ITEM 1. FINANCIAL STATEMENTS
ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF
INCOME
(in thousands, except per share
amounts)
(unaudited)
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
Net sales
|
|
$229,981
|
|
|
$199,277
|
|
Cost of goods sold
|
|
148,330
|
|
|
123,249
|
|
|
|
|
|
|
|
|
Gross profit
|
|
81,651
|
|
|
76,028
|
|
Selling, general, and administrative expenses
|
|
41,930
|
|
|
40,407
|
|
Technical and research expenses
|
|
10,317
|
|
|
10,262
|
|
Restructuring expenses, net
|
|
8,573
|
|
|
2,681
|
|
|
|
|
|
|
|
|
Operating income
|
|
20,831
|
|
|
22,678
|
|
Interest expense, net
|
|
4,288
|
|
|
4,328
|
|
Other expense, net
|
|
1,452
|
|
|
826
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
15,091
|
|
|
17,524
|
|
Income tax expense
|
|
4,609
|
|
|
6,550
|
|
|
|
|
|
|
|
|
Net income
|
|
10,482
|
|
|
10,974
|
|
Net income attributable to the noncontrolling interest
|
|
237
|
|
|
135
|
|
Net income attributable to the Company
|
|
$10,245
|
|
|
$10,839
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Company shareholders - Basic
|
|
$0.32
|
|
|
$0.34
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Company shareholders - Diluted
|
|
$0.32
|
|
|
$0.34
|
|
|
|
|
|
|
|
|
Shares of the Company used in computing earnings per share:
|
|
|
|
|
|
|
Basic
|
|
32,220
|
|
|
32,128
|
|
|
|
|
|
|
|
|
Diluted
|
|
32,236
|
|
|
32,164
|
|
|
|
|
|
|
|
|
Dividends declared per share, Class A and Class B
|
|
$0.17
|
|
|
$0.17
|
|
The accompanying notes are an integral part of the consolidated financial statements
ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME/(LOSS)
(in thousands)
(unaudited)
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
Net income
|
|
$10,482
|
|
|
$10,974
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss), before tax:
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
17,505
|
|
|
9,938
|
|
Amortization of pension liability adjustments:
|
|
|
|
|
|
|
Prior service credit
|
|
(1,114
|
)
|
|
(1,113
|
)
|
Net actuarial loss
|
|
1,297
|
|
|
1,347
|
|
Payments related to interest rate swaps included in earnings
|
|
180
|
|
|
600
|
|
Derivative valuation adjustment
|
|
5,715
|
|
|
416
|
|
|
|
|
|
|
|
|
Income taxes related to items of other comprehensive income/(loss):
|
|
|
|
|
|
|
Amortization of pension liability adjustment
|
|
(55
|
)
|
|
(70
|
)
|
Payments related to interest rate swaps included in earnings
|
|
(43
|
)
|
|
(228
|
)
|
Derivative valuation adjustment
|
|
(1,372
|
)
|
|
(158
|
)
|
Comprehensive income
|
|
32,595
|
|
|
21,706
|
|
Comprehensive income attributable to the noncontrolling interest
|
|
230
|
|
|
140
|
|
Comprehensive income attributable to the Company
|
|
$32,365
|
|
|
$21,566
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements
ALBANY INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share
data)
(unaudited)
|
|
March 31,
|
|
December 31,
|
|
|
|
|
|
|
|
2018
|
|
2017
|
ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$151,426
|
|
|
$183,727
|
|
Accounts receivable, net
|
|
248,538
|
|
|
202,675
|
|
Contract assets
|
|
42,895
|
|
|
-
|
|
Inventories
|
|
100,034
|
|
|
136,519
|
|
Income taxes prepaid and receivable
|
|
6,132
|
|
|
6,266
|
|
Prepaid expenses and other current assets
|
|
18,675
|
|
|
14,520
|
|
Total current assets
|
|
567,700
|
|
|
543,707
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
459,388
|
|
|
454,302
|
|
Intangibles, net
|
|
53,881
|
|
|
55,441
|
|
Goodwill
|
|
168,311
|
|
|
166,796
|
|
Deferred income taxes
|
|
70,174
|
|
|
68,648
|
|
Noncurrent receivables
|
|
35,338
|
|
|
32,811
|
|
Other assets
|
|
45,543
|
|
|
39,493
|
|
Total assets
|
|
$1,400,335
|
|
|
$1,361,198
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
Notes and loans payable
|
|
$226
|
|
|
$262
|
|
Accounts payable
|
|
45,694
|
|
|
44,899
|
|
Accrued liabilities
|
|
122,103
|
|
|
105,914
|
|
Current maturities of long-term debt
|
|
1,821
|
|
|
1,799
|
|
Income taxes payable
|
|
5,182
|
|
|
8,643
|
|
Total current liabilities
|
|
175,026
|
|
|
161,517
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
518,656
|
|
|
514,120
|
|
Other noncurrent liabilities
|
|
100,170
|
|
|
101,555
|
|
Deferred taxes and other liabilities
|
|
11,339
|
|
|
10,991
|
|
Total liabilities
|
|
805,191
|
|
|
788,183
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
Preferred stock, par value $5.00 per share; authorized 2,000,000 shares; none issued
|
|
-
|
|
|
-
|
|
Class A Common Stock, par value $.001 per share;
authorized 100,000,000 shares; issued 37,447,669 in 2018 and 37,395,753 in 2017
|
|
37
|
|
|
37
|
|
Class B Common Stock, par value $.001 per share;
authorized 25,000,000 shares; issued and outstanding 3,233,998 in 2018 and 2017
|
|
3
|
|
|
3
|
|
Additional paid in capital
|
|
428,859
|
|
|
428,423
|
|
Retained earnings
|
|
533,759
|
|
|
534,082
|
|
Accumulated items of other comprehensive income:
|
|
|
|
|
|
|
Translation adjustments
|
|
(69,672
|
)
|
|
(87,318
|
)
|
Pension and postretirement liability adjustments
|
|
(50,549
|
)
|
|
(50,536
|
)
|
Derivative valuation adjustment
|
|
6,433
|
|
|
1,953
|
|
Treasury stock (Class A), at cost 8,431,335 shares in
2018 and 2017
|
|
(256,876
|
)
|
|
(256,876
|
)
|
Total Company shareholders' equity
|
|
591,994
|
|
|
569,768
|
|
Noncontrolling interest
|
|
3,150
|
|
|
3,247
|
|
Total equity
|
|
595,144
|
|
|
573,015
|
|
Total liabilities and shareholders' equity
|
|
$1,400,335
|
|
|
$1,361,198
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements
ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF
CASH FLOW
(in thousands)
(unaudited)
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
$10,482
|
|
|
$10,974
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
Depreciation
|
|
18,302
|
|
|
14,644
|
|
Amortization
|
|
2,646
|
|
|
2,649
|
|
Change in other noncurrent liabilities
|
|
(377
|
)
|
|
(1,596
|
)
|
Change in deferred taxes and other liabilities
|
|
(784
|
)
|
|
(612
|
)
|
Provision for write-off of property, plant and equipment
|
|
271
|
|
|
296
|
|
Non-cash interest expense
|
|
-
|
|
|
211
|
|
Compensation and benefits paid or payable in Class A Common Stock
|
|
289
|
|
|
989
|
|
Fair value adjustment on foreign currency option
|
|
37
|
|
|
54
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities that (used)/provided cash:
|
|
|
|
|
|
|
Accounts receivable
|
|
(31,467
|
)
|
|
(741
|
)
|
Contract assets
|
|
2,116
|
|
|
-
|
|
Inventories
|
|
(9,244
|
)
|
|
(14,921
|
)
|
Prepaid expenses and other current assets
|
|
(4,063
|
)
|
|
(1,917
|
)
|
Income taxes prepaid and receivable
|
|
102
|
|
|
-
|
|
Accounts payable
|
|
(2,538
|
)
|
|
3,524
|
|
Accrued liabilities
|
|
(1,185
|
)
|
|
(10,971
|
)
|
Income taxes payable
|
|
(3,431
|
)
|
|
(2,486
|
)
|
Noncurrent receivables
|
|
2,527
|
|
|
(3,915
|
)
|
Other, net
|
|
(2,630
|
)
|
|
(754
|
)
|
Net cash used in operating activities
|
|
(18,947
|
)
|
|
(4,572
|
)
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
(15,771
|
)
|
|
(25,045
|
)
|
Purchased software
|
|
(29
|
)
|
|
(38
|
)
|
Net cash used in investing activities
|
|
(15,800
|
)
|
|
(25,083
|
)
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
Proceeds from borrowings
|
|
13,011
|
|
|
16,145
|
|
Principal payments on debt
|
|
(8,490
|
)
|
|
(20,602
|
)
|
Taxes paid in lieu of share issuance
|
|
(1,652
|
)
|
|
(1,364
|
)
|
Proceeds from options exercised
|
|
147
|
|
|
75
|
|
Dividends paid
|
|
(5,474
|
)
|
|
(5,459
|
)
|
Net cash used in financing activities
|
|
(2,458
|
)
|
|
(11,205
|
)
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
4,904
|
|
|
2,451
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
(32,301
|
)
|
|
(38,409
|
)
|
Cash and cash equivalents at beginning of period
|
|
183,727
|
|
|
181,742
|
|
Cash and cash equivalents at end of period
|
|
$151,426
|
|
|
$143,333
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements
ALBANY INTERNATIONAL
CORP.
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, the Registrant, the Company, we, us, or our) 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, 2017.
Effective January 1, 2018, we
adopted the provisions of ASC 606,
Revenue from contracts with customers
, using the modified retrospective method for
transition as discussed in Note 2, Revenue Recognition. Accounting policies have been applied consistently to periods
presented, except for the application of ASC 606, as described in Note 2.
2. Revenue Recognition
Effective January 1, 2018, the Company
adopted the provisions of ASC 606,
Revenue from contracts with customers
, using the modified retrospective (or cumulative
effect) method for transition. Under this transition method, periods prior to 2018 have not been restated and the cumulative effect
of initially applying the new standard was recorded as an adjustment to Retained earnings. The standard replaces numerous requirements
in U.S. GAAP, including industry-specific requirements, and provides companies with a single model for recognizing revenue from
contracts with customers. We applied the new accounting standard to contracts which were not completed by December 31, 2017.
In
our Machine Clothing (MC) business segment, prior to 2018, we recorded revenue from the sale of a product when persuasive evidence
of an arrangement existed, delivery had occurred, title was transferred, the selling price was fixed, and collectability was reasonably
assured. Under the new standard, we recognize MC revenue when we satisfy our performance obligations related to the manufacture
and delivery of a product, which, in certain cases, results in earlier recognition of revenue associated with these contracts.
For the MC segment, the cumulative effect of adopting ASC 606 included an increase to Accounts receivable, a decrease to Inventories,
and an increase to Retained earnings.
In
our Albany Engineered Composites (AEC) business segment, revenue from a number of long-term contracts was, prior to 2018, recorded
on the basis of the units-of-delivery method, which is considered an output method. Under the new standard, revenue from most of
these contracts is recognized over time using an input method as the measure of progress, which generally results in earlier recognition
of revenue. Prior to adoption of the new standard, the classification of revenue in excess of progress billings on long-term contracts
was included in Accounts receivable. Under the new standard, such assets are considered Contract assets, which are rights to consideration
that are conditional on something other than the passage of time, such as completion of remaining performance obligations. As a
result of adoption of the new standard, such assets were reclassified at transition from Accounts receivable to Contract assets.
In addition, under the new standard, we are required to limit our estimate of contract values to the period of the legally enforceable
contract, which in many cases is considerably shorter than the contract period used under the former standard. While certain contracts
are expected to be profitable over the course of the program life when including expected renewals, under the new standard, our
estimate of contract revenues and costs is limited to the estimated value of enforceable rights and obligations, excluding anticipated
renewals. In some cases, this shorter contract period may result in a loss contract provision, and our transition adjustment included
such loss accruals. Expected losses on projects includes losses on contract options that are probable of exercise, excluding profitable
options that often follow. For AEC, the cumulative effect of adopting ASC 606 included increases to Contract assets and Accrued
liabilities, and decreases to Accounts receivable, Inventories and Retained earnings.
