Albany International Corp. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also provides unaudited fourth-quarter data. Results present Albany Door Systems as a discontinued operation following the announced $130 million sale, completed January 11, 2012.
Business context
Albany operated four continuing reportable segments: Paper Machine Clothing, Engineered Fabrics, Engineered Composites and PrimaLoft Products. Paper Machine Clothing and Engineered Fabrics were fully integrated by year-end and are reported together as Machine Clothing beginning in 2012. The company serves global paper, industrial, aerospace, defense, outdoor apparel and military markets.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $814.7 million | $765.8 million | +6.4% |
| Gross profit | $329.0 million | $294.8 million | +11.6% |
| Gross margin | 40.4% | 38.5% | +190 bps |
| Operating income | $83.1 million | $71.3 million | +16.5% |
| Operating margin | 10.2% | 9.3% | +90 bps |
| Income from continuing operations | $26.5 million | $31.5 million | -15.7% |
| Net income | $34.9 million | $37.6 million | -7.2% |
| Diluted EPS | $1.11 | $1.21 | -8.3% |
| EBITDA from continuing operations | $144.6 million | $133.7 million | +8.2% |
| Adjusted EBITDA from continuing operations | $150.2 million | $122.4 million | +22.7% |
| Operating cash flow | $105.3 million | $99.6 million | +5.7% |
| Capital expenditures, including software | $27.5 million | $31.0 million | -11.4% |
Fourth-quarter 2011 sales were $202.6 million versus $199.8 million in the prior-year quarter. Gross profit was $80.1 million versus $80.6 million. Net income was a loss of $7.2 million, or diluted loss of $0.23 per share, compared with net income of $20.5 million, or $0.66 per share, in fourth-quarter 2010. Fourth-quarter results included restructuring charges reducing EPS by approximately $0.10; the quarter also included a favorable $0.11-per-share prior-period tax correction.
- Segment sales: Paper Machine Clothing $657.6 million, Engineered Fabrics $81.6 million, Engineered Composites $48.1 million and PrimaLoft Products $27.4 million.
- Segment performance: Paper Machine Clothing operating income was $165.5 million; Engineered Fabrics $11.2 million; Engineered Composites recorded a $4.2 million operating loss; and PrimaLoft Products generated $8.5 million.
- Cash and liquidity: Cash was $118.9 million at year-end. Accounts receivable were $148.8 million and inventories were $133.6 million.
- Debt: Long-term debt was $373.1 million, with total debt of approximately $374.4 million. The company had $187.0 million drawn on its $390 million revolving facility and $50.2 million of outstanding letters of credit.
- Covenants: The leverage ratio was 1.75x versus a 3.50x maximum, and interest coverage was 8.80x versus a 3.00x minimum. Management reported compliance with debt covenants and approximately $152 million of additional borrowing capacity.
- Dividends: Dividends declared were $0.51 per share, compared with $0.48 in 2010.
Material changes versus the prior comparable period
- Sales increased across all continuing segments, led by Engineered Composites and PrimaLoft Products. Excluding currency translation, consolidated sales increased 4.3%.
- Gross margin improved primarily because of higher Paper Machine Clothing sales and the absence of certain 2010 restructuring-related relocation and underutilization costs.
- Operating income improved despite higher selling, technical, general and research expenses. Restructuring charges increased to $9.3 million from $3.7 million, primarily for segment integration, U.S. capacity reductions and headquarters relocation.
- Income from continuing operations and EPS declined because of higher interest expense and a $22.8 million valuation-allowance charge, principally related to German deferred tax assets following the Albany Door Systems sale. The reported tax rate on continuing operations was 57.5%, compared with 42.9% in 2010.
- Operating cash flow increased, supported by favorable working-capital changes. Debt declined by approximately $49 million during the year.
- Backlog declined to $376.3 million from $407.6 million, reflecting the normalization of paper-machine-clothing customer inventories after an unusually strong 2010 restocking cycle.
Outlook, commentary, risks and unusual items
- Management expected 2012 Paper Machine Clothing performance to be broadly comparable with 2011, although first-quarter 2012 was not expected to match first-quarter 2011. January orders initially slowed but strengthened as the month progressed.
- Machine Clothing integration was expected to generate $15 million of incremental EBITDA by mid-2013. Additional restructuring costs were expected in 2012; the amount was not yet determinable.
- AEC management expected at least 20% sales growth in 2012, but expected income to remain near 2011 levels because of costs associated with the LEAP program and organizational ramp-up. The company was planning for a LEAP market of at least 1,500 engines annually beginning in the middle of the decade.
- PrimaLoft reported strong fourth-quarter growth, particularly in European outerwear, and anticipated continued growth in 2012. Approximately one-quarter of its sales had historically been to the U.S. military.
- The company planned to use approximately $70 million of Albany Door Systems sale proceeds and $30 million of offshore cash to fund or settle pension liabilities, and approximately $40 million to repay revolving debt. The pension actions could produce a 2012 settlement charge as high as $130 million.
- Defined-benefit pension liabilities exceeded plan assets by $101.2 million, and unfunded postretirement benefit liabilities totaled $79.0 million. Management expected annual pension contributions to decline materially after the planned funding and settlement actions.
- Key risks include paper-industry consolidation and secular demand pressure, pricing competition, raw-material and commodity inflation, foreign-exchange volatility, dependence on the LEAP program, customer and contract cancellations, debt covenant compliance, pension assumptions, tax audits, deferred-tax-asset realization and international operating risks.
- Asbestos litigation involved 4,427 Albany claims and 7,878 Brandon claims as of January 30, 2012. Management did not believe a meaningful loss range could be estimated, but expected insurance coverage and defenses to limit material exposure.
- Mexican NAFTA audits involved approximately $2.5 million of identified duties; broader adverse exposure could reach $8 million to $10 million before potential penalties, although management considered an adverse outcome unlikely.
- The company reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2011. PricewaterhouseCoopers issued an unqualified audit opinion.
Important facts for investors to verify
- Reconcile continuing-operations earnings with reported net income, including the Albany Door Systems discontinued operation and the timing of the January 2012 sale proceeds.
- Assess the sustainability of the 2011 margin improvement after restructuring benefits, currency effects, building-sale gains and other unusual items.
- Monitor AEC’s LEAP production milestones, capital requirements, customer commitments and ability to convert sales growth into earnings and cash flow.
- Verify the planned pension funding and settlement transactions, including the potential 2012 charge of up to $130 million and resulting reduction in future cash contributions.
- Review debt maturities, variable-rate exposure, letters of credit, covenant headroom and the planned use of Albany Door Systems proceeds.
- Track Machine Clothing backlog, paper-industry demand, pricing pressure and the targeted $15 million integration savings.
- Evaluate unresolved tax matters, including the Canadian assessment, German tax position, deferred-tax valuation allowances and unrecognized tax benefits of $27.1 million.
- Review asbestos claims, insurance limits and the company’s conclusion that material uninsured exposure is not expected.