NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
1. Significant Accounting Policies
Basis of Presentation
In the opinion of management, the
accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of results for
such periods. Albany International Corp. (“Albany”) consolidates the financial results of its subsidiaries for all
periods presented. The results for any interim period are not necessarily indicative of results for the full year.
The preparation of financial statements
in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and
assumptions that affect the amounts reported in Albany International Corp.’s Consolidated Financial Statements and accompanying
Notes. Actual results could differ materially from those estimates.
The information included in this
Quarterly Report on Form 10-Q should be read in conjunction with “Risk Factors,” “Legal Proceedings,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operation,” “Quantitative and Qualitative Disclosures
about Market Risk” and the Consolidated Financial Statements and Notes thereto included in Items 1A, 3, 7, 7A and 8, respectively,
of the Albany International Corp. Annual Report on Form 10-K for the year ended December 31, 2016.
2.
Business Acquisition
On April 8, 2016, the Company acquired
the outstanding shares of Harris Corporation’s composite aerostructures business for cash of $187 million, plus the assumption
of certain liabilities. The Company funded the cash payable at closing by utilizing proceeds from a $550 million, unsecured credit
facility agreement that was completed April 8, 2016. The acquired entity is located in Salt Lake City, Utah (“SLC”)
and is part of the Albany Engineered Composites (“AEC”) segment.
The Consolidated Statement of Income
for 2016 includes operational activity of the acquired business for only the period subsequent to the closing, which affects comparability
of year to date results. The following table shows total Company pro forma results for the nine month period ended September 30,
2016 as if the acquisition had occurred on January 1, 2015.
(in thousands, except per share amounts)
|
|
Unaudited - Pro forma
Nine months ended
September 30, 2016
|
|
|
|
Combined Net sales
|
|
$588,978
|
|
|
|
|
|
Combined Income before income taxes
|
|
$59,812
|
|
|
|
|
|
Pro forma increase/(decrease) to income before income taxes:
|
|
|
|
Acquisition expenses
|
|
5,367
|
|
Interest expense related to purchase price
|
|
(1,133
|
)
|
|
|
|
|
Acquisition accounting adjustments:
|
|
|
|
Depreciation and amortization on property, plant and equipment, and intangible assets
|
|
(1,696
|
)
|
Valuation of contract inventories
|
|
2,036
|
|
Interest expense on capital lease obligation
|
|
323
|
|
Interest expense on other obligations
|
|
(143
|
)
|
Pro forma Income before income taxes
|
|
$64,566
|
|
Pro forma Net Income
|
|
$41,286
|
|
3. Reportable Segments
The following tables show data by
reportable segment, reconciled to consolidated totals included in the financial statements:
|
Three
months ended September 30,
|
Nine
months ended September 30,
|
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
Net sales
|
|
|
|
|
|
|
|
|
Machine Clothing
|
$150,694
|
|
$143,248
|
|
$440,093
|
|
$437,445
|
|
Albany Engineered Composites (AEC)
|
71,447
|
|
48,024
|
|
196,896
|
|
129,348
|
|
Consolidated total
|
$222,141
|
|
$191,272
|
|
$636,989
|
|
$566,793
|
|
Operating income/(loss)
|
|
|
|
|
|
|
|
|
Machine Clothing
|
42,674
|
|
40,039
|
|
119,352
|
|
112,583
|
|
Albany Engineered Composites
|
(9,301
|
)
|
(4,529
|
)
|
(32,242
|
)
|
(14,083
|
)
|
Corporate expenses
|
(11,070
|
)
|
(10,690
|
)
|
(33,523
|
)
|
(33,554
|
)
|
Operating income
|
$22,303
|
|
$24,820
|
|
$53,587
|
|
$64,946
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
Interest income
|
(355
|
)
|
(675
|
)
|
(801
|
)
|
(1,347
|
)
|
Interest expense
|
4,784
|
|
4,356
|
|
13,843
|
|
10,957
|
|
Other expense/(income), net
|
(1,155
|
)
|
242
|
|
980
|
|
(2,103
|
)
|
Income before income taxes
|
$19,029
|
|
$20,897
|
|
$39,565
|
|
$57,439
|
|
There were no material changes in
the total assets of the reportable segments in the first nine months of 2017.
In the third quarter of 2017, the
Company decided to discontinue the Bear Claw® line of hydraulic fracturing components used in the oil and gas industry, which
was part of the Harris aerostructures business acquired by AEC in 2016. This decision resulted in a non-cash restructuring
charge of $4.5 million for the write-off of intangible assets and equipment, and a $3.2 million charge to Cost of goods sold for
the write-off of inventory.
In the second quarter of 2017, the
Company recorded a charge to Cost of goods sold of approximately $15.8 million associated with revisions in the estimated profitability
of two AEC contracts. The charge was principally due to second-quarter 2017 downward revisions of estimated customer demand for
the components manufactured by AEC related to the BR 725 and A380 programs. The charge included a $4.0 million write-off of program
inventory costs, and a reserve for future losses of $11.8 million, which is included in Accrued liabilities in the Consolidated
Balance Sheets. Total reserves for future contract losses were $11.1 million as of September 30, 2017, and $0.1 million as of December
31, 2016.
The Albany Engineered Composites
(AEC) segment, including Albany Safran Composites, LLC (ASC), in which our customer SAFRAN Group (Safran) owns a 10 percent noncontrolling
interest, provides highly engineered, advanced composite structures to customers in the aerospace and defense industries. AEC’s
largest program relates to CFM International’s LEAP engine. Under this program, AEC through ASC, is the exclusive supplier
of advanced composite fan blades and cases under a long-term supply contract. The manufacturing spaces used for the production
of parts under the long-term supply agreement are owned by Safran, and leased to the Company at a minimal cost. All lease
expense is reimbursable by Safran to the Company due to the cost-plus nature of the supply agreement. AEC net sales to Safran in
2017 were $25.6 million in the first quarter, $30.1 million in the second quarter, and $28.3 million in the third quarter. AEC
net sales to Safran in 2016 were $17.1 million in the first quarter, $18.5 million in the second quarter, and $17.4 million in
the third quarter. The
total of invoiced receivables, unbilled
receivables and contract receivables due from Safran amounted to $57.0 million and $37.1 million as of September 30, 2017 and December
31, 2016, respectively.
