3% increase |
| Operating cash flow | $21.0 million | $16.9 million | 24.5% increase |
Sales increased in every segment. Segment sales were: Paper Machine Clothing $167.9 million, Albany Door Systems $45.1 million, Engineered Fabrics $20.6 million, Engineered Composites $11.5 million, and PrimaLoft Products $6.8 million. Excluding currency translation, consolidated sales increased 16.6%.
Operating improvement reflected higher volume, improved plant utilization, prior restructuring and cost reductions, and lower idle-capacity and equipment-relocation costs. Foreign-currency revaluation shifted from a $2.8 million gain in Q1 2010 to a $3.9 million loss in Q1 2011, while interest expense increased to $4.8 million from $3.8 million because of higher borrowing costs.
Cash and cash equivalents were $137.5 million at March 31, 2011, compared with $122.3 million at December 31, 2010. Net cash used in investing activities was $4.3 million, including $6.0 million of capital expenditures and purchased software, partly offset by $1.7 million of asset-sale proceeds. Financing activities used $10.0 million, including $7.0 million of debt repayments and $3.7 million of dividends.
Total debt was approximately $419.1 million, including $416.8 million of long-term debt and $2.2 million of notes and loans payable. The company had $230.0 million outstanding under its $390.0 million revolving credit facility and $52.9 million of letters of credit, leaving stated additional borrowing capacity of $107.1 million. The leverage ratio was 2.04 to 1.00 versus a maximum of 3.50 to 1.00, and interest coverage was 8.93 to 1.00 versus a minimum of 3.00 to 1.00. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Net sales increased 17.8%, with volume growth reported across all businesses and a $2.5 million favorable currency translation effect.
- Gross margin expanded to 41.7% from 36.1%, primarily due to higher sales, improved cost structure, plant utilization, and lower restructuring-related costs.
- Restructuring expense declined to $0.2 million from $1.4 million. The prior-year amount included a $1.2 million plant and equipment write-down, partly offset by a $0.9 million post-retirement curtailment gain.
- Paper Machine Clothing operating income increased to $46.2 million from $27.7 million; Albany Door Systems increased to $5.4 million from $2.9 million; Engineered Fabrics increased to $4.0 million from $1.7 million; and Engineered Composites reduced its operating loss to $1.0 million from $2.2 million. PrimaLoft operating income declined to $1.9 million from $2.1 million.
- Operating cash flow increased by $4.1 million despite an $8.4 million inventory increase, principally reflecting higher net income.
- Comprehensive income was $43.8 million versus a comprehensive loss of $14.1 million, largely because of a favorable $25.9 million foreign-currency translation adjustment compared with a $19.6 million loss in the prior year.
Guidance, outlook, risks, contingencies, and unusual items
Management expected year-over-year improvement in the short term, excluding currency effects and assuming continued success in offsetting inflation. Stable Paper Machine Clothing performance and growth in Doors, Engineered Fabrics, PrimaLoft, and Engineered Composites were expected to support results.
- Management expected 2011 depreciation and amortization of approximately $65.0 million, capital spending of approximately $40.0 million, and income-tax payments of $10.0 million to $15.0 million.
- The company expected pension contributions of approximately $16.0 million in 2011 and substantially all of the remaining $2.2 million restructuring accrual to be paid by year-end.
- Engineered Composites sales were expected to improve year over year, although Boeing 787 landing-gear-brace production was expected to slow sharply during the balance of 2011. Management targeted a $60.0 million annual sales run rate by mid-2012 if the program ramps as expected.
- Adoption of multiple-element revenue-recognition guidance accelerated Albany Door Systems revenue by $2.4 million and operating income by $0.9 million in Q1 2011. Management stated that the effect of the new policy in future quarters could vary significantly.
- The estimated effective tax rate before discrete items was approximately 30%. Q1 included favorable discrete tax adjustments, while tax audits and uncertain tax positions could produce future changes. The company disclosed a contested German tax benefit of $23.1 million and Canadian tax reassessments of $57.3 million, supported by $52.9 million of letters of credit.
- Asbestos litigation remained significant: Albany was defending approximately 4,800 claims as of April 18, 2011, and Brandon Drying Fabrics was defending approximately 7,876 claims. Management stated that loss ranges could not be meaningfully estimated but did not anticipate material liability beyond available insurance; approximately $130.0 million of confirmed asbestos coverage was identified.
- Mexican authorities had identified approximately $2.5 million of import duties related to disputed NAFTA certificates. Potential duties for all affected shipments were estimated at $8.0 million to $10.0 million, with possible additional penalties, although management considered an adverse outcome unlikely.
- Key operating risks included paper-industry overcapacity, potential price erosion in mature markets, inflation, foreign-currency volatility, dependence on aerospace programs and customers, and execution of growth initiatives.
Important facts for investors to verify
- Determine the sustainability of the significant margin expansion after the unusually favorable comparison and substantially lower restructuring costs.
- Adjust Q1 Door Systems results for the $2.4 million one-time revenue-recognition acceleration and $0.9 million operating-income effect.
- Monitor cash conversion, inventory levels, planned $40.0 million capital spending, pension contributions, and debt repayment capacity.
- Review the $230.0 million revolving-credit balance, $52.9 million of tax-related letters of credit, covenant headroom, and scheduled private-placement repayments beginning in 2013.
- Assess the effect of currency movements, including the Q1 $3.9 million foreign-currency revaluation loss.
- Follow the German and Canadian tax matters, Mexican NAFTA audit, and asbestos litigation, including insurance coverage and potential changes in estimated exposure.
- Evaluate whether Engineered Composites can achieve the stated growth targets despite the expected Boeing 787 production slowdown and dependence on future aerospace programs.