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:SeptemberJune 30, 20172018
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) | ||
216 Airport Drive, Rochester, New Hampshire | 03867 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code518-445-2200603-330-5850
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.
Large accelerated filer | [ √ ] | Accelerated filer | [ ] | |
Non-accelerated filer | [ ] | Smaller reporting company | [ ] | |
Emerging growth company | [ ] | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
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 29.0 million shares of Class A Common Stock and 3.2 million shares of Class B Common Stock outstanding as of OctoberJuly 24, 2017.2018.
1
TABLE OF CONTENTS
2
ALBANY INTERNATIONAL CORP. | ||||||
CONSOLIDATED STATEMENTS OF INCOME | ||||||
(in thousands, except per share amounts) | ||||||
(unaudited) |
Three Months Ended | Nine Months Ended | |||||
September 30, | September 30, | |||||
2017 | 2016 | 2017 | 2016 | |||
$222,141 | $191,272 | Net sales | $636,989 | $566,793 | ||
142,706 | 118,852 | Cost of goods sold | 418,595 | 343,557 | ||
79,435 | 72,420 | Gross profit | 218,394 | 223,236 | ||
41,076 | 38,042 | Selling, general, and administrative expenses | 123,799 | 120,997 | ||
10,553 | 9,232 | Technical and research expenses | 30,788 | 29,640 | ||
5,503 | 326 | Restructuring expenses, net | 10,220 | 7,653 | ||
22,303 | 24,820 | Operating income | 53,587 | 64,946 | ||
4,429 | 3,681 | Interest expense, net | 13,042 | 9,610 | ||
(1,155) | 242 | Other expense/(income), net | 980 | (2,103) | ||
19,029 | 20,897 | Income before income taxes | 39,565 | 57,439 | ||
3,809 | 7,488 | Income tax expense | 12,138 | 20,613 | ||
15,220 | 13,409 | Net income | 27,427 | 36,826 | ||
(49) | 340 | Net income/(loss) attributable to the noncontrolling interest | 202 | (111) | ||
$15,269 | $13,069 | Net income attributable to the Company | $27,225 | $36,937 | ||
$0.47 | $0.41 | Earnings per share attributable to Company shareholders - Basic | $0.85 | $1.15 | ||
$0.47 | $0.41 | Earnings per share attributable to Company shareholders - Diluted | $0.85 | $1.15 | ||
Shares of the Company used in computing earnings per share: | ||||||
32,187 | 32,104 | Basic | 32,160 | 32,079 | ||
32,214 | 32,141 | Diluted | 32,193 | 32,118 | ||
$0.17 | $0.17 | Dividends declared per share, Class A and Class B | $0.51 | $0.51 | ||
The accompanying notes are an integral part of the consolidated financial statements | ||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||
$256,225 | $215,571 | Net sales | $486,206 | $414,848 | ||||||||
164,047 | 152,393 | Cost of goods sold | 312,377 | 275,642 | ||||||||
92,178 | 63,178 | Gross profit | 173,829 | 139,206 | ||||||||
36,707 | 41,314 | Selling, general, and administrative expenses | 78,637 | 81,721 | ||||||||
10,198 | 9,973 | Technical and research expenses | 20,515 | 20,235 | ||||||||
2,589 | 2,036 | Restructuring expenses, net | 11,162 | 4,717 | ||||||||
42,684 | 9,855 | Operating income | 63,515 | 32,533 | ||||||||
4,621 | 4,285 | Interest expense, net | 8,909 | 8,613 | ||||||||
726 | 2,558 | Other expense, net | 2,178 | 3,384 | ||||||||
37,337 | 3,012 | Income before income taxes | 52,428 | 20,536 | ||||||||
7,031 | 1,779 | Income tax expense | 11,640 | 8,329 | ||||||||
30,306 | 1,233 | Net income | 40,788 | 12,207 | ||||||||
(59 | ) | 116 | Net income/(loss) attributable to the noncontrolling interest | 178 | 251 | |||||||
$30,365 | $1,117 | Net income attributable to the Company | $40,610 | $11,956 | ||||||||
$0.94 | $0.03 | Earnings per share attributable to Company shareholders - Basic | $1.26 | $0.37 | ||||||||
$0.94 | $0.03 | Earnings per share attributable to Company shareholders - Diluted | $1.26 | $0.37 | ||||||||
Shares of the Company used in computing earnings per share: | ||||||||||||
32,257 | 32,166 | Basic | 32,239 | 32,147 | ||||||||
32,273 | 32,200 | Diluted | 32,255 | 32,182 | ||||||||
$0.17 | $0.17 | Dividends declared per share, Class A and Class B | $0.34 | $0.34 |
The accompanying notes are an integral part of the consolidated financial statements |
3
ALBANY INTERNATIONAL CORP. | ||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) | ||||||
(in thousands) | ||||||
(unaudited) |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||
$30,306 | $1,233 | Net income | $40,788 | $12,207 | ||||||||
Other comprehensive income/(loss), before tax: | ||||||||||||
(30,851 | ) | 17,436 | Foreign currency translation adjustments | (13,346 | ) | 27,374 | ||||||
(518 | ) | - | Pension/postretirement curtailment | (518 | ) | - | ||||||
Amortization of pension liability adjustments: | ||||||||||||
(1,113 | ) | (1,113 | ) | Prior service credit | (2,227 | ) | (2,226 | ) | ||||
1,291 | 1,353 | Net actuarial loss | 2,588 | 2,700 | ||||||||
54 | 343 | Payments and amortization related to interest rate swaps included in earnings | 234 | 943 | ||||||||
2,211 | (1,414 | ) | Derivative valuation adjustment | 7,926 | (998 | ) | ||||||
Income taxes related to items of other comprehensive income/(loss): | ||||||||||||
155 | - | Pension/postretirement curtailment | 155 | - | ||||||||
(53 | ) | (72 | ) | Amortization of pension liability adjustment | (108 | ) | (142 | ) | ||||
(13 | ) | (130 | ) | Payments related to interest rate swaps included in earnings | (56 | ) | (358 | ) | ||||
(530 | ) | 537 | Derivative valuation adjustment | (1,902 | ) | 379 | ||||||
939 | 18,173 | Comprehensive income | 33,534 | 39,879 | ||||||||
(48 | ) | 124 | Comprehensive income attributable to the noncontrolling interest | 182 | 264 | |||||||
$987 | $18,049 | Comprehensive income attributable to the Company | $33,352 | $39,615 |
The accompanying notes are an integral part of the consolidated financial statements |
4
CONSOLIDATED BALANCE SHEETS | |||
(in thousands, except share data) | |||
(unaudited) |
June 30, | December 31, | |||||
2018 | 2017 | |||||
ASSETS | ||||||
Cash and cash equivalents | $154,744 | $183,727 | ||||
Accounts receivable, net | 249,482 | 202,675 | ||||
Contract assets | 59,244 | - | ||||
Inventories | 97,659 | 136,519 | ||||
Income taxes prepaid and receivable | 6,087 | 6,266 | ||||
Prepaid expenses and other current assets | 19,559 | 14,520 | ||||
Total current assets | 586,775 | 543,707 | ||||
Property, plant and equipment, net | 450,694 | 454,302 | ||||
Intangibles, net | 52,322 | 55,441 | ||||
Goodwill | 165,474 | 166,796 | ||||
Deferred income taxes | 81,237 | 68,648 | ||||
Noncurrent receivables | 36,981 | 32,811 | ||||
Other assets | 48,978 | 39,493 | ||||
Total assets | $1,422,461 | $1,361,198 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
Notes and loans payable | $26 | $262 | ||||
Accounts payable | 54,752 | 44,899 | ||||
Accrued liabilities | 125,255 | 105,914 | ||||
Current maturities of long-term debt | 1,844 | 1,799 | ||||
Income taxes payable | 14,620 | 8,643 | ||||
Total current liabilities | 196,497 | 161,517 | ||||
Long-term debt | 523,186 | 514,120 | ||||
Other noncurrent liabilities | 97,563 | 101,555 | ||||
Deferred taxes and other liabilities | 13,556 | 10,991 | ||||
Total liabilities | 830,802 | 788,183 | ||||
SHAREHOLDERS' EQUITY | ||||||
Preferred stock, par value $5.00 per share; | ||||||
authorized 2,000,000 shares; none issued | - | - | ||||
Class A Common Stock, par value $.001 per share; | ||||||
authorized 100,000,000 shares; issued 37,447,819 in 2018 | ||||||
and 37,395,753 in 2017 | 37 | 37 | ||||
Class B Common Stock, par value $.001 per share; | ||||||
authorized 25,000,000 shares; issued and | ||||||
outstanding 3,233,998 in 2018 and 2017 | 3 | 3 | ||||
Additional paid in capital | 429,635 | 428,423 | ||||
Retained earnings | 558,639 | 534,082 | ||||
Accumulated items of other comprehensive income: | ||||||
Translation adjustments | (102,888 | ) | (87,318 | ) | ||
Pension and postretirement liability adjustments | (48,422 | ) | (50,536 | ) | ||
Derivative valuation adjustment | 8,155 | 1,953 | ||||
Treasury stock (Class A), at cost 8,418,620 shares in 2018 | ||||||
and 8,431,335 shares in 2017 | (256,602 | ) | (256,876 | ) | ||
Total Company shareholders' equity | 588,557 | 569,768 | ||||
Noncontrolling interest | 3,102 | 3,247 | ||||
Total equity | 591,659 | 573,015 | ||||
Total liabilities and shareholders' equity | $1,422,461 | $1,361,198 |
The accompanying notes are an integral part of the consolidated financial statements |
September 30, | December 31, | ||
2017 | 2016 | ||
ASSETS | |||
Cash and cash equivalents | $153,465 | $181,742 | |
Accounts receivable, net | 199,938 | 171,193 | |
Inventories | 157,143 | 133,906 | |
Income taxes prepaid and receivable | 8,133 | 5,213 | |
Prepaid expenses and other current assets | 12,690 | 9,251 | |
Total current assets | 531,369 | 501,305 | |
Property, plant and equipment, net | 451,966 | 422,564 | |
Intangibles, net | 56,997 | 66,454 | |
Goodwill | 166,010 | 160,375 | |
Income taxes receivable and deferred | 81,244 | 68,865 | |
Contract receivables | 29,688 | 14,045 | |
Other assets | 32,343 | 29,825 | |
Total assets | $1,349,617 | $1,263,433 | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |||
Notes and loans payable | $186 | $312 | |
Accounts payable | 45,121 | 43,305 | |
Accrued liabilities | 103,498 | 95,195 | |
Current maturities of long-term debt | 51,765 | 51,666 | |
Income taxes payable | 12,493 | 9,531 | |
Total current liabilities | 213,063 | 200,009 | |
Long-term debt | 453,578 | 432,918 | |
Other noncurrent liabilities | 105,318 | 106,827 | |