The table below presents restructuring
costs by reportable segment (also see Note 5):
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
Restructuring expenses, net
|
|
|
|
|
|
|
|
|
Machine Clothing
|
$96
|
|
($212
|
)
|
$1,012
|
|
$5,921
|
|
Albany Engineered Composites
|
5,407
|
|
640
|
|
9,208
|
|
1,787
|
|
Corporate expenses
|
-
|
|
(102
|
)
|
-
|
|
(55
|
)
|
Consolidated total
|
$5,503
|
|
$326
|
|
$10,220
|
|
$7,653
|
|
4.
Pensions and Other Postretirement Benefit Plans
Pension Plans
The Company has defined benefit
pension plans covering certain U.S. and non-U.S. employees. The U.S. qualified defined benefit pension plan has been closed to
new participants since October 1998 and, as of February 2009, benefits accrued under this plan were frozen. As a result of the
freeze, employees covered by the pension plan will receive, at retirement, benefits already accrued through February 2009 but no
new benefits accrue after that date. Benefit accruals under the U.S. Supplemental Executive Retirement Plan ("SERP")
were similarly frozen. The eligibility, benefit formulas, and contribution requirements for plans outside of the U.S. vary by location.
Other Postretirement Benefits
The Company also provides certain
postretirement benefits to retired employees in the U.S. and Canada. The Company accrues the cost of providing postretirement benefits
during the active service period of the employees. The Company currently funds the plan as claims are paid.
The composition of the net periodic
benefit plan cost for the nine months ended September 30, 2017 and 2016, was as follows:
|
Pension plans
|
Other postretirement benefits
|
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
Components of net periodic benefit cost:
|
|
|
|
Service cost
|
$1,960
|
|
$1,991
|
|
$183
|
|
$190
|
|
Interest cost
|
5,507
|
|
6,110
|
|
1,660
|
|
1,832
|
|
Expected return on assets
|
(6,004
|
)
|
(6,763
|
)
|
-
|
|
-
|
|
Curtailment gain
|
-
|
|
(130
|
)
|
-
|
|
-
|
|
Amortization of prior service cost/(credit)
|
27
|
|
28
|
|
(3,366
|
)
|
(3,366
|
)
|
Amortization of net actuarial loss
|
1,943
|
|
1,756
|
|
2,107
|
|
2,114
|
|
Net periodic benefit cost
|
$3,433
|
|
$2,992
|
|
$584
|
|
$770
|
|
5. Restructuring
Machine Clothing restructuring costs
for the first nine months of 2017 were principally related to additional costs for restructuring actions taken in 2016. Machine
Clothing restructuring costs in 2016 were principally related to plant closure costs in Göppingen, Germany and the cessation
of research and development activities at the production facility in Sélestat, France.
In October 2017, the Company
announced the initiation of discussions with the local works council regarding a proposal to discontinue operations at its
Machine Clothing production facility in Sélestat, France. The consultations are subject to applicable law and are
ongoing. At this time, the Company has not recorded any restructuring charge related to this proposal.
AEC incurred restructuring charges
of $9.2 million in the first nine months of 2017. In the third quarter of 2017, the Company decided to discontinue the Bear Claw®
line of hydraulic fracturing components used in the oil and gas industry, which led to non-cash restructuring charges totaling
$4.5 million relating to the impairment of long-lived assets. Other restructuring charges in 2017 principally related to work force
reductions in Salt Lake City, Utah and Rochester, New Hampshire.
AEC restructuring expenses in 2016
were principally related to the consolidation of legacy programs into Boerne, Texas.
The following table summarizes
charges reported in the Consolidated Statements of Income under “Restructuring expenses, net”:
|
Three months ended September 30,
|
Nine months ended
September 30,
|
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
Machine Clothing
|
$96
|
|
($212
|
)
|
$1,012
|
|
$5,921
|
|
Albany Engineered Composites
|
5,407
|
|
640
|
|
9,208
|
|
1,787
|
|
Corporate Expenses
|
-
|
|
(102
|
)
|
-
|
|
(55
|
)
|
Total
|
$5,503
|
|
$326
|
|
$10,220
|
|
$7,653
|
|
Nine months ended September 30, 2017
|
Total restructuring costs incurred
|
Termination and other costs
|
Impairment of plant and equipment
|
Impairment of intangible asset
|
(in thousands)
|
|
|
|
|
Machine Clothing
|
$1,012
|
|
$1,012
|
|
$-
|
|
$-
|
|
Albany Engineered Composites
|
9,208
|
|
4,173
|
|
886
|
|
4,149
|
|
Corporate Expenses
|
-
|
|
-
|
|
-
|
|
-
|
|
Total
|
$10,220
|
|
$5,185
|
|
$886
|
|
$4,149
|
|
Nine
months ended September 30, 2016
|
Total
restructuring costs incurred
|
Termination
and other costs
|
Impairment
of plant and equipment
|
Benefit
plan curtailment/
settlement
|
(in thousands)
|
|
|
|
|
Machine Clothing
|
$5,921
|
|
$5,751
|
|
$300
|
|
($130
|
)
|
Albany Engineered Composites
|
1,787
|
|
1,498
|
|
289
|
|
-
|
|
Corporate Expenses
|
(55
|
)
|
(55
|
)
|
-
|
|
-
|
|
Total
|
$7,653
|
|
$7,194
|
|
$589
|
|
($130
|
)
|
We expect that approximately $4.0
million of Accrued liabilities for restructuring at September 30, 2017 will be paid within one year and approximately $0.4 million
will be paid in the following year. The table below presents the year-to-date changes in restructuring liabilities for 2017 and
2016, all of which related to termination costs:
|
December 31,
|
Restructuring
|
|
Currency
|
September 30,
|
(in thousands)
|
2016
|
charges accrued
|
Payments
|
translation /other
|
2017
|
|
|
|
|
|
|
Total termination and other costs
|
$5,559
|
$5,185
|
($6,370)
|
$24
|
$4,398
|
|
December 31,
|
Restructuring
|
|
Currency
|
September 30,
|
(in thousands)
|
2015
|
charges accrued
|
Payments
|
translation /other
|
2016
|
|
|
|
|
|
|
Total termination and other costs
|
$10,177
|
$7,194
|
($9,862)
|
$2
|
$7,511
|
6. Other Expense/(Income), net
The components of other expense/(income),
net are:
|
Three months ended September 30,
|
Nine months ended September 30,
|
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
Currency transaction losses/(gains)
|
$261
|
|
($312
|
)
|
$2,310
|
|
($2,361
|
)
|
Bank fees and amortization of debt issuance costs
|
116
|
|
106
|
|
375
|
|
652
|
|
Gain on insurance recovery
|
(2,000
|
)
|
-
|
|
(2,000
|
)
|
-
|
|
Other
|
468
|
|
448
|
|
295
|
|
(394
|
)
|
Total
|
($1,155
|
)
|
$242
|
|
$980
|
|
($2,103
|
)
|
In the third quarter of 2017, the
Company recorded an insurance recovery gain of $2.0 million related to the theft in Japan that was reported in the fourth quarter
of 2016.
