UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Form 10-Q
(√) QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period
ended: March 31, 2015
OR
( ) TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from __________ to __________
Commission file number:
1-10026
ALBANY INTERNATIONAL
CORP.
(Exact name of registrant as
specified in its charter)
Delaware |
|
14-0462060 |
(State or other jurisdiction of |
|
(IRS Employer Identification No.) |
incorporation or organization) |
|
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216 Airport Drive, Rochester, New Hampshire |
|
03867 |
(Address of principal executive offices) |
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(Zip Code) |
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Registrant’s telephone number, including
area code 518-445-2200
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [ √ ] No [ ]
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes [ √ ] No [ ]
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
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Large accelerated filer |
[ √ ] |
Accelerated filer |
[ ] |
Non-accelerated filer |
[ ] |
Smaller reporting company |
[ ] |
Indicate by check mark whether the registrant is
a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ √ ]
The registrant had 28.8 million shares of Class
A Common Stock and 3.2 million shares of Class B Common Stock outstanding as of April 23, 2015.
ALBANY INTERNATIONAL
CORP.
TABLE OF CONTENTS
ALBANY INTERNATIONAL CORP. |
CONSOLIDATED STATEMENTS OF INCOME |
(in thousands, except per share data) |
(unaudited) |
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
March 31, |
|
|
|
|
|
2015 |
|
2014 |
|
|
|
|
Net sales |
$181,324 |
|
$180,307 |
Cost of goods sold |
104,640 |
|
105,498 |
|
|
|
|
Gross profit |
76,684 |
|
74,809 |
Selling, general, and administrative expenses |
35,233 |
|
39,157 |
Technical, product engineering, and research expenses |
12,301 |
|
13,869 |
Restructuring and other, net |
9,001 |
|
1,182 |
|
|
|
|
Operating income |
20,149 |
|
20,601 |
Interest expense, net |
2,676 |
|
2,918 |
Other (income)/expenses, net |
(3,285) |
|
(467) |
|
|
|
|
Income before income taxes |
20,758 |
|
18,150 |
Income tax expense |
8,519 |
|
7,457 |
|
|
|
|
Net income |
12,239 |
|
10,693 |
Net income attributable to the noncontrolling interest |
26 |
|
72 |
Net income attributable to the Company |
$12,213 |
|
$10,621 |
|
|
|
|
Earnings per share attributable to Company shareholders - Basic |
$0.38 |
|
$0.33 |
|
|
|
|
Earnings per share attributable to Company shareholders - Diluted |
$0.38 |
|
$0.33 |
|
|
|
|
Shares of the Company used in computing earnings per share: |
|
|
|
Basic |
31,882 |
|
31,786 |
Diluted |
31,972 |
|
31,892 |
|
|
|
|
Dividends per share |
$0.16 |
|
$0.15 |
|
|
|
|
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, |
|
|
|
|
|
2015 |
|
2014 |
|
|
|
|
Net income |
$12,239 |
|
$10,693 |
|
|
|
|
Other comprehensive income/(loss), before tax: |
|
|
|
Foreign currency translation adjustments |
(35,683) |
|
(5,228) |
Amortization of pension liability adjustments: |
|
|
|
Prior service (credit)/cost |
(1,109) |
|
(1,109) |
Net actuarial loss |
1,505 |
|
1,328 |
Payments related to derivatives included in earnings |
486 |
|
478 |
Derivative valuation adjustment |
(1,107) |
|
(360) |
|
|
|
|
Income taxes related to items of other comprehensive income/(loss): |
|
|
|
Amortization of pension liability adjustment |
(139) |
|
(88) |
Payments related to derivatives included in earnings |
(190) |
|
(186) |
Derivative valuation adjustment |
432 |
|
140 |
Comprehensive (loss)/income |
(23,566) |
|
5,668 |
Net income attributable to the noncontrolling interest |
27 |
|
72 |
Comprehensive (loss)/income attributable to the Company |
($23,593) |
|
$5,596 |
|
|
|
|
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, |
|
2015 |
|
2014 |
ASSETS |
|
|
|
Cash and cash equivalents |
$170,838 |
|
$179,802 |
Accounts receivable, net |
163,409 |
|
158,237 |
Inventories |
104,820 |
|
107,274 |
Deferred income taxes |
6,576 |
|
6,743 |
Prepaid expenses and other current assets |
10,412 |
|
8,074 |
Total current assets |
456,055 |
|
460,130 |
|
|
|
|
Property, plant and equipment, net |
380,864 |
|
395,113 |
Intangibles |
328 |
|
385 |
Goodwill |
65,724 |
|
71,680 |
Income taxes receivable and deferred |
65,732 |
|
69,540 |
Other assets |
32,916 |
|
32,456 |
Total assets |
$1,001,619 |
|
$1,029,304 |
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
Notes and loans payable |
$496 |
|
$661 |
Accounts payable |
36,361 |
|
34,787 |
Accrued liabilities |
88,987 |
|
95,149 |
Current maturities of long-term debt |
50,015 |
|
50,015 |
Income taxes payable and deferred |
1,810 |
|
2,786 |
Total current liabilities |
177,669 |
|
183,398 |
|
|
|
|
Long-term debt |
232,092 |
|
222,096 |
Other noncurrent liabilities |
98,496 |
|
103,079 |
Deferred taxes and other credits |
6,918 |
|
7,163 |
Total liabilities |
515,175 |
|
515,736 |
|
|
|
|
SHAREHOLDERS' EQUITY |
|
|
|
Preferred stock, par value $5.00 per share; |
|
|
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authorized 2,000,000 shares; none issued |
- |
|
- |
Class A Common Stock, par value $.001 per share; |
|
|
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authorized 100,000,000 shares; issued 37,175,813 |
|
|
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in 2015 and 37,085,489 in 2014 |
37 |
|
37 |
Class B Common Stock, par value $.001 per share; |
|
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authorized 25,000,000 shares; issued and |
|
|
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outstanding 3,235,048 in 2015 and 2014 |
3 |
|
3 |
Additional paid in capital |
420,493 |
|
418,972 |
Retained earnings |
463,238 |
|
456,105 |
Accumulated items of other comprehensive income: |
|
|
|
Translation adjustments |
(92,653) |
|
(55,240) |
Pension and postretirement liability adjustments |
(49,679) |
|
(51,666) |
Derivative valuation adjustment |
(1,240) |
|
(861) |
Treasury stock (Class A), at cost 8,459,498 shares |
|
|
|
in 2015 and 2014 |
(257,481) |
|
(257,481) |
Total Company shareholders' equity |
482,718 |
|
509,869 |
Noncontrolling interest |
3,726 |
|
3,699 |
Total equity |
486,444 |
|
513,568 |
Total liabilities and shareholders' equity |
$1,001,619 |
|
$1,029,304 |
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements |
ALBANY INTERNATIONAL CORP. |
CONSOLIDATED STATEMENTS OF CASH FLOW |
(in thousands) |
(unaudited) |
|
|
|
|
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|
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Three Months Ended |
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|
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March 31, |
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|
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|
|
|
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|
|
|
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2015 |
|
2014 |
OPERATING ACTIVITIES |
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|
|
|
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Net income |
|
|
|
$12,239 |
|
$10,693 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
Depreciation |
|
|
13,524 |
|
14,107 |
|
Amortization |
|
|
1,830 |
|
1,801 |
|
Change in long-term liabilities, deferred taxes and other credits |
(277) |
|
(214) |
|
Provision for write-off of property, plant and equipment |
152 |
|
1 |
|
Gain on disposition of assets |
|
|
(1,056) |
|
- |
|
Excess tax benefit of options exercised |
|
(261) |
|
(39) |
|
Compensation and benefits paid or payable in Class A Common Stock |
576 |
|
542 |
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities that provide/(use) cash: |
|
|
|
|
Accounts receivable |
|
|
(13,699) |
|
10,964 |
|
Inventories |
|
|
|
(3,070) |
|
(8,996) |
|
Prepaid expenses and other current assets |
|
(2,705) |
|
(2,148) |
|
Income taxes prepaid and receivable |
|
84 |
|
21 |
|
Accounts payable |
|
|
3,512 |
|
(1,294) |
|
Accrued liabilities |
|
|
(1,587) |
|
(12,849) |
|
Income taxes payable |
|
|
(398) |
|
(1,710) |
|
Other, net |
|
|
|
(2,455) |
|
(2,031) |
|
Net cash provided by operating activities |
|
6,409 |
|
8,848 |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
(12,211) |
|
(14,603) |
|
Purchased software |
|
|
(33) |
|
(294) |
|
Proceeds from sale of assets |
|
|
2,797 |
|
- |
|
Net cash used in investing activities |
|
(9,447) |
|
(14,897) |
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
Proceeds from borrowings |
|
|
15,274 |
|
4,435 |
|
Principal payments on debt |
|
|
(5,443) |
|
(6,516) |
|
Proceeds from options exercised |
|
|
685 |
|
126 |
|
Excess tax benefit of options exercised |
|
261 |
|
39 |
|
Dividends paid |
|
|
(5,098) |
|
(4,765) |
|
Net cash provided by/(used in) financing activities |
5,679 |
|
(6,681) |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
(11,605) |
|
(1,557) |
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
(8,964) |
|
(14,287) |
Cash and cash equivalents at beginning of period |
179,802 |
|
222,666 |
Cash and cash equivalents at end of period |
|
$170,838 |
|
$208,379 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements |
ALBANY INTERNATIONAL
CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
1.
