Albany International Corp. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, although fourth-quarter data are included in the quarterly financial table. The company operates through Machine Clothing (MC) and Albany Engineered Composites (AEC).
Business Context
- Machine Clothing: Supplies engineered belts and fabrics used in paper, tissue, packaging, pulp, nonwovens, fiber cement, and other industrial applications. MC generated 68% of consolidated revenue and remained the company’s primary cash generator.
- Albany Engineered Composites: Produces advanced composite structures for aerospace and defense, including components for the CFM LEAP engine, F-35, Boeing 787, CH-53K, and GE9X programs.
- AEC includes the composite aerostructures business acquired from Harris Corporation in April 2016 for $187 million. The 2017 results include a full year of acquired operations versus approximately nine months in 2016.
Financial Highlights
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $863.7 million | $779.8 million | +10.8% |
| Gross profit | $295.8 million | $300.6 million | -1.6% |
| Gross margin | 34.2% | 38.5% | -430 bps |
| Operating income | $76.2 million | $91.8 million | -17.0% |
| Net income attributable to the company | $33.1 million | $52.7 million | -37.2% |
| Basic and diluted EPS | $1.03 | $1.64 | -37.2% |
| Adjusted EBITDA | $169.4 million | $168.9 million | +0.3% |
| Operating cash flow | $64.2 million | $80.9 million | -20.6% |
| Capital expenditures, including software | $87.6 million | $73.5 million | +19.2% |
2017 fourth-quarter revenue was $226.7 million, gross profit was $77.4 million, net income attributable to the company was $5.9 million, and diluted EPS was $0.19.
Segment Performance
| Segment | 2017 Sales | 2016 Sales | 2017 Operating Income/(Loss) |
|---|---|---|---|
| Machine Clothing | $590.4 million | $582.2 million | $153.9 million |
| Albany Engineered Composites | $273.4 million | $197.6 million | $(31.7) million |
- MC sales increased 1.4%, or 0.9% excluding currency effects, as growth in tissue, packaging, and pulp grades offset continuing publication-grade declines. MC gross margin remained 47.5%.
- AEC sales increased 38.3%, driven by the acquired Salt Lake City business and 39.5% growth in LEAP program sales. AEC remained loss-making because of contract profitability revisions, restructuring, ramp-up inefficiencies, and other costs.
- Backlog increased to $201.1 million for MC and $157.7 million for AEC at year-end, with most backlog generally expected to be invoiced within 12 months.
Cash Flow, Liquidity, and Capital Structure
- Cash and cash equivalents were $183.7 million at December 31, 2017, including $156.7 million held outside the United States.
- Operating cash flow declined to $64.2 million, primarily because AEC accounts receivable, inventories, and contract receivables consumed approximately $44.3 million of cash during program ramp-up.
- Net cash used in investing activities was $87.6 million, consisting primarily of capital expenditures. Management estimated 2018 capital spending of approximately $80 million to $100 million.
- Total debt was $516.2 million and net debt was $332.5 million, compared with $484.9 million and $303.2 million, respectively, in 2016.
- The company had $501 million outstanding under a $685 million unsecured revolving credit facility and approximately $184 million of additional borrowing capacity.
- The leverage ratio was 2.62 to 1.00 and the interest coverage ratio was 9.27 to 1.00. The company was in compliance with all debt covenants at year-end.
- Quarterly dividends remained $0.17 per share, or $0.68 for the year. Dividend payments totaled $21.9 million.
Material Changes and Unusual Items
- AEC recorded a $15.8 million second-quarter charge for revised profitability estimates on the BR 725 and A380 long-term contracts, primarily due to lower expected demand and program inefficiencies.
- The company discontinued AEC’s Bear Claw hydraulic-fracturing product line, recording a $2.8 million inventory write-off and $4.5 million of non-cash restructuring and asset impairment charges.
- AEC recorded approximately $4 million of additional cost of goods sold from production ramp-up inefficiencies and a $1.1 million unfavorable long-term contract estimate adjustment in the fourth quarter. An amendment to an A380 licensing agreement reduced cost of goods sold by $4.9 million.
- Total restructuring expense increased to $13.5 million from $8.4 million in 2016. Management expected approximately $2 million of additional AEC savings in 2018 from workforce reductions and other actions.
- The company recorded a $2.0 million insurance recovery related to the 2016 theft of cash at its Japan subsidiary.
- The 2017 effective tax rate was 40.4%, including a $5.8 million provisional charge for the U.S. mandatory deemed repatriation tax and a $1.0 million charge from remeasuring U.S. deferred tax assets. Final tax reform accounting remained subject to further guidance and measurement-period adjustments.
- Management proposed discontinuing the MC production facility in Sélestat, France. Government approval was pending, and total severance and related costs could not yet be reasonably estimated.
- Effective January 1, 2018, the company adopted the new revenue recognition standard. Management expected changes in the timing and classification of revenue, particularly for AEC contracts, but had not quantified the full transition effect in the filing.
Outlook, Risks, and Management Commentary
- Management expects modest global paper and paperboard growth, led by packaging and tissue, but continued publication-grade declines, industry overcapacity, pricing pressure, and customer consolidation remain risks to MC.
- AEC is expected to provide substantial growth potential through LEAP and other aerospace and defense programs, but the segment faces significant execution, quality, capacity, and program-ramp risks.
- Safran represented approximately 44% of AEC sales and approximately 14% of consolidated sales in 2017. The LEAP agreement does not require minimum purchase quantities, creating concentration and demand risk.
- Approximately 30% of AEC sales were associated with U.S. government contracts or programs, which are subject to appropriations, cancellation, delay, audits, and regulatory requirements.
- AEC long-term contracts may be fixed-price or otherwise dependent on estimated costs and demand. Changes in contract assumptions can produce significant charges, as demonstrated by the 2017 BR 725 and A380 provisions.
- Additional risks include raw-material and supplier concentration, foreign exchange exposure, cybersecurity, international operations, pension and postretirement obligations, tax audits, asbestos litigation, and debt covenant compliance.
- The Standish family controlled approximately 53% of combined voting power, making the company a controlled company under NYSE rules and allowing reliance on certain governance exemptions.
- Joseph G. Morone announced his retirement effective March 2, 2018, with Olivier Jarrault succeeding him as President and Chief Executive Officer.
Most Important Facts for Investors to Verify
- Whether AEC can achieve profitable execution of LEAP, F-35, 787, CH-53K, GE9X, and other ramping programs.
- The sustainability of MC cash generation amid publication-grade declines, pricing pressure, and paper-industry consolidation.
- The assumptions underlying AEC’s long-term contract profitability estimates and the potential for additional contract-loss charges.
- Actual 2018 capital spending, working-capital consumption, operating cash flow, and progress toward AEC self-funding its growth.
- Debt refinancing and covenant headroom as the large 2022 maturity approaches, including the effect of interest rates on variable-rate borrowings.
- Final accounting effects of U.S. tax reform and adoption of the new revenue recognition standard.
- Approval, timing, and total cost of the Sélestat facility closure.
- Exposure from Safran concentration, U.S. government funding, supplier constraints, asbestos claims, pension deficits, and postretirement liabilities.
- The filing reports unqualified audit opinions and effective internal control over financial reporting as of December 31, 2017; investors should nevertheless review the remediation of prior material weaknesses and ongoing control changes.