The table below presents the cumulative
effect of changes made to our December 31, 2017 Consolidated Balance Sheet as the result of adoption of ASC 606:
ALBANY INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEET
(in thousands, except share
data)
(unaudited)
|
|
|
|
|
|
|
|
|
As previously reported at December 31, 2017
|
|
Adjustments Increase/(decrease)
|
|
Opening balance, as adjusted, January 1, 2018
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$183,727
|
|
|
$ -
|
|
|
$183,727
|
|
Accounts receivable, net
|
|
202,675
|
|
|
10,210
|
|
|
212,885
|
|
Contract assets
|
|
-
|
|
|
44,872
|
|
|
44,872
|
|
Inventories
|
|
136,519
|
|
|
(47,054
|
)
|
|
89,465
|
|
Income taxes prepaid and receivable
|
|
6,266
|
|
|
-
|
|
|
6,266
|
|
Prepaid expenses and other current assets
|
|
14,520
|
|
|
-
|
|
|
14,520
|
|
Total current assets
|
|
543,707
|
|
|
8,028
|
|
|
551,735
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
454,302
|
|
|
-
|
|
|
454,302
|
|
Intangibles, net
|
|
55,441
|
|
|
-
|
|
|
55,441
|
|
Goodwill
|
|
166,796
|
|
|
-
|
|
|
166,796
|
|
Deferred income taxes
|
|
68,648
|
|
|
1,756
|
|
|
70,404
|
|
Noncurrent receivables
|
|
32,811
|
|
|
-
|
|
|
32,811
|
|
Other assets
|
|
39,493
|
|
|
1,119
|
|
|
40,612
|
|
Total assets
|
|
$1,361,198
|
|
|
$10,903
|
|
|
$1,372,101
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Notes and loans payable
|
|
$262
|
|
|
$ -
|
|
|
$262
|
|
Accounts payable
|
|
44,899
|
|
|
-
|
|
|
44,899
|
|
Accrued liabilities
|
|
105,914
|
|
|
16,808
|
|
|
122,722
|
|
Current maturities of long-term debt
|
|
1,799
|
|
|
-
|
|
|
1,799
|
|
Income taxes payable
|
|
8,643
|
|
|
-
|
|
|
8,643
|
|
Total current liabilities
|
|
161,517
|
|
|
16,808
|
|
|
178,325
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
514,120
|
|
|
-
|
|
|
514,120
|
|
Other noncurrent liabilities
|
|
101,555
|
|
|
-
|
|
|
101,555
|
|
Deferred taxes and other liabilities
|
|
10,991
|
|
|
52
|
|
|
11,043
|
|
Total liabilities
|
|
788,183
|
|
|
16,860
|
|
|
805,043
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Preferred stock, par value $5.00 per share;
|
|
|
|
|
|
|
|
|
|
authorized 2,000,000 shares; none issued
|
|
-
|
|
|
-
|
|
|
-
|
|
Class A Common Stock, par value $.001 per share;
|
|
|
|
|
|
|
|
|
|
authorized 100,000,000 shares; issued 37,395,753 in
|
|
|
|
|
|
|
|
|
|
2017 and
37,319,266 in 2016
|
|
37
|
|
|
-
|
|
|
37
|
|
Class B Common Stock, par value $.001 per share;
|
|
|
|
|
|
|
|
|
|
authorized 25,000,000 shares; issued and
|
|
|
|
|
|
|
|
|
|
outstanding 3,233,998 in 2017 and 2016
|
|
3
|
|
|
-
|
|
|
3
|
|
Additional paid in capital
|
|
428,423
|
|
|
-
|
|
|
428,423
|
|
Retained earnings
|
|
534,082
|
|
|
(5,630
|
)
|
|
528,452
|
|
Accumulated items of other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
(87,318
|
)
|
|
-
|
|
|
(87,318
|
)
|
Pension and postretirement liability adjustments
|
|
(50,536
|
)
|
|
-
|
|
|
(50,536
|
)
|
Derivative valuation adjustment
|
|
1,953
|
|
|
-
|
|
|
1,953
|
|
Treasury stock (Class A), at cost 8,431,335 shares in
|
|
|
|
|
|
|
|
|
|
2017
and 8,443,444 shares in 2016
|
|
(256,876
|
)
|
|
-
|
|
|
(256,876
|
)
|
Total Company shareholders' equity
|
|
569,768
|
|
|
(5,630
|
)
|
|
564,138
|
|
Noncontrolling interest
|
|
3,247
|
|
|
(327
|
)
|
|
2,920
|
|
Total equity
|
|
573,015
|
|
|
(5,957
|
)
|
|
567,058
|
|
Total liabilities and shareholders' equity
|
|
$1,361,198
|
|
|
$10,903
|
|
|
$1,372,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant changes to our accounting
policies as a result of adopting the new standard are discussed below.
For
periods ending after December 31, 2017, we account for a contract when it has approval and commitment from both parties, the rights
of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration
is probable.
Revenue is
measured based on the consideration specified in the contract with the customer, and excludes any amounts collected on behalf of
third parties. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service,
or a series of distinct goods or services, to the customer which occurs either at a point in time, or over time, depending on the
contract. A performance obligation is a promise in the contract to transfer a distinct good or service to the customer, and is
the unit of account under the new revenue standard. “Control” refers to the ability to direct the use of, and obtain
substantially all of the remaining benefits from the product. A contract’s transaction price is allocated to each material
distinct performance obligation and is recognized as revenue when, or as, the performance obligation is satisfied.
In our Machine Clothing segment, our
primary performance obligation in most contracts is to provide solution-based, custom-designed fabrics and belts to the customer.
We satisfy this performance obligation upon transferring control of the product to the customer at a specific point in time. Generally,
the customer obtains control when the product has been received at the location specified by the customer, at which time the only
remaining obligations under the contract are fulfillment costs, which are accrued when control of the product is transferred.
In the Machine Clothing segment,
some contracts with certain customers may also obligate us to provide various product-related services at no additional cost
to the customer. When this obligation is material in the context of the contract with the customer, we recognize a separate
performance obligation and allocate revenue to those services based on their estimated standalone selling price. The
standalone selling price for these services is determined based upon an analysis of the services offered and an assessment of
the price we might charge for such services as a separate offering. As we typically provide such services on a stand-ready
basis, we recognize this revenue over time. Revenue allocated to such service performance obligations is the only Machine
Clothing revenue that is recognized over time.
In our Albany Engineered Composites
(AEC) business segment, we primarily enter into contracts to manufacture and deliver highly engineered advanced composite products
to our customers. The majority of AEC revenue is from short duration, firm-fixed-price orders that are placed under a master contract
containing general terms and conditions applicable to all orders placed under the agreement. To determine the proper revenue recognition
method, we evaluate whether two or more orders or contracts should be combined and accounted for as one single contract, and whether
the combined or single contract contains single or multiple performance obligations. This evaluation requires significant judgment,
and the decision to combine a group of contracts, or to allocate revenue from the combined or single contract among multiple performance
obligations could have a significant impact on the amount of revenue and profit recorded in a given period. For most AEC contracts,
the nature of our promise (or our performance obligation) to the customer is to manage the contract and provide a significant service
of integrating a complex set of tasks and components into a single project or capability, which will often result in the delivery
of multiple highly interdependent and interrelated units.
At the inception of a contract we estimate
the transaction price based on our current rights, and do not contemplate future modifications (including unexercised options)
or follow-on contracts until they become legally enforceable. Many AEC contracts are subsequently modified to include changes in
specifications, requirements or price, which may create new or change existing enforceable rights and obligations. Depending on
the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or
as a separate contract. Generally, we are able to conclude that such modifications are not distinct from the existing contract,
due to the significant integration of the obligations, and the interrelated nature of tasks, provided for in the modification and
the existing contract. Therefore, such modifications are accounted for as if they were part of the existing contract, and recognized
as a cumulative adjustment to revenue.
Revenue is recognized over time for
a large portion of our contracts in AEC as most of our contracts have provisions that, under the guidance in ASC 606, are deemed
to transfer control to the customer over time. Revenue is recognized based on the extent of progress towards completion of the
performance obligation. The selection of the method to measure progress toward completion requires judgment and is based on the
nature of the products or services to be provided. We generally use the cost-to-cost measure of progress for our contracts because
it best depicts the transfer of assets to the customer which occurs as we incur costs to produce the contract deliverables. Under
the cost-to-cost measure of progress, the extent of progress toward completion is measured based on the ratio of costs incurred
to date to the total estimated costs at completion of the performance obligation. Revenue, including profit, is recorded proportionally
as costs are incurred. Accounting for long-term contracts requires significant judgment and estimation, which could be considerably
different if the underlying circumstances were to change. When adjustments in estimated contract revenue or costs are required,
any changes from prior estimates are included in revenues or earnings in the period in which the change occurs.
In other AEC contracts, revenue is
recognized at a point in time because the products are offered to multiple customers, or do not have an enforceable right to payment
until the product is shipped or delivered to the location specified by the customer in the contract.
AEC’s largest source of revenue
is derived from the LEAP contract (see Note 3) under a cost- plus-fee agreement. Beginning in 2018, the fee is variable based on
our success in achieving certain cost targets. Revenue is recognized over time as costs are incurred. Under this contract, there
is significant judgment involved in determining applicable contract costs and expected margin, and therefore in determining the
amount of revenue to be recognized.
Payment terms granted to MC and AEC
customers reflect general competitive practices. Terms vary with product, competitive conditions, and the country of operation.
The following table provides a summary
of the composition of each business segment:
Segment
|
Unit
|
Principal Product or Service
|
Principal Locations
|
Machine Clothing (MC)
|
Machine Clothing
|
Paper machine clothing: Permeable and impermeable
belts used in the manufacture of paper, paperboard, tissue and towel, and pulp
Engineered fabrics: Belts used in the manufacture
of nonwovens, fiber cement and several other industrial applications
|
World-wide
|
Albany Engineered Composites (AEC)
|
Albany Safran Composites (ASC)
|
3D-woven, injected composite components for aircraft engines
|
Rochester, NH, Commercy, France, Queretero, Mexico
|
Airframe and engine Components (Other AEC)
|
Composite airframe and engine components for military and commercial aircraft
|
Salt Lake City, UT Boerne, TX Queretero, Mexico
|
|
|
|
We disaggregate revenue earned from
contracts with customers for each of our business segments based on the timing of revenue recognition, and
groupings used for internal review purposes.
The following table disaggregates revenue for
each business segment by timing of revenue recognition:
|
|
For the Three Months Ended
|
|
|
|
|
|
March 31, 2018
|
|
|
|
(in thousands)
|
|
Point
in Time Revenue Recognition
|
|
Over
Time Revenue Recognition
|
|
Total
|
|
|
|
|
|
|
|
Machine Clothing
|
|
$147,351
|
|
|
$800
|
|
|
$148,151
|
|
|
|
|
|
|
|
|
|
|
|
Albany Engineered Composites
|
|
|
|
|
|
|
ASC
|
|
-
|
|
|
40,781
|
|
|
40,781
|
|
Other AEC
|
|
6,040
|
|
|
35,009
|
|
|
41,049
|
|
Total Albany Engineered Composites
|
|
6,040
|
|
|
75,790
|
|
|
81,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$153,391
|
|
|
$76,590
|
|
|
$229,981
|
|
The following table disaggregates MC
segment revenue by significant product or service (paper machine clothing (PMC) and engineered fabrics), and, for PMC, the geographical
region to which the paper machine clothing was sold:
|
|
For
the Three Months Ended
|
(in thousands)
|
|
March
31, 2018
|
|
|
|
|
Americas PMC
|
|
$69,858
|
|
Eurasia PMC
|
|
56,933
|
|
Engineered Fabrics
|
|
21,360
|
|
Total Machine Clothing Net sales
|
|
$148,151
|
|
In accordance with ASC 606-10-50-14,
we do not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one
year or less. Contracts in the Machine Clothing segment are generally for periods of less than a year. Most contracts in the AEC segment
are short duration firm-fixed price orders representing performance obligations with an original maturity of less than one year.
Performance obligations as of March 31, 2018 that had an original duration of greater than one year totaled $115 million and relate
primarily to firm contracts in the AEC segment. Of that amount, we expect to recognize as revenue approximately $50 million during
2018, with the remainder to be recognized between 2019 and 2021.
For some AEC contracts, we perform
pre-production or nonrecurring engineering services. These costs are normally considered a fulfillment activity, rather than a
performance obligation. Fulfillment activities that create resources that will be used in satisfying performance obligations in
the future, and are expected to be recovered, are capitalized to Other Assets, which is classified as a noncurrent asset in the
Consolidated Balance Sheets. The capitalized costs are amortized into Cost of goods sold over the period over which the asset is
expected to contribute to future cash flows.
As a result of applying the cumulative
effect method for transition to ASC 606, we are required to disclose the effect of the new standard on each line of the consolidated
financial statements. The following tables show the balances as reported for the period ended March 31, 2018, and how the consolidated
financial statements would have appeared if we had not adopted ASC 606.
ALBANY INTERNATIONAL
CORP.
CONSOLIDATED STATEMENT
OF INCOME
(in thousands,
except per share amounts)
(unaudited)
|
|
As reported for the Three Months Ended March 31, 2018
|
|
Adjustments to reverse effects of ASC 606
|
|
As adjusted for the Three months ended March 31, 2018 to exclude adoption of ASC 606
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$229,981
|
|
|
($8,434
|
)
|
|
$221,547
|
|
Cost of goods sold
|
|
148,330
|
|
|
(6,526
|
)
|
|
141,804
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
81,651
|
|
|
(1,908
|
)
|
|
79,743
|
|
Selling, general, and administrative expenses
|
|
41,930
|
|
|
(60
|
)
|
|
41,870
|
|
Technical and research expenses
|
|
10,317
|
|
|
-
|
|
|
10,317
|
|
Restructuring expenses, net
|
|
8,573
|
|
|
-
|
|
|
8,573
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
20,831
|
|
|
(1,848
|
)
|
|
18,983
|
|
Interest expense, net
|
|
4,288
|
|
|
-
|
|
|
4,288
|
|
Other expense, net
|
|
1,452
|
|
|
-
|
|
|
1,452
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
15,091
|
|
|
(1,848
|
)
|
|
13,243
|
|
Income tax expense
|
|
4,609
|
|
|
(601
|
)
|
|
4,008
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
10,482
|
|
|
(1,247
|
)
|
|
9,235
|
|
Net income attributable to the noncontrolling interest
|
|
237
|
|
|
(57
|
)
|
|
180
|
|
Net income attributable to the Company
|
|
$10,245
|
|
|
($1,190
|
)
|
|
$9,055
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Company shareholders - Basic
|
|
$0.32
|
|
|
($0.04
|
)
|
|
$0.28
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Company shareholders - Diluted
|
|
$0.32
|
|
|
($0.04
|
)
|
|
$0.28
|
|
ALBANY INTERNATIONAL
CORP.
CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME/(LOSS)
(in thousands)
(unaudited)
|
|
As reported for the Three Months Ended March 31, 2018
|
|
Adjustments to reverse effects of ASC 606
|
|
As adjusted for the Three months ended March 31, 2018 to exclude adoption of ASC 606
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$10,482
|
|
|
($1,247
|
)
|
|
$9,235
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss), before tax:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
17,505
|
|
|
(308
|
)
|
|
17,197
|
|
Amortization of pension liability adjustments:
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
(1,114
|
)
|
|
-
|
|
|
(1,114
|
)
|
Net actuarial loss
|
|
1,297
|
|
|
-
|
|
|
1,297
|
|
Payments related to interest rate swaps included in earnings
|
|
180
|
|
|
-
|
|
|
180
|
|
Derivative valuation adjustment
|
|
5,715
|
|
|
-
|
|
|
5,715
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes related to items of other comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
|
Pension/postretirement plan remeasurement
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization of pension liability adjustment
|
|
(55
|
)
|
|
-
|
|
|
(55
|
)
|
Payments related to interest rate swaps included in earnings
|
|
(43
|
)
|
|
-
|
|
|
(43
|
)
|
Derivative valuation adjustment
|
|
(1,372
|
)
|
|
-
|
|
|
(1,372
|
)
|
Comprehensive income
|
|
32,595
|
|
|
(1,555
|
)
|
|
31,040
|
|
Comprehensive income attributable to the noncontrolling interest
|
|
230
|
|
|
(57
|
)
|
|
173
|
|
Comprehensive income attributable to the Company
|
|
$32,365
|
|
|
($1,498
|
)
|
|
$30,867
|
|
ALBANY INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEET
(in thousands, except share
data)
(unaudited)
|
|
As reported March 31, 2018
|
|
Adjustments to reverse effects of ASC 606
|
|
As adjusted for the Three months ended March 31, 2018 to exclude adoption of ASC 606
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$151,426
|
|
|
$ -
|
|
|
$151,426
|
|
Accounts receivable, net
|
|
248,538
|
|
|
(21,720
|
)
|
|
226,818
|
|
Contract assets
|
|
42,895
|
|
|
(42,895
|
)
|
|
-
|
|
Inventories
|
|
100,034
|
|
|
53,752
|
|
|
153,786
|
|
Income taxes prepaid and receivable
|
|
6,132
|
|
|
-
|
|
|
6,132
|
|
Prepaid expenses and other current assets
|
|
18,675
|
|
|
-
|
|
|
18,675
|
|
Total current assets
|
|
567,700
|
|
|
(10,863
|
)
|
|
556,837
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
459,388
|
|
|
-
|
|
|
459,388
|
|
Intangibles, net
|
|
53,881
|
|
|
-
|
|
|
53,881
|
|
Goodwill
|
|
168,311
|
|
|
-
|
|
|
168,311
|
|
Income taxes receivable and deferred
|
|
70,174
|
|
|
(1,155
|
)
|
|
69,019
|
|
Noncurrent receivables
|
|
35,338
|
|
|
-
|
|
|
35,338
|
|
Other assets
|
|
45,543
|
|
|
(1,256
|
)
|
|
44,287
|
|
Total assets
|
|
$1,400,335
|
|
|
($13,274
|
)
|
|
$1,387,061
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Notes and loans payable
|
|
$226
|
|
|
$ -
|
|
|
$226
|
|
Accounts payable
|
|
45,694
|
|
|
-
|
|
|
45,694
|
|
Accrued liabilities
|
|
122,103
|
|
|
(17,624
|
)
|
|
104,479
|
|
Current maturities of long-term debt
|
|
1,821
|
|
|
-
|
|
|
1,821
|
|
Income taxes payable
|
|
5,182
|
|
|
-
|
|
|
5,182
|
|
Total current liabilities
|
|
175,026
|
|
|
(17,624
|
)
|
|
157,402
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
518,656
|
|
|
-
|
|
|
518,656
|
|
Other noncurrent liabilities
|
|
100,170
|
|
|
-
|
|
|
100,170
|
|
Deferred taxes and other liabilities
|
|
11,339
|
|
|
(51
|
)
|
|
11,288
|
|
Total liabilities
|
|
805,191
|
|
|
(17,675
|
)
|
|
787,516
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Preferred stock, par value $5.00 per share;
|
|
|
|
|
|
|
|
|
|
authorized 2,000,000 shares; none issued
|
|
-
|
|
|
-
|
|
|
-
|
|
Class A Common Stock, par value $.001 per share;
|
|
|
|
|
|
|
|
|
|
authorized 100,000,000 shares; issued 37,447,669 in 2018
|
|
|
|
|
|
|
|
|
|
and 37,395,753 in 2017
|
|
37
|
|
|
-
|
|
|
37
|
|
Class B Common Stock, par value $.001 per share;
|
|
|
|
|
|
|
|
|
|
authorized 25,000,000 shares; issued and
|
|
|
|
|
|
|
|
|
|
outstanding 3,233,998 in 2018 and 2017
|
|
3
|
|
|
-
|
|
|
3
|
|
Additional paid in capital
|
|
428,859
|
|
|
|
|
|
428,859
|
|
Retained earnings
|
|
533,759
|
|
|
4,439
|
|
|
538,198
|
|
Accumulated items of other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
(69,672
|
)
|
|
(308
|
)
|
|
(69,980
|
)
|
Pension and postretirement liability adjustments
|
|
(50,549
|
)
|
|
-
|
|
|
(50,549
|
)
|
Derivative valuation adjustment
|
|
6,433
|
|
|
-
|
|
|
6,433
|
|
Treasury stock (Class A), at cost 8,431,335 shares in 2018
|
|
|
|
|
|
|
|
|
|
and 2017
|
|
(256,876
|
)
|
|
-
|
|
|
(256,876
|
)
|
Total Company shareholders' equity
|
|
591,994
|
|
|
4,131
|
|
|
596,125
|
|
Noncontrolling interest
|
|
3,150
|
|
|
270
|
|
|
3,420
|
|
Total equity
|
|
595,144
|
|
|
4,401
|
|
|
599,545
|
|
Total liabilities and shareholders' equity
|
|
$1,400,335
|
|
|
($13,274
|
)
|
|
$1,387,061
|
|
ALBANY INTERNATIONAL
CORP.
CONSOLIDATED STATEMENT
OF CASH FLOW
(in thousands)
(unaudited)
|
|
As reported for the Three Months ended March 31, 2018
|
|
Adjustments to reverse effects of ASC 606
|
|
As adjusted for the Three months ended March 31, 2018 to exclude adoption of ASC 606
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$10,482
|
|
|
($1,247
|
)
|
|
$9,235
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
18,302
|
|
|
-
|
|
|
18,302
|
|
Amortization
|
|
2,646
|
|
|
-
|
|
|
2,646
|
|
Change in other noncurrent liabilities
|
|
(377
|
)
|
|
-
|
|
|
(377
|
)
|
Change in deferred taxes and other liabilities
|
|
(784
|
)
|
|
1,103
|
|
|
319
|
|
Provision for write-off of property, plant and equipment
|
|
271
|
|
|
-
|
|
|
271
|
|
Non-cash interest expense
|
|
-
|
|
|
-
|
|
|
-
|
|
Compensation and benefits paid or payable in Class A Common Stock
|
|
289
|
|
|
-
|
|
|
289
|
|
Fair value adjustment on foreign currency option
|
|
37
|
|
|
-
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities that (used)/provided cash:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(31,467
|
)
|
|
7,324
|
|
|
(24,143
|
)
|
Contract assets
|
|
2,116
|
|
|
(2,116
|
)
|
|
-
|
|
Inventories
|
|
(9,244
|
)
|
|
(8,023
|
)
|
|
(17,267
|
)
|
Prepaid expenses and other current assets
|
|
(4,063
|
)
|
|
-
|
|
|
(4,063
|
)
|
Income taxes prepaid and receivable
|
|
102
|
|
|
-
|
|
|
102
|
|
Accounts payable
|
|
(2,538
|
)
|
|
-
|
|
|
(2,538
|
)
|
Accrued liabilities
|
|
(1,185
|
)
|
|
(250
|
)
|
|
(1,435
|
)
|
Income taxes payable
|
|
(3,431
|
)
|
|
-
|
|
|
(3,431
|
)
|
Noncurrent receivables
|
|
2,527
|
|
|
-
|
|
|
2,527
|
|
Other, net
|
|
(2,630
|
)
|
|
3,209
|
|
|
579
|
|
Net cash provided by operating activities
|
|
(18,947
|
)
|
|
-
|
|
|
(18,947
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(15,800
|
)
|
|
|
|
|
(15,800
|
)
|
Net cash used in financing activities
|
|
(2,458
|
)
|
|
-
|
|
|
(2,458
|
)
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
4,904
|
|
|
-
|
|
|
4,904
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
(32,301
|
)
|
|
-
|
|
|
(32,301
|
)
|
Cash and cash equivalents at beginning of period
|
|
183,727
|
|
|
-
|
|
|
183,727
|
|
Cash and cash equivalents at end of period
|
|
$151,426
|
|
|
$-
|
|
|
$151,426
|
|
3. Reportable Segments
As described in Note 2, the Company
adopted the provisions of ASC 606, “Revenue from contracts with customers”, effective January 1, 2018, using the cumulative
effect method for transition. Periods prior to 2018 have not been restated. The following tables show data by reportable segment,
reconciled to consolidated totals, and the impact that ASC 606 had on first-quarter results, included in the consolidated financial
statements:
|
|
Three months ended March 31,
|
|
Three months ended
March 31, 2018
|
(in thousands)
|
|
2018
|
|
2017
|
|
Increase/(decrease)
attributable to application of ASC 606
|
Net sales
|
|
|
|
|
|
|
|
|
|
Machine Clothing
|
|
$148,151
|
|
|
$142,827
|
|
|
$4,211
|
|
Albany Engineered Composites
|
|
81,830
|
|
|
56,450
|
|
|
4,223
|
|
Consolidated total
|
|
$229,981
|
|
|
$199,277
|
|
|
$8,434
|
|
Operating income/(loss)
|
|
|
|
|
|
|
|
|
|
Machine Clothing
|
|
$30,769
|
|
|
$38,263
|
|
|
$979
|
|
Albany Engineered Composites
|
|
2,275
|
|
|
(5,114
|
)
|
|
869
|
|
Corporate expenses
|
|
(12,213
|
)
|
|
(10,471
|
)
|
|
-
|
|
Operating income
|
|
20,831
|
|
|
22,678
|
|
|
1,848
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
(382
|
)
|
|
(107
|
)
|
|
-
|
|
Interest expense
|
|
4,670
|
|
|
4,435
|
|
|
-
|
|
Other expense, net
|
|
1,452
|
|
|
826
|
|
|
-
|
|
Income before income taxes
|
|
$15,091
|
|
|
$17,524
|
|
|
$1,848
|
|
At the January 1, 2018 date of adoption
of ASC 606, Machine Clothing assets increased by $22 million, and AEC assets decreased by $13 million. Except for the effect of
adopting ASC 606, there were no material changes in the total assets of the reportable segments for the three months ended March
31, 2018.
As described in Note 4, effective
January 1, 2018, the Company adopted an accounting update that affects the classification of components of pension and postretirement
benefit costs. Some costs that were previously included in operating expenses shall now be included in Other expense, net. Periods
prior to 2018 have been restated to conform to the current year presentation.
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 either market rent or 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 were $40.8 and $25.4 million in the first quarter of 2018 and 2017, respectively. The total of Accounts receivables,
Contract assets and Noncurrent receivables due from Safran amounted to $90.0 million and $58.6 million as of March 31, 2018 and
December 31, 2017, respectively.
The table below presents restructuring
costs by reportable segment (also see Note 5):
|
|
Three months ended March 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Restructuring expenses, net
|
|
|
|
|
|
|
Machine Clothing
|
|
$8,352
|
|
|
$110
|
|
Albany Engineered Composites
|
|
221
|
|
|
2,571
|
|
Consolidated total
|
|
$8,573
|
|
|
$2,681
|
|
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 plans as claims are paid.
The composition of the net periodic
benefit plan cost for the three months ended March 31, 2018 and 2017, was as follows:
|
|
Pension plans
|
|
Other postretirement benefits
|
(in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
Service cost
|
|
$699
|
|
|
$651
|
|
|
$58
|
|
|
$61
|
|
Interest cost
|
|
1,820
|
|
|
1,828
|
|
|
507
|
|
|
553
|
|
Expected return on assets
|
|
(2,247
|
)
|
|
(1,993
|
)
|
|
-
|
|
|
-
|
|
Amortization of prior service cost/(credit)
|
|
8
|
|
|
9
|
|
|
(1,122
|
)
|
|
(1,122
|
)
|
Amortization of net actuarial loss
|
|
558
|
|
|
645
|
|
|
739
|
|
|
702
|
|
Net periodic benefit cost
|
|
$838
|
|
|
$1,140
|
|
|
$182
|
|
|
$194
|
|
In 2018, the Company adopted the
provisions of ASU 2017-07, “
Compensation – Retirement Benefits: improving the presentation of net periodic pension
cost and net periodic postretirement benefit cost
”. This accounting update 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 periodic 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.
The Company elected to report the components of net periodic benefit cost other than the service component in the line item, Other
expense, net in the Consolidated Statements of Income.
We
restated 2017 expenses using the application of a practical expedient, which permits the usage of amounts disclosed in the prior
year Pension and Other Postretirement benefit plans footnote as the estimation basis for applying the retrospective presentation
requirements. The tables below show the 2017 amounts reclassified by segment and financial statement line item that resulted from
adopting this update:
Effect by segment operating expenses:
(in thousands)
|
|
Increase/(decrease) in expense for the
three months ended March 31, 2017
|
Machine Clothing
|
|
($2
|
)
|
Albany Engineered Composites
|
|
-
|
|
Corporate expenses
|
|
(620
|
)
|
Total operating expenses
|
|
($622
|
)
|
|
|
|
|
Other expense, net
|
|
$622
|
|
Effect by Statement of Income line
item:
(in thousands)
|
|
Increase/(decrease) in expense for the
three months ended March 31, 2017
|
Cost of goods sold
|
|
($123
|
)
|
Selling, general and administrative expenses
|
|
(499
|
)
|
Total operating expenses
|
|
($622
|
)
|
|
|
|
|
Other expense, net
|
|
$622
|
|
5. Restructuring
On October 5, 2017, the Company
filed a form 8-K to announce the initiation of discussions regarding a proposal to discontinue operations at its Machine Clothing
production facility in Sélestat, France. During 2017, we incurred $1.1 million of restructuring expense associated with
this proposal but were unable to reasonably estimate the total costs for severance and other charges associated with the proposal
as there was no assurance, at that time, that approval for the proposal would be obtained. In the first quarter of 2018 the plan
was approved by the French Labor Ministry. The restructuring program was driven by the Company’s need to balance manufacturing
capacity with demand. In the first-quarter of 2018, we recorded restructuring expense of $8.1 million, which includes our estimate
of the severance and outplacement costs for the approximately 50 positions that will be terminated under this plan. To date, we
have recorded $9.2 million of restructuring charges related to this action. The Company has started to assess property, plant and
equipment in that location to determine if equipment will be transferred to other facilities, or if the value of the assets can
be recovered through a sale. Depending on the outcome of that assessment, additional restructuring charges could be recorded in
future periods.