Deferred taxes and other liabilities | 13,002 | 12,389 | |
Total liabilities | 784,961 | 752,143 | |
SHAREHOLDERS' EQUITY | |||
Preferred stock, par value $5.00 per share; | |||
authorized 2,000,000 shares; none issued | - | - | |
Class A Common Stock, par value $.001 per share; | |||
authorized 100,000,000 shares; issued 37,392,353 in 2017 | |||
and 37,319,266 in 2016 | 37 | 37 | |
Class B Common Stock, par value $.001 per share; | |||
authorized 25,000,000 shares; issued and | |||
outstanding 3,233,998 in 2017 and 2016 | 3 | 3 | |
Additional paid in capital | 428,088 | 425,953 | |
Retained earnings | 533,670 | 522,855 | |
Accumulated items of other comprehensive income: | |||
Translation adjustments | (92,523) | (133,298) | |
Pension and postretirement liability adjustments | (52,648) | (51,719) | |
Derivative valuation adjustment | 917 | 828 | |
Treasury stock (Class A), at cost 8,431,335 shares in 2017 | |||
and 8,443,444 shares in 2016 | (256,876) | (257,136) | |
Total Company shareholders' equity | 560,668 | 507,523 | |
Noncontrolling interest | 3,988 | 3,767 | |
Total equity | 564,656 | 511,290 | |
Total liabilities and shareholders' equity | $1,349,617 | $1,263,433 | |
The accompanying notes are an integral part of the consolidated financial statements |
5
ALBANY INTERNATIONAL CORP. | ||||||||||
CONSOLIDATED STATEMENTS OF CASH FLOW | ||||||||||
(in thousands) | ||||||||||
(unaudited) |
Three Months Ended | Nine Months ended | |||||||||
September 30, | September 30, | |||||||||
2017 | 2016 | 2017 | 2016 | |||||||
OPERATING ACTIVITIES | ||||||||||
$15,220 | $13,409 | Net income | $27,427 | $36,826 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
15,522 | 16,470 | Depreciation | 45,367 | 44,736 | ||||||
2,608 | 1,975 | Amortization | 7,889 | 6,488 | ||||||
(168) | (275) | Change in other noncurrent liabilities | (2,522) | (5,010) | ||||||
(3,263) | (1,712) | Change in deferred taxes and other liabilities | (10,620) | (640) | ||||||
1,086 | 333 | Provision for write-off of property, plant and equipment | 1,916 | 1,409 | ||||||
211 | - | Non-cash interest expense | 634 | - | ||||||
195 | 350 |
Compensation and benefits paid or payable in Class A Common Stock | 1,865 | 1,882 | ||||||
4,149 | - | Write-off of intangible assets in a discontinued product line | 4,149 | - | ||||||
Changes in operating assets and liabilities that provided/(used) cash, net of impact of business acquisition: | ||||||||||
(4,645) | 4,794 | Accounts receivable | (19,781) | (6,492) | ||||||
(3,944) | (5,511) | Inventories | (17,210) | (12,886) | ||||||
(599) | (481) | Prepaid expenses and other current assets | (3,167) | (3,302) | ||||||
- | (100) | Income taxes prepaid and receivable | (2,817) | 1,737 | ||||||
(4,769) | (4,443) | Accounts payable | (2,704) | (1,544) | ||||||
5,425 | 4,418 | Accrued liabilities | 4,525 | (3,736) | ||||||
3,472 | 4,932 | Income taxes payable | 2,964 | 3,999 | ||||||
(8,107) | - | Contract receivables | (15,643) | - | ||||||
(4,495) | (4,974) | Other, net | (557) | (10,252) | ||||||
17,898 | 29,185 | Net cash provided by operating activities | 21,715 | 53,215 | ||||||
INVESTING ACTIVITIES | ||||||||||
- | - | Purchase of business, net of cash acquired | - | (187,000) | ||||||
(15,319) | (21,924) | Purchases of property, plant and equipment | (61,724) | (50,029) | ||||||
(147) | (591) | Purchased software | (538) | (1,262) | ||||||
- | 4,686 | Proceeds from sale or involuntary conversion of assets | - | 6,422 | ||||||
(15,466) | (17,829) | Net cash used in investing activities | (62,262) | (231,869) | ||||||
FINANCING ACTIVITIES | ||||||||||
13,076 | 13,265 | Proceeds from borrowings | 45,335 | 232,795 | ||||||
(3,569) | (871) | Principal payments on debt | (24,711) | (23,695) | ||||||
- | - | Debt acquisition costs | - | (1,771) | ||||||
- | - | Swap termination payment | - | (5,175) | ||||||
- | - | Taxes paid in lieu of share issuance | (1,364) | (1,272) | ||||||
356 | 64 | Proceeds from options exercised | 531 | 454 | ||||||
(5,470) | (5,457) | Dividends paid | (16,396) | (16,354) | ||||||
4,393 | 7,001 | Net cash provided by financing activities | 3,395 | 184,982 | ||||||
7,848 | 1,788 | Effect of exchange rate changes on cash and cash equivalents | 8,875 | 4,729 | ||||||
14,673 | 20,145 | (Decrease)/increase in cash and cash equivalents | (28,277) | 11,057 | ||||||
138,792 | 176,025 | Cash and cash equivalents at beginning of period | 181,742 | 185,113 | ||||||
$153,465 | $196,170 | Cash and cash equivalents at end of period | $153,465 | $196,170 | ||||||
The accompanying notes are an integral part of the consolidated financial statements |
Three Months Ended June 30, | Six Months ended June 30, | |||||||||
2018 | 2017 | 2018 | 2017 | |||||||
OPERATING ACTIVITIES | ||||||||||
$30,306 | $1,233 | Net income | $40,788 | $12,207 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
17,114 | 15,201 | Depreciation | 35,416 | 29,845 | ||||||
2,559 | 2,632 | Amortization | ��5,205 | 5,281 | ||||||
(854) | (758) | Change in other noncurrent liabilities | (1,231) | (2,354) | ||||||
(6,118) | (6,745) | Change in deferred taxes and other liabilities | (6,902) | (7,357) | ||||||
853 | 534 | Provision for write-off of property, plant and equipment | 1,124 | 830 | ||||||
154 | 212 | Non-cash interest expense | 154 | 423 | ||||||
1,047 | 681 | Compensation and benefits paid or payable in Class A Common Stock | 1,336 | 1,670 | ||||||
34 | 75 | Fair value adjustment on foreign currency option | 71 | 129 | ||||||
Changes in operating assets and liabilities that (used)/provided cash: | ||||||||||
(12,903) | (14,395) | Accounts receivable | (44,370) | (15,136) | ||||||
(13,877) | - | Contract assets | (11,761) | - | ||||||
(1,371) | 1,655 | Inventories | (10,615) | (13,266) | ||||||
(1,157) | (780) | Prepaid expenses and other current assets | (5,220) | (2,697) | ||||||
(5) | (2,817) | Income taxes prepaid and receivable | 97 | (2,817) | ||||||
11,420 | (1,459) | Accounts payable | 8,882 | 2,065 | ||||||
5,853 | 10,071 | Accrued liabilities | 4,668 | (900) | ||||||
10,020 | 1,978 | Income taxes payable | 6,589 | (508) | ||||||
(1,643) | (3,621) | Noncurrent receivables | (4,170) | (7,536) | ||||||
(5,745) | 4,692 | Other, net | (3,321) | 3,938 | ||||||
35,687 | 8,389 | Net cash provided by operating activities | 16,740 | 3,817 | ||||||
INVESTING ACTIVITIES | ||||||||||
(23,352) | (21,360) | Purchases of property, plant and equipment | (39,123) | (46,405) | ||||||
(23) | (353) | Purchased software | (52) | (391) | ||||||
(23,375) | (21,713) | Net cash used in investing activities | (39,175) | (46,796) | ||||||
FINANCING ACTIVITIES | ||||||||||
10,020 | 16,114 | Proceeds from borrowings | 23,031 | 32,259 | ||||||
(5,653) | (540) | Principal payments on debt | (14,143) | (21,142) | ||||||
- | - | Taxes paid in lieu of share issuance | (1,652) | (1,364) | ||||||
3 | 100 | Proceeds from options exercised | 150 | 175 | ||||||
(5,482) | (5,467) | Dividends paid | (10,956) | (10,926) | ||||||
(1,112) | 10,207 | Net cash (used in)/provided by financing activities | (3,570) | (998) | ||||||
(7,882) | (1,424) | Effect of exchange rate changes on cash and cash equivalents | (2,978) | 1,027 | ||||||
3,318 | (4,541) | (Decrease)/increase in cash and cash equivalents | (28,983) | (42,950) | ||||||
151,426 | 143,333 | Cash and cash equivalents at beginning of period | 183,727 | 181,742 | ||||||
$154,744 | $138,792 | Cash and cash equivalents at end of period | $154,744 | $138,792 |
The accompanying notes are an integral part of the consolidated financial statements |
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Significant Accounting Policies
Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of results for such periods. Albany International Corp. (“Albany”)(Albany, the Registrant, the Company, we, us, or our) consolidates the financial results of its subsidiaries for all periods presented. The results for any interim period are not necessarily indicative of results for the full year.
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in Albany International Corp.’s Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Risk Factors,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” “Quantitative and Qualitative Disclosures about Market Risk” and the Consolidated Financial Statements and Notes thereto included in Items 1A, 3, 7, 7A and 8, respectively, of the Albany International Corp. Annual Report on Form 10-K for the year ended December 31, 2016.2017.
Effective January 1, 2018, we adopted the provisions of ASC 606,Revenue from contracts with customers, using the modified retrospective method for transition as discussed in Note 2, Revenue Recognition. Accounting policies have been applied consistently to periods presented, except for the application of ASC 606, as further described in Note 2.
7
2. Revenue Recognition
Effective January 1, 2018, the Company adopted the provisions of ASC 606,2.Revenue from contracts with customersBusiness Acquisition, using the modified retrospective (or cumulative effect) method for transition. Under this transition method, periods prior to 2018 have not been restated and the cumulative effect of initially applying the new standard was recorded as an adjustment to Retained earnings at January 1, 2018. The standard replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single model for recognizing revenue from contracts with customers. We applied the new accounting standard to contracts which were not completed by December 31, 2017.
