Business Context and Reporting Period
Albany International Corp. filed this unaudited Form 10-Q for the three months ended March 31, 2022. The company operates through two reportable segments: Machine Clothing (MC), which serves paper, packaging, tissue, nonwovens, and industrial markets, and Albany Engineered Composites (AEC), which supplies advanced composite structures for commercial and defense aerospace programs.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $244.2 million | $222.4 million | 9.8% increase |
| Gross profit | $91.6 million | $88.5 million | 3.5% increase |
| Gross margin | 37.5% | 39.8% | 230 basis-point decrease |
| Operating income | $38.8 million | $41.8 million | 7.3% decrease |
| Operating margin | 15.9% | 18.8% | Approximately 290 basis-point decrease |
| Net income attributable to the company | $27.7 million | $27.6 million | 0.6% increase |
| Diluted EPS | $0.87 | $0.85 | Increase |
| Adjusted EPS | $0.91 | $0.87 | Increase |
| Net cash used in operating activities | $5.4 million | $33.7 million provided | $39.1 million unfavorable change |
| Capital expenditures | $15.8 million | $12.5 million | Increase |
| Cash and cash equivalents | $307.4 million | $237.9 million at March 31, 2021 | Increase |
| Total debt | $427.0 million | $384.0 million at March 31, 2021 | Increase |
| Net debt | $119.6 million | $146.1 million at March 31, 2021 | Decrease |
Segment Performance
- Machine Clothing: Sales increased 4.0% to $154.1 million, or 5.7% excluding currency effects. Operating income declined to $49.6 million from $50.4 million. Gross margin remained 51.5%.
- Albany Engineered Composites: Sales increased 21.5% to $90.1 million, or 23.1% excluding currency effects, mainly from LEAP and CH-53K programs. Operating income declined to $1.2 million from $2.9 million, while gross margin fell to 13.6% from 16.4%.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher MC sales for packaging and tissue grades and increased AEC activity on LEAP and CH-53K programs. Currency translation reduced reported sales growth by $3.7 million.
- Gross margin declined because of inflationary and supply-chain pressures, reserves for damaged AEC inventory, and a $0.7 million unfavorable change in estimated profitability of long-term contracts.
- Operating income decreased despite higher sales because of increased selling, general, and administrative expenses, incentive compensation, customer credit-loss reserves, and foreign-currency effects.
- Other income improved materially, primarily because of a $3.7 million foreign-currency gain in 2022 compared with a $0.2 million loss in 2021. This helped offset lower operating income and supported slightly higher net income.
- Operating cash flow changed from $33.7 million provided to $5.4 million used, primarily because of working-capital timing, higher receivables and inventories, accrued liability payments, taxes, and incentive compensation payouts.
- Debt increased by $77.0 million during the quarter, while the company repurchased 514,686 shares for $43.9 million and paid $6.7 million in dividends.
Outlook, Commentary, Risks, and Unusual Items
- The company expects approximately $10.0 million of future annual MC sales to be lost because it ceased doing business in Russia.
- MC input costs are estimated to increase by $8.0 million to $10.0 million in 2022 after expected pricing and productivity offsets, potentially reducing MC gross margin by 100 to 140 basis points.
- Albany ceased Russian operations and began exiting a Russian joint venture. The quarter included $1.8 million of reserves for potentially uncollectible receivables and obsolete inventory and a $0.8 million impairment of the joint-venture investment.
- Management identified inflation, energy and logistics costs, supply-chain constraints, COVID-19 disruptions, the Russia-Ukraine conflict, aerospace demand and program execution as significant risks. The filing states that AEC generally expects to pass certain cost increases through to customers, but provides no assurance that all increases can be recovered.
- Remaining performance obligations on contracts with original terms longer than one year totaled $263 million at March 31, 2022, principally in AEC. The company expects to recognize approximately $79 million in 2022, $45 million in 2023, and $38 million in 2024.
- Liquidity totaled approximately $580 million, consisting of $307 million of cash and $273 million of remaining revolving-credit availability. The company was in compliance with its debt covenants, with a leverage ratio of 1.32 to 1.00 versus a maximum of 3.50 to 1.00.
- The company defended 3,616 asbestos claims at March 31, 2022. Management believes insurance coverage and available defenses make a material adverse outcome unlikely, but the filing states that a meaningful range of possible loss cannot be estimated.
- USD LIBOR-based debt and derivatives are expected to transition to alternative reference rates after LIBOR discontinuation. Management did not expect a significant impact but stated that it would continue monitoring the transition.
Important Facts for Investors to Verify
- Whether MC pricing and productivity actions offset the projected $8.0 million to $10.0 million of 2022 input-cost increases.
- Whether AEC margins recover from the 13.6% first-quarter level and whether LEAP, CH-53K, F-35, and other aerospace programs meet expected production and profitability levels.
- The pace and ultimate cost of exiting Russia, including additional receivable, inventory, joint-venture, or other write-offs and the projected $10.0 million annual sales reduction.
- Whether working-capital requirements normalize and operating cash flow improves after the first-quarter use of cash.
- Future borrowing, share repurchases, dividends, and compliance with leverage and interest-coverage covenants.
- Potential effects of inflation, supply-chain disruptions, COVID-19 restrictions, geopolitical sanctions, and foreign-currency volatility on margins and liquidity.
- The development and insurance coverage of asbestos litigation claims, for which the filing does not provide a reliable estimate of reasonably possible losses.