AEC restructuring charges in the
first quarter of 2017 principally relate to work force reductions in Salt Lake City, Utah and Rochester, New Hampshire. To date,
we have recorded $5.2 million of restructuring charges related to these actions.
The following table summarizes
charges reported in the Consolidated Statements of Income under “Restructuring expenses, net”:
|
|
Three months ended March 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Machine Clothing
|
|
$8,352
|
|
|
$110
|
|
Albany Engineered Composites
|
|
221
|
|
|
2,571
|
|
Total
|
|
$8,573
|
|
|
$2,681
|
|
Three months ended March 31, 2018
|
|
Total restructuring costs incurred
|
|
Termination and other costs
|
|
Impairment of assets
|
(in thousands)
|
|
|
|
|
|
|
Machine Clothing
|
|
$8,352
|
|
|
$8,352
|
|
|
$-
|
|
Albany Engineered Composites
|
|
221
|
|
|
221
|
|
|
-
|
|
Total
|
|
$8,573
|
|
|
$8,573
|
|
|
$-
|
|
Three months ended March 31, 2017
|
|
Total restructuring costs incurred
|
|
Termination and other costs
|
|
Impairment of assets
|
(in thousands)
|
|
|
|
|
|
|
Machine Clothing
|
|
$110
|
|
|
$110
|
|
|
$-
|
|
Albany Engineered Composites
|
|
2,571
|
|
|
2,456
|
|
|
115
|
|
Total
|
|
$2,681
|
|
|
$2,566
|
|
|
$115
|
|
We expect that approximately $8.2
million of Accrued liabilities for restructuring at March 31, 2018 will be paid within one year and approximately $1.7 million
will be paid in the following year. The table below presents the year-to-date changes in restructuring liabilities for 2018 and
2017, all of which related to termination costs:
(in thousands)
|
|
December 31,
2017
|
|
Restructuring
charges accrued
|
|
Payments
|
|
Currency translation /other
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total termination and other costs
|
|
$3,326
|
|
|
$8,573
|
|
|
($2,051
|
)
|
|
$25
|
|
|
$9,873
|
|
(in thousands)
|
|
December 31, 2016
|
|
Restructuring
charges accrued
|
|
Payments
|
|
Currency translation /other
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total termination and other costs
|
|
$5,559
|
|
|
$2,566
|
|
|
($2,126
|
)
|
|
$17
|
|
|
$6,016
|
|
6. Other expense, net
The components of Other expense,
net are:
|
|
Three
months ended March 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Currency transaction losses
|
|
$690
|
|
|
$101
|
|
Bank fees
|
|
108
|
|
|
149
|
|
Components of net periodic pension and postretirement cost other than service
|
|
263
|
|
|
622
|
|
Other
|
|
391
|
|
|
(46
|
)
|
Total
|
|
$1,452
|
|
|
$826
|
|
In 2018, the Company adopted the
provisions of ASU 2017-07. This accounting update affected the classification of components of net periodic benefit cost, other
than service cost, to be reported separately from the service cost component and outside of operating income. The Company elected
to report other components of net periodic pension and post retirement cost in Other expense, net. The comparative consolidated
statement of income was restated as required by this update. Further detail of this accounting update is disclosed in Note 4.
7. Income Taxes
The following
table presents components of income tax expense for the three months ended March 31, 2018 and 2017:
|
|
Three months ended March 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Income tax based on income from continuing operations, at estimated tax rates of 32.5% and 32.6%, respectively
|
|
$4,899
|
|
|
$5,719
|
|
|
|
|
|
|
|
|
Income tax before discrete items
|
|
4,899
|
|
|
5,719
|
|
|
|
|
|
|
|
|
Discrete tax expense:
|
|
|
|
|
|
|
Exercise of US Stock Options
|
|
(123
|
)
|
|
(21
|
)
|
Adjustments to prior period tax liabilities
|
|
(46
|
)
|
|
-
|
|
Provision for/resolution of tax audits and contingencies, net
|
|
5
|
|
|
852
|
|
Other
|
|
(126
|
)
|
|
-
|
|
Total income tax expense
|
|
$4,609
|
|
|
$6,550
|
|
The first-quarter
estimated effective tax rate on continuing operations was 32.5 percent in 2018, compared to 32.6 percent for the same period in
2017.
Income tax
expense for the quarter was computed in accordance with ASC 740-270 “
Income Taxes – Interim Reporting
”.
Under this method, loss jurisdictions which cannot recognize a tax benefit with regard to their generated losses are excluded from
the annual effective tax rate (AETR) calculation and their taxes will be recorded discretely in each quarter.
The Company’s
tax rate is affected by recurring items such as the income tax rate in the U.S. and in non-U.S. jurisdictions and the mix of income
earned in those jurisdictions, including changes in losses and income from excluded loss jurisdictions, and the impact of discrete
items in the respective quarter. Additionally, tax adjustments resulting from the 2017 Tax Cut and Jobs Act (TCJA) have affected
the Company’s 2018 AETR, including the global intangible low-taxed income (GILTI) inclusion, the foreign-derived intangible
income (FDII) deduction and the corporate U.S. tax rate reduction from 35% to 21%.
The TCJA significantly revised the
U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January
1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing
a transition tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation
be recognized in the period in which the law was enacted.
In December 2017, the Securities
and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (SAB 118), which addresses how a company recognizes provisional
amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable
detail to complete its accounting for the effect of the changes in the TCJA. The measurement period ends when a company has obtained,
prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. The Company elected
to apply the measurement period guidance provided in SAB 118.
Deferred tax assets and liabilities:
At December 31, 2017, the Company re-measured certain deferred tax assets and liabilities based on the federal rate of 21%. However,
the Company is still analyzing certain aspects of the TCJA, such as IRC section 162(m), and refining its calculations which could
potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. As such, no adjustment
has been recorded to the provisional amount previously recorded in 2017.
Foreign tax effects: At December
31, 2017, the Company recorded a provisional federal tax charge due to the transition tax on deemed repatriation of foreign earnings.
No adjustment has been recorded to the provisional amount previously recorded in 2017. The Company is still analyzing its U.S.
tax attributes such as accumulated foreign earnings and profits, foreign tax paid, and other tax components involved in foreign
tax credit calculations for prior years back to 1986.
The Company has elected to
account for the global intangible low taxed income (GILTI) as a current-period expense when incurred (the “period cost
method”). The estimated net GILTI inclusion calculated by the Company (including the gross up on the GILTI inclusion
and the apportioned foreign tax credits applied to GILTI) was $20 million and increased the AETR by 2.7%.The Company also
calculated an estimated foreign-derived intangible income (FDII) deduction of $7 million which decreased the AETR by 1.8% in
the first quarter of 2018. Because of the complexity of the GILTI and FDII tax rules and the lack of legislative guidance, the
Company continues to evaluate these provisions of the TCJA and the application of ASC 740, Income Taxes. The final impact on
the Company from the TCJA’s GILTI and FDII tax legislation may differ from the estimate calculated by the Company. Such
differences could be material, due to, among other things, changes in interpretations of the TCJA, future legislative action
to address questions that arise because of the TCJA, changes in accounting standards for income taxes
or related interpretations in response
to the TCJA, or any updates or changes to estimates the Company has utilized to calculate the GILTI inclusion and FDII deduction.
The Company continues to believe
that the Base Erosion Anti-Abuse Tax (BEAT) does not apply under the Company’s current policies. Therefore no adjustments
for BEAT have been recorded.
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 indefinitely reinvested, and the Company accrued for the tax cost on these earnings to the extent they
cannot be repatriated in a tax-free manner. The Company has targeted for repatriation $97.8 million of current year and prior year
earnings of the Company’s foreign operations. If these earnings were distributed, the Company would be subject to foreign
withholding taxes of $2.1 million which have already been recorded.
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 2018. 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 change within a range of a net increase of
nil to a net decrease of $0.6 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.
In October 2016, an accounting update,
ASU 2016-16 was issued which modifies the recognition of income tax effects on intercompany transfers of assets, other than inventory.
The Company adopted this update effective January 1, 2018, which resulted in a decrease of $0.5 million to deferred tax liabilities,
with an offsetting increase to Retained earnings.
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 March 31,
|
(in thousands, except market price and earnings per share)
|
|
2018
|
|
2017
|
|
|
|
|
|
Net income attributable to the Company
|
|
$10,245
|
|
|
$10,839
|
|
|
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
Weighted average number of shares used in
|
|
|
|
|
|
|
calculating basic net income per share
|
|
32,220
|
|
|
32,128
|
|
|
|
|
|
|
|
|
Effect of dilutive stock-based compensation plans:
|
|
|
|
|
|
|
Stock options
|
|
16
|
|
|
36
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in
|
|
|
|
|
|
|
calculating diluted net income per share
|
|
32,236
|
|
|
32,164
|
|
|
|
|
|
|
|
|
Average market price of common stock used
|
|
|
|
|
|
|
for calculation of dilutive shares
|
|
$63.86
|
|
|
$46.69
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
Basic
|
|
$0.32
|
|
|
$0.34
|
|
Diluted
|
|
$0.32
|
|
|
$0.34
|
|
9. Noncontrolling Interest
The table below presents a reconciliation
of income attributable to the noncontrolling interest and noncontrolling equity, and the impact that the ASC 606 standard had on
first-quarter results, included in the consolidated financial statements:
(in thousands)
|
|
2018
|
|
2017
|
Net income of ASC
|
|
$2,681
|
|
|
$1,601
|
|
Less: Return attributable to the Company's preferred holding
|
|
312
|
|
|
254
|
|
Net income of ASC available for common ownership
|
|
$2,369
|
|
|
$1,347
|
|
Ownership percentage of noncontrolling shareholder
|
|
10
|
%
|
|
10
|
%
|
Net income attributable to noncontrolling interest
|
|
$237
|
|
|
$135
|
|
|
|
|
|
|
|
|
Noncontrolling interest, beginning of year
|
|
$3,247
|
|
|
$3,767
|
|
Decrease attributable to application of ASC 606
|
|
(327
|
)
|
|
-
|
|
Net income attributable to noncontrolling interest
|
|
237
|
|
|
135
|
|
Changes in other comprehensive income attributable to noncontrolling interest
|
|
(7
|
)
|
|
5
|
|
Noncontrolling interest
|
|
$3,150
|
|
|
$3,907
|
|
10. Accumulated Other Comprehensive
Income (AOCI)
The table below presents changes
in the components of AOCI for the period December 31, 2017 to March 31, 2018:
(in thousands)
|
|
Translation adjustments
|
|
Pension and postretirement liability adjustments
|
|
Derivative valuation adjustment
|
|
Total Other Comprehensive Income
|
December
31, 2017
|
|
($87,318
|
)
|
|
($50,536
|
)
|
|
$1,953
|
|
|
($135,901
|
)
|
Other comprehensive income/(loss) before reclassifications
|
|
17,646
|
|
|
(141
|
)
|
|
4,343
|
|
|
21,848
|
|
Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax
|
|
-
|
|
|
-
|
|
|
137
|
|
|
137
|
|
Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax
|
|
-
|
|
|
128
|
|
|
-
|
|
|
128
|
|
Net current period other comprehensive income
|
|
17,646
|
|
|
(13
|
)
|
|
4,480
|
|
|
22,113
|
|
March
31, 2018
|
|
($69,672
|
)
|
|
($50,549
|
)
|
|
$6,433
|
|
|
($113,788
|
)
|
The table below presents changes
in the components of AOCI for the period December 31, 2016 to March 31, 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
|
|
10,126
|
|
|
(193
|
)
|
|
258
|
|
|
10,191
|
|
Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax
|
|
-
|
|
|
-
|
|
|
372
|
|
|
372
|
|
Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax
|
|
-
|
|
|
164
|
|
|
-
|
|
|
164
|
|
Net current period other comprehensive income
|
|
10,126
|
|
|
(29
|
)
|
|
630
|
|
|
10,727
|
|
March
31, 2017
|
|
($123,172
|
)
|
|
($51,748
|
)
|
|
$1,458
|
|
|
($173,462
|
)
|
The table below presents the expense/(income)
amounts reclassified, and the line items of the Consolidated Statements of Income that were affected for the periods ended March
31, 2018 and 2017.
|
|
Three months ended March 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Pretax Derivative valuation reclassified from Accumulated Other Comprehensive Income:
|
|
|
|
Expense related to interest rate swaps included in Income
before taxes (a)
|
|
$180
|
|
|
$600
|
|
Income tax effect
|
|
(43
|
)
|
|
(228
|
)
|
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income
|
|
$137
|
|
|
$372
|
|
|
|
|
|
|
|
|
Pretax pension and postretirement liabilities reclassified from Accumulated Other
Comprehensive Income:
|
Amortization of prior service credit
|
|
($1,114
|
)
|
|
($1,113
|
)
|
Amortization of net actuarial loss
|
|
1,297
|
|
|
1,347
|
|
Total pretax amount reclassified (b)
|
|
183
|
|
|
234
|
|
Income tax effect
|
|
(55
|
)
|
|
(70
|
)
|
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income
|
|
$128
|
|
|
$164
|
|
|
(a)
|
Included
in Interest expense are payments related to the interest rate swap agreements and amortization of swap buyouts (see Note 16).
|
|
(b)
|
These
accumulated other comprehensive income components are included in Other expense, net (see Note 4).
|
11. Accounts Receivable
Accounts receivable includes trade
receivables and bank promissory notes. As a result of adopting ASC 606, Revenue in excess of progress billings on long-term contracts
in the Albany Engineered Composites segment was reclassified to Contract assets in 2018. Including that reclassification, the cumulative
effect from the adoption of ASC 606 was an increase to Accounts receivable of $10.2 million as Accounts receivable recorded in
the cumulative adjustment exceeded that reclassification.