In our Machine Clothing (MC) business segment, prior to 2018, we recorded revenue from the sale of a product when persuasive evidence of an arrangement existed, delivery had occurred, title was transferred, the selling price was fixed, and collectability was reasonably assured. Under the new standard, we recognize MC revenue when we satisfy our performance obligations related to the manufacture and delivery of a product, which, in certain cases, results in earlier recognition of revenue associated with these contracts. For the MC segment, the cumulative effect of adopting ASC 606 included an increase to Accounts receivable, a decrease to Inventories, and an increase to Retained earnings.
In our Albany Engineered Composites (AEC) business segment, revenue from a number of long-term contracts was, prior to 2018, recorded on the basis of the units-of-delivery method, which is considered an output method. Under the new standard, revenue from most of these contracts is recognized over time using an input method as the measure of progress, which generally results in earlier recognition of revenue. Prior to adoption of the new standard, the classification of revenue in excess of progress billings on long-term contracts was included in Accounts receivable. Under the new standard, such assets are considered Contract assets, which are rights to consideration that are conditional on something other than the passage of time, such as completion of remaining performance obligations. As a result of adoption of the new standard, such assets were reclassified at transition from Accounts receivable to Contract assets. In addition, under the new standard, we are required to limit our estimate of contract values to the period of the legally enforceable contract, which in many cases is considerably shorter than the contract period used under the former standard. While certain contracts are expected to be profitable over the course of the program life when including expected renewals, under the new standard, our estimate of contract revenues and costs is limited to the estimated value of enforceable rights and obligations, excluding anticipated renewals. In some cases, this shorter contract period may result in a loss contract provision, and our transition adjustment included such loss accruals. Expected losses on projects includes losses on contract options that are probable of exercise, excluding profitable options that often follow. For AEC, the cumulative effect of adopting ASC 606 included increases to Contract assets and Accrued liabilities, and decreases to Accounts receivable, Inventories and Retained earnings.
On April
8 2016,
The table below presents the Company acquiredcumulative effect of changes made to our December 31, 2017 Consolidated Balance Sheet as the outstanding sharesresult of Harris Corporation’s composite aerostructures businessadoption of ASC 606:
ALBANY INTERNATIONAL CORP. | |||||
CONSOLIDATED BALANCE SHEET | |||||
(in thousands, except share data) | |||||
(unaudited) |
As previously reported at December 31, 2017 | Adjustments Increase/(decrease) | Opening balance, as adjusted, January 1, 2018 | |||||||
ASSETS | |||||||||
Cash and cash equivalents | $183,727 | $- | $183,727 | ||||||
Accounts receivable, net | 202,675 | 7,667 | 210,342 | ||||||
Contract assets | - | 47,415 | 47,415 | ||||||
Inventories | 136,519 | (47,054 | ) | 89,465 | |||||
Income taxes prepaid and receivable | 6,266 | - | 6,266 | ||||||
Prepaid expenses and other current assets | 14,520 | - | 14,520 | ||||||
Total current assets | 543,707 | 8,028 | 551,735 | ||||||
Property, plant and equipment, net | 454,302 | - | 454,302 | ||||||
Intangibles, net | 55,441 | - | 55,441 | ||||||
Goodwill | 166,796 | - | 166,796 | ||||||
Deferred income taxes | 68,648 | 1,756 | 70,404 | ||||||
Noncurrent receivables | 32,811 | - | 32,811 | ||||||
Other assets | 39,493 | 1,119 | 40,612 | ||||||
Total assets | $1,361,198 | $10,903 | $1,372,101 | ||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||
Notes and loans payable | $262 | $- | $262 | ||||||
Accounts payable | 44,899 | - | 44,899 | ||||||
Accrued liabilities | 105,914 | 16,808 | 122,722 | ||||||
Current maturities of long-term debt | 1,799 | - | 1,799 | ||||||
Income taxes payable | 8,643 | - | 8,643 | ||||||
Total current liabilities | 161,517 | 16,808 | 178,325 | ||||||
Long-term debt | 514,120 | - | 514,120 | ||||||
Other noncurrent liabilities | 101,555 | - | 101,555 | ||||||
Deferred taxes and other liabilities | 10,991 | 52 | 11,043 | ||||||
Total liabilities | 788,183 | 16,860 | 805,043 | ||||||
SHAREHOLDERS' EQUITY | |||||||||
Preferred stock, par value $5.00 per share; | |||||||||
authorized 2,000,000 shares; none issued | - | - | - | ||||||
Class A Common Stock, par value $.001 per share; | |||||||||
authorized 100,000,000 shares; issued 37,395,753 in 2017 | |||||||||
and 37,319,266 in 2016 | 37 | - | 37 | ||||||
Class B Common Stock, par value $.001 per share; | |||||||||
authorized 25,000,000 shares; issued and | |||||||||
outstanding 3,233,998 in 2017 and 2016 | 3 | - | 3 | ||||||
Additional paid in capital | 428,423 | - | 428,423 | ||||||
Retained earnings | 534,082 | (5,630 | ) | 528,452 | |||||
Accumulated items of other comprehensive income: | |||||||||
Translation adjustments | (87,318 | ) | - | (87,318 | ) | ||||
Pension and postretirement liability adjustments | (50,536 | ) | - | (50,536 | ) | ||||
Derivative valuation adjustment | 1,953 | - | 1,953 | ||||||
Treasury stock (Class A), at cost 8,431,335 shares in 2017 | |||||||||
and 8,443,444 shares in 2016 | (256,876 | ) | - | (256,876 | ) | ||||
Total Company shareholders' equity | 569,768 | (5,630 | ) | 564,138 | |||||
Noncontrolling interest | 3,247 | (327 | ) | 2,920 | |||||
Total equity | 573,015 | (5,957 | ) | 567,058 | |||||
Total liabilities and shareholders' equity | $1,361,198 | $10,903 | $1,372,101 |
9
Significant changes to our accounting policies as a result of adopting the new standard are discussed below.
For periods ending after December 31, 2017, we account for casha contract when it has approval and commitment from both parties, the rights of $187 million, plus the assumptionparties are identified, payment terms are identified, the contract has commercial substance and collectability of certain liabilities. The Company fundedconsideration is probable.Revenue is measured based on the cash payableconsideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service, or a series of distinct goods or services, to the customer which occurs either at closing by utilizing proceeds from a $550 million, unsecured credit facility agreement that was completed April 8, 2016. The acquired entitypoint in time, or over time, depending on the performance obligation in the contract. A performance obligation is locateda promise in Salt Lake City, Utah (“SLC”)the contract to transfer a distinct good or service to the customer, and is the unit of account under the new revenue standard. “Control” refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from the product. A contract’s transaction price is allocated to each material distinct performance obligation and is recognized as revenue when, or as, the performance obligation is satisfied.
In our Machine Clothing segment, our primary performance obligation in most contracts is to provide solution-based, custom-designed fabrics and belts to the customer. We satisfy this performance obligation upon transferring control of the product to the customer at a specific point in time. Generally, the customer obtains control when the product has been received at the location specified by the customer, at which time the only remaining obligations under the contract are fulfillment costs, which are accrued when control of the product is transferred.
In the Machine Clothing segment, some contracts with certain customers may also obligate us to provide various product-related services at no additional cost to the customer. When this obligation is material in the context of the contract with the customer, we recognize a separate performance obligation and allocate revenue to those services based on their estimated standalone selling price. The standalone selling price for these services is determined based upon an analysis of the services offered and an assessment of the price we might charge for such services as a separate offering. As we typically provide such services on a stand-ready basis, we recognize this revenue over time. Revenue allocated to such service performance obligations is the only Machine Clothing revenue that is recognized over time.
In our Albany Engineered Composites (AEC) business segment, we primarily enter into contracts to manufacture and deliver highly engineered advanced composite products to our customers. The majority of AEC revenue is from short duration, firm-fixed-price orders that are placed under a master agreement containing general terms and conditions applicable to all orders placed under the master agreement. To determine the proper revenue recognition method, we evaluate whether two or more orders or contracts should be combined and accounted for as one single contract, and whether the combined or single contract contains single or multiple performance obligations. This evaluation requires significant judgment, and the decision to combine a group of contracts, or to allocate revenue from the combined or single contract among multiple performance obligations could have a significant impact on the amount of revenue and profit recorded in a given period. For most AEC contracts, the nature of our promise (or our performance obligation) to the customer is to manage the contract and provide a significant service of integrating a complex set of tasks and components into a single project or capability, which will often result in the delivery of multiple highly interdependent and interrelated units.
At the inception of a contract we estimate the transaction price based on our current rights, and do not contemplate future modifications (including unexercised options) or follow-on contracts until they become legally enforceable. Many AEC contracts are subsequently modified to include changes in specifications, requirements or price, which may create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, we are able to conclude that such modifications are not distinct from the existing contract, due to the significant integration of the obligations, and the interrelated nature of tasks, provided for in the modification and
10
the existing contract. Therefore, such modifications are accounted for as if they were part of the Albany Engineered Composites (“AEC”) segment.existing contract, and we accumulate the values of such modifications in our estimates of contract value.
7
Revenue is recognized over time for a large portion of our contracts in AEC as most of our contracts have provisions that, under the guidance in ASC 606, are deemed to transfer control to the customer over time. Revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress toward completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of assets to the customer which occurs as we incur costs to produce the contract deliverables. Under the cost-to-cost measure of progress, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenue, including profit, is recorded proportionally as costs are incurred. Accounting for long-term contracts requires significant judgment and estimation, which could be considerably different if the underlying circumstances were to change. When any adjustments of estimated contract revenue or costs is required, any changes from prior estimates are included in revenues or earnings in the period in which the change occurs.
In other AEC contracts, revenue is recognized at a point in time because the products are offered to multiple customers, or do not have an enforceable right to payment until the product is shipped or delivered to the location specified by the customer in the contract.
AEC’s largest source of revenue is derived from the LEAP contract (see Note 3) under a cost- plus-fee agreement. Beginning in 2018, the fee is variable based on our success in achieving certain cost targets. Revenue is recognized over time as costs are incurred. Under this contract, there is significant judgment involved in determining applicable contract costs and expected margin, and therefore in determining the amount of revenue to be recognized.
Payment terms granted to MC and AEC customers reflect general competitive practices. Terms vary with product, competitive conditions, and the country of operation.