7. Income Taxes
The following
table presents components of income tax expense for the three and nine months ended September 30, 2017 and 2016:
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
Income tax based on income from continuing operations, at estimated tax rates of 36.4% and 37.5%, respectively
|
$6,935
|
|
$7,838
|
|
$14,420
|
|
$21,545
|
|
Provision for change in estimated tax rates
|
741
|
|
(424
|
)
|
-
|
|
-
|
|
Income tax before discrete items
|
7,676
|
|
7,414
|
|
14,420
|
|
21,545
|
|
|
|
|
|
|
|
|
|
|
Discrete tax expense:
|
|
|
|
|
|
|
|
|
Provision for/resolution of tax audits and contingencies, net
|
-
|
|
-
|
|
961
|
|
(825
|
)
|
Adjustments to prior period tax liabilities
|
(73
|
)
|
(11
|
)
|
606
|
|
(254
|
)
|
Other discrete tax adjustments, net
|
(7
|
)
|
85
|
|
(62
|
)
|
113
|
|
Provision for/adjustment to beginning of year valuation allowance
|
(3,787
|
)
|
-
|
|
(3,787
|
)
|
-
|
|
Enacted tax legislation
|
-
|
|
-
|
|
|
|
34
|
|
Total income tax expense
|
$3,809
|
|
$7,488
|
|
$12,138
|
|
$20,613
|
|
The third quarter
estimated effective tax rate on continuing operations was 36.4 percent in 2017, compared to 37.5 percent for the same period in
2016.
The Company
records the residual U.S. and foreign taxes on certain amounts of foreign earnings that have been targeted for repatriation to
the U.S. These amounts are not considered to be permanently reinvested, and the Company accrued for the tax cost on these earnings
to the extent they cannot be repatriated in a tax-free manner. At September 30, 2017 the Company calculated a deferred tax liability
of $3.7 million on $62.8 million of non-U.S. earnings that have been targeted for future repatriation to the U.S.
The Company
conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world,
including major jurisdictions such as the United States, Brazil, Canada, France, Germany, Italy, Mexico, and Switzerland. The open
tax years in these jurisdictions range from 2007 to 2016. The Company is currently under audit in non-U.S. tax jurisdictions, including
but not limited to Canada and Italy.
It is reasonably
possible that over the next twelve months the amount of unrecognized tax benefits may decrease up to $0.2 million, from the reevaluation
of uncertain tax positions arising in examinations, in appeals, or in the courts, or from the closure of tax statutes of limitations.
As of each
reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization
of deferred tax assets. As of September 2017, primarily as the Company achieved three years of cumulative pretax income in Canada
and Japan, management determined that there was sufficient positive evidence to conclude that it is more likely than not that additional
deferred tax assets of $3.4 million in Canada and $0.4 million in Japan are realizable. Therefore, in the third quarter of 2017,
we reversed previously recorded valuation allowances which resulted in a discrete tax benefit of $3.8 million.
In March 2016,
an accounting update was issued which simplifies several aspects related to accounting for share-based payment transactions, including
the income tax consequences. The income tax consequences which relate to accounting for excess tax benefits have been adopted prospectively,
resulting in recognition of excess tax benefits against income tax expense, rather than additional paid-in capital, of $0.1 million
for the nine months ended September 30, 2017. No adjustment was necessary related to the deferred tax balances. The Company adopted
this update on January 1, 2017.
8. Earnings Per Share
The amounts used in computing earnings
per share and the weighted average number of shares of potentially dilutive securities are as follows:
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
(in thousands, except market price and earnings per share)
|
2017
|
2016
|
2017
|
2016
|
|
|
|
|
|
Net income attributable to the Company
|
$15,269
|
|
$13,069
|
|
$27,225
|
|
$36,937
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in
|
|
|
|
|
|
|
|
|
calculating basic net income per share
|
32,187
|
|
32,104
|
|
32,160
|
|
32,079
|
|
Effect of dilutive stock-based compensation plans:
|
|
|
|
|
|
|
|
|
Stock options
|
27
|
|
37
|
|
33
|
|
39
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in
|
|
|
|
|
|
|
|
|
calculating diluted net income per share
|
32,214
|
|
32,141
|
|
32,193
|
|
32,118
|
|
|
|
|
|
|
|
|
|
|
Average market price of common stock used
|
|
|
|
|
|
|
|
|
for calculation of dilutive shares
|
$53.49
|
|
$42.03
|
|
$49.49
|
|
$38.97
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
$0.47
|
|
$0.41
|
|
$0.85
|
|
$1.15
|
|
Diluted
|
$0.47
|
|
$0.41
|
|
$0.85
|
|
$1.15
|
|
9. Noncontrolling Interest
The table below presents a reconciliation
of income attributable to the noncontrolling interest and noncontrolling equity:
|
Nine months ended
September 30,
|
(in thousands)
|
2017
|
2016
|
Net income/(loss) of Albany Safran Composites, LLC ("ASC")
|
$2,805
|
|
($374
|
)
|
Less: Return attributable to the Company's preferred holding
|
782
|
|
732
|
|
Net income/(loss) of ASC available for common ownership
|
$2,023
|
|
($1,106
|
)
|
Ownership percentage of noncontrolling shareholder
|
10
|
%
|
10
|
%
|
Net income/(loss) attributable to noncontrolling interest
|
$202
|
|
($111
|
)
|
|
|
|
|
|
Noncontrolling interest, beginning of year
|
$3,767
|
|
$3,690
|
|
Net income/(loss) attributable to noncontrolling interest
|
202
|
|
(111
|
)
|
Changes in other comprehensive income attributable to noncontrolling interest
|
19
|
|
(1
|
)
|
Noncontrolling interest
|
$3,988
|
|
$3,578
|
|
10. Accumulated Other Comprehensive
Income (AOCI)
The table below presents changes
in the components of AOCI for the period December 31, 2016 to September 30, 2017:
(in thousands)
|
Translation adjustments
|
Pension and postretirement liability adjustments
|
Derivative valuation adjustment
|
Total Other Comprehensive Income
|
December 31, 2016
|
($133,298
|
)
|
($51,719
|
)
|
$828
|
|
($184,189
|
)
|
Other comprehensive income/(loss) before reclassifications
|
40,775
|
|
(1,427
|
)
|
(679
|
)
|
38,669
|
|
Interest expense related to swaps reclassified to the Statement of Income, net of tax
|
-
|
|
-
|
|
768
|
|
768
|
|
Pension and postretirement liability adjustments reclassified to Statement of Income, net of tax
|
-
|
|
498
|
|
-
|
|
498
