Albany International Corp. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2017. Albany operates through Machine Clothing (MC), its established paper-machine clothing business and primary cash generator, and Albany Engineered Composites (AEC), which serves aerospace and defense markets. AEC includes the Salt Lake City composite aerostructures business acquired from Harris in April 2016.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $222.1 million | $191.3 million | $637.0 million | $566.8 million |
| Gross profit | $79.4 million | $72.4 million | $218.4 million | $223.2 million |
| Gross margin | 35.8% | 37.9% | 34.3% | 39.4% |
| Operating income | $22.3 million | $24.8 million | $53.6 million | $64.9 million |
| Net income attributable to the Company | $15.3 million | $13.1 million | $27.2 million | $36.9 million |
| Diluted EPS | $0.47 | $0.41 | $0.85 | $1.15 |
| Operating cash flow | Not separately emphasized | Not separately emphasized | $21.7 million | $53.2 million |
Q3 operating margin was approximately 10.0%, compared with approximately 13.0% in the prior-year quarter. Net margin attributable to the Company was approximately 6.9% versus 6.8%. For the first nine months, operating margin was approximately 8.4% versus 11.5%, and net margin was approximately 4.3% versus 6.5%.
- MC sales increased 5.2% in Q3 and 0.6% for the nine months. MC operating income increased to $42.7 million in Q3 and $119.4 million year to date, supported by higher sales, productivity, and lower restructuring costs.
- AEC sales increased 48.8% in Q3 and 52.2% year to date, driven by LEAP, Boeing 787 fuselage-frame, and CH-53K programs and the additional contribution from the acquired Salt Lake City business. AEC nevertheless reported an operating loss of $9.3 million in Q3 and $32.2 million for the nine months.
- Cash and cash equivalents were $153.5 million at September 30, 2017, down from $181.7 million at December 31, 2016. Approximately $140.8 million was held by foreign subsidiaries.
- Total debt was $505.5 million, including $440.0 million outstanding under the revolving credit facility. Net debt was $352.1 million, compared with $303.2 million at year-end 2016.
- The $550 million revolving facility had approximately $110 million of additional borrowing capacity based on covenant calculations. The leverage ratio was 2.55:1 versus a maximum of 3.50:1, and interest coverage was 9.38:1 versus a minimum of 3.00:1. The Company was in compliance with its debt covenants.
- Capital expenditures were $62.3 million for the first nine months, compared with $51.3 million in the prior-year period, primarily reflecting the ramp-up of AEC programs. Dividends declared were $0.17 per share for Q3 and $0.51 per share year to date.
Material Changes Versus the Prior Comparable Period
- Sales grew 16.1% in Q3 and 12.4% year to date, but gross profit declined 2.2% year to date because of AEC contract and inventory charges.
- AEC recorded a $15.8 million second-quarter 2017 cost-of-goods-sold charge after revising the estimated profitability of two contracts, principally because of lower expected demand for BR 725 and A380 components. The charge included $11.8 million of reserves for anticipated future losses and a $4.0 million inventory write-off.
- AEC discontinued the Bear Claw hydraulic-fracturing components line in Q3, resulting in a $4.5 million non-cash restructuring charge for intangible assets and equipment and a $3.2 million inventory write-off in cost of goods sold.
- Nine-month operating cash flow fell by $31.5 million, primarily because of higher accounts receivable and inventories associated with AEC growth programs, as well as changes in other noncurrent liabilities and deferred taxes.
- Interest expense increased by $3.4 million year to date, principally because of debt incurred for the 2016 acquisition and the related capital lease obligation.
- The Q3 effective tax rate was 20.0%, compared with 35.8% in Q3 2016, benefiting from a $3.8 million release of valuation allowances in Canada and Japan. The nine-month effective tax rate was 30.7%, compared with 35.9%.
- Other income in Q3 included a $2.0 million insurance recovery related to a theft in Japan reported in Q4 2016.
Outlook, Commentary, Risks, Contingencies, and Unusual Items
- No formal quantitative revenue or earnings guidance is provided in the filing. Management describes MC as a continuing cash-generating business despite paper-industry changes, pricing pressure, and overcapacity. AEC is positioned for long-term aerospace and defense growth, but profitability remains exposed to program execution and contract-estimate changes.
- Key AEC risks include reductions, delays, technical difficulties, or cancellations in aerospace programs; failure to achieve profitable growth; and adverse changes in demand or estimated costs under long-term contracts. Fixed-price contract estimates can materially affect revenue and gross profit when revised.
- As of September 30, 2017, AEC had $11.1 million of reserves for future contract losses, compared with $0.1 million at December 31, 2016. Fixed-price contracts in process had $430.8 million of revenue to be recognized in future periods.
- Management announced discussions regarding a proposal to discontinue operations at the MC facility in Sélestat, France. Consultations were ongoing, and no related restructuring charge had been recorded as of the filing date.
- The Company was defending 3,727 asbestos claims as of September 30, 2017. Management stated that insurance coverage of approximately $140 million remained available and did not expect current or future claims to have a material adverse effect, although the number and timing of future claims cannot be predicted.
- Disclosure controls and procedures were concluded to be ineffective because of previously identified material weaknesses involving foreign-location financial reporting controls, banking authority controls, and management review of potential loss-contract reserves. Remediation was underway and expected by management to be effective by year-end 2017, subject to testing.
- The Company expects to adopt the new revenue-recognition standard on January 1, 2018. Management expects earlier recognition for certain MC and AEC contracts but had not quantified the cumulative or full financial-statement effect.
- The $50.0 million private-placement debt maturity shown at September 30, 2017 was paid on October 25, 2017.
Most Important Facts for Investors to Verify
- Whether AEC achieves sustained profitability as LEAP, 787, CH-53K, and other aerospace programs ramp.
- The adequacy of the $11.1 million future-loss reserve and whether additional BR 725, A380, or other contract charges arise.
- The effect of working-capital growth and capital spending on operating cash flow and net debt.
- Progress in remediating the material weaknesses and the effectiveness of the related controls in subsequent filings.
- The implementation impact of the new revenue-recognition standard, particularly on AEC long-term contracts.
- Future restructuring costs associated with Sélestat and other workforce or facility actions.
- Debt capacity, covenant compliance, interest-rate exposure, and the availability of cash held by foreign subsidiaries.