The Consolidated Statement of Income for 2016 includes operational activityfollowing table provides a summary of the acquiredcomposition of each business for only the period subsequent to the closing, which affects comparability of year to date results. The following table shows total Company pro forma results for the nine month period ended September 30, 2016 as if the acquisition had occurred on January 1, 2015.segment:
Segment | Principal Product or Service | Principal Locations | |
Machine Clothing (MC) | Machine Clothing |
Engineered fabrics: Belts used in the manufacture of nonwovens, fiber cement and several other industrial applications | World-wide |
Albany Engineered Composites (AEC) | Albany Safran Composites (ASC) | 3D-woven, injected composite components for aircraft engines | Rochester, NH Commercy, France Queretaro, Mexico |
Airframe and engine Components (Other AEC) | Composite airframe and engine components for military and commercial aircraft | Salt Lake City, UT Boerne, TX Queretaro, Mexico | |
11
We disaggregate revenue earned from contracts with customers for each of our business segments and reporting units based on the timing of revenue recognition, and groupings used for internal review purposes.
The following table disaggregates revenue for each reporting unit by timing of revenue recognition:
For the Six Months Ended | ||||
June 30, 2018 | ||||
(in thousands) | Point in Time Revenue Recognition | Over Time Revenue Recognition | Total | |
Machine Clothing | $309,186 | $1,600 | $310,786 | |
Albany Engineered Composites | ||||
ASC | - | 87,806 | 87,806 | |
Other AEC | 11,744 | 75,870 | 87,614 | |
Total Albany Engineered Composites | 11,744 | 163,676 | 175,420 | |
Total Revenue | $320,930 | $165,276 | $486,206 |
The following table disaggregates MC segment revenue by significant product groupings (paper machine clothing (PMC) and engineered fabrics), and, for PMC, the geographical region to which the paper machine clothing was sold:
For the Six Months Ended | ||||
June 30, 2018 | ||||
Americas PMC | $152,686 | |||
Eurasia PMC | 116,500 | |||
Engineered Fabrics | 41,600 | |||
Total Machine Clothing Net sales | $310,786 |
In accordance with ASC 606-10-50-14, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less. Contracts in the Machine Clothing segment are generally for periods of less than a year. Most contracts in the AEC segment are short duration firm-fixed price orders representing performance obligations with an original maturity of less than one year. Performance obligations as of June 30, 2018 that had an original duration of greater than one year totaled $105 million and relate primarily to firm contracts in the AEC segment. Of that amount, we expect to recognize as revenue approximately $35 million during 2018, with the remainder to be recognized between 2019 and 2021.
For some AEC contracts, we perform pre-production or nonrecurring engineering services. These costs are normally considered a fulfillment activity, rather than a performance obligation. Fulfillment activities that create resources that will be used in satisfying performance obligations in the future, and are expected to be recovered, are capitalized to Other Assets, which is classified as a noncurrent asset in the Consolidated Balance Sheets. The capitalized costs are amortized into Cost of goods sold over the period over which the asset is expected to contribute to future cash flows.
12
As a result of applying the cumulative effect method for transition to ASC 606, we are required to disclose the effect of the new standard on each line of the consolidated financial statements. The following tables show the balances as reported for the period ended June 30, 2018, and how the consolidated financial statements would have appeared if we had not adopted ASC 606.
ALBANY INTERNATIONAL CORP. | ||||||||||
CONSOLIDATED STATEMENT OF INCOME | ||||||||||
(in thousands, except per share amounts) | ||||||||||
(unaudited) | ||||||||||
As reported for the Three Months Ended June 30, 2018 | Adjustments to reverse effects of ASC 606 | As adjusted for the Three Months Ended June 30, 2018 to exclude adoption of ASC 606 | As reported for the Six Months Ended June 30, 2018 | Adjustments to reverse effects of ASC 606 | As adjusted for the Six Months Ended June 30, 2018 to exclude adoption of ASC 606 | |||||
$256,225 | $400 | $256,625 | Net sales | $486,206 | ($8,034) | $478,172 | ||||
164,047 | 2,304 | 166,351 | Cost of goods sold | 312,377 | (4,222) | 308,155 | ||||
92,178 | (1,904) | 90,274 | Gross profit | 173,829 | (3,812) | 170,017 | ||||
36,707 | 5 | 36,712 | Selling, general, and administrative expenses | 78,637 | (55) | 78,582 | ||||
10,198 | - | 10,198 | Technical and research expenses | 20,515 | - | 20,515 | ||||
2,589 | - | 2,589 | Restructuring expenses, net | 11,162 | - | 11,162 | ||||
42,684 | (1,909) | 40,775 | Operating income | 63,515 | (3,757) | 59,758 | ||||
4,621 | - | 4,621 | Interest expense, net | 8,909 | - | 8,909 | ||||
726 | - | 726 | Other expense, net | 2,178 | - | 2,178 | ||||
37,337 | (1,909) | 35,428 | Income before income taxes | 52,428 | (3,757) | 48,671 | ||||
7,031 | (507) | 6,524 | Income tax expense | 11,640 | (1,108) | 10,532 | ||||
30,306 | (1,402) | 28,904 | Net income | 40,788 | (2,649) | 38,139 | ||||
(59) | (27) | (86) | Net income/(loss) attributable to the noncontrolling interest | 178 | (84) | 94 | ||||
$30,365 | ($1,375) | $28,990 | Net income attributable to the Company | $40,610 | ($2,565) | $38,045 | ||||
$0.94 | ($0.04) | $0.90 | Earnings per share attributable to Company shareholders - Basic | $1.26 | ($0.08) | $1.18 | ||||
$0.94 | ($0.04) | $0.90 | Earnings per share attributable to Company shareholders - Diluted | $1.26 | ($0.08) | $1.18 |
13
ALBANY INTERNATIONAL CORP. | ||||||||||
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(LOSS) | ||||||||||
(in thousands) | ||||||||||
(unaudited) | ||||||||||
As reported for the Three Months Ended June 30, 2018 | Adjustments to reverse effects of ASC 606 | As adjusted for the Three Months Ended June 30, 2018 to exclude adoption of ASC 606 | As reported for the Six Months Ended June 30, 2018 | Adjustments to reverse effects of ASC 606 | As adjusted for the Six Months Ended June 30, 2018 to exclude adoption of ASC 606 | |||||
$30,306 | ($1,402) | $28,904 | Net income | $40,788 | ($2,649) | $38,139 | ||||
Other comprehensive income/(loss), before tax: | ||||||||||
(30,851) | 839 | (30,012) | Foreign currency translation adjustments | (13,346) | 531 | (12,815) | ||||
(518) | - | (518) | Pension/postretirement curtailment | (518) | - | (518) | ||||
Amortization of pension liability adjustments: | ||||||||||
(1,113) | - | (1,113) | Prior service credit | (2,227) | - | (2,227) | ||||
1,291 | - | 1,291 | Net actuarial loss | 2,588 | - | 2,588 | ||||
54 | - | 54 | Payments and amortization related to interest rate swaps included in earnings | 234 | - | 234 | ||||
2,211 | - | 2,211 | Derivative valuation adjustment | 7,926 | - | 7,926 | ||||
Income taxes related to items of other comprehensive income/(loss): | ||||||||||
155 | - | 155 | Pension/postretirement curtailment | 155 | - | 155 | ||||
(53) | - | (53) | Amortization of pension liability adjustment | (108) | - | (108) | ||||
(13) | - | (13) | Payments related to interest rate swaps included in earnings | (56) | - | (56) | ||||
(530) | - | (530) | Derivative valuation adjustment | (1,902) | - | (1,902) | ||||
939 | (563) | 376 | Comprehensive income | 33,534 | (2,118) | 31,416 | ||||
(48) | (27) | (75) | Comprehensive income attributable to the noncontrolling interest | 182 | (84) | 98 | ||||
$987 | ($536) | $451 | Comprehensive income attributable to the Company | $33,352 | ($2,034) | $31,318 |
14
CONSOLIDATED BALANCE SHEET | |||
(in thousands, except share data) | |||
(unaudited) |
As reported June 30, 2018 | Adjustments to reverse effects of ASC 606 | As adjusted for June 30, 2018 to exclude adoption of ASC 606 | |||||||
ASSETS | |||||||||
Cash and cash equivalents | $154,744 | $- | $154,744 | ||||||
Accounts receivable, net | 249,482 | (4,286 | ) | 245,196 | |||||
Contract assets | 59,244 | (59,244 | ) | - | |||||
Inventories | 97,659 | 51,736 | 149,395 | ||||||
Income taxes prepaid and receivable | 6,087 | - | 6,087 | ||||||
Prepaid expenses and other current assets | 19,559 | - | 19,559 | ||||||
Total current assets | 586,775 | (11,794 | ) | 574,981 | |||||
Property, plant and equipment, net | 450,694 | - | 450,694 | ||||||
Intangibles, net | 52,322 | - | 52,322 | ||||||
Goodwill | 165,474 | - | 165,474 | ||||||
Deferred income taxes | 81,237 | (648 | ) | 80,589 | |||||
Noncurrent receivables | 36,981 | - | 36,981 | ||||||
Other assets | 48,978 | (1,256 | ) | 47,722 | |||||
Total assets | $1,422,461 | ($13,698 | ) | $1,408,763 | |||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||
Notes and loans payable | $26 | $- | $26 | ||||||
Accounts payable | 54,752 | - | 54,752 | ||||||
Accrued liabilities | 125,255 | (17,485 | ) | 107,770 | |||||
Current maturities of long-term debt | 1,844 | - | 1,844 | ||||||
Income taxes payable | 14,620 | - | 14,620 | ||||||
Total current liabilities | 196,497 | (17,485 | ) | 179,012 | |||||
Long-term debt | 523,186 | - | 523,186 | ||||||
Other noncurrent liabilities | 97,563 | - | 97,563 | ||||||
Deferred taxes and other liabilities | 13,556 | (52 | ) | 13,504 | |||||
Total liabilities | 830,802 | (17,537 | ) | 813,265 | |||||
SHAREHOLDERS' EQUITY | |||||||||
Preferred stock, par value $5.00 per share; | |||||||||
authorized 2,000,000 shares; none issued | - | - | - | ||||||
Class A Common Stock, par value $.001 per share; | |||||||||
authorized 100,000,000 shares; issued 37,447,819 in 2018 and 37,395,753 in 2017 | 37 | - | 37 | ||||||
Class B Common Stock, par value $.001 per share; | |||||||||
authorized 25,000,000 shares; issued and | |||||||||
outstanding 3,233,998 in 2018 and 2017 | 3 | - | 3 | ||||||
Additional paid in capital | 429,635 | - | 429,635 | ||||||
Retained earnings | 558,639 | $3,065 | 561,704 | ||||||
Accumulated items of other comprehensive income: | |||||||||
Translation adjustments | (102,888 | ) | 531 | (102,357 | ) | ||||
Pension and postretirement liability adjustments | (48,422 | ) | - | (48,422 | ) | ||||