|
|
Net current period other comprehensive income
|
40,775
|
|
(929
|
)
|
89
|
|
39,935
|
|
September 30, 2017
|
($92,523
|
)
|
($52,648
|
)
|
$917
|
|
($144,254
|
)
|
The table below presents changes
in the components of AOCI for the period December 31, 2015 to September 30, 2016:
(in thousands)
|
Translation
adjustments
|
Pension
and postretirement liability adjustments
|
Derivative
valuation adjustment
|
Total
Other Comprehensive Income
|
December 31, 2015
|
($108,655
|
)
|
($48,725
|
)
|
($1,464
|
)
|
($158,844
|
)
|
Other comprehensive income/(loss) before reclassifications
|
2,216
|
|
330
|
|
(4,300
|
)
|
(1,754
|
)
|
Interest expense related to swaps reclassified to the Statement of Income,
net of tax
|
-
|
|
-
|
|
1,045
|
|
1,045
|
|
Pension and postretirement liability adjustments
reclassified to Statement of Income, net of tax
|
-
|
|
372
|
|
-
|
|
372
|
|
Net current period other comprehensive income
|
2,216
|
|
702
|
|
(3,255
|
)
|
(337
|
)
|
September 30, 2016
|
($106,439
|
)
|
($48,023
|
)
|
($4,719
|
)
|
($159,181
|
)
|
The
table below presents the expense/(income) amounts reclassified, and the line items of the Statements of Income that were affected
for the periods ended September 30, 2017 and 2016.
|
Three months ended September 30,
|
Nine months ended September 30,
|
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
Pretax Derivative valuation reclassified from Accumulated Other Comprehensive Income:
|
|
|
|
|
Expense related to interest rate swaps included in Income
before taxes(a)
|
$295
|
|
$1,100
|
|
$1,238
|
|
$1,686
|
|
Income tax effect
|
(112
|
)
|
(418
|
)
|
(470
|
)
|
(641
|
)
|
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income
|
$183
|
|
$682
|
|
$768
|
|
$1,045
|
|
|
|
|
|
|
|
|
|
|
Pretax pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income:
|
|
|
Amortization of prior service credit
|
($1,113
|
)
|
($1,113
|
)
|
($3,339
|
)
|
($3,338
|
)
|
Amortization of net actuarial loss
|
1,350
|
|
1,296
|
|
4,050
|
|
3,870
|
|
Total pretax amount reclassified (b)
|
237
|
|
183
|
|
711
|
|
532
|
|
Income tax effect
|
(71
|
)
|
(55
|
)
|
(213
|
)
|
(160
|
)
|
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income
|
$166
|
|
$128
|
|
$498
|
|
$372
|
|
|
(a)
|
Included
in Interest expense are payments related to the interest rate swap agreements and amortization of swap buyouts (see Note 15).
|
|
(b)
|
These
accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 4).
|
11. Accounts Receivable
Accounts receivable includes trade
receivables and revenue in excess of progress billings on long-term contracts in the Albany Engineered Composites segment. The
Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required
payments. The Company determines the allowance based on historical write-off experience, customer-specific facts and economic conditions.
If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
As of September 30, 2017 and December
31, 2016, Accounts receivable consisted of the following:
(in thousands)
|
September
30,
2017
|
December 31,
2016
|
Trade and other accounts receivable
|
$157,171
|
|
$146,460
|
|
Bank promissory notes
|
19,525
|
|
15,759
|
|
Revenue in excess of progress billings
|
30,957
|
|
15,926
|
|
Allowance for doubtful accounts
|
(7,715
|
)
|
(6,952
|
)
|
Total accounts receivable
|
$199,938
|
|
$171,193
|
|
In connection with certain sales
in Asia, the Company accepts a bank promissory note as customer payment. The notes may be presented for payment at maturity, which
is less than one year.
The Company also has Contract receivables
in the AEC segment that represent revenue earned which has extended payment terms. The Contract receivables will be invoiced to
the customer, with 2% interest, over a 10-year period starting in 2020.
As of September 30, 2017 and December
31, 2016, Contract receivables consisted of the following:
|
|
|
(in thousands)
|
September 30,
2017
|
December 31,
2016
|
Contract receivable
|
$29,688
|
$14,045
|
12. Inventories
Costs included in inventories are
raw materials, labor, supplies and allocable depreciation and overhead. Raw material inventories are valued on an average cost
basis. Other inventory cost elements are valued at cost, using the first-in, first-out method. The Company writes down the inventories
for estimated obsolescence, and to lower of cost or net realizable value based upon assumptions about future demand and market
conditions. If actual demand or market conditions are less favorable than those projected by the Company, additional inventory
write-downs may be required. Once established, the original cost of the inventory less the related write-down represents the new
cost basis of such inventories. The AEC segment has long-term contracts under which we incur engineering and development costs
that are allocable to parts that will be delivered over multiple years. These costs are included in Work in process in the table
below.
As of September 30, 2017 and December
31, 2016, inventories consisted of the following:
(in thousands)
|
September 30,
2017
|
December 31,
2016
|
Raw materials
|
$45,142
|
$37,691
|
Work in process
|
83,129
|
58,715
|
Finished goods
|
28,872
|
37,500
|
Total inventories
|
$157,143
|
$133,906
|
13.
Goodwill and Other Intangible Assets
Goodwill and intangible assets with
indefinite useful lives are not amortized, but are tested for impairment at least annually. Goodwill represents the excess of the
purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination.
Determining the fair value of a reporting
unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates,
and future market conditions, among others. Goodwill and other long-lived assets are reviewed for impairment whenever events, such
as significant changes in the business climate, plant closures, changes in product offerings, or other circumstances indicate that
the carrying amount may not be recoverable.
To determine fair value, we utilize
two market-based approaches and an income approach. Under the market-based approaches, we utilize information regarding the Company
as well as publicly available industry information to determine earnings multiples and sales multiples. Under the income approach,
we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average
cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor
would expect to earn.