Basis of Presentation
In the
opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of only
normal recurring adjustments and elimination of intercompany transactions necessary for a fair presentation of results for such
periods. Albany International Corp. (“Albany”) consolidates the financial results of its subsidiaries for all periods
presented. The results for any interim period are not necessarily indicative of results for the full year. The 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 fiscal year ended December
31, 2014.
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.
2.
Noncontrolling Interest
The table
below presents a reconciliation of income attributable to the noncontrolling interest and noncontrolling equity:
|
Three months ended
March 31, |
(in thousands, except percentages) |
2015 |
2014 |
Net income of Albany Safran Composites, LLC (ASC) |
$511 |
$967 |
Return attributable to the Company's preferred holding |
(255) |
(246) |
Net income of ASC available for common ownership |
256 |
721 |
Ownership percentage of noncontrolling shareholder |
10% |
10% |
Net income attributable to noncontrolling interest |
$26 |
$72 |
|
|
|
Noncontrolling interest, beginning of year |
$3,699 |
$3,482 |
Net income attributable to noncontrolling interest |
26 |
72 |
Changes in other comprehensive income attributable to noncontrolling interest |
1 |
- |
Noncontrolling interest, year to date |
$3,726 |
$3,554 |
3.
Reportable Segments
The following
tables show data by reportable segment, reconciled to consolidated totals included in the financial statements:
|
Three months ended March 31, |
(in thousands) |
2015 |
2014 |
Net sales |
|
|
Machine Clothing |
$158,494 |
$164,088 |
Albany Engineered Composites |
22,830 |
16,219 |
Consolidated total |
$181,324 |
$180,307 |
Operating income |
|
|
Machine Clothing |
$35,689 |
$36,142 |
Albany Engineered Composites |
(3,811) |
(3,475) |
Corporate expenses |
(11,729) |
(12,066) |
Operating income before reconciling items |
20,149 |
20,601 |
Reconciling items: |
|
|
Interest income |
(340) |
(196) |
Interest expense |
3,016 |
3,114 |
Other expense/(income), net |
(3,285) |
(467) |
Income before income taxes |
$20,758 |
$18,150 |
The table
below presents restructuring costs by reportable segment (also see Note 5):
|
Three months ended March 31, |
(in thousands) |
2015 |
2014 |
Restructuring expense |
|
|
Machine Clothing |
$9,001 |
$862 |
Albany Engineered Composites |
- |
320 |
Consolidated total |
$9,001 |
$1,182 |
2015
Machine Clothing restructuring expense was principally related to the announced plan to discontinue manufacturing operations at
its press fabric manufacturing facility in Germany. Machine Clothing restructuring costs in 2014 were principally related to restructuring
actions in France. Albany Engineered Composites restructuring expense in 2014 was related to organizational changes.
There
were no material changes in the total assets of the reportable segments during this period.
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 life insurance benefits to retired employees in the U.S. and Canada. The Company accrues
the cost of providing postretirement benefits during the active service period of the employees. The Company currently funds the
plan as claims are paid.
The composition
of the net periodic benefit plan cost for the three months ended March 31, 2015 and 2014 was as follows:
|
Pension plans |
Other postretirement benefits |
(in thousands) |
2015 |
2014 |
2015 |
2014 |
Components of net periodic benefit cost: |
|
|
|
|
Service cost |
$790 |
$825 |
$83 |
$79 |
Interest cost |
2,013 |
2,359 |
610 |
686 |
Expected return on assets |
(2,235) |
(2,371) |
- |
- |
Amortization of prior service cost/(credit) |
13 |
13 |
(1,122) |
(1,122) |
Amortization of net actuarial loss |
670 |
601 |
835 |
727 |
Curtailment gain |
- |
(493) |
- |
- |
Net periodic benefit cost |
$1,251 |
$934 |
$406 |
$370 |
5.
Restructuring
During
the first quarter of 2015, the Company announced a plan to discontinue manufacturing operations at its press fabric
manufacturing facility in Göppingen, Germany. The restructuring program was driven by the Company’s
need to balance manufacturing capacity with demand. In April 2015, we completed negotiations and reached agreement on
the restructuring plan with the Works Council. Approximately 50 employees will be terminated under this plan, and the
restructuring expense recorded in the first quarter of 2015 reflects our estimate of the severance costs. Manufacturing
operations will be discontinued in the second quarter of 2015. It is likely that we will record additional charges for
asset impairments, but the amounts are presently not estimable. Whereas the affected employees are related to
manufacturing operations, cost savings associated with this action will flow through Cost of goods sold.
Machine
Clothing restructuring costs in 2014 were principally related to restructuring actions in France. Albany Engineered Composites
restructuring expense in 2014 was related to organizational changes.
The following
table summarizes charges reported in the Statements of Income under “Restructuring and other, net”:
|
Three months ended
March 31, |
(in thousands) |
2015 |
2014 |
Machine Clothing |
$9,001 |
$862 |
Albany Engineered Composites |
- |
320 |
Total |
$9,001 |
$1,182 |
Three months ended March 31, 2015
(in thousands) |
Total
restructuring
costs
incurred |
Termination
and other
costs |
Impairment
of plant and
equipment |
Benefit
plan
curtailment/
settlement |
Machine Clothing |
$9,001 |
$9,001 |
$- |
$- |
Albany Engineered Composites |
- |
- |
- |
- |
Total |
$9,001 |
$9,001 |
$- |
$- |
Three months ended March 31, 2014
(in thousands) |
Total
restructuring
costs
incurred |
Termination
and other
costs |
Impairment
of plant and
equipment |
Benefit
plan
curtailment/
settlement |
Machine Clothing |
$862 |
$1,355 |
$- |
($493) |
Albany Engineered Composites |
320 |
320 |
- |
- |
Total |
$1,182 |
$1,675 |
$- |
$(493) |
We expect
that substantially all Accrued liabilities for restructuring will be paid within one year. The table below presents year-to-date
changes in restructuring liabilities for 2015 and 2014, all of which related to termination costs:
|
December 31, |
Restructuring |
|
Currency |
March 31, |
(in thousands) |
2014 |
charges accrued |
Payments |
translation /other |
2015 |
|
|
|
|
|
|
Total Termination costs |
$1,874 |
$9,001 |
$(2,122) |
$(228) |
$8,525 |
|
December 31, |
Restructuring |
|
Currency |
March 31, |
(in thousands) |
2013 |
charges accrued |
Payments |
translation /other |
2014 |
|
|
|
|
|
|
Total Termination costs |
$9,656 |
$1,182 |
($4,633) |
$481 |
$6,686 |
6.
Other (Income)/Expenses, net
The components
of Other (income)/expenses, net, are:
|
Three months ended
March 31, |
(in thousands) |
2015 |
2014 |
Currency transactions |
($2,427) |
($505) |
Bank fees and amortization of debt issuance costs |
311 |
312 |
Gain on sale of investment |
(872) |
- |
Other |
(297) |
(274) |
Total |
($3,285) |
($467) |
In March
2015, the Company sold its total equity investment in an unaffiliated company. The value of the investment was written off in
2004, resulting in a gain of $0.9 million in the first quarter of 2015.
7.
Income Taxes
The following
table presents components of income tax expense for the three months ended March 31, 2015 and 2014:
|
Three months ended
March 31, |
(in thousands) |
2015 |
2014 |
|
|
|
Income tax based on income from continuing operations, at estimated tax rates of 40.0% and 35.0%, respectively |
$8,300 |
$6,353 |
Income tax before discrete items |
8,300 |
6,353 |
|
|
|
Discrete tax expense: |
|
|
Provision for/resolution of tax audits and contingencies, net |
83 |
880 |
Adjustments to prior period tax liabilities |
45 |
224 |
Enacted tax legislation |
91 |
- |
Total income tax expense |
$8,519 |
$7,457 |
The first
quarter estimated effective tax rate on continuing operations was 40.0 percent in 2015, as compared to 35.0 percent for the same
period in 2014.
The Company
records the residual U.S. and foreign taxes on certain amounts of current year foreign earnings that have been targeted for repatriation
to the U.S. As a result, such amounts are not considered to be permanently reinvested, and the Company accrued as part of the
income tax provision before discrete items, for the residual taxes on these earnings to the extent they cannot be repatriated
in a tax-free manner. At March 31, 2015 the Company reported a deferred tax liability of $3.7 million on $59.4 million of prior
year non-U.S. earnings that had been targeted for future repatriation to the U.S.
We conduct
business globally and, as a result, the Company files income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. In the normal course of business we are 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 2000 to 2014. We are currently under audit in the
U.S. and
in other non-U.S. tax jurisdictions, including but not limited to Canada, Germany, Switzerland 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 $8.8 million to a net decrease of $2.4 million, from the reevaluation of uncertain tax positions arising in examinations,
in appeals, or in the courts, or from the closure of tax statutes.
The Company
recognized current and deferred tax benefits of approximately $25.3 million on their corporate income tax returns filed in Germany
related to a 1999 reorganization that have been challenged by the German tax authorities in the course of an audit. In 2008
the German Federal Tax Court (FTC) denied tax benefits to other taxpayers in a case involving German tax laws relevant to our
reorganization. One of these cases involved a non-German party, and in the ruling in that case, the FTC acknowledged that the
German law in question may be violative of European Union (EU) principles and referred the issue to the European Court of Justice
(ECJ) for its determination on this issue. In September 2009, the ECJ issued an opinion in this case that is generally favorable
to the other taxpayer and referred the case back to the FTC for further consideration. In May 2010 the FTC released its decision,
in which it resolved certain tax issues that may be relevant to our audit and remanded the case to a lower court for further development.