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 March 31, 2018 and December
31, 2017, Accounts receivable consisted of the following:
(in thousands)
|
|
March 31,
2018
|
|
December 31, 2017
|
Trade and other accounts receivable
|
|
$237,767
|
|
|
$152,375
|
|
Bank promissory notes
|
|
18,865
|
|
|
20,255
|
|
Revenue in excess of progress billings
|
|
-
|
|
|
37,964
|
|
Allowance for doubtful accounts
|
|
(8,094
|
)
|
|
(7,919
|
)
|
Total accounts receivable
|
|
$248,538
|
|
|
$202,675
|
|
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 Noncurrent
receivables in the AEC segment that represent revenue earned which has extended payment terms. The Noncurrent receivables will
be invoiced to the customer, with 2% interest, over a 10-year period starting in 2020.
As of March 31, 2018 and December
31, 2017, Noncurrent receivables consisted of the following:
(in thousands)
|
|
March 31,
2018
|
|
December 31, 2017
|
Noncurrent receivables
|
|
$35,338
|
|
|
$32,811
|
|
12. Contract Assets and Liabilities
Beginning in 2018, Contract assets
includes unbilled amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is
utilized, and revenue recognized exceeds the amount billed to the customer. For periods prior to 2018, that asset was included
in Accounts receivable. At the date of adoption of ASC 606, we recorded Contract assets of $44.9 million, which included the amount
that was in Accounts receivable as of December 31, 2017, and additional transition adjustments that resulted from the retrospective
application of ASC 606 to contracts in process at the time of adoption.
Contract assets are transferred
to Accounts receivable, net when the entitlement to pay becomes unconditional. Contract liabilities include advance payments and
billings in excess of revenue recognized. Contract liabilities are included in Accrued liabilities in the Consolidated Balance
Sheet.
Contract assets and Contract liabilities
are reported on the Consolidated Balance Sheets in a net position on a contract-by-contract basis at the end of each reporting
period. Contract assets and contract liabilities were as follows:
(in thousands)
|
|
March
31,
2018
|
|
December 31, 2017
|
Contract assets
|
|
$42,895
|
|
|
$ -
|
|
Contract liabilities
|
|
3,030
|
|
|
-
|
|
Contract assets decreased $2.0 million
during the quarter ended March 31, 2018 as compared to the January 1, 2018 opening balance sheet, as adjusted for the adoption
of ASC 606 (see Note 2).
The decrease was primarily due to
an increase in amounts billed to customers, in excess of the recognition of unbilled revenue related to the satisfaction or partial
satisfaction of performance obligations. There were no significant impairment losses related to our Contract assets during the
quarter ended March 31, 2018.
Contract liabilities increased $2.3 million
during the quarter ended March 31, 2018, as compared to the January 1, 2018 opening balance sheet, as adjusted for the adoption
of ASC 606, primarily due to increased billings in excess of revenue recognized. Revenue recognized for the three-month period
ended March 31, 2018, that was included in the Contract liability balance at the beginning of the year was less than $1 million,
and represented revenue primarily in ASC.
13. 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 decrease in Inventories in 2018, compared to the balances as of December 31, 2017, was principally
due to the cumulative effect of adopting ASC 606 (see Note 2) which decreased Inventories by $47.1 million.
As of March 31, 2018 and December
31, 2017, inventories consisted of the following:
(in thousands)
|
|
March
31, 2018
|
|
December 31, 2017
|
Raw materials
|
|
$42,411
|
|
|
$42,215
|
|
Work in process
|
|
44,184
|
|
|
65,448
|
|
Finished goods
|
|
13,439
|
|
|
28,856
|
|
Total inventories
|
|
$100,034
|
|
|
$136,519
|
|
14. 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.
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, 2017 and March 31, 2018, were
as follows:
As of March 31, 2018
(in thousands)
|
|
Weighted average amortization life in years
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Net carrying amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
AEC trade names
|
|
15
|
|
|
$140
|
|
|
($126
|
)
|
|
$14
|
|
AEC technology
|
|
15
|
|
|
370
|
|
|
(296
|
)
|
|
74
|
|
Customer relationships
|
|
15
|
|
|
48,421
|
|
|
(6,462
|
)
|
|
41,959
|
|
Customer contracts
|
|
6
|
|
|
17,471
|
|
|
(5,830
|
)
|
|
11,641
|
|
Other intangibles
|
|
5
|
|
|
322
|
|
|
(129
|
)
|
|
193
|
|
Net amortized intangible assets
|
|
|
|
|
$66,724
|
|
|
($12,843
|
)
|
|
$53,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
MC Goodwill
|
|
|
|
|
$72,581
|
|
|
$-
|
|
|
$72,581
|
|
AEC Goodwill
|
|
|
|
|
95,730
|
|
|
-
|
|
|
95,730
|
|
Total unamortized intangible assets:
|
|
|
|
|
$168,311
|
|
|
$-
|
|
|
$168,311
|
|
As of December 31,
2017
(in
thousands)
|
|
Weighted average amortization life in years
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Net carrying amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
AEC trade names
|
|
15
|
|
|
$140
|
|
|
($125
|
)
|
|
$15
|
|
AEC technology
|
|
15
|
|
|
370
|
|
|
(290
|
)
|
|
80
|
|
Customer relationships
|
|
15
|
|
|
48,421
|
|
|
(5,654
|
)
|
|
42,767
|
|
Customer contracts
|
|
6
|
|
|
17,471
|
|
|
(5,102
|
)
|
|
12,369
|
|
Other intangibles
|
|
5
|
|
|
322
|
|
|
(112
|
)
|
|
210
|
|
Net amortized intangible assets
|
|
|
|
|
$66,724
|
|
|
($11,283
|
)
|
|
$55,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
MC Goodwill
|
|
|
|
|
$71,066
|
|
|
$-
|
|
|
$71,066
|
|
AEC Goodwill
|
|
|
|
|
95,730
|
|
|
-
|
|
|
95,730
|
|
Total unamortized intangible assets:
|
|
|
|
|
$166,796
|
|
|
$-
|
|
|
$166,796
|
|
The changes in intangible assets, net
and goodwill from December 31, 2017 to March 31, 2018, were as follows:
(in thousands)
|
|
December
31, 2017
|
|
Amortization
|
|
Currency Translation
|
|
March
31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
AEC trade names
|
|
$15
|
|
|
$(1
|
)
|
|
$-
|
|
|
$14
|
|
AEC technology
|
|
80
|
|
|
(6
|
)
|
|
-
|
|
|
74
|
|
Customer relationships
|
|
42,767
|
|
|
(808
|
)
|
|
-
|
|
|
41,959
|
|
Customer contracts
|
|
12,369
|
|
|
(728
|
)
|
|
-
|
|
|
11,641
|
|
Other intangibles
|
|
210
|
|
|
(17
|
)
|
|
-
|
|
|
193
|
|
Net amortized intangible assets
|
|
$55,441
|
|
|
($1,560
|
)
|
|
$-
|
|
|
$53,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
MC Goodwill
|
|
$71,066
|
|
|
$-
|
|
|
$1,515
|
|
|
$72,581
|
|
AEC Goodwill
|
|
95,730
|
|
|
-
|
|
|
-
|
|
|
95,730
|
|
Total unamortized intangible assets:
|
|
$166,796
|
|
|
$-
|
|
|
$1,515
|
|
|
$168,311
|
|
Estimated amortization expense of
intangibles for the years ending December 31, 2018 through 2022, is as follows:
|
|
Annual amortization
|
Year
|
|
(in thousands)
|
2018
|
|
|
$6,234
|
|
2019
|
|
|
6,234
|
|
2020
|
|
|
6,234
|
|
2021
|
|
|
6,163
|
|
2022
|
|
|
3,949
|
|
15. Financial Instruments
Long-term debt, principally to banks
and bondholders, consists of:
(in thousands, except interest rates)
|
|
March 31,
2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Revolving credit agreement with borrowings outstanding at an end of period interest rate of 3.49% in 2018 and 3.40% in 2017 (including the effect of interest rate hedging transactions, as described below), due in 2022
|
|
$506,000
|
|
|
$501,000
|
|
|
|
|
|
|
|
|
Obligation under capital lease, matures 2022
|
|
14,477
|
|
|
14,919
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
520,477
|
|
|
515,919
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
(1,821
|
)
|
|
(1,799
|
)
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$518,656
|
|
|
$514,120
|
|
On November 7, 2017, we entered
into a $685 million unsecured Five-Year Revolving Credit Facility Agreement (the “Credit Agreement”) which amended
and restated the prior $550 million Agreement, entered into on April 8, 2016 (the “Prior Agreement”). Under the Credit
Agreement, $506 million of borrowings were outstanding as of March 31, 2018. 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 March 16, 2018, 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 March 31, 2018,
we would have been able to borrow an additional $179 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 March 31, 2018.
Years ending December 31,
|
|
(in
thousands)
|
2018
|
|
|
$1,854
|
|
2019
|
|
|
2,473
|
|
2020
|
|
|
2,520
|
|
2021
|
|
|
2,520
|
|
2022
|
|
|
7,373
|
|
Total minimum lease payments
|
|
|
16,740
|
|
Less: Amount representing interest
|
|
|
(2,263
|
)
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
$14,477
|
|
On November 27, 2017, we terminated
our interest rate swap agreements, originally entered into on May 9, 2016, that had effectively fixed the interest rate on $300
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 received cash of $6.3 million when the swap agreements were terminated and that payment
will be amortized into interest expense through March 2021.
On May 6, 2016, we terminated other
interest rate swap agreements that had effectively fixed the interest rate on $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 November 28, 2017, we entered
into interest rate swap agreements for the period December 18, 2017 through October 17, 2022. These transactions have the effect
of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $350 million of indebtedness drawn
under the Credit Agreement at the rate of 2.11% during the period. Under the terms of these transactions, we pay the fixed rate
of 2.11% and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly calculation date, which on
March 16, 2018 was 1.79%, during the swap period. On March 16, 2018, the all-in-rate on the $350 million of debt was 3.61%.
These interest rate swaps are accounted
for as a hedge of future cash flows, as further described in Note 16 of the Notes to Consolidated Financial Statements. No cash
collateral was received or pledged in relation to the swap agreements.
Under the Credit Agreement, we are
currently required to maintain a leverage ratio (as defined in the agreement) of not greater than 3.75 to 1.00 for each fiscal
quarter ending prior to (but not including) September 30, 2019, and 3.50 to 1.00 for each fiscal quarter ending on or after September
30, 2019, and minimum interest coverage (as defined) of 3.00 to 1.00.
As of March 31, 2018, our leverage
ratio was 2.55 to 1.00 and our interest coverage ratio was 9.50 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 does
not exceed the limits noted above.
Indebtedness under 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 March 31, 2018.
16. 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, 2017 or March 31, 2018.
The following table presents the
fair-value hierarchy for our Level 1 and Level 2 financial and non-financial assets and liabilities, which are measured at fair
value on a recurring basis:
|
|
March
31, 2018
|
|
December 31, 2017
|
|
|
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
|
|
$14,806
|
|
|
$-
|
|
|
$13,601
|
|
|
$-
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency options
|
|
75
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock of unaffiliated foreign public company
(a)
|
|
1,022
|
|
|
-
|
|
|
999
|
|
|
-
|
|
Interest rate swaps
|
|
-
|
|
|
6,554
|
(b)
|
|
-
|
|
|
313
|
(c)
|
|
(a)
|
Original
cost basis $0.5 million
|
|
(b)
|
Net
of $39.2 million receivable floating leg and $32.7 million liability fixed leg
|
|
(c)
|
Net
of $34.9 million receivable floating leg and $34.6 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, 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 mitigate
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, net. Revaluation
gains and losses occur when our business units have cash, intercompany (recorded in Other expense, 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 March 31, 2018, 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
payments under the active swap agreements totaled $0.5 million for the three month period ended March 31, 2018 and $0.4 million
for the three month period ended March 31, 2017. Additionally, non-cash interest expense related to the amortization of swap buyouts
totaled ($0.2) million for the three month period ended March 31, 2018 and $0.2 million of the three month period ended March 31,
2017.
Gains/(losses) related to changes
in fair value of derivative instruments that were recognized in Other expense, net in the Consolidated Statements of Income were
as follows:
|
|
Three months ended
March 31,
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
Foreign currency options (losses)/gains
|
|
($37
|
)
|
|
($54
|
)
|
17. 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 3,662 claims as
of March 31, 2018.
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
|
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
|
3,745
|
105
|
90
|
3,730
|
55
|
2018 (as of March 31)
|
3,730
|
96
|
28
|
3,662
|
$93
|
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 and therefore are unable to estimate a range of reasonably possible
loss in excess of amounts already accrued for 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 March
31, 2018 we had resolved, by means of settlement or dismissal, 37,690 claims. The total cost of resolving all claims was $10.3
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
7,707 claims as of March 31, 2018, only nine 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.