In the second quarter of 2017, the
Company applied the qualitative assessment approach in performing its annual evaluation of goodwill and concluded that no impairment
provision was required. There were no amounts at risk due to the large spread between the fair, and carrying value, of each reporting
unit.
In the third quarter, the Company
decided to discontinue the Bear Claw® line of hydraulic fracturing components used in the oil and gas industry, which was part
of the Harris aerostructures business acquired by AEC in 2016. This decision resulted in a non-cash write-off of intangibles
for $4.1 million to restructuring expense, which is presented as other changes in the table below for intangible assets and goodwill
as of September 30, 2017. The write-off represents the full carrying value of intangible assets associated with the Bear Claw®
product line as, based upon anticipated cash flows and the Company’s plan to exit the business, we determined the product
line to have no fair value as of September 30, 2017. Due to the decision to exit this product line, management performed an interim
assessment of goodwill and concluded that no goodwill was allocable to the Bear Claw® product line, and no impairment provision
was required.
We are continuing to amortize certain
patents, trade names, customer relationships, customer contracts and technology assets that have finite lives. The gross carrying
value, accumulated amortization and net values of intangible assets and goodwill as of December 31, 2016 to September 30, 2017,
were as follows:
As
of September 30, 2017
(in thousands)
|
Weighted average amortization life in years
|
Gross carrying amount
|
Accumulated amortization
|
Net carrying amount
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
AEC trade names
|
15
|
$43
|
$27
|
|
$16
|
AEC technology
|
15
|
228
|
142
|
|
86
|
Customer relationships
|
15
|
48,528
|
4,956
|
|
43,572
|
Customer contracts
|
6
|
18,211
|
5,114
|
|
13,097
|
Other intangibles
|
5
|
742
|
516
|
|
226
|
Total amortized intangible assets
|
|
$67,752
|
$10,755
|
|
$56,997
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
MC Goodwill
|
|
$70,280
|
$-
|
|
$70,280
|
AEC Goodwill
|
|
95,730
|
-
|
|
95,730
|
Total unamortized intangible assets:
|
|
$166,010
|
$-
|
|
$166,010
|
As of December 31, 2016
(in thousands)
|
Weighted average amortization life in years
|
Gross carrying amount
|
Accumulated amortization
|
Net carrying amount
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
AEC trade names
|
15
|
$43
|
$23
|
|
$20
|
AEC technology
|
15
|
228
|
124
|
|
104
|
Customer relationships
|
15
|
49,490
|
2,481
|
|
47,009
|
Customer contracts
|
6
|
20,420
|
2,561
|
|
17,859
|
Other intangibles
|
5
|
1,720
|
258
|
|
1,462
|
Total amortized intangible assets
|
|
$71,901
|
$5,447
|
|
$66,454
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
MC Goodwill
|
|
$64,645
|
$-
|
|
$64,645
|
AEC Goodwill
|
|
95,730
|
-
|
|
95,730
|
Total unamortized intangible assets:
|
|
$160,375
|
$-
|
|
$160,375
|
The changes in intangible assets and
goodwill from December 31, 2016 to September 30, 2017, were as follows:
(in
thousands)
|
December
31,
2016
|
Amortization
|
Other
Changes
|
Currency
Translation
|
September
30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
AEC trade names
|
$20
|
|
$(4
|
)
|
$-
|
|
$-
|
|
$16
|
|
AEC technology
|
104
|
|
(18
|
)
|
0
|
|
-
|
|
86
|
|
Customer relationships
|
47,009
|
|
(2,475
|
)
|
(962
|
)
|
-
|
|
43,572
|
|
Customer contracts
|
17,859
|
|
(2,553
|
)
|
(2,209
|
)
|
-
|
|
13,097
|
|
Other intangibles
|
1,462
|
|
(258
|
)
|
(978
|
)
|
-
|
|
226
|
|
Total amortized intangible assets
|
$66,454
|
|
($5,308
|
)
|
($4,149
|
)
|
$-
|
|
$56,997
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
MC Goodwill
|
$64,645
|
|
$-
|
|
|
|
$5,635
|
|
$70,280
|
|
AEC Goodwill
|
95,730
|
|
-
|
|
|
|
-
|
|
95,730
|
|
Total unamortized intangible assets:
|
$160,375
|
|
$-
|
|
$-
|
|
$5,635
|
|
$166,010
|
|
Estimated amortization expense of
intangibles for the years ending December 31, 2017 through 2021, is as follows:
|
Annual amortization
|
Year
|
(in thousands)
|
2017
|
$6,865
|
2018
|
6,232
|
2019
|
6,232
|
2020
|
6,232
|
2021
|
6,162
|
14. Financial Instruments
Long-term debt, principally to banks
and bondholders, consists of:
(in thousands, except interest rates)
|
September
30,
2017
|
December 31,
2016
|
|
|
|
|
|
Private placement with a fixed interest rate of 6.84%, final payment was made October 25, 2017
|
$50,000
|
|
$50,000
|
|
Revolving credit agreement with borrowings outstanding at an end of period interest rate of 2.74% in 2017 and 2.58% in 2016 (including the effect of interest rate hedging transactions, as described below), due in 2021
|
440,000
|
|
418,000
|
|
|
|
|
|
|
Obligation under capital lease, matures 2022
|
15,343
|
|
16,584
|
|
|
|
|
|
|
Long-term debt
|
505,343
|
|
484,584
|
|
|
|
|
|
|
Less: current portion
|
(51,765
|
)
|
(51,666
|
)
|
|
|
|
|
|
Long-term debt, net of current portion
|
$453,578
|
|
$432,918
|
|
A note agreement and guaranty (“Prudential
Agreement”) was originally entered into in October 2005 with the Prudential Insurance Company of America, and certain other
purchasers, with interest at 6.84%. The final principal payment under the Prudential Agreement of $50.0 million was made on October
25, 2017. As of September 30, 2017, the fair value of this debt was $50.9 million.
On April 8, 2016, we entered into
a $550 million unsecured Five-Year Revolving Credit Facility Agreement (the “Credit Agreement”) which amended and restated
the prior $400 million Agreement, entered into on June 18, 2015 (the “Prior Agreement”). Under the Credit Agreement,
$440 million of borrowings were outstanding as of September 30, 2017. The applicable interest rate for borrowings was LIBOR plus
a spread, based on our leverage ratio at the time of borrowing. At the time of the last borrowing on September 25, 2017, the spread
was 1.500%. The spread was based on a pricing grid, which ranged from 1.250% to 1.750%, based on our leverage ratio. Based on our
maximum leverage ratio and our Consolidated EBITDA, and without modification to any other credit agreements, as of September 30,
2017, we would have been able to borrow an additional $110 million under the Agreement.