Derivative valuation adjustment | 8,155 | - | 8,155 | ||||||
Treasury stock (Class A), at cost 8,418,620 shares in 2018 | |||||||||
and 8,431,335 shares in 2017 | (256,602 | ) | - | (256,602 | ) | ||||
Total Company shareholders' equity | 588,557 | 3,596 | 592,153 | ||||||
Noncontrolling interest | 3,102 | 243 | 3,345 | ||||||
Total equity | 591,659 | 3,839 | 595,498 | ||||||
Total liabilities and shareholders' equity | $1,422,461 | ($13,698 | ) | $1,408,763 |
8
15
ALBANY INTERNATIONAL CORP. |
CONSOLIDATED STATEMENT OF CASH FLOW |
(in thousands) |
(unaudited) |
As reported for the Three Months Ended June 30, 2018 | Adjustments to reverse effects of ASC 606 | As adjusted for the Three Months Ended June 30, 2018 to exclude adoption of ASC 606 | As reported for the Six Months Ended June 30, 2018 | Adjustments to reverse effects of ASC 606 | As adjusted for the Six Months Ended June 30, 2018 to exclude adoption of ASC 606 | |||||||||
OPERATING ACTIVITIES | ||||||||||||||
$30,306 | ($1,402) | $28,904 | Net income | $40,788 | ($2,649) | $38,139 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
17,114 | - | 17,114 | Depreciation | 35,416 | - | 35,416 | ||||||||
2,559 | - | 2,559 | Amortization | 5,205 | - | 5,205 | ||||||||
(854) | - | (854) | Change in other noncurrent liabilities | (1,231) | - | (1,231) | ||||||||
(6,118) | (507) | (6,625) | Change in deferred taxes and other liabilities | (6,902) | (1,108) | (8,010) | ||||||||
853 | - | 853 | Provision for write-off of property, plant and equipment | 1,124 | - | 1,124 | ||||||||
154 | - | 154 | Non-cash interest expense | 154 | - | 154 | ||||||||
1,047 | - | 1,047 | Compensation and benefits paid or payable in Class A Common Stock | 1,336 | - | 1,336 | ||||||||
34 | - | 34 | Fair valule adjustment on foreign currency option | 71 | - | 71 | ||||||||
Changes in operating assets and liabilities that (used)/provided cash: | ||||||||||||||
(12,903) | (14,277) | (27,180) | Accounts receivable | (44,370) | (3,727) | (48,097) | ||||||||
(13,877) | 13,877 | - | Contract assets | (11,761) | 11,761 | - | ||||||||
(1,371) | 2,304 | 933 | Inventories | (10,615) | (4,222) | (14,837) | ||||||||
(1,157) | - | (1,157) | Prepaid expenses and other current assets | (5,220) | - | (5,220) | ||||||||
(5) | - | (5) | Income taxes prepaid and receivable | 97 | - | 97 | ||||||||
11,420 | - | 11,420 | Accounts payable | 8,882 | - | 8,882 | ||||||||
5,853 | 5 | 5,858 | Accrued liabilities | 4,668 | (55) | 4,613 | ||||||||
10,020 | - | 10,020 | Income taxes payable | 6,589 | - | 6,589 | ||||||||
(1,643) | - | (1,643) | Noncurrent receivables | (4,170) | - | (4,170) | ||||||||
(5,745) | - | (5,745) | Other, net | (3,321) | - | (3,321) | ||||||||
35,687 | - | 35,687 | Net cash provided by operating activities | 16,740 | - | 16,740 | ||||||||
(23,375) | - | (23,375) | Net cash used in investing activities | (39,175) | - | (39,175) | ||||||||
(1,112) | - | (1,112) | Net cash used in financing activities | (3,570) | - | (3,570) | ||||||||
(7,882) | - | (7,882) | Effect of exchange rate changes on cash and cash equivalents | (2,978) | - | (2,978) | ||||||||
3,318 | - | 3,318 | (Decrease)/increase in cash and cash equivalents | (28,983) | - | (28,983) | ||||||||
151,426 | - | 151,426 | Cash and cash equivalents at beginning of period | 183,727 | - | 183,727 | ||||||||
$154,744 | $ - | $154,744 | Cash and cash equivalents at end of period | $154,744 | $ - | $154,744 |
3. Reportable Segments
As described in Note 2, the Company adopted the provisions of ASC 606, “Revenue from contracts with customers”, effective January 1, 2018, using the cumulative effect method for transition. Periods prior to 2018 have not been restated. The following tables show data by reportable segment, reconciled to consolidated totals, included inand the financial statements:impact that ASC 606 had on the three- and six-month periods ended June 30, 2018:
Three months ended September 30, | Nine months ended September 30, | |||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||
Net sales | ||||||||
Machine Clothing | $150,694 | $143,248 | $440,093 | $437,445 | ||||
Albany Engineered Composites (AEC) | 71,447 | 48,024 | 196,896 | 129,348 | ||||
Consolidated total | $222,141 | $191,272 | $636,989 | $566,793 | ||||
Operating income/(loss) | ||||||||
Machine Clothing | 42,674 | 40,039 | 119,352 | 112,583 | ||||
Albany Engineered Composites | (9,301 | ) | (4,529 | ) | (32,242 | ) | (14,083 | ) |
Corporate expenses | (11,070 | ) | (10,690 | ) | (33,523 | ) | (33,554 | ) |
Operating income | $22,303 | $24,820 | $53,587 | $64,946 | ||||
Reconciling items: | ||||||||
Interest income | (355 | ) | (675 | ) | (801 | ) | (1,347 | ) |
Interest expense | 4,784 | 4,356 | 13,843 | 10,957 | ||||
Other expense/(income), net | (1,155 | ) | 242 | 980 | (2,103 | ) | ||
Income before income taxes | $19,029 | $20,897 | $39,565 | $57,439 |
There 16
Three months ended June 30, | Three months ended June 30, 2018 | |||
(in thousands) | 2018 | 2017 | Increase/(decrease) attributable to application of ASC 606 | |
Net sales | ||||
Machine Clothing | $162,635 | $146,572 | $857 | |
Albany Engineered Composites | 93,590 | 68,999 | (1,257) | |
Consolidated total | $256,225 | $215,571 | ($400) | |
Operating income/(loss) | ||||
Machine Clothing | $50,843 | $38,425 | $1,786 | |
Albany Engineered Composites | 4,092 | (17,828) | 123 | |
Corporate expenses | (12,251) | (10,742) | ||
Operating income | $42,684 | $9,855 | $1,909 | |
Reconciling items: | ||||
Interest income | (438) | (340) | - | |
Interest expense | 5,059 | 4,625 | - | |
Other expense, net | 726 | 2,558 | - | |
Income before income taxes | $37,337 | $3,012 | $1,909 |
Six months ended June 30, | Six months ended June 30, 2018 | |||
(in thousands) | 2018 | 2017 | Increase/(decrease) attributable to application of ASC 606 | |
Net sales | ||||
Machine Clothing | $310,786 | $289,399 | $5,068 | |
Albany Engineered Composites | 175,420 | 125,449 | 2,966 | |
Consolidated total | $486,206 | $414,848 | $8,034 | |
Operating income/(loss) | ||||
Machine Clothing | $81,613 | $76,688 | $2,765 | |
Albany Engineered Composites | 6,366 | (22,942) | 992 | |
Corporate expenses | (24,464) | (21,213) | - | |
Operating income | $63,515 | $32,533 | $3,757 | |
Reconciling items: | ||||
Interest income | (820) | (447) | - | |
Interest expense | 9,729 | 9,060 | - | |
Other expense, net | 2,178 | 3,384 | - | |
Income before income taxes | $52,428 | $20,536 | $3,757 |
17
At the January 1, 2018 date of adoption of ASC 606, Machine Clothing assets increased by $22 million, and AEC assets decreased by $13 million. Except for the effect of adopting ASC 606, there were no material changes in the total assets of the reportable segments for the six months ended June 30, 2018.
As described in the first nine months of 2017.
In the third quarter of 2017,Note 4, effective January 1, 2018, the Company decidedadopted an accounting update that affects the classification of components of pension and postretirement benefit costs. As a result of adopting that update, some costs that were previously included in operating expenses shall now be included in Other expense, net. Periods prior to discontinue the Bear Claw® line of hydraulic fracturing components used in the oil and gas industry, which was part of the Harris aerostructures business acquired by AEC in 2016. This decision resulted in a non-cash restructuring charge of $4.5 million for the write-off of intangible assets and equipment, and a $3.2 million charge2018 have been restated to Cost of goods sold for the write-off of inventory.
In the second quarter of 2017, the Company recorded a charge to Cost of goods sold of approximately $15.8 million associated with revisions in the estimated profitability of two AEC contracts. The charge was principally due to second-quarter 2017 downward revisions of estimated customer demand for the components manufactured by AEC relatedconform to the BR 725 and A380 programs. The charge included a $4.0 million write-off of program inventory costs, and a reserve for future losses of $11.8 million, which is included in Accrued liabilities in the Consolidated Balance Sheets. Total reserves for future contract losses were $11.1 million as of September 30, 2017, and $0.1 million as of December 31, 2016.current year presentation (see Note 4).
The Albany Engineered Composites (AEC) segment, including Albany Safran Composites, LLC (ASC), in which our customer SAFRAN Group (Safran) owns a 10 percent noncontrolling interest, provides highly engineered, advanced composite structures to customers in the aerospace and defense industries. AEC’s largest program relates to CFM International’s LEAP engine. Under this program, AEC through ASC, is the exclusive supplier of advanced composite fan blades and cases under a long-term supply contract. The manufacturing spaces used for the production of parts under the long-term supply agreement are owned by Safran, and leased to the Company at either market rent or a minimal cost. All lease expense is reimbursable by Safran to the Company due to the cost-plus nature of the supply agreement. AEC net sales to Safran in 2017 were $25.6$88.4 million in the first quarter, $30.1 million in the second quarter,six months of 2018 and $28.3 million in the third quarter. AEC net sales to Safran in 2016 were $17.1$56.8 million in the first quarter, $18.5 million in the second quarter, and $17.4 million in the third quarter.six months of 2017. The
9
total of invoicedAccounts receivables, unbilled receivablesContract assets and contractNoncurrent receivables due from Safran amounted to $57.0$96.8 million and $37.1$58.6 million as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.
In the second quarter of 2017, the Company recorded a charge to Cost of goods sold of approximately $15.8 million associated with revisions in the estimated profitability of two AEC contracts. The charge was principally due to second-quarter 2017 downward revisions of estimated customer demand for the components manufactured by AEC related to the BR 725 and A380 programs. The charge included a $4.0 million write-off of program inventory costs, and a reserve for future losses of $11.8 million, which is included in Accrued liabilities in the Consolidated Balance Sheets.