18. 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, 2017
|
|
$40
|
|
|
$428,423
|
|
|
$534,082
|
|
|
($135,901
|
)
|
|
($256,876
|
)
|
|
$3,247
|
|
|
$573,015
|
|
Adoption of accounting standards (a),(b)
|
|
-
|
|
|
-
|
|
|
(5,085
|
)
|
|
-
|
|
|
-
|
|
|
(327
|
)
|
|
(5,412
|
)
|
Net income
|
|
-
|
|
|
-
|
|
|
10,245
|
|
|
-
|
|
|
-
|
|
|
237
|
|
|
10,482
|
|
Compensation and benefits paid or payable in shares
|
|
-
|
|
|
289
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
289
|
|
Options exercised
|
|
-
|
|
|
147
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
147
|
|
Dividends declared
|
|
-
|
|
|
-
|
|
|
(5,483
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,483
|
)
|
Cumulative translation adjustments
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17,646
|
|
|
-
|
|
|
(7
|
)
|
|
17,639
|
|
Pension and postretirement liability adjustments
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(13
|
)
|
|
-
|
|
|
-
|
|
|
(13
|
)
|
Derivative valuation adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,480
|
|
|
-
|
|
|
-
|
|
|
4,480
|
|
March
31, 2018
|
|
$40
|
|
|
$428,859
|
|
|
$533,759
|
|
|
($113,788
|
)
|
|
($256,876
|
)
|
|
$3,150
|
|
|
$595,144
|
|
|
(a)
|
As
described in Note 2, the Company adopted ASC 606 effective January 1, 2018, which resulted in a decrease to Retained earnings
of $5.6 million and a $0.3 million decrease to Noncontrolling interest.
|
|
(b)
|
As
described in Note 7, the Company adopted ASU 2016-16 effective January 1, 2018, which resulted in a $0.5 increase to Retained
earnings.
|
19. Recent Accounting Pronouncements
In February 2016, an accounting
update was issued which requires the recognition of lease assets and lease liabilities on the balance sheet and the disclosure
of key information about leasing arrangements for both lessees and lessors. The new standard is effective January 1, 2019
for public companies, with early adoption permitted. Currently, we are required to adopt the requirements of the new standard by
applying a modified retrospective approach to the beginning of the earliest period presented in the financial statements. We are
continuing to evaluate the expected impact to our consolidated financial statements and related disclosures. We will adopt the
new standard effective January 1, 2019.
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. We
adopted this accounting update on January 1, 2018 and it did not have a material effect on our financial statements.
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 adopted this accounting update on January 1, 2018 and it did not have a material effect on our financial statements.
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 do not expect a significant impact to our consolidated assets and liabilities,
net earnings, or cash flows as a result of adopting this new standard. We plan to adopt the new standard effective January 1,
2019.
In February 2018, an accounting
update was issued which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded
tax effects resulting from the Tax Cuts and Jobs Act. This update is effective for annual and interim periods in fiscal years beginning
after December 15, 2018. We are currently evaluating the impact of this update.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis
(“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company.
MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the
accompanying Notes.
Forward-looking statements
This quarterly report and the documents
incorporated or deemed to be incorporated by reference in this quarterly report contain statements concerning our future results
and performance and other matters that are “forward-looking” statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,”
“expect,” “anticipate,” “intend,” “estimate,” “plan,” “project,”
”may,” “will,” “should” and variations of such words or similar expressions are intended, but
are not the exclusive
means, to identify forward-looking
statements. Because forward-looking statements are subject to risks and uncertainties, (including, without limitation, those set
forth in the Company’s most recent Annual Report on Form 10-K or prior Quarterly Reports on Form 10-Q) actual results may
differ materially from those expressed or implied by the forward-looking statements.
There are a number of risks, uncertainties,
and other important factors that could cause actual results to differ materially from the forward-looking statements, including,
but not limited to:
|
·
|
Conditions
in the industries in which our Machine Clothing and Albany Engineered Composites segments compete, along with the general risks
associated with macroeconomic conditions;
|
|
·
|
In
the Machine Clothing segment, greater than anticipated declines in the demand for publication grades of paper or, lower than anticipated
growth in other paper grades;
|
|
·
|
In
the Albany Engineered Composites segment, unanticipated reductions in demand, delays, technical difficulties or cancellations
in aerospace programs that are expected to drive growth;
|
|
·
|
Failure
to achieve or maintain anticipated profitable growth in our Albany Engineered Composites segment; and
|
|
·
|
Other
risks and uncertainties detailed in this report.
|
Further information concerning important
factors that could cause actual events or results to be materially different from the forward-looking statements can be found in
“Business Environment Overview and Trends” sections of this quarterly report, as well as in Item 1A-“Risk Factors”
section of our most recent Annual Report on Form 10-K. Statements expressing our assessments of the growth potential of the Albany
Engineered Composites segment are not intended as forecasts of actual future growth, and should not be relied on as such. While
we believe such assessments to have a reasonable basis, such assessments are, by their nature, inherently uncertain. This report
sets forth a number of assumptions regarding these assessments, including projected timing and volume of demand for aircraft and
for LEAP aircraft engines. Such assumptions could prove incorrect. Although we believe the expectations reflected in our other
forward-looking statements are based on reasonable assumptions, it is not possible to foresee or identify all factors that could
have a material and negative impact on our future performance. The forward-looking statements included or incorporated by reference
in this report are made on the basis of our assumptions and analyses, as of the time the statements are made, in light of our experience
and perception of historical conditions, expected future developments, and other factors believed to be appropriate under the circumstances.
Except as otherwise required by
the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking
statement contained or incorporated by reference in this report to reflect any change in our expectations with regard thereto or
any change in events, conditions or circumstances on which any such statement is based.
Business Environment Overview and
Trends
Our reportable segments, Machine Clothing
(MC) and Albany Engineered Composites (AEC), draw on the same advanced textiles and materials processing capabilities, and compete
on the basis of product-based advantage that is grounded in those core capabilities.
The Machine Clothing segment is
the Company’s long-established core business and primary generator of cash. While it has suffered from well-documented declines
in publication grades in the
Company’s traditional markets,
the paper and paperboard industry is still expected to grow slightly on a global basis, driven by demand for packaging and tissue
grades. We feel we are now well-positioned in key markets, with high-quality, low-cost production in growth markets, substantially
lower fixed costs in mature markets, and continued strength in new product development, technical product support, and manufacturing
technology. Because of pricing pressures and industry overcapacity, the machine clothing and paper industries will continue to
face top line pressure. Nonetheless, the business retains the potential for maintaining stable earnings in the future. It has been
a significant generator of cash, and we seek to maintain the cash-generating potential of this business by maintaining the low
costs that we achieved through previous restructuring, and competing vigorously by using our differentiated and technically superior
products to reduce our customers’ total cost of operation and improve their paper quality.
The AEC segment provides significant
growth potential for our Company both near and long term. Our strategy is to grow by focusing our proprietary 3D-woven technology,
as well as our conventional non-3D technology, on high-value aerospace and defense applications, while at the same time performing
successfully on our portfolio of growth programs. AEC (including Albany Safran Composites, LLC (ASC), in which our customer SAFRAN
Group owns a 10 percent noncontrolling interest) supplies a number of customers in the aerospace and defense industry. AEC’s
largest aerospace customer is the SAFRAN Group and sales to SAFRAN (consisting primarily of fan blades and cases for CFM’s
LEAP engine) accounted for approximately 14 percent of the Company’s consolidated net sales in 2017. Through ASC, AEC develops
and sells 3D-woven composite aerospace components to SAFRAN, with the most significant current program being the production of
fan blades and other components for the LEAP engine. AEC, through ASC, also supplies 3D-woven composite fan cases for the GE9X
engine. AEC’s current portfolio of non-3D programs includes components for the F-35 Joint Strike Fighter, fuselage components
for the Boeing 787, components for the CH-53K helicopter, vacuum waste tanks for Boeing 7-Series aircraft, and missile bodies for
Lockheed Martin’s JASSM air-to-surface missiles. AEC is actively engaged in research to develop new applications in the aircraft
engine, airframe, and automotive markets. In 2017, approximately 30 percent of AEC sales were related to U.S. government contracts
or programs.
Consolidated Results
of Operations
In the first quarter of 2018, the Company
adopted the provisions of ASC 606, “
Revenue from contracts with customers
”, using the modified retrospective
(or cumulative effect) method for transition. Under this transition method, periods prior to 2018 are not restated.
The following table summarizes the
effect on various operational metrics that resulted from the adoption of ASC 606:
Increase/(decrease) attributable to application of ASC 606 for the Three Months ended March 31, 2018
(in thousands)
|
|
Machine Clothing
|
|
Albany Engineered Composites
|
|
Income tax and noncontrolling interest effect
|
|
Total
Company
|
Net sales
|
|
$4,211
|
|
|
$4,223
|
|
|
$ -
|
|
|
$8,434
|
|
Gross profit
|
|
1,039
|
|
|
869
|
|
|
-
|
|
|
1,908
|
|
Selling, technical, general and research expenses
|
|
60
|
|
|
-
|
|
|
-
|
|
|
60
|
|
Operating income and Income before income taxes
|
|
979
|
|
|
869
|
|
|
-
|
|
|
1,848
|
|
Income taxes
|
|
-
|
|
|
-
|
|
|
601
|
|
|
601
|
|
Net income
|
|
979
|
|
|
869
|
|
|
(601
|
)
|
|
1,247
|
|
Net income attributable to the noncontrolling interest
|
|
-
|
|
|
-
|
|
|
57
|
|
|
57
|
|
Net income attributable to the Company
|
|
$979
|
|
|
$869
|
|
|
($658
|
)
|
|
$1,190
|
|
Net sales
The following table summarizes our
Net sales by business segment:
|
|
Three months ended March 31,
|
(in thousands, except percentages)
|
|
2018
|
|
2017
|
|
% Change
|
Machine Clothing
|
|
$148,151
|
|
|
$142,827
|
|
|
3.7
|
%
|
Albany Engineered Composites
|
|
81,830
|
|
|
56,450
|
|
|
45.0
|
%
|
Total
|
|
$229,981
|
|
|
$199,277
|
|
|
15.4
|
%
|
The following table summarizes first-quarter
2018 Net sales, excluding the impact of ASC 606 and currency translation effects:
|
|
Three months ended
March 31,
|
|
|
|
|
|
(in thousands, except percentages)
|
|
Net sales as reported, Q1 2018
|
|
Increase due to ASC 606
|
|
Increase due to changes in currency translation rates
|
|
Q1 2018 sales on same basis as Q1 2017
|
|
% Change compared to Q1 2017
|
Machine Clothing
|
|
$148,151
|
|
|
$4,211
|
|
|
$6,760
|
|
|
$137,180
|
|
|
-4.0
|
%
|
Albany Engineered Composites
|
|
81,830
|
|
|
4,223
|
|
|
2,311
|
|
|
75,296
|
|
|
33.4
|
%
|
Total
|
|
$229,981
|
|
|
$8,434
|
|
|
$9,071
|
|
|
$212,476
|
|
|
6.6
|
%
|
Three month comparison
|
·
|
Changes
in currency translation rates had the effect of increasing net sales by $9.1 million during the first quarter of 2018, as compared
to 2017, principally due to the euro and Chinese renminbi strengthening in 2018.
|
|
·
|
Excluding
the effect of changes in currency translation rates:
|
|
·
|
Net
sales increased 10.9% compared to the same period in 2017. Excluding the additional effect of ASC 606, Net sales increased 6.6%.
|
|
·
|
Net
sales in MC decreased 1.0%. Excluding the additional effect of adopting ASC 606, Net sales decreased 4.0%, principally due to
continuing declines in publication grade sales and lower sales in tissue and packaging, primarily in North America as first-quarter
2017 sales were particularly strong in those grades.
|
|
·
|
Net
sales in AEC increased 40.9%. Excluding the additional effect of adopting ASC 606, Net sales increased 33.4%, primarily driven
by growth in the LEAP, Boeing 787, and F-35 programs.
|
Gross Profit
The following table summarizes gross
profit by business segment:
|
|
Three
months ended March 31,
|
(in thousands, except percentages)
|
|
2018
|
|
2017
|
Machine Clothing
|
|
$70,181
|
|
|
$69,218
|
|
Albany Engineered Composites
|
|
11,524
|
|
|
6,833
|
|
Corporate expenses
|
|
(54
|
)
|
|
(23
|
)
|
Total
|
|
$81,651
|
|
|
$76,028
|
|
% of Net sales
|
|
35.5
|
%
|
|
38.2
|
%
|
Three month comparison
The overall increase in 2018 gross
profit, as compared to the same period in 2017, was principally due to the net effect of the following individually significant
items:
|
·
|
AEC gross profit increased $4.7 million due to the increase in net sales,
as described above, and improved labor productivity.
|
|
·
|
An increase in MC gross profit, principally due to increased capacity
utilization.
|
|
·
|
Changes in currency translation rates did not have a significant effect
on MC gross profit in 2018.
|
Selling, Technical, General, and Research
(STG&R)
Selling, Technical, General and Research
(STG&R) expenses include; selling, general, administrative, technical, product engineering and research expenses. The following
table summarizes STG&R expenses by business segment:
|
|
Three
months ended March 31,
|
(in thousands, except percentages)
|
|
2018
|
|
2017
|
Machine Clothing
|
|
$31,060
|
|
|
$30,845
|
|
Albany Engineered Composites
|
|
9,028
|
|
|
9,376
|
|
Corporate expenses
|
|
12,159
|
|
|
10,448
|
|
Total
|
|
$52,247
|
|
|
$50,669
|
|
% of Net sales
|
|
22.7
|
%
|
|
25.4
|
%
|
Three month comparison
The increase in STG&R expenses
in the first three months of 2018, compared to the same period in 2017, was principally due to the net effect of the following
individually significant items:
|
·
|
In MC, revaluation of nonfunctional currency assets and liabilities resulted
in first-quarter losses of $1.5 million in 2018, and $1.7 million in 2017.
|
|
·
|
Corporate STG&R expenses increased by approximately $1.7 million
principally due to higher costs for information systems to support continued growth in AEC.
|
Research and Development
The following table is a subset of
the STG&R expenses table above and summarizes expenses associated with internally funded research and development by business
segment:
|
|
Three months ended March
31,
|
(in thousands)
|
|
2018
|
|
2017
|
Machine Clothing
|
|
$4,418
|
|
|
$4,519
|
|
Albany Engineered Composites
|
|
3,148
|
|
|
3,076
|
|
Total
|
|
$7,566
|
|
|
$7,595
|
|
Restructuring Expense
In addition to the items discussed
above affecting gross profit, and STG&R expenses, operating income was affected by restructuring costs of $8.6 million in the
first quarter of 2018 and $2.7 million for the same period in 2017.