In 2012, the lower court decided in favor of the taxpayer and the government appealed the findings to the FTC. On July 2,
2014, The FTC conducted a hearing in the aforementioned case involving the other taxpayer, and the taxpayer lost. The final
written decision of the FTC was published during the fourth quarter of 2014. Although the decision of the FTC in the case
is not determinative of the outcome in our case, management viewed the conclusion of this matter as an opportunity to approach
the German tax authorities with the goal of a settlement agreement. We were required to pay tax and interest of approximately
$14.5 million to the German tax authorities in order to pursue our appeal position. In anticipation of a settlement, a portion
of the prepaid taxes and interest along with certain deferred tax assets were adjusted downward by $6.3 million in 2014. The recognition
of the uncertain tax position in deferred tax assets was partially offset by a reduction in a valuation allowance that offset
the deferred tax assets. The remaining tax benefits sustained on the books are related to current tax benefits that were recognized
in earlier tax years. Included in the range above is approximately $8.8 million of tax benefits that will continue to be challenged
by the German tax authorities.
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) |
2015 |
2014 |
|
|
|
Net income attributable to the Company |
$12,213 |
$10,621 |
|
|
|
Weighted average number of shares: |
|
|
Weighted average number of shares used in |
|
|
calculating basic net income per share |
31,882 |
31,786 |
Effect of dilutive stock-based compensation plans: |
|
|
Stock options |
90 |
106 |
|
|
|
Weighted average number of shares used in |
|
|
calculating diluted net income per share |
31,972 |
31,892 |
|
|
|
Average market price of common stock used |
|
|
for calculation of dilutive shares |
$37.36 |
$35.68 |
|
|
|
Earnings per share attributable to Company shareholders: |
|
Basic |
$0.38 |
$0.33 |
Diluted |
$0.38 |
$0.33 |
9.
Accumulated Other Comprehensive Income/(Loss)
The table
below presents changes in the components of AOCI for the period December 31, 2014 to March 31, 2015:
(in thousands) |
Translation
adjustments |
Pension and
postretirement
liability
adjustments |
Derivative
valuation
adjustment |
Total Other
Comprehensive
Income |
December 31, 2014 |
($55,240) |
($51,666) |
($861) |
($107,767) |
Other comprehensive income before reclassifications |
(37,413) |
1,730 |
(675) |
(36,358) |
Interest expense related to swaps reclassified to the Statement of Income, net of tax |
|
|
296 |
296 |
Pension and postretirement liability adjustments reclassified to Statement of Income, net of tax |
|
257 |
|
257 |
Net current period other comprehensive income |
(37,413) |
1,987 |
(379) |
(35,805) |
March 31, 2015 |
($92,653) |
($49,679) |
($1,240) |
($143,572) |
The table
below presents changes in the components of AOCI for the period December 31, 2013 to March 31, 2014:
(in thousands) |
Translation
adjustments |
Pension and
postretirement
liability
adjustments |
Derivative
valuation
adjustment |
Total Other
Comprehensive
Income |
December 31, 2013 |
($138) |
($48,383) |
($977) |
($49,498) |
Other comprehensive income before reclassifications |
(5,599) |
371 |
(220) |
(5,448) |
Interest expense related to swaps reclassified to the Statement of Income, net of tax |
|
|
292 |
292 |
Pension and postretirement liability adjustments reclassified to Statement of Income, net of tax |
|
131 |
|
131 |
Net current period other comprehensive income |
(5,599) |
502 |
72 |
(5,025) |
March 31, 2014 |
($5,737) |
($47,881) |
($905) |
($54,523) |
The table
below presents the expense/(income) amounts reclassified, and the line items of the Statement of Income that were affected for
the periods March 31, 2015 and 2014.
|
Three months ended
March 31, |
(in thousands) |
2015 |
2014 |
Pretax Derivative valuation reclassified from Accumulated Other Comprehensive Income: |
|
|
Payments made on interest rate swaps included in Income before taxes(a) |
$486 |
$478 |
Income tax effect |
(190) |
(186) |
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income |
$296 |
$292 |
|
|
|
Pretax pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income: |
|
|
Amortization of prior service cost/(credit) |
($1,109) |
($1,109) |
Amortization of net actuarial loss |
1,505 |
1,328 |
Total pretax amount reclassified (b) |
396 |
219 |
Income tax effect |
(139) |
(88) |
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income |
$257 |
$131 |
| (a) | Included
in Interest expense. |
| (b) | These
accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 4). |
10.
Accounts Receivable
Accounts
receivable includes trade receivables and revenue in excess of progress billings on long-term contracts in the Albany Engineered
Composites business. 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, 2015 and December 31, 2014, accounts receivable consisted of the following:
(in thousands) |
March 31,
2015 |
December 31,
2014 |
Trade and other accounts receivable |
$133,219 |
$136,479 |
Bank promissory notes |
17,156 |
17,426 |
Revenue in excess of progress billings |
20,909 |
13,045 |
Allowance for doubtful accounts |
(7,875) |
(8,713) |
Total accounts receivable |
$163,409 |
$158,237 |
In connection
with certain sales in Asia Pacific, 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.
11.
Inventories
Inventories
are stated at the lower of cost or market, and are valued at average cost, net of reserves. Costs included in inventory are raw
materials, labor, supplies, and allocable depreciation and overhead. The Company maintains reserves for possible impairment in
the value of inventories. Such reserves can be specific to certain inventory, or general based on judgments about the overall
condition of the inventory. General reserves are established based on percentage write-downs applied to aged inventories, or for
inventories that are slow-moving. If actual results differ from estimates, additional inventory write-downs may be necessary.
These general reserves for aged inventory are relieved through income only when the inventory is sold.
As of
March 31, 2015 and December 31, 2014, inventories consisted of the following:
(in thousands) |
March 31,
2015 |
December 31,
2014 |
Raw materials |
$24,612 |
$27,006 |
Work in process |
43,639 |
43,512 |
Finished goods |
36,569 |
36,756 |
Total inventories |
$104,820 |
$107,274 |
12.
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. Our reporting units are consistent with our operating segments.
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.
The entire
balance of goodwill on our books is attributable to the Machine Clothing business. There were no amounts at risk due to the large
spread between the fair and carrying values.
We are
continuing to amortize certain patents, trade names, customer contracts and technology assets that have finite lives. The changes
in intangible assets and goodwill from December 31, 2014 to March 31, 2015, were as follows:
|
December 31,
2014 |
Amortization |
Currency
Translation |
March 31,
2015 |
(in thousands) |
|
|
|
|
|
Amortized intangible assets: |
|
|
|
|
AEC trade names |
$29 |
($1) |
$- |
$28 |
AEC customer contracts |
202 |
(50) |
- |
152 |
AEC technology |
154 |
(6) |
- |
148 |
Total amortized intangible assets |
$385 |
($57) |
$- |
$328 |
|
|
|
|
|
Unamortized intangible assets: |
|
|
|
|
Goodwill |
$71,680 |
$- |
($5,956) |
$65,724 |
Estimated
amortization expense of intangibles for the years ending December 31, 2015 through 2019, is as follows:
|
Annual amortization |
Year |
(in thousands) |
2015 |
$231 |
2016 |
29 |
2017 |
29 |
2018 |
29 |
2019 |
29 |
13.
Financial Instruments
Long-term
debt, principally to banks and bondholders, consists of:
(in thousands, except interest rates) |
March 31, 2015 |
December 31, 2014 |
|
|
|
Private placement with a fixed interest rate of 6.84%, due 2015 and 2017 |
$100,000 |
$100,000 |
|
|
|
Credit agreement with borrowings outstanding at an end of period interest rate of 2.63% in 2015 and 2.69% in 2014 (including the effect of interest rate hedging transactions, as described below), due in 2018 |
182,000 |
172,000 |
|
|
|
Various notes and mortgages relative to operations principally outside the United States, at an average end of period rate of 5.5% in 2015 and 2014, due in varying amounts through 2021 |
107 |
111 |
|
|
|
Long-term debt |
282,107 |
272,111 |
|
|
|
Less: current portion |
(50,015) |
(50,015) |
|
|
|
Long-term debt, net of current portion |
$232,092 |
$222,096 |
A note
agreement and guaranty (“Prudential Agreement”) was entered into in October 2005, and was amended and restated as
of September 17, 2010 and March 26, 2013, with the Prudential Insurance Company of America, and certain other purchasers with
interest at 6.84% and a maturity date of October 25, 2017. The remaining obligation under the Prudential Agreement has a mandatory
payment of $50 million due on October 25, 2015, and the final payment is due October 25, 2017. At the noteholders’ election,
certain prepayments may also be required in connection with certain asset dispositions or financings. The notes may not otherwise
be prepaid without a premium, under certain market conditions. The Prudential Agreement contains customary terms, as well as affirmative
covenants, negative covenants, and events of default comparable to those in our current principal credit facility (as described
below). For disclosure purposes, we are required to measure the fair value of outstanding debt on a recurring basis. As of March
31, 2015, the fair value of this debt was approximately $109.6 million, and was measured using active market interest rates, which
would be considered Level 2 for fair value measurement purposes.
