Albany International Corp. Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2012. Albany operated through Machine Clothing (MC) and Albany Engineered Composites (AEC). MC remained the primary cash-generating business, while AEC represented the principal growth opportunity, particularly in aerospace and defense applications.
Effective in 2012, Paper Machine Clothing and Engineered Fabrics were combined into the MC segment. Albany Door Systems and PrimaLoft Products were presented as discontinued operations following their 2012 dispositions.
Financial Performance and Position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $194.6 million | $200.3 million | $566.6 million | $589.9 million |
| Gross profit | $79.7 million | $78.1 million | $226.4 million | $237.2 million |
| Gross margin | 40.9% | 39.0% | 40.0% | 40.2% |
| Operating income/(loss) | $23.1 million | $26.8 million | $(63.8) million | $64.3 million |
| Income/(loss) from continuing operations | $9.1 million | $14.5 million | $(48.8) million | $31.3 million |
| Net income | $9.5 million | $16.7 million | $22.8 million | $42.2 million |
| Diluted EPS | $0.30 | $0.53 | $0.72 | $1.34 |
- MC sales declined 5.8% in the quarter and 6.7% year to date; AEC sales increased 43.6% in the quarter and 40.8% year to date.
- Q3 MC gross margin improved to 44.6% from 42.1%, primarily from higher utilization in the Americas and favorable geographic mix. AEC generated $1.5 million of Q3 gross profit versus a $0.3 million loss in the prior-year quarter.
- Adjusted EBITDA from continuing operations was $41.9 million in Q3 and $107.7 million for the first nine months, compared with $38.8 million and $111.2 million, respectively, in the comparable periods.
- Net cash used in operating activities was $10.3 million for the first nine months, compared with $74.3 million of cash provided in 2011. Pension funding and settlements were the primary use of cash.
- Investing activities provided $125.3 million, including proceeds from the sales of Albany Door Systems and PrimaLoft Products. Capital expenditures and purchased software totaled $25.4 million year to date.
- Cash and cash equivalents were $173.9 million at September 30, 2012, versus $118.9 million at December 31, 2011. Net debt was $148.5 million, down from $255.9 million at year-end 2011.
- Total debt was $322.5 million, including $134.0 million outstanding under the revolving credit facility, $150.0 million of fixed-rate private placement debt, and $28.4 million of convertible notes. The company reported $256 million of additional borrowing capacity under its revolving facility.
- Leverage was 1.06-to-1.00 versus a maximum covenant of 3.50-to-1.00; interest coverage was 13.56-to-1.00 versus a minimum covenant of 3.00-to-1.00. The company was in compliance with its debt covenants.
Material Changes Versus Prior Comparable Period
- Revenue declined 2.8% in Q3 and 3.9% year to date. Excluding currency translation, Q3 sales were approximately flat overall, while nine-month sales declined 1.7%.
- A change in contract terms with a major North American customer accelerated inventory ownership transfers and increased Q3 sales by approximately $8 million, with a smaller residual benefit expected over the following two quarters.
- Operating results were materially affected by $119.7 million of pension settlement charges recorded during the first half of 2012. The charge reduced year-to-date operating income and was partly offset by a $39.5 million related tax benefit.
- Discontinued operations contributed $71.6 million to nine-month income, including approximately $92.4 million of pre-tax gains from the sales of Albany Door Systems and PrimaLoft Products, partially offset by transaction adjustments.
- Restructuring expense increased to $6.1 million year to date from $4.5 million, primarily for workforce reductions in Sweden and manufacturing curtailments in New York and Wisconsin.
- The company completed pension funding and settlement actions that reduced the global unfunded pension liability from $101.2 million at December 31, 2011 to $26.9 million at June 30, 2012. Management expects annual pension expense to decline by approximately $7 million to $8 million.
Outlook, Commentary, Risks, and Unusual Items
- Management expected a sharp slowdown across MC markets late in 2012 and a very slow start to 2013, with continued European weakness and likely price deterioration.
- AEC's LEAP engine fan-module development program remained on schedule. Key milestones included production of parts for the first LEAP engine test in the third quarter of 2013 and completion of a new plant in mid-2013.
- Management estimated 2012 depreciation and amortization of approximately $63 million and capital expenditures of approximately $35 million to $40 million.
- Asbestos litigation involved 4,443 Albany claims and 7,873 Brandon claims as of October 17, 2012. The company stated that it could not reasonably estimate potential losses but did not anticipate material liability beyond insurance coverage. Confirmed insurance coverage exceeded $125 million for Albany claims.
- Mexican authorities continued reviewing certain 2006-2008 NAFTA certificate audits. Nineteen of 19 reviewed audits were found valid; remaining audits were unresolved, although the company expected any duties or penalties to be immaterial.
- German tax authorities challenged $22.4 million of tax benefits related to a 1999 reorganization. The company had not accrued tax expense for this matter and stated that the ultimate outcome remained uncertain.
- The filing reported no material changes in risk factors from December 31, 2011. Foreign currency movements, paper-industry demand, customer concentration, aerospace program execution, pension obligations, tax examinations, litigation, and covenant compliance remain important areas of risk.
Important Facts for Investors to Verify
- Separate recurring operating performance from the $119.7 million pension settlement charge and the gains on discontinued-business sales.
- Assess MC demand trends, particularly the expected late-2012 slowdown, European weakness, and pricing pressure.
- Verify AEC program milestones, customer concentration, and the timing of LEAP-related production and capital investments.
- Review debt maturities, including the $50 million private-placement payments due in 2013 and 2015, and the convertible notes' holder purchase right in March 2013.
- Monitor cash generation after completion of pension funding and settlement activities, as nine-month operating cash flow was negative.
- Follow asbestos claims, available insurance coverage, the German tax matter, and unresolved Mexican NAFTA audits.
- Confirm the impact of the major-customer contract transition on future reported sales and working capital.