The following table summarizes restructuring
expenses by business segment:
|
|
Three
months ended March 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Machine Clothing
|
|
$8,352
|
|
|
$110
|
|
Albany Engineered Composites
|
|
221
|
|
|
2,571
|
|
Total
|
|
$8,573
|
|
|
$2,681
|
|
In the first quarter of 2018, the
Company’s proposal to close its Machine Clothing production facility in Sélestat, France was approved by the French
Labor Ministry. The restructuring program was driven by the Company’s need to balance manufacturing capacity with demand.
In the first-quarter of 2018, we recorded restructuring expense of $8.1 million, which includes our estimate of the severance and
outplacement costs for the approximately 50 positions that will be terminated under this plan. To date, we have recorded $9.2 million
of restructuring charges related to this action. The Company has started to assess property, plant and equipment in that location
to determine if equipment will be transferred to other facilities, or if the value of the assets can be recovered through a sale.
Depending on the outcome of that assessment, additional restructuring charges could be recorded in future periods. Annual cost
savings associated with this action will principally result in lower cost of goods sold in 2018.
AEC restructuring charges in the
first quarter of 2017 principally relate to work force reductions in Salt Lake City, Utah and Rochester, New Hampshire. Cost savings
associated with this action will result, principally, in lower costs of goods sold in 2018.
For more information on our restructuring
charges, see Note 5 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.
Operating Income
The following table summarizes operating
income/(loss) by business segment:
|
|
|
|
|
|
|
Three months ended March 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Machine Clothing
|
|
$30,769
|
|
|
$38,263
|
|
Albany Engineered Composites
|
|
2,275
|
|
|
(5,114
|
)
|
Corporate expenses
|
|
(12,213
|
)
|
|
(10,471
|
)
|
Total
|
|
$20,831
|
|
|
$22,678
|
|
Other Earnings Items
|
|
Three months ended March 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Interest expense, net
|
|
$4,288
|
|
|
$4,328
|
|
Other expense, net
|
|
1,452
|
|
|
826
|
|
Income tax expense
|
|
4,609
|
|
|
6,550
|
|
Net income attributable to the noncontrolling interest
|
|
237
|
|
|
135
|
|
Interest Expense, net
Interest expense, net, decreased slightly
in 2018, as lower average interest rates were nearly offset by an increase in average debt outstanding. The lower average interest
rates in 2018 principally resulted from the October 2017 repayment of the remaining $50 million of Prudential notes which carried
an interest rate of 6.84%. See the Capital Resources section for further discussion of borrowings and interest rates.
Other Expense, net
The increase in Other expense, net included the
following individually significant items:
Three month comparison
|
·
|
For
the first quarter of each year, foreign currency revaluations of cash and intercompany balances resulted in losses of $0.7 million
in 2018 and $0.1 million in 2017, respectively.
|
Income Tax
The Company has
operations which constitute a taxable presence in 18 countries outside of the United States. Countries outside of the United States
had income tax rates that were both above and below the United States’ federal tax rate of 21% during the periods reported.
The jurisdictional location of earnings is a significant component of our effective tax rate each year. The rate impact of this
component is influenced by the specific location of non-U.S. earnings and the level of our total earnings. From period to period,
the jurisdictional mix of earnings can vary as a result of operating fluctuations in the normal course of business, as well as
the extent and location of other income and expense items, such as pension settlement and restructuring charges.
Three month comparison
The Company’s
effective tax rates for the first quarter of 2018 and 2017 were 30.5% and 37.4%, respectively. The tax rate is affected by recurring
items, such as the income tax rate in the U.S. and in non-U.S. jurisdictions and the mix of income earned in those jurisdictions.
The tax rate is also affected by U.S. tax costs on foreign earnings, and by discrete items that may occur in any given year but
are not consistent from year to year.
Significant
items that impacted the tax rate in the first quarter of 2018 included the following (percentages reflect the effect of each item
as a percentage of Income before income taxes):
|
·
|
The income tax rate on continuing operations,
excluding discrete items, was 32.5%.
|
|
·
|
A $0.1 million [-0.9%] discrete income tax
benefit related to the exercise of U.S. stock options.
|
|
·
|
A $0.2 million [-1.1%] net tax benefit related
to other discrete items.
|
Significant
items that impacted the first quarter of 2017 tax rate included the following:
|
·
|
The income tax rate on continuing operations,
excluding discrete items, was 32.6%.
|
|
·
|
A $0.9 million [4.8%] discrete income tax
expense related to provisions for and settlements of income tax audits.
|
Segment Results of Operations
Machine Clothing Segment
Machine Clothing is our primary business
segment and accounted for 64% of our consolidated revenues during the first three months of 2018. Machine Clothing products are
purchased primarily by manufacturers of paper and paperboard.
According to RISI, Inc., global production
of paper and paperboard is expected to grow at an annual rate of approximately 1 percent over the next five years, driven primarily
by global growth in packaging and tissue, which is expected to be greater than expected declines in publication grades.
While the MC business has suffered
from well-documented declines in publication grades in the Company’s traditional markets, the paper and paperboard industry
is still expected to grow slightly on a global basis, driven by demand for packaging and tissue grades. We feel we are now well-positioned
in key markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and
continued strength in new product development, technical product support, and manufacturing technology. Recent technological advances
in paper machine clothing, while contributing to the papermaking efficiency of customers, have lengthened the useful life of many
of our products and had an adverse impact on overall paper machine clothing demand.
The Company’s manufacturing and
product platforms position us well to meet these shifting demands across product grades and geographic regions. Our strategy for
meeting these challenges continues to be to grow share in all markets, with new products and technology, and to maintain our manufacturing
footprint to align with global demand, while we offset the effects of inflation through continuous productivity improvement.
We have incurred significant restructuring
charges in recent periods as we reduced Machine Clothing manufacturing capacity and administrative positions in the United States,
Germany and France.
Review of Operations
|
|
Three months ended March 31,
|
(in thousands, except percentages)
|
|
2018
|
|
2017
|
Net sales
|
|
$148,151
|
|
|
$142,827
|
|
Gross profit
|
|
70,181
|
|
|
69,218
|
|
% of net sales
|
|
47.4
|
%
|
|
48.5
|
%
|
STG&R expenses
|
|
31,060
|
|
|
30,845
|
|
Operating income
|
|
30,769
|
|
|
38,263
|
|
Net Sales
Three month comparison
|
·
|
Net sales increased by 3.7%.
|
|
·
|
Changes in currency translation rates had the effect of increasing first-quarter
2018 sales by $6.8 million compared to the same period in 2017. That currency translation effect was principally due to the euro
and Chinese renminbi strengthening in 2018.
|
|
·
|
Excluding the effect of changes in currency translation rates, Net sales
in MC decreased $1.4 million or 1.0%. Excluding the additional effect of adopting ASC 606, Net sales decreased 4.0%, principally
due to continuing declines in publication grade sales and lower sales in tissue and packaging, primarily in North America as first-quarter
2017 sales were particularly strong in those grades.
|
Gross Profit
Three month comparison
|
·
|
The increase in MC gross profit was principally due to the application
of ASC 606, as noted above.
|
|
·
|
Changes in currency translation rates did not have a significant effect
on gross profit for the first three months of 2018.
|
Operating Income
Three month comparison
The
increase in operating income was principally due to the net effect of the following individually significant items:
|
·
|
Gross profit increased $1.0 million due to the
impact of ASC 606, as described above.
|
|
·
|
STG&R expenses increased $0.2 million due
to:
|
|
o
|
In MC, revaluation of nonfunctional currency assets and liabilities resulted
in first-quarter losses of $1.5 million in 2018, and $1.7 million in 2017.
|
|
·
|
Restructuring charges were $8.4 million in the first-quarter of 2018,
compared to $0.1 in the same period in 2017.
|
Albany Engineered Composites Segment
The Albany Engineered Composites
(AEC) segment, including Albany Safran Composites, LLC (ASC), in which our customer SAFRAN Group owns a 10 percent noncontrolling
interest, provides highly engineered advanced composite structures to customers primarily in the aerospace and defense industries.
AEC’s largest program relates to CFM International’s LEAP engine. AEC, through ASC, is the exclusive supplier of advanced
composite fan blades and cases for this program under a long-term supply contract. Other significant AEC programs include components
for the F-35 Joint Strike Fighter, fuselage frame components for the Boeing 787, and the fan case for the GE9X engine.
Review of Operations
|
|
Three months ended March
31,
|
(in thousands, except percentages)
|
|
2018
|
|
2017
|
Net sales
|
|
$81,830
|
|
|
$56,450
|
|
Gross profit
|
|
11,524
|
|
|
6,833
|
|
% of net sales
|
|
14.1
|
%
|
|
12.1
|
%
|
STG&R expenses
|
|
9,028
|
|
|
9,376
|
|
Operating income/(loss)
|
|
2,275
|
|
|
(5,114
|
)
|
Net Sales
Three month comparison
The increase in net sales was principally
due to the net effect of the following individually significant items:
|
·
|
Excluding
the effect of changes in currency translation rates, Net sales increased 40.9%. Excluding the additional effect of adopting ASC
606, Net sales increased 33.4%, primarily driven by growth in the LEAP, Boeing 787, and F-35 programs.
|
Gross Profit
Three month comparison
The increase in gross profit was principally
due to the net effect of the following individually significant items:
|
·
|
AEC
gross profit increased $4.7 million due to an increase in Net sales, as described above, and improved labor productivity.
|
Long-term contracts
AEC has contracts with certain customers,
including its contract for the LEAP program, where revenue is determined by a cost-plus fee agreement. Revenue earned under these
arrangements accounted for approximately 50 and 45 percent of segment revenue for the first three months of 2018 and 2017, respectively.
In addition, AEC has long-term contracts
in which the selling price is fixed. In accounting for those contracts, we estimate the profit margin expected at the completion
of the contract and recognize a pro-rata share of that profit during the course of the contract using a cost-to-cost
approach. Changes in estimated contract
profitability will affect revenue and gross profit when the change occurs, which could have a significant favorable or unfavorable
effect on revenue and gross profit in any reporting period.
Changes in contract estimates had
a minor effect on gross profit in the first three months of 2018, and decreased gross profit by $0.7 million for the same period
of 2017.
Operating Income/(Loss)
Three month comparison
The increase in operating income was
principally due to the net effect of the following individually significant items:
|
·
|
AEC
operating income increased $7.4 million principally due to higher sales and strong productivity, as described above.
|
Liquidity and Capital Resources
Cash Flow Summary
|
|
Three months ended March 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Net income
|
|
$10,482
|
|
|
$10,974
|
|
Depreciation and amortization
|
|
20,948
|
|
|
17,293
|
|
Changes in working capital
|
|
(49,813
|
)
|
|
(32,181
|
)
|
Changes in other noncurrent liabilities and deferred taxes
|
|
(1,161
|
)
|
|
(2,208
|
)
|
Other operating items
|
|
597
|
|
|
1,550
|
|
Net cash used in operating activities
|
|
(18,947
|
)
|
|
(4,572
|
)
|
Net cash used in investing activities
|
|
(15,800
|
)
|
|
(25,083
|
)
|
Net cash used in financing activities
|
|
(2,458
|
)
|
|
(11,205
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
4,904
|
|
|
2,451
|
|
Decrease in cash and cash equivalents
|
|
(32,301
|
)
|
|
(38,409
|
)
|
Cash and cash equivalents at beginning of year
|
|
183,727
|
|
|
181,742
|
|
Cash and cash equivalents at end of period
|
|
$151,426
|
|
|
$143,333
|
|
Operating activities
Cash flow used by operating activities
was $18.9 million and $4.6 million for the first three months of 2018 and 2017. The increase in use of cash in 2018 was principally
due to working capital increases associated with the ramp of several key programs in AEC.
Cash paid for income taxes was $8.2
million and $9.1 million for the first three months of 2018 and 2017, respectively.
At March 31, 2018, we had $151.4
million of cash and cash equivalents, of which $137.6 million was held by subsidiaries outside of the United States.
Investing and Financing Activities
Capital expenditures for the first
three months were $15.8 million in 2018 and $25.1 million in 2017.
Dividends have been declared each quarter
since the fourth quarter of 2001. Decisions with respect to whether a dividend will be paid, and the amount of the dividend, are
made by the Board of Directors each quarter. To the extent the Board declares cash dividends in the future, we expect to pay such
dividends out of operating cash flows. Future cash dividends will also depend on debt covenants and on the Board’s assessment
of our ability to generate sufficient cash flows.
Capital Resources
We finance our business activities
primarily with cash generated from operations and borrowings, largely through our revolving credit agreement as discussed below.
Our subsidiaries outside of the United States may also maintain working capital lines with local banks, but borrowings under such
local facilities tend not to be significant. Substantially all of our cash balance at March 31, 2018 was held by non-U.S. subsidiaries.
Based on cash on hand and credit facilities, we anticipate that the Company has sufficient capital resources to operate for the
foreseeable future. We were in compliance with all debt covenants as of March 31, 2018.