On March
26, 2013, we entered into a $330 million, unsecured Five-Year Revolving Credit Facility Agreement (“Credit Agreement”),
under which $182 million of borrowings were outstanding as of March 31, 2015. The Credit Agreement replaces the previous $390
million five-year Credit Agreement made in 2010. The applicable interest rate for borrowings under the Credit Agreement, as well
as under the former agreement, is LIBOR plus a spread, based on our leverage ratio at the time of borrowing. At the time of the
last borrowing on March 23, 2015, the spread was 1.375%. The spread is based on a pricing grid, which ranges from 1.25% to 1.875%,
based on our leverage ratio.
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. Based on our maximum leverage ratio and our consolidated EBITDA (as defined in the Credit Agreement),
and without modification to any other credit agreements, as of March 31, 2015, we would have been able to borrow an additional
$148 million under the Credit Agreement.
On July
16, 2010, we entered into interest rate hedging transactions that have the effect of fixing the LIBOR portion of the effective
interest rate (before addition of the spread) on $105 million of
the indebtedness
drawn under the Credit Agreement at the rate of 2.04% until July 16, 2015. Under the terms of these transactions, we pay the fixed
rate of 2.04% and the counterparties pay a floating rate based on the three-month LIBOR rate at each quarterly calculation date,
which on January 16, 2015 was 0.26%. The net effect is to fix the effective interest rate on $105 million of indebtedness at 2.04%,
plus the applicable spread, until these swap agreements expire. On March 31, 2015, the all-in rate on the $105 million of debt
was 3.415%.
On May
20, 2013, we entered into interest rate hedging transactions for the period July 16, 2015 through March 16, 2018. These transactions
have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $110 million of
indebtedness drawn under the Credit Agreement at the rate of 1.414% during this period. Under the terms of these transactions,
we pay the fixed rate of 1.414% and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly calculation
date, which on March 31, 2015 was 0.17625%. The net effect is to fix the effective interest rate on $110 million of indebtedness
at 1.414%, plus the applicable spread, during the swap period.
These
interest rate swaps are accounted for as a hedge of future cash flows, as further described in Note 14 of the Notes to Consolidated
Financial Statements. No cash collateral was received or pledged in relation to the swap agreements.
Under
the Credit Agreement and Prudential Agreement, we are currently required to maintain a leverage ratio (as defined in the agreements)
of not greater than 3.50 to 1.00 and minimum interest coverage (as defined) of 3.00 to 1.00.
As of
March 31, 2015, our leverage ratio was 1.28 to 1.00 and our interest coverage ratio was 13.94 to 1.00. We may purchase our Common
Stock or pay dividends to the extent our leverage ratio remains at or below 3.50 to 1.00, and may make acquisitions with cash
provided our leverage ratio would not exceed 3.50 to 1.00 after giving pro forma effect to the acquisition.
Indebtedness
under each of the Prudential Agreement and the Credit Agreement is ranked equally in right of payment to all unsecured senior
debt.
We were
in compliance with all debt covenants as of March 31, 2015.
14.
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. As of March 31, 2015 and December 31, 2014, we have no Level 3 financial assets or
liabilities.
The following
table presents the fair-value hierarchy for our Level 1 and Level 2 financial assets and liabilities measured at fair value on
a recurring basis:
|
|
March 31, 2015 |
|
December 31, 2014 |
|
|
|
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 |
|
$19,391 |
|
$- |
|
$14,096 |
|
$- |
|
Prepaid expenses and other current assets: |
|
|
|
|
|
|
|
|
|
Foreign currency options |
|
286 |
|
- |
|
69 |
|
- |
|
Other Assets: |
|
|
|
|
|
|
|
|
|
Common stock of unaffiliated foreign public company |
735 |
|
- |
|
701 |
|
- |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities: |
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
- |
|
(2,034) |
(a) |
- |
|
(1,411) |
(b) |
| (a) | Net
of $3.2 million receivable floating leg and $5.2 million liability fixed leg |
| (b) | Net
of $4.3 million receivable floating leg and $5.7 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.
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 (income)/expenses, net.
When
exercised, the foreign currency instruments are net settled with the same financial institution that bought or sold them. For
all positions, whether options or forward contracts, there is risk from the possible inability of the financial institution to
meet the terms of the contracts and the risk of unfavorable changes in interest and currency rates, which may reduce the value
of the instruments. We seek to control risk by evaluating the creditworthiness of counterparties and by monitoring the currency
exchange and interest rate markets while reviewing the hedging risks and contracts to ensure compliance with our internal guidelines
and policies.
We operate
our business in many regions of the world, and currency rate movements can have a significant effect on operating results.
Changes
in exchange rates can result in revaluation gains and losses that are recorded in Selling, General and Administrative expenses
or Other (income)/expenses, net. Revaluation gains and losses occur when our business units have cash, intercompany (recorded
in Other (income)/expenses, 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 Statement 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 Other noncurrent
liabilities in the Consolidated Balance Sheets. Unrealized gains and losses on the swaps will 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, 2015, these interest rate swaps were determined to be 100% effective hedges of interest
rate cash flow risk. 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) affect earnings. Interest expense related to the swaps totaled $0.5 million
for each of the three month periods ended March 31, 2015 and 2014.
Gains/
(losses) related to changes in fair value of derivative instruments that were recognized in Other (income)/expenses, net in the
Statements of Income were as follows:
|
Three months ended
March 31, |
(in thousands) |
2015 |
2014 |
|
|
|
Derivatives not designated as hedging instruments |
|
|
Forward currency options |
$217 |
$74 |
15.
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 products that we previously manufactured. We produced
asbestos-containing paper machine clothing synthetic dryer fabrics marketed during the period from 1967 to 1976 and used in certain
paper mills. Such fabrics generally had a useful life of three to twelve months.
We were
defending 3,813 claims as of March 31, 2015.
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 |
2005 |
29,411 |
6,257 |
1,297 |
24,451 |
$504 |
2006 |
24,451 |
6,841 |
1,806 |
19,416 |
3,879 |
2007 |
19,416 |
808 |
190 |
18,798 |
15 |
2008 |
18,798 |
523 |
110 |
18,385 |
52 |
2009 |
18,385 |
9,482 |
42 |
8,945 |
88 |
2010 |
8,945 |
3,963 |
188 |
5,170 |
159 |
2011 |
5,170 |
789 |
65 |
4,446 |
1,111 |
2012 |
4,446 |
90 |
107 |
4,463 |
530 |
2013 |
4,463 |
230 |
66 |
4,299 |
78 |
2014 |
4,299 |
625 |
147 |
3,821 |
437 |
As of March 31, 2015 |
3,821 |
22 |
14 |
3,813 |
$69 |
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.
Exposure
and disease information sufficient to meaningfully estimate a range of possible loss of a particular claim is typically not available
until late in the discovery process, and often not until a trial date is imminent and a settlement demand has been received. For
these reasons, we do not believe a meaningful estimate can be made regarding the range of possible loss with respect to pending
or future claims.
While
we believe we have meritorious defenses to these claims, we have settled certain claims for amounts we consider reasonable given
the facts and circumstances of each case. Our insurer, Liberty Mutual, has defended each case and funded settlements under a standard
reservation of rights. As of March 31, 2015 we had resolved, by means of settlement or dismissal, 37,247 claims. The total cost
of resolving all claims was $9.3 million. Of this amount, almost 100% was paid by our insurance carrier. The Company’s insurer
has confirmed that although the coverage limits under two (of approximately 23) primary insurance policies have been exhausted,
there still remains approximately $3 million in coverage limits under other applicable primary policies, and $140 million in coverage
under excess umbrella coverage policies that should be available with respect to current and future asbestos claims.
Brandon
Drying Fabrics, Inc. (“Brandon”), a subsidiary of Geschmay Corp., which is a subsidiary of the Company, is also a
separate defendant in many of the asbestos cases in which Albany is named as a defendant. Brandon was defending against 7,730
claims as of March 31, 2015.
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 |
2005 |
9,985 |
642 |
223 |
9,566 |
$- |
2006 |
9,566 |
1,182 |
730 |
9,114 |
- |
2007 |
9,114 |
462 |
88 |
8,740 |
- |
2008 |
8,740 |
86 |
10 |
8,664 |
- |
2009 |
8,664 |
760 |
3 |
7,907 |
- |
2010 |
7,907 |
47 |
9 |
7,869 |
- |
2011 |
7,869 |
3 |
11 |
7,877 |
- |
2012 |
7,877 |
12 |
2 |
7,867 |
- |
2013 |
7,867 |
55 |
3 |
7,815 |
- |
2014 |
7,815 |
87 |
2 |
7,730 |
|
As of March 31, 2015 |
7,730 |
- |
- |
7,730 |
$- |
We acquired
Geschmay Corp., formerly known as Wangner Systems Corporation, in 1999. Brandon is a wholly owned subsidiary of Geschmay Corp.