The table below presents restructuring costs by reportable segment (also see Note 5):
Three months ended September 30, | Nine months ended September 30, | |||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||
Restructuring expenses, net | ||||||||
Machine Clothing | $96 | ($212 | ) | $1,012 | $5,921 | |||
Albany Engineered Composites | 5,407 | 640 | 9,208 | 1,787 | ||||
Corporate expenses | - | (102 | ) | - | (55 | ) | ||
Consolidated total | $5,503 | $326 | $10,220 | $7,653 |
Three months ended June 30, | Six months ended June 30, | |||
(in thousands) | 2018 | 2017 | 2018 | 2017 |
Machine Clothing | $1,800 | $805 | $10,152 | $916 |
Albany Engineered Composites | 558 | 1,231 | 779 | 3,801 |
Corporate expenses | 231 | - | 231 | - |
Total | $2,589 | $2,036 | $11,162 | $4,717 |
18
4. Pensions and Other Postretirement Benefit Plans
Pension Plans
The Company has defined benefit pension plans covering certain U.S. and non-U.S. employees. The U.S. qualified defined benefit pension plan has been closed to new participants since October 1998 and, as of February 2009, benefits accrued under this plan were frozen. As a result of the freeze, employees covered by the pension plan will receive, at retirement, benefits already accrued through February 2009 but no new benefits accrue after that date. Benefit accruals under the U.S. Supplemental Executive Retirement Plan ("SERP") were similarly frozen. The eligibility, benefit formulas, and contribution requirements for plans outside of the U.S. vary by location.
Other Postretirement Benefits
The Company also provides certain postretirement benefits to retired employees in the U.S. and Canada. The Company accrues the cost of providing postretirement benefits during the active service period of the employees. The Company currently funds the planplans as claims are paid.
The composition of the net periodic benefit plan cost for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, was as follows:
Pension plans | Other postretirement benefits | |||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||
Components of net periodic benefit cost: | ||||||||
Service cost | $1,960 | $1,991 | $183 | $190 | ||||
Interest cost | 5,507 | 6,110 | 1,660 | 1,832 | ||||
Expected return on assets | (6,004 | ) | (6,763 | ) | - | - | ||
Curtailment gain | - | (130 | ) | - | - | |||
Amortization of prior service cost/(credit) | 27 | 28 | (3,366 | ) | (3,366 | ) | ||
Amortization of net actuarial loss | 1,943 | 1,756 | 2,107 | 2,114 | ||||
Net periodic benefit cost | $3,433 | $2,992 | $584 | $770 |
Pension plans | Other postretirement benefits | |||
(in thousands) | 2018 | 2017 | 2018 | 2017 |
Components of net periodic benefit cost: | ||||
Service cost | $1,391 | $1,307 | $116 | $122 |
Interest cost | 3,621 | 3,671 | 1,013 | 1,107 |
Expected return on assets | (4,470) | (4,003) | - | |
Curtailment gain | (518) | - | - | - |
Amortization of prior service cost/(credit) | 17 | 18 | (2,244) | (2,244) |
Amortization of net actuarial loss | 1,110 | 1,295 | 1,478 | 1,405 |
Net periodic benefit cost | $1,151 | $2,288 | $363 | $390 |
In 2018, the Company adopted the provisions of ASU 2017-07, “Compensation – Retirement Benefits: improving the presentation of net periodic pension cost and net periodic postretirement benefit cost”. This accounting update requires that service cost for defined benefit pension and postretirement plans be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Additionally, the other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The Company elected to report the components of net periodic benefit cost other than the service component in the line item, Other expense, net in the Consolidated Statements of Income.
We restated 2017 expenses using the application of a practical expedient, which permits the usage of amounts disclosed in the prior year Pension and Other Postretirement benefit plans footnote as the estimation basis for applying the retrospective presentation requirements. The tables below show the 2017 amounts reclassified by segment and financial statement line item that resulted from adopting this update:
Effect by segment operating expenses:
19
(in thousands) | Increase/(decrease) in expense for the six months ended June 30, 2017 |
Machine Clothing | ($9) |
Albany Engineered Composites | - |
Corporate expenses | (1,240) |
Total operating expenses | ($1,249) |
Other expense, net | $1,249 |
Effect by Statement of Income line item:
(in thousands) | Increase/(decrease) in expense for the six months ended June 30, 2017 |
Cost of goods sold | ($247) |
Selling, general and administrative expenses | (1,002) |
Total operating expenses | ($1,249) |
Other expense, net | $1,249 |
5. Restructuring
Machine Clothing restructuring costs for the first nine months of 2017 were principally related to additional costs for restructuring actions taken in 2016. Machine Clothing restructuring costs in 2016 were principally related to plant closure costs in Göppingen, Germany and the cessation of research and development activities at the production facility in Sélestat, France.
InOn October 5, 2017, the Company announcedfiled a form 8-K to announce the initiation of discussions with the local works council regarding a proposal to discontinue operations at its Machine Clothing production facility in Sélestat, France. During 2017, we incurred $1.1 million of restructuring expense associated with this proposal but were unable to reasonably estimate the total costs for severance and other charges associated with the proposal as there was no assurance, at that time, that approval for the proposal would be obtained. In the first quarter of 2018 the plan was approved by the French Labor Ministry. The consultations are subjectrestructuring program was driven by the Company’s need to applicable lawbalance manufacturing capacity with demand. In the first six months of 2018, we recorded restructuring expense of $8.6 million, which includes our estimate of the severance and are ongoing. Atoutplacement costs for the approximately 50 positions that will be terminated under this time, the Company has notplan. To date, we have recorded any$9.7 million of restructuring chargecharges related to this proposal.action. The Company continues to assess property, plant and equipment in that location to determine if equipment will be transferred to other facilities, or if the value of the assets can be recovered through a sale. Depending on the outcome of that assessment, additional restructuring charges could be recorded in future periods.
AEC incurred restructuring charges of $9.2 million infor the first ninesix months of 2017. In the third quarter of 2017, the Company decided to discontinue the Bear Claw® line of hydraulic fracturing components used in the oil2018 and gas industry, which led to non-cash restructuring charges totaling $4.5 million relating to the impairment of long-lived assets. Other restructuring charges in 2017 principally relatedrelate to work force reductions in Salt Lake City, Utah and Rochester, New Hampshire.
AEC To date, we have recorded $5.8 million of restructuring expenses in 2016 were principallycharges related to the consolidation of legacy programs into Boerne, Texas.these actions.
The following table summarizes charges reported in the Consolidated Statements of Income under “Restructuring expenses, net”:
Three months ended September 30, | Nine months ended September 30, | |||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||
Machine Clothing | $96 | ($212 | ) | $1,012 | $5,921 | |||
Albany Engineered Composites | 5,407 | 640 | 9,208 | 1,787 | ||||
Corporate Expenses | - | (102 | ) | - | (55 | ) | ||
Total | $5,503 | $326 | $10,220 | $7,653 |
20
Three months ended June 30, | Six months ended June 30, | |||
(in thousands) | 2018 | 2017 | 2018 | 2017 |
Machine Clothing | $1,800 | $805 | $10,152 | $916 |
Albany Engineered Composites | 558 | 1,231 | 779 | 3,801 |
Corporate expenses | 231 | - | 231 | - |
Total | $2,589 | $2,036 | $11,162 | $4,717 |
Six months ended June 30, 2018 | Total restructuring costs incurred | Termination and other costs | Impairment of assets |
(in thousands) | |||
Machine Clothing | $10,152 | $10,152 | $- |
Albany Engineered Composites | 779 | 779 | - |
Corporate expenses | 231 | 231 | - |
Total | $11,162 | $11,162 | $- |
Six months ended June 30, 2017 | Total restructuring costs incurred | Termination and other costs | Impairment of assets |
(in thousands) | |||
Machine Clothing | $916 | $916 | $- |
Albany Engineered Composites | 3,801 | 3,356 | 445 |
Corporate expenses | - | - | - |
Total | $4,717 | $4,272 | $445 |
We expect that approximately $4.0$8.4 million of Accrued liabilities for restructuring at SeptemberJune 30, 20172018 will be paid within one year and approximately $0.4 million will be paid in the following year. The table below presents the year-to-date changes in restructuring liabilities for 20172018 and 2016,2017, all of which related to termination costs:
December 31, | Restructuring | Currency | September 30, | ||
(in thousands) | 2016 | charges accrued | Payments | translation /other | 2017 |
Total termination and other costs | $5,559 | $5,185 | ($6,370) | $24 | $4,398 |
December 31, | Restructuring | Currency | September 30, | December 31, | Restructuring | Currency | June 30, | |||
(in thousands) | 2015 | charges accrued | Payments | translation /other | 2016 | 2017 | charges accrued | Payments | translation /other | 2018 |
Total termination and other costs | $10,177 | $7,194 | ($9,862) | $2 | $7,511 | $3,326 | $11,162 | ($5,323) | ($378) | $8,787 |
12
21
December 31, | Restructuring | Currency | June 30, | ||
(in thousands) | 2016 | charges accrued | Payments | translation /other | 2017 |
Total termination and other costs | $5,559 | $4,272 | ($4,513) | $65 | $5,383 |
6. Other Expense/(Income),expense, net
The components of other expense/(income),Other expense, net are:
Three months ended September 30, | Nine months ended September 30, | |||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||
Currency transaction losses/(gains) | $261 | ($312 | ) | $2,310 | ($2,361 | ) | ||
Bank fees and amortization of debt issuance costs | 116 | 106 | 375 | 652 | ||||
Gain on insurance recovery | (2,000 | ) | - | (2,000 | ) | - | ||
Other | 468 | 448 | 295 | (394 | ) | |||
Total | ($1,155 | ) | $242 | $980 | ($2,103 | ) |
Three months ended June 30, | Six months ended June 30, | |||
(in thousands) | 2018 | 2017 | 2018 | 2017 |
Currency transaction (gains)/losses | ($9) | $1,948 | $681 | $2,049 |
Bank fees | 96 | 111 | 204 | 259 |
Components of net periodic pension and postretirement cost other than service | 259 | 627 | 525 | 1,249 |
Other | 380 | (128) | 768 | (173) |
Total | $726 | $2,558 | $2,178 | $3,384 |
In the third quarter of 2017,2018, the Company recorded an insurance recovery gainadopted the provisions of $2.0 million relatedASU 2017-07. This accounting update affected the classification of components of net periodic benefit cost, other than service cost, to be reported separately from the theftservice cost component and outside of operating income. The Company elected to report other components of net periodic pension and postretirement cost in Japan thatOther expense, net. The comparative consolidated statement of income was reportedrestated as required by this update. Further detail of this accounting update is disclosed in the fourth quarter of 2016.Note 4.