The Credit Agreement contains customary
terms, as well as affirmative covenants, negative covenants and events of default comparable to those in the Prior Agreement. The
Borrowings are guaranteed by certain of the Company's subsidiaries.
Our ability to borrow additional
amounts under the Credit Agreement is conditional upon the absence of any defaults, as well as the absence of any material adverse
change (as defined in the Credit Agreement).
The Company has a long-term capital
lease obligation for real property in Salt Lake City, Utah. The lease has an implied interest rate of 5.0% and matures in 2022.
The following schedule presents
future minimum annual lease payments under the capital lease obligation and the present value of the minimum lease payments, as
of September 30, 2017.
Years ending December 31,
|
(in
thousands)
|
2017
|
$606
|
|
2018
|
2,473
|
|
2019
|
2,473
|
|
2020
|
2,520
|
|
2021
|
2,520
|
|
Thereafter
|
7,373
|
|
Total minimum lease payments
|
17,965
|
|
Less: Amount representing interest
|
(2,622
|
)
|
|
|
|
Present value of minimum lease payments
|
$15,343
|
|
On May 6, 2016, we terminated our
interest rate swap agreements that had effectively fixed the interest rate on up to $120 million of revolving credit borrowings,
in order to enter into a new interest rate swap with a greater notional amount, and the same maturity as the Credit Agreement.
We paid $5.2 million to terminate the swap agreements and that cost will be amortized into interest expense through June 2020.
On May 9, 2016, we entered into
interest rate hedges for the period May 16, 2016 through March 16, 2021. These transactions have the effect of fixing the LIBOR
portion of the effective interest rate (before addition of the spread) on $300 million of indebtedness drawn under the Credit Agreement
at the rate of 1.245% during the period. Under the terms of these transactions, we pay the fixed rate of 1.245% and the counterparties
pay a floating rate based on the one-month LIBOR rate at each monthly calculation date, which on September 18, 2017 was 1.245%,
plus the applicable spread, during the swap period. On September 18, 2017, the all-in-rate on the $300 million of debt was 2.745%.
These interest rate swaps are accounted
for as a hedge of future cash flows, as further described in Note 15 of the Notes to Consolidated Financial Statements. No cash
collateral was received or pledged in relation to the swap agreements.
Under the Credit Agreement and Prudential
Agreement, we are currently required to maintain a leverage ratio (as defined in the agreements) of not greater than 3.50 to 1.00
and minimum interest coverage (as defined) of 3.00 to 1.00.
As of September 30, 2017, our leverage
ratio was 2.55 to 1.00 and our interest coverage ratio was 9.38 to 1.00. We may purchase our Common Stock or pay dividends to the
extent our leverage ratio remains at or below 3.50 to 1.00, and may make acquisitions with cash provided our leverage ratio would
not exceed 3.50 to 1.00 after giving pro forma effect to any such acquisition.
Indebtedness under each of the Prudential
Agreement and the Credit Agreement is ranked equally in right of payment to all unsecured senior debt.
We were in compliance with all debt
covenants as of September 30, 2017.
15. Fair-Value Measurements
Fair value is defined as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting principles
establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable
inputs and minimizes the use of unobservable
inputs by requiring that the most observable inputs be used when available. Level 3 inputs are unobservable data points for the
asset or liability, and include situations in which there is little, if any, market activity for the asset or liability. We had
no Level 3 financial assets or liabilities at December 31, 2016 or September 30, 2017.
The following table presents the
fair-value hierarchy for our Level 1 and Level 2 financial assets and liabilities, which are measured at fair value on a recurring
basis:
|
September 30, 2017
|
December 31, 2016
|
|
Quoted
prices in active markets
|
|
Significant
other observable inputs
|
|
Quoted prices in active markets
|
|
Significant other observable inputs
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
(Level
1)
|
|
(Level
2)
|
|
(Level 1)
|
|
(Level 2)
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$18,246
|
|
$-
|
|
$8,468
|
|
$-
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Common stock of unaffiliated foreign public company
|
880
|
(a)
|
-
|
|
762
|
(a)
|
-
|
|
Interest rate swaps
|
-
|
|
5,293
|
(b)
|
-
|
|
5,784
|
(c)
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Original
cost basis $0.5 million
|
|
(b)
|
Net
of $18.2 million receivable floating leg and $12.9 million liability fixed leg
|
|
(c)
|
Net
of $21.4 million receivable floating leg and $15.6 million liability fixed leg
|
Cash equivalents include short-term
securities that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in
active markets for identical securities.
The common stock of the unaffiliated
foreign public company is traded in an active market exchange. The shares are measured at fair value using closing stock prices
and are recorded in the Consolidated Balance Sheets as Other assets. The securities are classified as available for sale, and as
a result any unrealized gain or loss is recorded in the Shareholders’ Equity section of the Consolidated Balance Sheets rather
than in the Consolidated Statements of Income. When the security is sold or impaired, gains and losses are reported on the Consolidated
Statements of Income. Investments are considered to be impaired when a decline in fair value is judged to be other than temporary.
We operate our business in many
regions of the world, and currency rate movements can have a significant effect on operating results. Foreign currency instruments
are entered into periodically, and consist of foreign currency option contracts and forward contracts that are valued using quoted
prices in active markets obtained from independent pricing sources. These instruments are measured using market foreign exchange
prices and are recorded in the Consolidated Balance Sheets as Other current assets and Accounts payable, as applicable. Changes
in fair value of these instruments are recorded as gains or losses within Other expense/(income) net.
When exercised, the foreign currency
instruments are net settled with the same financial institution that bought or sold them. For all positions, whether options or
forward contracts, there is risk from the possible inability of the financial institution to meet the terms of the contracts and
the risk of
unfavorable changes in interest and
currency rates, which may reduce the value of the instruments. We seek to control risk by evaluating the creditworthiness of counterparties
and by monitoring the currency exchange and interest rate markets while reviewing the hedging risks and contracts to ensure compliance
with our internal guidelines and policies.
Changes in exchange rates can result
in revaluation gains and losses that are recorded in Selling, General and Administrative expenses or Other expense/(income), net.