In 1978, Brandon acquired certain assets from Abney Mills (“Abney”), a South Carolina textile manufacturer. Among
the assets acquired by Brandon from Abney were assets of Abney’s wholly owned subsidiary, Brandon Sales, Inc. which had
sold, among other things, dryer fabrics containing asbestos made by its parent, Abney. Although Brandon manufactured and sold
dryer fabrics under its own name subsequent to the asset purchase, none of such fabrics contained asbestos. Because Brandon did
not manufacture asbestos-containing products, and because it does not believe that it was the legal successor to, or otherwise
responsible for obligations of Abney with respect to products manufactured by Abney, it believes it has strong defenses to the
claims that have been asserted against it. As of March 31, 2015, Brandon has resolved, by means of settlement or dismissal, 9,875
claims for a total of $0.2 million. Brandon’s insurance carriers initially agreed to pay 88.2% of the total indemnification
and defense costs related to these proceedings, subject to the standard reservation of rights. The remaining 11.8% of the costs
had been borne directly by Brandon. During 2004, Brandon’s insurance carriers agreed to cover 100% of indemnification and
defense costs, subject to policy limits and the standard reservation of rights, and to reimburse Brandon for all indemnity and
defense costs paid directly by Brandon related to these proceedings.
For the
same reasons set forth above with respect to Albany’s claims, as well as the fact that no amounts have been paid to resolve
any Brandon claims since 2001, we do not believe a meaningful estimate can be made regarding the range of possible loss with respect
to these remaining claims.
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.
Although
we do not believe, based on currently available information and for the reasons stated above, that a meaningful estimate of a
range of possible loss can be made with respect to such claims, based on our understanding of the insurance policies available,
how settlement amounts have been allocated to various policies, our settlement experience, the absence of any judgments against
the Company
or Brandon, the ratio of paper mill claims to total claims filed, and the defenses available, we currently do not anticipate any
material liability relating to the resolution of the aforementioned pending proceedings in excess of existing insurance limits.
Consequently,
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 and the trends in claims against us to date,
we do not anticipate that additional claims likely to be filed against us in the future will have a material adverse effect on
our financial position, results of operations, or cash flows. We are aware that litigation is inherently uncertain, especially
when the outcome is dependent primarily on determinations of factual matters to be made by juries.
16.
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 |
Treasury
stock |
Noncontrolling
Interest |
Total
Shareholders’
Equity |
December
31, 2014 |
$40 |
$418,972 |
$456,105 |
($107,767) |
($257,481) |
$3,699 |
$513,568 |
Compensation and benefits paid or payable in shares |
- |
575 |
- |
- |
- |
- |
575 |
Options exercised |
- |
946 |
- |
- |
- |
- |
946 |
Net income attributable to the Company |
- |
- |
12,213 |
- |
- |
26 |
12,239 |
Dividends declared |
- |
- |
(5,080) |
- |
- |
- |
(5,080) |
Cumulative translation adjustments |
- |
- |
- |
(37,413) |
- |
1 |
(37,412) |
Pension and postretirement liability adjustments |
- |
- |
- |
1,987 |
- |
- |
1,987 |
Derivative valuation adjustment |
- |
- |
- |
(379) |
- |
- |
(379) |
March
31, 2015 |
$40 |
$420,493 |
$463,238 |
($143,572) |
($257,481) |
$3,726 |
$486,444 |
17. Recent
Accounting Pronouncements
In April
2014, an accounting update was issued regarding which disposals qualify for reporting as discontinued operations. Additionally,
new disclosures will apply for discontinued operations. This accounting update was adopted in 2015 and had no effect on our
financial statements.
In June
2014, an accounting update was issued that replaces the existing revenue recognition framework regarding contracts with customers.
In April 2015, the FASB proposed a one year delay in the required adoption date. We have not determined the impact of this update
on our financial statements.
In June
2014, an accounting update was issued relating to accounting for share-based payments with a performance target that could be
achieved after the requisite service period. The adoption of this accounting guidance will be effective for reporting periods
beginning after December 15, 2015. We do not expect the adoption of this update to have a significant effect on our financial
statements.
In August
2014, an accounting update was issued relating to how management assesses conditions and events that could raise substantial doubt
about an entity’s ability to continue as a going concern. This accounting update is effective for reporting periods
beginning after December 15, 2016. We do not expect the adoption of this update to have a significant effect on our financial
statements.
In January
2015, an accounting update was issued which simplifies the income statement presentation by eliminating the concept of extraordinary
items from U.S. GAAP. The concept of separately presenting an extraordinary item after income from continuing operations will
no longer be required. This accounting update is effective for reporting periods beginning after December 15, 2015. We do not
expect this update to have a significant effect on our financial statements, absent any future transactions that would have qualified
for extraordinary item presentation under the prior guidance.
In February
2015, amended accounting guidance was issued which changes the evaluation of variable interest entities (VIE) regarding whether
they should consolidate limited partnerships and similar entities, or whether fees are paid to a decision maker or service provider,
or whether they are held by related parties. This accounting update is effective for reporting periods beginning after December
15, 2015. We do not expect the adoption of this update to have a significant effect on our financial statements.
In April
2015, an accounting update was issued which requires that debt issuance costs related to a recognized debt liability be presented
in the balance sheet as a direct deduction of that debt, which will result in a minor netting down of our assets and liabilities.
This accounting update is effective January 1, 2016; early adoption is permitted.
In April
2015, an accounting update was issued which clarifies that if a license is acquired as part of fees paid in a cloud computing
arrangement, then the license should be accounted for in the same manner as other software licenses. This accounting update is
effective for reporting periods beginning after January 1, 2016. We do not expect the adoption of this update to have a significant
effect on our financial statements.
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,” “intend,” “estimate,” “anticipate,”
”may,” “plan,” “project,” “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 segment competes, including the paper industry, along with general risks associated
with economic downturns; |
| · | Recent
declines in demand for paper in certain regions and market segments could continue at a rate that is greater than anticipated,
and growth in demand in other segments or regions could be lower or slower than anticipated; |
| · | 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 and Trends” section of this quarterly report, as well as in the “Risk
Factors”, section of our most recent Annual Report on Form 10-K. 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 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.
Overview
Our reportable
segments: Machine Clothing (MC) and Albany Engineered Composites (AEC) draw on many of the same advanced textiles and materials
processing capabilities, and compete on the basis of proprietary, product-based advantage that is grounded in those core capabilities.
As a result, technology and manufacturing advances in one tend to benefit the other.
The Machine
Clothing segment is the Company’s long-established core business and primary generator of cash. While the paper and paperboard
industry in our traditional geographic markets has suffered from well-documented overcapacity in publication grades, especially
newsprint, the industry is still expected to grow on a global basis, driven by demand for packaging and tissue grades, as well
as the expansion of paper consumption and production in Asia and South America. We feel we are now well-positioned in these markets,
with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength
in new product development, field services, and manufacturing technology. Although we consider the market for Machine Clothing
as having flat growth potential, the business 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
restructuring, and competing vigorously by using our differentiated products and services to reduce our customers’ total
cost of operation and improve their paper quality.
We believe
that AEC provides the greatest growth potential, both near and long term, for our Company. Our strategy is to grow organically
by focusing our proprietary technology on high-value aerospace and defense applications that cannot be served effectively by conventional
composites. We are also pursuing opportunities outside of aerospace, such as applications for the automotive industry. 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 industry. AEC’s largest aerospace customer is the SAFRAN Group. Through
ASC, AEC develops and sells composite aerospace components to SAFRAN, with the most significant program at present being the production
of fan blades and other components for the LEAP engine. AEC (through ASC and otherwise) is also developing other new and potentially
significant composite products for aerospace (engine and airframe) applications.
Consolidated
Results of Operations
Net sales
The following
table summarizes our net sales by business segment:
|
Three months ended
March 31, |
% Change |
(in thousands, except percentages) |
2015 |
2014 |
Machine Clothing |
$158,494 |
$164,088 |
-3.4% |
Albany Engineered Composites |
22,830 |
16,219 |
40.8% |
Total |
$181,324 |
$180,307 |
0.6% |
Net sales
were affected by the following:
| · | Changes
in currency translation rates had the effect of decreasing net sales by $11.7 million during the first quarter of 2015 as compared
to 2014. |
| · | MC
sales were strong in every region, particularly in Europe and Asia. |
| · | AEC
sales increased due to growth in the LEAP programs as compared to 2014 when sales were negatively affected by a change in invoicing
terms, resulting in a build-up of inventory and an associated temporary lag in sales. |
| · | Excluding
the effect of changes in currency translation rates: |
| · | Net sales increased 7.0% compared to the same period in
2014 |
| · | Net sales in MC increased 3.5% |
| · | Net sales in AEC increased 42.8% |
Gross
Profit
The following
table summarizes gross profit by business segment:
|
Three months ended
March 31, |
(in thousands, except percentages) |
2015 |
2014 |
Machine Clothing |
$75,260 |
$73,870 |
Albany Engineered Composites |
1,815 |
1,293 |
Corporate expenses |
(391) |
(354) |
Total |
$76,684 |
$74,809 |
% of Net sales |
42.3% |
41.5% |
The increase
in gross profit, compared to the same period in 2014, was principally due to the net effect of the following:
| · | MC
gross profit increased principally due to higher sales volume, favorable product mix, and the impact of cost-reduction activities. |
| · | AEC
gross profit increased due to higher sales. |
Selling,
Technical, General, and Research (STG&R)
The following
table summarizes STG&R by business segment:
|
Three months ended
March 31, |
(in thousands, except percentages) |
2015 |
2014 |
Machine Clothing |
$30,570 |
$36,865 |
Albany Engineered Composites |
5,626 |
4,449 |
Corporate expenses |
11,338 |
11,712 |
Total |
$47,534 |
$53,026 |
% of Net sales |
26.2% |
29.4% |
STG&R
expenses decreased $5.5 million, compared to the same period in 2014, principally due to the net effect of the following:
| · | Revaluation
of nonfunctional currency assets and liabilities resulted in gains of $2.9 million during the first quarter of 2015 and losses
of $0.2 million in the comparable quarter of 2014. |
| · | Currency
translation decreased 2015 STG&R expenses by $3.9 million. |
| · | AEC
STG&R increased $1.2 million, principally due to research activity. |
Research
and Development
The following
table summarizes expenses associated with internally funded research and development by business segment:
|
Three months ended
March 31, |
(in thousands) |
2015 |
2014 |
Machine Clothing |
$4,796 |
$4,838 |
Albany Engineered Composites |
2,873 |
2,318 |
Corporate expenses |
294 |
192 |
Total |
$7,963 |
$7,348 |
Restructuring
Expense
In addition
to the items discussed above affecting gross profit and STG&R, operating income was affected by restructuring costs of $9.0
million in the first quarter of 2015 and $1.2 million in the first quarter of 2014.