7. Income Taxes
The following table presents components of income tax expense for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
Three months ended September 30, | Nine months ended September 30, | |||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||
Income tax based on income from continuing operations, at estimated tax rates of 36.4% and 37.5%, respectively | $6,935 | $7,838 | $14,420 | $21,545 | ||||
Provision for change in estimated tax rates | 741 | (424 | ) | - | - | |||
Income tax before discrete items | 7,676 | 7,414 | 14,420 | 21,545 | ||||
Discrete tax expense: | ||||||||
Provision for/resolution of tax audits and contingencies, net | - | - | 961 | (825 | ) | |||
Adjustments to prior period tax liabilities | (73 | ) | (11 | ) | 606 | (254 | ) | |
Other discrete tax adjustments, net | (7 | ) | 85 | (62 | ) | 113 | ||
Provision for/adjustment to beginning of year valuation allowance | (3,787 | ) | - | (3,787 | ) | - | ||
Enacted tax legislation | - | - | 34 | |||||
Total income tax expense | $3,809 | $7,488 | $12,138 | $20,613 |
22
Three months ended June 30, | Six months ended June 30, | |||
(in thousands) | 2018 | 2017 | 2018 | 2017 |
Income tax based on income from continuing operations, at estimated tax rates of 30.1% and 32.8%, respectively | $11,239 | $989 | $15,779 | $6,744 |
Provision for change in estimated tax rate | (359) | 36 | - | - |
Income tax before discrete items | 10,880 | 1,025 | 15,779 | 6,744 |
Discrete tax expense: | ||||
Exercise of US Stock Options | (3) | - | (126) | (55) |
Impact of mandatory repatriation | (1,099) | - | (1,099) | - |
Adjustments to prior period tax liabilities | (206) | 189 | (252) | 189 |
Provision for/resolution of tax audits and contingencies, net | 2,443 | 599 | 2,448 | 1,451 |
Changes in valuation allowance | (4,986) | - | (4,986) | - |
Other | 2 | (34) | (124) | - |
Total income tax expense | $7,031 | $1,779 | $11,640 | $8,329 |
The thirdsecond quarter estimated effective tax rate on continuing operations was 36.430.1 percent in 2017,2018, compared to 37.532.8 percent for the same period in 2016.2017.
Income tax expense for the quarter was computed in accordance with ASC 740-270 “Income Taxes – Interim Reporting”. Under this method, loss jurisdictions which cannot recognize a tax benefit with regard to their generated losses are excluded from the annual effective tax rate (AETR) calculation and their taxes are recorded discretely in each quarter.
The Company’s tax rate is affected by recurring items such as the income tax rate in the U.S. and in non-U.S. jurisdictions and the mix of income earned in those jurisdictions, including changes in losses and income from excluded loss jurisdictions, and the impact of discrete items in the respective quarter. Additionally, tax adjustments resulting from the 2017 Tax Cut and Jobs Act (TCJA) have affected the Company’s 2018 AETR, including the global intangible low-taxed income (GILTI) inclusion, the foreign-derived intangible income (FDII) deduction and the corporate U.S. tax rate reduction from 35% to 21%.
The TCJA significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing a transition tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (SAB 118), which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the TCJA. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. The Company elected to apply the measurement period guidance provided in SAB 118.
Deferred tax assets and liabilities: At December 31, 2017, the Company re-measured certain deferred tax assets and liabilities based on the federal rate of 21%. However, the Company is still analyzing certain aspects of the TCJA, such as IRC section 162(m), and refining its calculations which
23
could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. As such, no adjustment has been recorded to the provisional amount previously recorded in 2017.
Foreign tax effects: At December 31, 2017, the Company recorded a provisional federal tax charge due to the transition tax on deemed repatriation of foreign earnings. As of June 30, 2018, the Company is still analyzing its U.S. tax attributes such as foreign earnings and profits, foreign tax paid, and other tax components involved in foreign tax credit calculations, however, the Company has recorded a net $1.1 million reduction to the provisional transition tax in Q2 2018. The $1.1 million adjustment is comprised of a $1.9 million federal tax benefit attributable to adjustments discovered while analyzing the Post 1986 E&P and tax pools through 2016 and a $0.8 million state tax charge based on interpretive guidance issued by various states during the quarter on how the deemed mandatory repatriation would be taxed in those jurisdictions. These amounts are still considered provisional as the Company continues to analyze guidance and legislation published by the taxing jurisdictions.
The Company has elected to account for the global intangible low-taxed income (GILTI) as a current-period expense when incurred (the “period cost method”). The estimated net GILTI inclusion calculated by the Company (including the gross up on the GILTI Inclusion and the apportioned foreign tax credits applied to GILTI) was $18 million and increased the AETR by 2.3%. The Company also calculated an estimated foreign-derived intangible income (FDII) deduction of $9 million which decreased the AETR by 2.1%. Because of the complexity of the GILTI and FDII tax rules and the lack of legislative guidance, the Company continues to evaluate these provisions of the TCJA and the application of ASC 740, Income Taxes. The final impact on the Company from the TCJA’s GILTI and FDII tax legislation may differ from the estimate calculated by the Company. Such differences could be material, due to, among other things, changes in interpretations of the TCJA, future legislative action to address questions that arise because of the TCJA, changes in accounting standards for income taxes or related interpretations in response to the TCJA, or any updates or changes to estimates the Company has utilized to calculate the GILTI inclusion and FDII deduction.
The Company continues to believe that the Base Erosion Anti-Abuse Tax (BEAT) does not apply under the Company’s current policies. Therefore no adjustments for BEAT have been recorded.
The Company records the residual U.S. and foreign taxes on certain amounts of foreign earnings that have been targeted for repatriation to the U.S. These amounts are not considered to be permanentlyindefinitely reinvested, and the Company accrued for the tax cost on these earnings to the extent they cannot be repatriated in a tax-free manner. At September 30, 2017The Company has targeted for repatriation $92.9 million of current year and prior year earnings of the Company’s foreign operations. If these earnings were distributed, the Company calculated a deferred tax liabilitywould be subject to foreign withholding taxes of $3.7$2.2 million on $62.8 million of non-U.S. earnings thatwhich have already been targeted for future repatriation to the U.S.recorded.
The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including major jurisdictions such as the United States, Brazil, Canada, France, Germany, Italy, Mexico, and Switzerland. The open tax years in these jurisdictions range from 2007 to 2016.2018. The Company is currently under audit in non-U.S. tax jurisdictions, including but not limited to Canada and Italy.
13
During the second quarter of 2018, the Company recorded a charge for additional uncertain tax positions of $2.4 million as a result of developments in ongoing tax audits.
It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change within a range of a net increase of nil to a net decrease up to $0.2of $0.7 million, from the
24
reevaluation of uncertain tax positions arising in examinations, in appeals, or in the courts, or from the closure of tax statutes of limitations.
As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of September 2017, primarily as the Company achieved three years of cumulative pretax income in Canada and Japan,June 2018, management determined that there was sufficient positive evidence to conclude that it is more likely than not that additional deferred tax assets of $3.4 million in Canada and $0.4 million in JapanGermany are realizable. Therefore, in the third quarter of 2017, weCompany reversed the previously recorded valuation allowancesallowance in the second quarter of 2018 which resulted in a discrete tax benefit of $3.8$5.0 million.
In MarchOctober 2016, an accounting update, ASU 2016-16 was issued which simplifies several aspects related to accounting for share-based payment transactions, includingmodifies the recognition of income tax consequences. The income tax consequences which relate to accounting for excess tax benefits have been adopted prospectively, resulting in recognitioneffects on intercompany transfers of excess tax benefits against income tax expense, ratherassets, other than additional paid-in capital, of $0.1 million for the nine months ended September 30, 2017. No adjustment was necessary related to the deferred tax balances.inventory. The Company adopted this update oneffective January 1, 2017.2018, which resulted in a decrease of $0.5 million to deferred taxes liabilities, with an offsetting increase to retained earnings.