On November 7, 2017, we entered
into a $685 million unsecured Five-Year Revolving Credit Facility Agreement (the “Credit Agreement”) which amended
and restated the prior $550 million Agreement, entered into on April 8, 2016 (the “Prior Agreement”). Under the Credit
Agreement, $506 million of borrowings were outstanding as of March 31, 2018. 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 March 16, 2018, 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 March 31, 2018,
we would have been able to borrow an additional $179 million under the Agreement.
On November 27, 2017, we terminated
our interest rate swap agreements, originally entered into on May 9, 2016, that had effectively fixed the interest rate on $300
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 received cash of $6.3 million to terminate when the swap agreements were terminated and
that payment will be amortized into interest expense through March 2021.
On May 6, 2016, we terminated other
interest rate swap agreements that had effectively fixed the interest rate on $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 November 28, 2017, we entered
into interest rate swap agreements for the period December 18, 2017 through October 17, 2022. These transactions have the effect
of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $350 million of indebtedness drawn
under the Credit Agreement at the rate of 2.11% during the period. Under the terms of these transactions, we pay the fixed rate
of 2.11% and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly calculation date, which on
March 16, 2018 was 1.79%, during the swap period. On March 16, 2018, the all-in-rate on the $350 million of debt was 3.61%.
As of March 31, 2018, our leverage
ratio was 2.55 to 1.00 and our interest coverage ratio was 9.50 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
does not exceed the limits noted above.
For more information, see Note 15 to
the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.
Off-Balance Sheet Arrangements
As of March 31, 2018, we have no off-balance
sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.
Recent Accounting Pronouncements
The information set forth under Note
19 contained in Item 1, “Notes to Consolidated Financial Statements”, which is incorporated herein by reference.
Non-GAAP Measures
This Form 10-Q contains certain
non-GAAP metrics, including: net sales, and percent change in net sales excluding the impact of ASC 606 and/or currency
translation effects (for each segment and the Company as a whole); EBITDA and Adjusted EBITDA (for each segment and the
Company as a whole represented in dollars or as a percentage of net sales); net debt; and net income per share attributable
to the Company, excluding adjustments. Such items are provided because management believes that, when reconciled from the
GAAP items to which they relate, they provide additional useful information to investors regarding the Company’s
operational performance.
Presenting sales and increases or decreases
in sales, after currency effects and/or ASC 606 impacts are excluded, can give management and investors insight into underlying
sales trends. EBITDA, or net income with interest, taxes, depreciation, and amortization added back, is a common indicator of financial
performance used, among other things, to analyze and compare core profitability between companies and industries because it eliminates
effects due to differences in financing, asset bases and taxes. An understanding of the impact in a particular quarter of specific
restructuring costs, currency revaluation, inventory write-offs associated with discontinued businesses, or other gains and losses,
on net income (absolute as well as on a per-share basis), operating income or EBITDA can give management and investors additional
insight into core financial performance, especially when compared to quarters in which such items had a greater or lesser effect,
or no effect. Restructuring expenses in the MC segment, while frequent in recent years, are reflective of significant reductions
in manufacturing capacity and associated headcount in response to shifting markets, and not of the profitability of the business
going forward as restructured. Net debt is, in the opinion of the Company, helpful to investors wishing to understand what the
Company’s debt position would be if all available cash were applied to pay down indebtedness. EBITDA, Adjusted EBITDA and
net income per share attributable to the Company, excluding adjustments, are performance measures that relate to the Company’s
continuing operations.
Net sales, or percent changes in net
sales, excluding currency rate effects, are calculated by converting amounts reported in local currencies into U.S. dollars at
the exchange rate of a prior period. The impact of ASC 606 is determined by calculating what GAAP net sales could have been under
the
prior ASC 605 standard, and comparing
that amount to the amount reported under the new ASC 606 standard. These amounts are then compared to the U.S. dollar amount as
reported in the current period. The Company calculates EBITDA by removing the following from Net income: Interest expense net,
Income tax expense, Depreciation and amortization. Adjusted EBITDA is calculated by: adding to EBITDA costs associated with restructuring,
and inventory write-offs associated with discontinued businesses; adding (or subtracting) revaluation losses (or gains); subtracting
(or adding) gains (or losses) from the sale of buildings or investments; subtracting insurance recovery gains in excess of previously
recorded losses; and subtracting (or adding) Income (or loss) attributable to the non-controlling interest in Albany Safran Composites
(ASC). Adjusted EBITDA may also be presented as a percentage of net sales by dividing it by net sales. Net income per share attributable
to the Company, excluding adjustments, is calculated by adding to (or subtracting from) net income attributable to the Company
per share, on an after-tax basis: restructuring charges; inventory write-offs associated with discontinued businesses; discrete
tax charges (or gains) and the effect of changes in the income tax rate; foreign currency revaluation losses (or gains); acquisition
expenses; and losses (or gains) from the sale of investments.
EBITDA, Adjusted EBITDA, and net income
per share attributable to the Company, excluding adjustments, as defined by the Company, may not be similar to similarly named
measures of other companies. Such measures are not considered measurements under GAAP, and should be considered in addition to,
but not as substitutes for, the information contained in the Company’s statements of income.
The following tables show the calculation
of EBITDA and Adjusted EBITDA:
Three months ended March 31, 2018
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Machine Clothing
|
|
Albany Engineered Composites
|
|
Corporate expenses and other
|
|
Total Company
|
Operating
income/(loss) (GAAP)
|
|
$30,769
|
|
|
$2,275
|
|
|
($12,213
|
)
|
|
$20,831
|
|
Interest, taxes, other income/expense
|
|
-
|
|
|
-
|
|
|
(10,349
|
)
|
|
(10,349
|
)
|
Net income/(loss)
(GAAP)
|
|
30,769
|
|
|
2,275
|
|
|
(22,562
|
)
|
|
10,482
|
|
Interest expense, net
|
|
-
|
|
|
-
|
|
|
4,288
|
|
|
4,288
|
|
Income tax expense
|
|
-
|
|
|
-
|
|
|
4,609
|
|
|
4,609
|
|
Depreciation and amortization
|
|
8,362
|
|
|
11,156
|
|
|
1,430
|
|
|
20,948
|
|
EBITDA (non-GAAP)
|
|
39,131
|
|
|
13,431
|
|
|
(12,235
|
)
|
|
40,327
|
|
Restructuring expenses, net
|
|
8,352
|
|
|
221
|
|
|
-
|
|
|
8,573
|
|
Foreign currency revaluation losses
|
|
1,517
|
|
|
186
|
|
|
687
|
|
|
2,390
|
|
Pretax income attributable to the noncontrolling interest in ASC
|
|
-
|
|
|
(343
|
)
|
|
-
|
|
|
(343
|
)
|
Adjusted
EBITDA (non-GAAP)
|
|
$49,000
|
|
|
$13,495
|
|
|
($11,548
|
)
|
|
$50,947
|
|
Three months ended March
31, 2017
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Machine Clothing
|
|
Albany Engineered Composites
|
|
Corporate expenses and other
|
|
Total Company
|
Operating
income/(loss) (GAAP)
|
|
$38,263
|
|
|
($5,114
|
)
|
|
($10,471
|
)
|
|
$22,678
|
|
Interest, taxes, other income/expense
|
|
-
|
|
|
-
|
|
|
(11,704
|
)
|
|
(11,704
|
)
|
Net income/(loss) (GAAP)
|
|
38,263
|
|
|
(5,114
|
)
|
|
(22,175
|
)
|
|
10,974
|
|
Interest expense, net
|
|
-
|
|
|
-
|
|
|
4,328
|
|
|
4,328
|
|
Income tax expense
|
|
-
|
|
|
-
|
|
|
6,550
|
|
|
6,550
|
|
Depreciation and amortization
|
|
8,287
|
|
|
7,804
|
|
|
1,202
|
|
|
17,293
|
|
EBITDA (non-GAAP)
|
|
46,550
|
|
|
2,690
|
|
|
(10,095
|
)
|
|
39,145
|
|
Restructuring expenses, net
|
|
110
|
|
|
2,571
|
|
|
-
|
|
|
2,681
|
|
Foreign currency revaluation losses
|
|
1,663
|
|
|
98
|
|
|
102
|
|
|
1,863
|
|
Pretax income attributable to the noncontrolling interest in ASC
|
|
-
|
|
|
(171
|
)
|
|
-
|
|
|
(171
|
)
|
Adjusted
EBITDA (non-GAAP)
|
|
$48,323
|
|
|
$5,188
|
|
|
($9,993
|
)
|
|
$43,518
|
|
The Company discloses certain income
and expense items on a per-share basis. The Company believes that such disclosures provide important insight into underlying quarterly
earnings and are financial performance metrics commonly used by investors. The Company calculates the quarterly per-share amount
for items included in continuing operations by using the income tax rate based on income from continuing operations and the weighted-average
number of shares outstanding for each period. Year-to-date earnings per-share effects are determined by adding the amounts calculated
at each reporting period.
The following tables show the earnings
per share effect of certain income and expense items:
Three months ended March 31, 2018
|
|
Pre tax
|
|
Tax
|
|
After tax
|
|
Per Share
|
(in thousands, except per share amounts)
|
|
Amounts
|
|
Effect
|
|
Effect
|
|
Effect
|
Restructuring expenses, net
|
|
$8,573
|
|
|
$2,786
|
|
|
$5,787
|
|
|
$0.18
|
|
Foreign currency revaluation losses
|
|
2,390
|
|
|
777
|
|
|
1,613
|
|
|
0.05
|
|
Net discrete income tax benefit
|
|
-
|
|
|
290
|
|
|
290
|
|
|
0.01
|
|
Favorable effect of applying ASC 606
|
|
1,848
|
|
|
658
|
|
|
1,190
|
|
|
0.04
|
|
* Includes tax and noncontrolling
interest effects
Three months ended March 31, 2017
|
|
Pre tax
|
|
Tax
|
|
After tax
|
|
Per Share
|
(in thousands, except per share amounts)
|
|
Amounts
|
|
Effect
|
|
Effect
|
|
Effect
|
Restructuring expenses, net
|
|
$2,681
|
|
|
$979
|
|
|
$1,702
|
|
|
$0.05
|
|
Foreign currency revaluation losses
|
|
1,863
|
|
|
680
|
|
|
1,183
|
|
|
0.04
|
|
Net discrete income tax charge
|
|
-
|
|
|
831
|
|
|
831
|
|
|
0.03
|
|
The following table contains the calculation
of net income per share attributable to the Company, excluding adjustments:
|
|
Three months ended March 31,
|
Per share amounts (Basic)
|
|
2018
|
|
2017
|
Net income attributable to the Company (GAAP)
|
|
$0.32
|
|
|
$0.34
|
|
Adjustments:
|
|
|
|
|
|
|
Restructuring expenses, net
|
|
0.18
|
|
|
0.05
|
|
Discrete tax adjustments
|
|
(0.01
|
)
|
|
0.03
|
|
Foreign currency revaluation losses
|
|
0.05
|
|
|
0.04
|
|
Net income attributable to the Company,
excluding adjustments (non-GAAP)
|
|
$0.54
|
|
|
$0.46
|
|
The following table contains the
calculation of AEC Adjusted EBITDA as a percentage of sales:
|
|
For the three month periods ended:
|
(in thousands, except percentages)
|
|
March
31, 2018
|
|
March
31, 2017
|
AEC Adjusted EBITDA (non-GAAP)
|
|
$13,495
|
|
|
$5,188
|
|
AEC Net sales (GAAP)
|
|
81,830
|
|
|
56,450
|
|
AEC Adjusted EBITDA as a percentage of sales (non-GAAP)
|
|
16.5
|
%
|
|
9.2
|
%
|
The following table contains the calculation
of net debt:
(in thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
|
March 31, 2017
|
|
December 31, 2016
|
Notes and loans payable
|
|
$226
|
|
|
$262
|
|
|
$274
|
|
|
$312
|
|
Current maturities of long-term debt
|
|
1,821
|
|
|
1,799
|
|
|
51,699
|
|
|
51,666
|
|
Long-term debt
|
|
518,656
|
|
|
514,120
|
|
|
428,477
|
|
|
432,918
|
|
Total
debt
|
|
520,703
|
|
|
516,181
|
|
|
480,450
|
|
|
484,896
|
|
Cash and cash equivalents
|
|
151,426
|
|
|
183,727
|
|
|
143,333
|
|
|
181,742
|
|
Net
debt
|
|
$369,277
|
|
|
$332,454
|
|
|
$337,117
|
|
|
$303,154
|
|
The following table contains the reconciliation
of MC 2018 projected Adjusted EBITDA to MC 2018 projected net income:
Machine Clothing Full-Year 2018 Outlook
(in millions)
|
|
Actual, Three months ended March 31, 2018
|
|
Results for last three quarters of year to meet low end of range
|
|
Results for last three quarters of year to meet high end of range
|
|
Estimated range for full-year
|
Net income/(loss)
(GAAP)
|
|
$31
|
|
|
$107
|
|
|
$122
|
|
|
$138-$153
|
|
Depreciation and amortization
|
|
8
|
|
|
24
|
|
|
24
|
|
|
32
|
|
EBITDA (non-GAAP)
|
|
$39
|
|
|
$131
|
|
|
$146
|
|
|
$170-$185
|
|
Restructuring expenses, net
|
|
8
|
|
|
*
|
|
|
*
|
|
|
*
|
|
Foreign currency revaluation losses
|
|
2
|
|
|
*
|
|
|
*
|
|
|
*
|
|
Adjusted
EBITDA (non-GAAP)
|
|
$49
|
|
|
$131
|
|
|
$146
|
|
|
$180-$195
|
|
*Due to the uncertainty of these items, management
is currently unable to project restructuring expenses and foreign currency revaluation gains/losses for 2018