The following
table summarizes restructuring expense by business segment:
|
Three months ended
March 31, |
(in thousands) |
2015 |
2014 |
Machine Clothing |
$9,001 |
$862 |
Albany Engineered Composites |
- |
320 |
Total |
$9,001 |
$1,182 |
During
the first quarter of 2015, the Company announced a plan to discontinue manufacturing operations at its press fabric
manufacturing facility in Göppingen, Germany. The restructuring program was driven by the Company’s
need to balance manufacturing capacity with demand. In April 2015, we completed negotiations and reached agreement on
the restructuring plan with the Works Council. Approximately 50 employees will be terminated under this plan, and the
restructuring expense recorded in the first quarter of 2015 reflects our estimate of the severance costs. Manufacturing
operations will be discontinued in the second quarter of 2015. It is likely that we will record additional charges for
asset impairments, but the amounts are presently not estimable. Whereas the affected employees are related to
manufacturing operations, cost savings associated with this action will flow through Cost of goods sold. We expect the annual
cost savings associated with this restructuring, expected to be realized by the first quarter of 2016, to be approximately $4
to $5 million.
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 by business segment:
|
Three months ended
March 31, |
(in thousands) |
2015 |
2014 |
Machine Clothing |
$35,689 |
$36,142 |
Albany Engineered Composites |
(3,811) |
(3,475) |
Corporate expenses |
(11,729) |
(12,066) |
Total |
$20,149 |
$20,601 |
Other
Earnings Items
|
Three months ended
March 31, |
(in thousands) |
2015 |
2014 |
Interest expense, net |
$2,676 |
$2,918 |
Other (income)/expenses, net |
(3,285) |
(467) |
Income tax expense |
8,519 |
7,457 |
Net income attributable to the noncontrolling interest |
26 |
72 |
Interest
Expense, net
First
quarter Interest expense, net, decreased $0.2 million principally due to lower debt. For more information on borrowings and interest
rates, see Note 13 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.
Other
(Income)/Expenses, net
Other
(income)/expenses, net included the following:
| · | Foreign
currency revaluations of intercompany balances resulted in gains of $2.4 million during the first quarter of 2015 and gains of
$0.5 million in the first quarter of 2014. |
| · | Sale
of the Company’s total equity investment in an unaffiliated company resulted in a gain of $0.9 million. |
Income
Tax
The Company
has operations which constitute a taxable presence in 19 countries outside of the United States. All of these countries except
one had income tax rates that were lower than the United States federal tax rate of 35% during the periods reported. The jurisdictional
location of earnings is a significant component of our effective tax rate each year and therefore on our overall income tax expense.
The Company’s
effective tax rates for the first quarter of 2015 and 2014 were 41.0% and 41.1%, 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 that have been or will be repatriated to the U.S., 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 rates in the first quarter of 2015 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 40.0%. |
| · | The
increase in the tax rate on continuing operations was due primarily to the impact of restructuring charges in Germany, where the
Company is unable to record a tax benefit related to the expense. |
| · | Other
discrete charges of $0.2 million (1.0%) were recognized. |
Significant
items that impacted the first quarter 2014 tax rate included the following:
| · | The
income tax rate on continuing operations, excluding discrete items, was 35.0%. |
| · | A
discrete charge of $0.9 million (4.9%) related to provision for tax audits and contingencies. |
| · | A
$0.2 million (1.2%) net tax expense related to other discrete items. |
Segment
Results of Operations
Machine
Clothing Segment
Business Environment and Trends
MC is
our primary business segment and accounted for nearly 90% of our consolidated revenues during the first three months of 2015.
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 2% over the next
five years, driven primarily by secular demand increases in Asia and South America, with stabilization in the mature markets of
Europe and North America.
Shifting
demand for paper, across different paper grades as well as across geographical regions, continues to drive the elimination of
papermaking capacity in areas with significant established capacity, primarily in the mature markets of Europe and North America.
At the same time, the newest, most efficient machines are being installed in areas of growing demand, including Asia and South
America generally, as well as tissue and towel paper grades in all regions. 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 in the United
States, Germany, France, and Sweden.
Review
of Operations
| |
Three months ended March 31, |
(in thousands, except percentages) | |
2015 | |
2014 |
Net sales | |
$ | 158,494 | | |
$ | 164,088 | |
Gross profit | |
| 75,260 | | |
| 73,870 | |
% of net sales | |
| 47.5 | % | |
| 45.0 | % |
Operating income | |
| 35,689 | | |
| 36,142 | |
Net
Sales
Net
sales were affected by the following:
| · | Sales
were strong in every region, particularly in Europe and Asia. |
| · | Changes
in currency translation rates had the effect of decreasing 2015 sales by $11.3 million. |
| · | Excluding
the effect of changes in currency translation rates, sales increased 3.5% compared to the same period in 2014. |
Gross
Profit
| · | The
increase in gross profit was principally due to higher sales volume, favorable product mix, and the impact of cost-reduction activities. |
Operating
Income
Despite
the increase in gross profit, operating income decreased principally due to the net effect of the following:
| · | Restructuring
charges of $9.0 million in the first quarter of 2015, compared to $0.9 million in 2014. |
| · | Revaluation
of nonfunctional currency assets and liabilities resulted in first quarter gains of $2.9 million in 2015, compared to losses of
$0.2 million in 2014. |
| · | Lower
STG&R expenses principally resulting from the effect of changes in currency translation rates which lowered STG&R by $3.3
million. |
Albany
Engineered Composites Segment
Business Environment and Trends
AEC,
including ASC, provides highly engineered advanced composite structures based on proprietary technology to customers in the aerospace
and defense industries. AEC’s largest program relates to CFM International’s LEAP engine, which is scheduled to enter
into service in 2016. AEC, through ASC, is the exclusive supplier of advanced composite fan blades and cases for this program
under a long-term supply contract. In 2014, approximately 20 percent of this segment’s sales were related to U.S. government
contracts or programs.
Review
of Operations
| |
Three months ended March 31, |
(in thousands, except percentages) | |
2015 | |
2014 |
Net sales | |
$ | 22,830 | | |
$ | 16,219 | |
Gross profit | |
| 1,815 | | |
| 1,293 | |
% of net sales | |
| 8.0 | % | |
| 8.0 | % |
Operating income/(loss) | |
| (3,811 | ) | |
| (3,457 | ) |
Net Sales
| · | AEC
sales increased $6.6 million compared to the first quarter of 2014 and were principally due to growth in the LEAP program. |
| · | Approximately
half of AEC sales were related to LEAP production activities, which were $4.6 million ahead of a weak Q1 2014, when sales were
affected by a temporary lag due to start-up and inventory effects. |
Gross
Profit
The increase
in gross profit is attributable to the sales increase noted above.
Long-term
contracts
AEC has
contracts with certain customers, including its contract for the LEAP program, where revenue is determined by cost, plus a defined
profit margin. Revenue earned under these arrangements accounted for approximately 49 percent and 40 percent of total revenue
for the first three months of 2015 and 2014, respectively.
In addition,
AEC has long-term fixed price contracts. 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 or units
of delivery 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 minimal impact on gross profit in the first quarter of 2015, but reduced gross profit by $0.6 million in
the same period of 2014.
The table
below provides a summary of long-term fixed price contracts that were in process at the end of each period.
|
Three months ended
March 31, |
(in thousands) |
2015 |
2014 |
Revenue earned during period |
$5,198 |
$2,661 |
Total value of contracts in process |
34,892 |
26,465 |
Revenue recognized to date |
23,329 |
12,262 |
Revenue to be recognized in future periods |
11,563 |
14,203 |
One of
the important projects for our operations in Boerne, Texas, which has been in development for several years, is the production
of composite components for the BR 725, which is
the engine
that powers the Gulfstream 650. We have now entered what is anticipated to be a very long production period. As of March
31, 2015, we have capitalized development costs of $9.6 million which will be allocated to future deliveries. We are currently
delivering parts on time, and are meeting all customer requirements. The contract for the BR725 program, which was signed in 2007,
sets very aggressive pricing levels. We will have to pay careful attention in the coming quarters to the projected life-of-program
profitability as we gain more production experience.