Revaluation gains and losses occur when our business units have cash, intercompany (recorded in Other expense/(income), net) or
third-party trade (recorded in Selling, General and Administrative expenses) receivable or payable balances in a currency other
than their local reporting (or functional) currency.
Operating results can also be affected
by the translation of sales and costs, for each non-U.S. subsidiary, from the local functional currency to the U.S. dollar. The
translation effect on the Consolidated Statements of Income is dependent on our net income or expense position in each non-U.S.
currency in which we do business. A net income position exists when sales realized in a particular currency exceed expenses paid
in that currency; a net expense position exists if the opposite is true.
The interest rate swaps are accounted
for as hedges of future cash flows. The fair value of our interest rate swaps are derived from a discounted cash flow analysis
based on the terms of the contract and the interest rate curve, and is included in Other assets and/or Other noncurrent liabilities
in the Consolidated Balance Sheets. Unrealized gains and losses on the swaps flow through the caption Derivative valuation adjustment
in the Shareholders’ equity section of the Consolidated Balance Sheets, to the extent that the hedges are highly effective.
As of September 30, 2017, these interest rate swaps were determined to be highly effective hedges of interest rate cash flow risk.
Any gains and losses related to the ineffective portion of the hedges will be recognized in the current period in earnings. Amounts
accumulated in Other comprehensive income are reclassified as Interest expense, net when the related interest payments (that is,
the hedged forecasted transactions), and amortization related to the swap buyouts, affect earnings. Interest expense related to
the current swaps totaled $0.6 million for the nine month period ended September 30, 2017 and $1.2 million for the nine month period
ended September 30, 2016. Additionally, interest expense related to the swap buyouts totaled $0.6 million for the nine month period
ended September 30, 2017 and $0.5 million of the nine month period ended September 30, 2016.
Gains and losses related to changes
in fair value of derivative instruments that were recognized in Other expense/(income), net in the Consolidated Statements of Income
were as follows:
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
(in thousands)
|
2017
|
2016
|
2017
|
2016
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
Foreign currency options (losses)/gains
|
($2)
|
($218)
|
($131)
|
$237
|
16.
Contingencies
Asbestos Litigation
Albany International Corp. is a
defendant in suits brought in various courts in the United States by plaintiffs who allege that they have suffered personal injury
as a result of exposure to
asbestos-containing paper machine
clothing synthetic dryer fabrics marketed during the period from 1967 to 1976 and used in certain paper mills.
We were defending 3,727 claims as
of September 30, 2017.
The following table sets forth the
number of claims filed, the number of claims settled, dismissed or otherwise resolved, and the aggregate settlement amount during
the periods presented:
Year ended December 31,
|
Opening Number of Claims
|
Claims Dismissed,Settled, or Resolved
|
New Claims
|
Closing Number of Claims
|
Amounts Paid (thousands) to Settle or Resolve
|
2012
|
4,446
|
90
|
107
|
4,463
|
$530
|
2013
|
4,463
|
230
|
66
|
4,299
|
78
|
2014
|
4,299
|
625
|
147
|
3,821
|
437
|
2015
|
3,821
|
116
|
86
|
3,791
|
164
|
2016
|
3,791
|
148
|
102
|
3,745
|
758
|
2017 (as of September 30)
|
3,745
|
75
|
57
|
3,727
|
$10
|
We
anticipate that additional claims will be filed against the Company and related companies in the future, but are unable to predict
the number and timing of such future claims. Due to the fact that information sufficient to meaningfully estimate a range of possible
loss of a particular claim is typically not available until late in the discovery process, we do not believe a meaningful estimate
can be made regarding the range of possible loss with respect to pending or future claims.
While we believe we have meritorious
defenses to these claims, we have settled certain claims for amounts we consider reasonable given the facts and circumstances of
each case. Our insurance carrier has defended each case and funded settlements under a standard reservation of rights. As of September
30, 2017 we had resolved, by means of settlement or dismissal, 37,564 claims. The total cost of resolving all claims was $10.2
million. Of this amount, almost 100% was paid by our insurance carrier, who has confirmed that we have approximately $140 million
of remaining coverage under primary and excess policies that should be available with respect to current and future asbestos claims.
The Company’s subsidiary,
Brandon Drying Fabrics, Inc. (“Brandon”), is also a separate defendant in many of the asbestos cases in which Albany
is named as a defendant, despite never having manufactured any fabrics containing asbestos. While Brandon was defending against
7,706 claims as of September 30, 2017, only eight claims have been filed against Brandon since January 1, 2012, and no settlement
costs have been incurred since 2001. Brandon was acquired by the Company in 1999, and has its own insurance policies covering periods
prior to 1999. Since 2004, Brandon’s insurance carriers have covered 100% of indemnification and defense costs, subject to
policy limits and a standard reservation of rights.
In some of these asbestos cases,
the Company is named both as a direct defendant and as the “successor in interest” to Mount Vernon Mills (“Mount
Vernon”). We acquired certain assets from Mount Vernon in 1993. Certain plaintiffs allege injury caused by asbestos-containing
products alleged to have been sold by Mount Vernon many years prior to this acquisition. Mount Vernon is contractually obligated
to indemnify the Company against any liability arising out of such products. We deny any liability for products sold by Mount Vernon
prior to the acquisition of the Mount Vernon assets. Pursuant to its contractual indemnification obligations, Mount Vernon has
assumed the defense of these claims. On this basis, we have successfully moved for dismissal in a number of actions.
We currently do not anticipate,
based on currently available information, that the ultimate resolution of the aforementioned proceedings will have a material adverse
effect on the financial position, results of operations, or cash flows of the Company. Although we cannot predict the number and
timing of future claims, based on the foregoing factors, the trends in claims filed against us, and available insurance, we also
do not currently anticipate that potential future claims will have a material adverse effect on our financial position, results
of operations, or cash flows.