Operating
Income/(Loss)
| · | The
operating loss increased in 2015 due to higher STG&R expenses. |
Liquidity
and Capital Resources
Cash
Flow Summary
|
Three months ended March 31, |
(in thousands) |
2015 |
2014 |
Net income |
$12,239 |
$10,693 |
Depreciation and amortization |
15,354 |
15,908 |
Changes in working capital |
(20,318) |
(18,043) |
Gain on disposition of assets |
(1,056) |
- |
Changes in long-term liabilities, deferred taxes and other credits |
(277) |
(214) |
Other operating items |
467 |
504 |
Net cash provided by operating activities |
6,409 |
8,848 |
Net cash used in investing activities |
(9,447) |
(14,897) |
Net cash provided by/(used in) financing activities |
5,679 |
(6,681) |
Effect of exchange rate changes on cash flows |
(11,605) |
(1,557) |
Decrease in cash and cash equivalents |
(8,964) |
(14,287) |
Cash and cash equivalents at beginning of year |
179,802 |
222,666 |
Cash and cash equivalents at end of period |
$170,838 |
$208,379 |
Operating
activities
Cash
provided by operating activities was $6.4 million for the first three months of 2015, compared to $8.8 million in the same period
last year. First quarter changes in working capital resulted in a use of cash totaling $20.3 million in 2015 and $18.0 million
in 2014. Compared to the first quarter of 2014, changes in Accounts receivable used $24.6 million of cash flow, while the cash
flows from Inventories improved $6.0 million. Changes in Accrued liabilities resulted in a use of cash of $1.6 million in 2015
compared to $12.8 million in 2014. In the first quarter of each year, we make payments related to incentive compensation which
generally cause cash flows related to accrued liabilities to be negative. In the first quarter of 2015, that negative amount was
partially offset by new restructuring accruals. Cash paid for income taxes was $7.1 million and $6.7 million for the first three
months of 2015 and 2014, respectively.
At
March 31, 2015, we had $171 million of cash and cash equivalents, of which $158 million was held by subsidiaries outside of the
United States. As disclosed in Note 7 contained in Item 1, “Notes to Consolidated Financial Statements”, we determined
that all but $59.4 million of this amount
(which
represents the amount of prior year earnings to be repatriated to the United States at some point in the future) is intended to
be utilized by these non-U.S. operations for an indefinite period of time. Our current plans do not anticipate that we will need
funds generated from foreign operations to fund our domestic operations or satisfy debt obligations in the United States. In the
event that such funds were to be needed to fund operations in the U.S., and if associated accruals for U.S. tax have not already
been provided, we would be required to accrue and pay additional U.S. taxes to repatriate these funds.
Investing
Activities
Capital
spending for equipment and software was $12.2 million for the first three months of 2015, including $6.2 million for AEC. The
Company expects full-year capital expenditure spending of $65 to $75 million.
Financing
Activities
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, 2015 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, 2015.
On March
26, 2013, we entered into a $330 million, unsecured Five-Year Revolving Credit Facility Agreement ("Credit Agreement"),
under which $182 million of borrowings were outstanding as of March 31, 2015. The applicable interest rate for borrowings under
the Credit Agreement is LIBOR plus a spread, based on our leverage ratio at the time of borrowing. At the time of the last borrowing
on March 23, 2015, the spread was 1.375%. The spread is based on a pricing grid, which ranges from 1.25% to 1.875%, based on our
leverage ratio.
On July
16, 2010, we entered into interest rate hedging transactions that have the effect of fixing the LIBOR portion of the effective
interest rate (before addition of the spread) on $105 million of the indebtedness drawn under the Credit Agreement at the rate
of 2.04% until July 16, 2015. Under the terms of these transactions, we pay the fixed rate of 2.04% and the counterparties pay
a floating rate based on the three-month LIBOR rate at each quarterly calculation date, which on January 16, 2015 was 0.26%. The
net effect is to fix the effective interest rate on $105 million of indebtedness at 2.04%, plus the applicable spread, until these
swap agreements expire. On March 31, 2015, the all-in rate on the $105 million of debt was 3.415%.
On May
20, 2013, we entered into interest rate hedging transactions for the period July 16, 2015 through March 16, 2018. These transactions
have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $110 million of
indebtedness drawn under the
Credit Agreement
at the rate of 1.414% during this period. Under the terms of these transactions, we pay the fixed rate of 1.414% and the counterparties
pay a floating rate based on the one-month LIBOR rate at each monthly calculation date, which on March 31, 2015 was 0.17625%.
The net effect is to fix the effective interest rate on $110 million of indebtedness at 1.414%, plus the applicable spread, during
the swap period.
As of
March 31, 2015, our leverage ratio was 1.28 to 1.00 and our interest coverage ratio was 13.94 to 1.00. We may purchase our Common
Stock or pay dividends to the extent our leverage ratio remains at or below 3.50 to 1.00, and may make acquisitions with cash
provided our leverage ratio would not exceed 3.50 to 1.00 after giving pro forma effect to the acquisition.
These
interest rate swaps are accounted for as hedges of future cash flows. For more information on our interest rate swaps, see Note
13 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.
Off-Balance
Sheet Arrangements
As of
March 31, 2015, 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 17 contained in Item 1, “Notes to Consolidated Financial Statements”, which is incorporated herein
by reference.
Non-GAAP
Measures
This
Form 10-Q contains certain items, such as earnings before interest, taxes, depreciation and amortization (EBITDA), Adjusted EBITDA,
sales excluding currency effects, income tax rate excluding adjustments, net debt, net income attributable to the Company, excluding
adjustments (on an absolute and per-share basis), and certain income and expense items on a per- share basis that could be considered
non-GAAP financial measures. Such items are provided because management believes that, when presented together with the GAAP items
to which they relate, they provide additional useful information to investors regarding the Company’s operational performance.
Presenting increases or decreases in sales, after currency effects are excluded, can give management and investors insight into
underlying sales trends. An understanding of the impact in a particular period of specific restructuring costs, or other gains
and losses, on operating income or EBITDA can give management and investors additional insight into period performance, especially
when compared to periods in which such items had a greater or lesser effect, or no effect. All non-GAAP financial measures in
this report relate to the Company’s continuing operations.
The effect
of changes in currency translation rates is calculated by converting amounts reported in local currencies into U.S. dollars at
the exchange rate of a prior period. That amount is then compared to the U.S. dollar amount reported in the current period. The
Company calculates Income tax adjustments by adding discrete tax items to the effect of a change in tax rate for the reporting
period. The Company calculates its income tax rate, exclusive of income tax adjustments, by removing income tax adjustments from
total income tax expense, then dividing that result by income before income taxes. The Company calculates EBITDA by removing the
following from Net income: Interest expense net, Income tax expense, and Depreciation and amortization. Adjusted EBITDA is calculated
by:
adding to EBITDA costs associated with restructuring; adding (or subtracting) revaluation losses (or gains); subtracting (or
adding) gains (or losses) from the sale of investments; and subtracting Income attributable to the noncontrolling interest in
Albany Safran Composites, LLC (ASC). The Company believes that EBITDA and Adjusted EBITDA provide useful information to
investors because they provide an indication of the strength and performance of the Company's ongoing business operations,
including its ability to fund discretionary spending such as capital expenditures and strategic investments, as well as its
ability to incur and service debt. While depreciation and amortization are operating costs under GAAP, they are non-cash
expenses equal to current period allocation of costs associated with capital and other long-lived investments made in prior
periods. While restructuring expenses, foreign currency revaluation losses or gains, and gains or losses from sales
of investments have an impact on the Company's net income, removing them from EBITDA can provide, in the opinion
of the Company, a better measure of operating performance. EBITDA is also a calculation commonly used by investors and
analysts to evaluate and compare the periodic and future operating performance and value of companies. EBITDA, as defined by
the Company, may not be similar to EBITDA measures of other companies. Such EBITDA measures may not be considered
measurements under GAAP, and should be considered in addition to, but not as substitutes for, the information contained in
the Company’s Consolidated Statements of Income.