17. Changes in Shareholders’
Equity
The following table summarizes changes
in Shareholders’ Equity:
(in thousands)
|
Common
Stock Class A and B
|
Additional paid in capital
|
Retained earnings
|
Accumulated items of other comprehensive income/(loss)
|
Treasury stock
|
Noncontrolling Interest
|
Total Equity
|
December
31, 2016
|
$40
|
|
$425,953
|
|
$522,855
|
|
($184,189
|
)
|
($257,136
|
)
|
$3,767
|
|
$511,290
|
|
Net income
|
-
|
|
-
|
|
27,225
|
|
-
|
|
-
|
|
202
|
|
27,427
|
|
Compensation and benefits paid or payable in shares
|
-
|
|
1,604
|
|
-
|
|
-
|
|
260
|
|
-
|
|
1,864
|
|
Options exercised
|
-
|
|
531
|
|
-
|
|
-
|
|
-
|
|
-
|
|
531
|
|
Dividends declared
|
-
|
|
-
|
|
(16,410
|
)
|
-
|
|
-
|
|
-
|
|
(16,410
|
)
|
Cumulative translation adjustments
|
-
|
|
-
|
|
-
|
|
40,775
|
|
-
|
|
19
|
|
40,794
|
|
Pension and postretirement liability adjustments
|
-
|
|
-
|
|
-
|
|
(929
|
)
|
-
|
|
-
|
|
(929
|
)
|
Derivative valuation adjustment
|
-
|
|
-
|
|
-
|
|
89
|
|
-
|
|
-
|
|
89
|
|
September
30, 2017
|
$40
|
|
$428,088
|
|
$533,670
|
|
($144,254
|
)
|
($256,876
|
)
|
$3,988
|
|
$564,656
|
|
18. Recent Accounting Pronouncements
In May 2014, an accounting update
was issued that replaces the existing revenue recognition framework regarding contracts with customers. We will adopt the standard
on January 1, 2018 using the cumulative effect method for transitioning to the new standard. In our Machine Clothing segment, we
currently record revenue for the sale of a product when persuasive evidence of an arrangement exists, delivery has occurred, title
has been transferred, the selling price is fixed, and collectability is reasonably assured. In this segment, we often have contracts
with customers whereby the Company satisfies its performance obligation related to the manufacture and delivery of a product before
title has transferred to the customer. Under the new accounting standard, this will result in earlier recognition of revenue associated
with these contracts. The selling price of products may include a performance obligation to provide certain support services for
no additional cost. When we adopt the new standard, it is probable that, for some of these arrangements, we will need to allocate
a portion of the associated revenue to such services. We currently estimate less than 5% of revenue will be allocated to such services.
While we currently expect that the timing of revenue recognition and the line-item description of Machine Clothing revenue will
be affected by the new standard, we do not expect a significant effect in total annual Machine Clothing revenue. We are continuing
to assess the effect that the new revenue recognition will have on the Albany Engineered Composites (AEC) segment. One change that
we anticipate is that we currently use the units-of-delivery method for some long-term contracts, which is considered an output
method. Under the new standard, we expect that revenue for these contracts will be recognized over time using an input method as
the measure of progress, which is expected to result in earlier recognition of revenue. We are currently unable to determine the
full effect that the new standard will have on our financial statements. We are also currently unable to quantify the cumulative
effect of adopting the new standard. The new standard will also require some additional footnote disclosures, including footnote
disclosure of 2018 results under the current standard.
In January 2016, an accounting update
was issued which requires entities to present separately in Other comprehensive income the portion of the total change in the fair
value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability
at fair value in accordance with the fair value option for financial instruments. This accounting
update is effective for reporting
periods beginning after December 15, 2017. We have not determined the impact of this update on our financial statements.
In February 2016, an accounting
update was issued which requires lessees to recognize most leases on the balance sheet. The update may significantly increase reported
assets and liabilities. This accounting update is effective for reporting periods beginning after December 15, 2018. We have not
determined the impact of this update on our financial statements.
In March 2016, an accounting update
was issued which simplifies several aspects related to the accounting for share-based payment transactions, including the income
tax consequences, statutory tax withholding requirements, and classification of excess tax benefits and cash paid to a tax authority
in lieu of share issuances to employees on the statements of cash flows. The update also affects presentation in the Statements
of Cash Flows of income tax effects of shares withheld for incentive compensation, and the exercise of stock options. We adopted
this accounting update on January 1, 2017 and it had an insignificant effect on income tax expense. The updates affecting the Statements
of Cash Flows have been applied retrospectively as follows:
|
-
|
As a result of the change affecting cash payments of taxes in lieu of
share issuance, operating cash flows for the nine month period ending September 30, 2016 were increased $1.3 million and financing
cash flows were decreased by the same amount.
|
|
-
|
As a result of the change affecting classification of excess tax benefits,
operating cash flows for the nine month period ending September 30, 2016 cash flows were increased $0.1 million and financing cash
flows were decreased by the same amount.
|
In October 2016, an accounting update
was issued which modifies the recognition of income tax effects on intracompany transfers of assets, other than inventory. This
accounting update is effective for reporting periods beginning after December 15, 2017. We have not determined the effect of this
update on our financial statements.
In November 2016, an accounting update
was issued which provides clarification of how changes in restricted cash should be reported in the statement of cash flows. This
accounting update is effective for reporting periods beginning after December 15, 2017. We do not expect this update to have a
material impact on our financial statements.
In January 2017, an accounting update
was issued which provides the definition of a business for the purposes of business combination accounting. This accounting update
is effective for reporting periods beginning after December 15, 2017 and is to be applied prospectively. Accordingly, there will
be no effect on prior business combinations. We have not determined the impact of the update due to the absence of transactions
that would be impacted.
In January 2017, an accounting update
was issued which simplifies the process for determining the amount of goodwill impairment. We adopted this standard as of January
1, 2017 and it did not have any effect on the conclusions reached in our periodic goodwill impairment assessment.
In March 2017, an accounting update
was issued which requires that service cost for defined benefit pension and postretirement plans be reported in the same line item
or items as other compensation costs arising from services rendered by the pertinent employees during the period. Additionally,
the other components of net benefit cost are required to be presented in the income statement separately from the service cost
component and outside a subtotal of income from operations. This accounting update is effective for reporting periods beginning
after December 15, 2017. We expect that the principal effect of adopting this standard will be to reclassify a portion of our pension
and postretirement costs to Other expense/(income).
In May 2017, an accounting update was
issued to provide clarity as to when a company must account for changes to stock-based compensation programs as award modifications.
Award modifications require an update to the value of the award, resulting in an adjustment to compensation expense. We have not
made changes to awards in recent years that would be affected by this update, but such changes are possible in future periods.
We are currently evaluating the potential impact of this update. The update is effective for periods beginning after December 15,
2017.
In August 2017, an accounting update
was issued which simplifies the application of hedge accounting to better align the financial reporting of hedging relationships
with a company’s risk management activities. We are currently evaluating the potential impact of this update, which must
be adopted by January 1, 2019, but may be adopted early.