The following
tables show the calculation of EBITDA and Adjusted EBITDA:
Three months ended March 31, 2015 |
|
|
|
|
(in thousands) |
Machine
Clothing |
AEC |
Corporate
expenses
and other |
Total
Company |
Net income |
$35,689 |
($3,811) |
($19,639) |
$12,239 |
Interest expense, net |
- |
- |
2,676 |
2,676 |
Income tax expense |
- |
- |
8,519 |
8,519 |
Depreciation and amortization |
10,205 |
2,995 |
2,154 |
15,354 |
EBITDA |
45,894 |
(816) |
(6,290) |
38,788 |
Restructuring and other, net |
9,001 |
- |
- |
9,001 |
Foreign currency revaluation (gains)/losses |
(2,923) |
(17) |
(2,431) |
(5,371) |
Gain on sale of investment |
- |
- |
(872) |
(872) |
Pretax income attributable to noncontrolling interest in ASC |
- |
(26) |
- |
(26) |
Adjusted EBITDA |
$51,972 |
($859) |
($9,593) |
$41,520 |
Three months ended March 31, 2014 |
|
|
|
|
(in thousands) |
Machine
Clothing |
AEC |
Corporate
expenses
and other |
Total
Company |
Net income |
$36,142 |
($3,475) |
($21,974) |
$10,693 |
Interest expense, net |
- |
- |
2,918 |
2,918 |
Income tax expense |
- |
- |
7,457 |
7,457 |
Depreciation and amortization |
11,455 |
2,322 |
2,131 |
15,908 |
EBITDA |
47,597 |
(1,153) |
(9,468) |
36,976 |
Restructuring and other, net |
862 |
320 |
- |
1,182 |
Foreign currency revaluation (gains)/losses |
152 |
38 |
(505) |
(315) |
Pretax income attributable to noncontrolling interest in ASC |
- |
(59) |
- |
(59) |
Adjusted EBITDA |
$48,611 |
($854) |
($9,973) |
$37,784 |
The Company
discloses certain income and expense items on a per-share basis. The Company believes that such disclosures provide important
insight into the 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 estimated effective annual tax rate and the weighted average
number of shares outstanding for each period. The 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, 2015 |
Pre tax |
Tax |
After tax |
Per Share |
(in thousands, except per share amounts) |
Amounts |
Effect |
Effect |
Effect |
Restructuring and other, net |
$9,001 |
$3,420 |
$5,581 |
$0.18 |
Foreign currency revaluation gains |
5,371 |
2,041 |
3,330 |
0.10 |
Gain on sale of investment |
872 |
331 |
541 |
0.02 |
Net discrete income tax charge |
- |
219 |
219 |
0.01 |
Three months ended March 31, 2014 |
Pre tax |
Tax |
After tax |
Per Share |
(in thousands, except per share amounts) |
Amounts |
Effect |
Effect |
Effect |
Restructuring and other, net |
$1,182 |
$414 |
$768 |
$0.02 |
Foreign currency revaluation gains |
315 |
110 |
205 |
0.01 |
Net discrete income tax charge |
- |
1,104 |
1,104 |
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) |
2015 |
2014 |
Net income attributable to the Company |
$0.38 |
$0.33 |
Adjustments: |
|
|
Restructuring and other, net |
0.18 |
0.02 |
Discrete tax charges/(benefits) |
0.01 |
0.03 |
Foreign currency revaluation (gains)/losses |
(0.10) |
(0.01) |
Gain on sale of investment |
(0.02) |
- |
Net income attributable to the Company, excluding adjustments |
$0.45 |
$0.37 |
The following
table contains the calculation of net debt:
(in thousands) |
March 31,
2015 |
December 31,
2014 |
December 31,
2013 |
December 31,
2012 |
Notes and loans payable |
$496 |
$661 |
$625 |
$586 |
Current maturities of long-term debt |
50,015 |
50,015 |
3,764 |
83,276 |
Long-term debt |
232,092 |
222,096 |
300,111 |
235,877 |
Total debt |
282,603 |
272,772 |
304,500 |
319,739 |
Cash |
170,838 |
179,802 |
222,666 |
190,718 |
Net debt |
$111,765 |
$92,970 |
$81,834 |
$129,021 |
Item
3. Quantitative and Qualitative Disclosures about Market Risk
For discussion
of our exposure to market risk, refer to “Quantitative and Qualitative Disclosures About Market Risk”, which is included
as an exhibit to this Form 10-Q.
Item
4. Controls and Procedures
| a) | Disclosure
controls and procedures. |
The principal
executive officers and principal financial officer, based on their evaluation of disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have
concluded that the Company’s disclosure controls and procedures are effective for ensuring that information required to
be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be disclosed in filed or submitted
reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal
financial officer as appropriate, to allow timely decisions regarding required disclosure.
| (b) | Changes
in internal control over financial reporting. |
There
were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
PART
II – OTHER INFORMATION
Item
1. LEGAL PROCEEDINGS
The information
set forth above under Note 15 in Item 1, “Notes to Consolidated Financial Statements” is incorporated herein by reference.
Item
1A. Risk Factors
There
have been no material changes in risks since December 31, 2014. For discussion of risk factors, refer to Item 1A of our Annual
Report on Form 10-K for the year ended December 31, 2014.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
We made
no share purchases during the first quarter of 2015. We remain authorized by the Board of Directors to purchase up to 2 million
shares of our Class A Common Stock.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Mine Safety Disclosures
Not Applicable.
Item
5. Other Information
None.
Item
6. Exhibits
| Exhibit No. | Description |
|
| | |
|
| 31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act. |
| | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act. |
| | |
|
32.1 |
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code). |
|
|
|
| 99.1 | Quantitative and qualitative disclosures about market risks as reported at March 31, 2015. |
| | |
|
101 |
The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, formatted in eXtensible Business Reporting Language (XBRL), filed herewith:
|
|
|
|
|
| (i) | Consolidated
Statements of Income for the three months ended March 31, 2015 and 2014. |
|
| | |
|
| (ii) | Consolidated
Statements of Comprehensive Income/(Loss) for the three months ended March 31, 2015 and 2014. |
|
| | |
|
| (iii) | Consolidated
Balance Sheets at March 31, 2015 and December 31, 2014. |
|
| | |
|
| (iv) | Consolidated
Statements of Cash Flows for the three months ended March 31, 2015 and 2014. |
|
| | |
|
| (v) | Notes
to Consolidated Financial Statements. |
|
| | |
|
| | As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for
purposes of Sections 11 and 12 of the Securities Act and Section 18 of the Securities Exchange Act or otherwise
subject to liability under those sections. |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
ALBANY INTERNATIONAL CORP. |
|
(Registrant) |
|
|
Date: May 5, 2015 |
|
|
|
|
|
|
By |
/s/ John B. Cozzolino |
|
|
|
|
|
John B. Cozzolino |
|
|
Chief Financial Officer and Treasurer |
|
|
(Principal Financial Officer) |
EXHIBIT (31.1)
CERTIFICATION
PURSUANT TO
RULE 13A-14
OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT
TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph G. Morone, certify that:
| 1. | I have reviewed this report on Form 10-Q of Albany International Corp.;
|
| 2. | Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant
and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| (d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| 5. | The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information;
and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting. |
Date: May 5, 2015
|
By |
/s/ Joseph G. Morone |
|
|
Joseph G. Morone |
|
|
President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
EXHIBIT (31.2)
CERTIFICATION
PURSUANT TO
RULE 13A-14
OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT
TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, John B. Cozzolino, certify that:
| 1. | I have reviewed this report on Form 10-Q of Albany International Corp.;
|
| 2. | Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant
and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| (d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| 5. | The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies
and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant's ability to record, process, summarize and report financial information; and
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting. |
Date: May 5, 2015
|
By |
/s/ John B. Cozzolino |
|
|
John B. Cozzolino |
|
|
Chief Financial Officer and Treasurer |
|
|
(Principal Financial Officer) |
|
|
|
EXHIBIT (32.1)
CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION
1350,
AS ADOPTED PURSUANT
TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection
with the Quarterly Report of Albany International Corp. (the Company) on Form 10-Q for the period ending March 31, 2015, as filed
with the Securities and Exchange Commission on the date hereof (the Report), Joseph G. Morone, President and Chief Executive Officer,
and John B. Cozzolino, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The
Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and |
| (2) | The
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company. |
Dated: May
5, 2015
/s/ Joseph G. Morone
Joseph G. Morone
President and Chief Executive Officer
(Principal Executive Officer)
/s/ John B. Cozzolino
John B. Cozzolino
Chief Financial Officer and Treasurer
(Principal Financial Officer)
EXHIBIT (99.1)
MARKET RISK
SENSITIVITY – AS OF March 31, 2015
We have
market risk with respect to foreign currency exchange rates and interest rates. The market risk is the potential loss arising
from adverse changes in these rates as discussed below.
Foreign
Currency Exchange Rate Risk
We have
manufacturing plants and sales transactions worldwide and therefore are subject to foreign currency risk. This risk is composed
of both potential losses from the translation of foreign currency financial statements and the remeasurement of foreign currency
transactions. To manage this risk, we periodically enter into forward exchange contracts either to hedge the net assets of a foreign
investment or to provide an economic hedge against future cash flows. The total net assets of non-U.S. operations and long-term
intercompany loans denominated in nonfunctional currencies subject to potential loss amount to approximately $530.5 million. The
potential loss in fair value resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounts
to $53.0 million. Furthermore, related to foreign currency transactions, we have exposure to various nonfunctional currency balances
totaling $132.2 million. This amount includes, on an absolute basis, exposures to assets and liabilities held in currencies other
than our local entity’s functional currency. On a net basis, we had $77.3 million of foreign currency liabilities as of
March 31, 2015. As currency rates change, these nonfunctional currency balances are revalued, and the corresponding adjustment
is recorded in the income statement. A hypothetical change of 10% in currency rates could result in an adjustment to the income
statement of approximately $7.7 million. Actual results may differ.
Interest
Rate Risk
We are
exposed to interest rate fluctuations with respect to our variable rate debt, depending on general economic conditions.
On March
31, 2015, we had the following variable rate debt:
|
|
|
|
(in thousands, except interest rates) |
|
|
|
Short-term debt |
|
|
|
Notes payable, end of period interest rate of 1.5% |
|
|
$496 |
Long-term debt |
|
|
|
Credit agreement with borrowings outstanding, net of fixed rate portion, at an end of period interest rate of 1.56% in 2015, due in 2018 |
|
|
77,000 |
|
|
|
|
|
|
|
|
Total |
|
|
$77,496 |
Assuming
borrowings were outstanding for an entire year, an increase of one percentage point in weighted average interest rates would increase
interest expense by $0.8 million. To manage interest rate risk, we may periodically enter into interest rate swap agreements to
effectively fix the interest rates on variable debt to a specific rate for a period of time.
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