8. Earnings Per Share
The amounts used in computing earnings per share and the weighted average number of shares of potentially dilutive securities are as follows:
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||
(in thousands, except market price and earnings per share) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||
Net income attributable to the Company | $15,269 | $13,069 | $27,225 | $36,937 | $30,365 | $1,117 | $40,610 | $11,956 | ||||
Weighted average number of shares: | ||||||||||||
Weighted average number of shares used in | ||||||||||||
calculating basic net income per share | 32,187 | 32,104 | 32,160 | 32,079 | 32,257 | 32,166 | 32,239 | 32,147 | ||||
Effect of dilutive stock-based compensation plans: | ||||||||||||
Stock options | 27 | 37 | 33 | 39 | 16 | 34 | 16 | 35 | ||||
Weighted average number of shares used in | ||||||||||||
calculating diluted net income per share | 32,214 | 32,141 | 32,193 | 32,118 | 32,273 | 32,200 | 32,255 | 32,182 | ||||
Average market price of common stock used | ||||||||||||
for calculation of dilutive shares | $53.49 | $42.03 | $49.49 | $38.97 | $61.86 | $48.44 | $62.83 | $47.47 | ||||
Net income per share: | ||||||||||||
Basic | $0.47 | $0.41 | $0.85 | $1.15 | $0.94 | $0.03 | $1.26 | $0.37 | ||||
Diluted | $0.47 | $0.41 | $0.85 | $1.15 | $0.94 | $0.03 | $1.26 | $0.37 |
14
9. Noncontrolling Interest
The table below presents a reconciliation of income attributable to the noncontrolling interest and noncontrolling equity:equity in the Company’s subsidiary Albany Safran Composites, LLC, and the impact that the ASC 606 revenue standard had on Company results for the first six months of 2018, included in the consolidated financial statements:
Nine months ended September 30, | ||||
(in thousands) | 2017 | 2016 | ||
Net income/(loss) of Albany Safran Composites, LLC ("ASC") | $2,805 | ($374 | ) | |
Less: Return attributable to the Company's preferred holding | 782 | 732 | ||
Net income/(loss) of ASC available for common ownership | $2,023 | ($1,106 | ) | |
Ownership percentage of noncontrolling shareholder | 10 | % | 10 | % |
Net income/(loss) attributable to noncontrolling interest | $202 | ($111 | ) | |
Noncontrolling interest, beginning of year | $3,767 | $3,690 | ||
Net income/(loss) attributable to noncontrolling interest | 202 | (111 | ) | |
Changes in other comprehensive income attributable to noncontrolling interest | 19 | (1 | ) | |
Noncontrolling interest | $3,988 | $3,578 |
25
Six months ended June 30, | ||
(in thousands) | 2018 | 2017 |
Net income of Albany Safran Composites (ASC) | $2,419 | $3,029 |
Less: Return attributable to the Company's preferred holding | 635 | 515 |
Net income of ASC available for common ownership | $1,784 | $2,514 |
Ownership percentage of noncontrolling shareholder | 10% | 10% |
Net income attributable to noncontrolling interest | $178 | $251 |
Noncontrolling interest, beginning of year | $3,247 | $3,767 |
Decrease attributable to application of ASC 606 | (327) | - |
Net income attributable to noncontrolling interest | 178 | 251 |
Changes in other comprehensive income attributable to noncontrolling interest | 4 | 13 |
Noncontrolling interest | $3,102 | $4,031 |
10. Accumulated Other Comprehensive Income (AOCI)
The table below presents changes in the components of AOCI for the period December 31, 20162017 to SeptemberJune 30, 2017:2018:
(in thousands) | Translation adjustments | Pension and postretirement liability adjustments | Derivative valuation adjustment | Total Other Comprehensive Income | ||||
December 31, 2016 | ($133,298 | ) | ($51,719 | ) | $828 | ($184,189 | ) | |
Other comprehensive income/(loss) before reclassifications | 40,775 | (1,427 | ) | (679 | ) | 38,669 | ||
Interest expense related to swaps reclassified to the Statement of Income, net of tax | - | - | 768 | 768 | ||||
Pension and postretirement liability adjustments reclassified to Statement of Income, net of tax | - | 498 | - | 498 | ||||
Net current period other comprehensive income | 40,775 | (929 | ) | 89 | 39,935 | |||
September 30, 2017 | ($92,523 | ) | ($52,648 | ) | $917 | ($144,254 | ) |
(in thousands) | Translation adjustments | Pension and postretirement liability adjustments | Derivative valuation adjustment | Total Other Comprehensive Income |
December 31, 2017 | ($87,318) | ($50,536) | $1,953 | ($135,901) |
Other comprehensive income/(loss) before reclassifications | (15,570) | 2,224 | 6,024 | (7,322) |
Pension/postretirement curtailment gain, net of tax | (363) | (363) | ||
Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax | 178 | 178 | ||
Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax | 253 | 253 | ||
Net current period other comprehensive income | (15,570) | 2,114 | 6,202 | (7,254) |
June 30, 2018 | ($102,888) | ($48,422) | $8,155 | ($143,155) |
The table below presents changes in the components of AOCI for the period December 31, 20152016 to SeptemberJune 30, 2016:2017:
(in thousands) | Translation adjustments | Pension and postretirement liability adjustments | Derivative valuation adjustment | Total Other Comprehensive Income | ||||
December 31, 2015 | ($108,655 | ) | ($48,725 | ) | ($1,464 | ) | ($158,844 | ) |
Other comprehensive income/(loss) before reclassifications | 2,216 | 330 | (4,300 | ) | (1,754 | ) | ||
Interest expense related to swaps reclassified to the Statement of Income, net of tax | - | - | 1,045 | 1,045 | ||||
Pension and postretirement liability adjustments reclassified to Statement of Income, net of tax | - | 372 | - | 372 | ||||
Net current period other comprehensive income | 2,216 | 702 | (3,255 | ) | (337 | ) | ||
September 30, 2016 | ($106,439 | ) | ($48,023 | ) | ($4,719 | ) | ($159,181 | ) |
(in thousands) | Translation adjustments | Pension and postretirement liability adjustments | Derivative valuation adjustment | Total Other Comprehensive Income |
December 31, 2016 | ($133,298) | ($51,719) | $828 | ($184,189) |
Other comprehensive income/(loss) before reclassifications | 28,453 | (1,079) | (619) | 26,755 |
Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax | 585 | 585 | ||
Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax | 332 | 332 | ||
Net current period other comprehensive income | 28,453 | (747) | (34) | 27,672 |
June 30, 2017 | ($104,845) | ($52,466) | $794 | ($156,517) |
The table below presents the expense/(income) amounts reclassified, and the line items of the Consolidated Statements of Income that were affected for the periods ended SeptemberJune 30, 20172018 and 2016.2017.
Three months ended September 30, | Nine months ended September 30, | |||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||
Pretax Derivative valuation reclassified from Accumulated Other Comprehensive Income: | ||||||||
Expense related to interest rate swaps included in Income before taxes(a) | $295 | $1,100 | $1,238 | $1,686 | ||||
Income tax effect | (112 | ) | (418 | ) | (470 | ) | (641 | ) |
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income | $183 | $682 | $768 | $1,045 | ||||
Pretax pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income: | ||||||||
Amortization of prior service credit | ($1,113 | ) | ($1,113 | ) | ($3,339 | ) | ($3,338 | ) |
Amortization of net actuarial loss | 1,350 | 1,296 | 4,050 | 3,870 | ||||
Total pretax amount reclassified (b) | 237 | 183 | 711 | 532 | ||||
Income tax effect | (71 | ) | (55 | ) | (213 | ) | (160 | ) |
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income | $166 | $128 | $498 | $372 |
Three months ended June 30, | Six months ended June 30, | |||
(in thousands) | 2018 | 2017 | 2018 | 2017 |
Pretax Derivative valuation reclassified from Accumulated Other Comprehensive Income: | ||||
Expense related to interest rate swaps included in Income before taxes (a) | $54 | $343 | $234 | $943 |
Income tax effect | (13) | (130) | (56) | (358) |
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income | $41 | $213 | $178 | $585 |
Pretax pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income: | ||||
Pension/postretirement curtailment | ($518) | $- | ($518) | $- |
Amortization of prior service credit (b) | (1,113) | (1,113) | (2,227) | (2,226) |
Amortization of net actuarial loss (b) | 1,291 | 1,353 | 2,588 | 2,700 |
Total pretax amount reclassified | (340) | 240 | (157) | 474 |
Income tax effect | 102 | (72) | 47 | (142) |
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income | ($238) | $168 | ($110) | $332 |
(a) | Included in Interest expense are payments related to the interest rate swap agreements and amortization of swap buyouts (see Note |
(b) | These accumulated other comprehensive income components are included in |
16
11. Accounts Receivable
27
Accounts receivable includes trade receivables and revenuebank promissory notes. As a result of adopting ASC 606, Revenue in excess of progress billings on long-term contracts in the Albany Engineered Composites segment. segment was reclassified to Contract assets in 2018. Including that reclassification, the cumulative effect from the adoption of ASC 606 was an increase to Accounts receivable of $7.7 million as Accounts receivable recorded in the cumulative adjustment exceeded that reclassification.
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company determines the allowance based on historical write-off experience, customer-specific facts and economic conditions. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
As of SeptemberJune 30, 20172018 and December 31, 2016,2017, Accounts receivable consisted of the following:
(in thousands) | June 30, 2018 | December 31, 2017 |
Trade and other accounts receivable | $238,763 | $152,375 |
Bank promissory notes | 18,070 | 20,255 |
Revenue in excess of progress billings | - | 37,964 |
Allowance for doubtful accounts | (7,351) | (7,919) |
Total accounts receivable | $249,482 | $202,675 |
In connection with certain sales in Asia, the Company accepts a bank promissory note as customer payment. The notes may be presented for payment at maturity, which is less than one year.
The Company also has ContractNoncurrent receivables in the AEC segment that represent revenue earned which has extended payment terms. The ContractNoncurrent receivables will be invoiced to the customer, with 2% interest, over a 10-year period starting in 2020.
As of SeptemberJune 30, 20172018 and December 31, 2016, Contract2017, Noncurrent receivables consisted of the following:
(in thousands) | September 30, 2017 | December 31, 2016 |
Contract receivable | $29,688 | $14,045 |
(in thousands) | June 30, 2018 | December 31, 2017 |
Noncurrent receivables | $36,981 | $32,811 |
12. Contract Assets and Liabilities
Beginning in 2018, Contract assets includes unbilled amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is utilized, and revenue recognized exceeds the amount billed to the customer. For periods prior to 2018, that asset was included in Accounts receivable. At the date of adoption of ASC 606, we recorded Contract assets of $47.4 million, which included the amount that was in Accounts receivable as of December 31, 2017, and additional transition adjustments that resulted from the retrospective application of ASC 606 to contracts in process at the time of adoption.
28
Contract assets are transferred to Accounts receivable, net when the entitlement to pay becomes unconditional. Contract liabilities include advance payments and billings in excess of revenue recognized. Contract liabilities are included in Accrued liabilities in the Consolidated Balance Sheet.
Contract assets and Contract liabilities are reported on the Consolidated Balance Sheets in a net position on a contract-by-contract basis at the end of each reporting period. Contract assets and contract liabilities were as follows:
(in thousands) | June 30, 2018 | December 31, 2017 |
Contract assets | $59,244 | $ - |
Contract liabilities | 4,220 | - |
Contract assets increased $11.8 million during the six month period ended June 30, 2018 as compared to the January 1, 2018 opening balance sheet, as adjusted for the adoption of ASC 606 (see Note 2). The increase was primarily due to an increase in unbilled revenue related to the satisfaction of performance obligations, in excess of the amounts billed to customers. There were no impairment losses related to our Contract assets during the six month period ended June 30, 2018.
Contract liabilities increased $3.5 million during the six month period ended June 30, 2018, as compared to the January 1, 2018 opening balance sheet, as adjusted for the adoption of ASC 606, primarily due to increased billings in excess of revenue recognized. Revenue recognized for the six month period ended June 30, 2018, that was included in the Contract liability balance at the beginning of the year was less than $1 million, and represented revenue primarily in the ASC reporting unit.
13. Inventories
Costs included in inventories are raw materials, labor, supplies and allocable depreciation and overhead. Raw material inventories are valued on an average cost basis. Other inventory cost elements are valued at cost, using the first-in, first-out method. The Company writes down the inventories for estimated obsolescence, and to lower of cost or net realizable value based upon assumptions about future demand and market conditions. If actual demand or market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related write-down represents the new cost basis of such inventories. The AEC segment has long-term contracts underdecrease in Inventories in 2018, compared to the balances as of December 31, 2017, was principally due to the cumulative effect of adopting ASC 606 (see Note 2) which we incur engineering and development costs that are allocable to parts that will be delivered over multiple years. These costs are included in Work in process in the table below.
17
decreased Inventories by $47.1 million.
As of SeptemberJune 30, 20172018 and December 31, 2016,2017, inventories consisted of the following:
(in thousands) | September 30, 2017 | December 31, 2016 |
Raw materials | $45,142 | $37,691 |
Work in process | 83,129 | 58,715 |
Finished goods | 28,872 | 37,500 |
Total inventories | $157,143 | $133,906 |
29
(in thousands) | June 30, 2018 | December 31, 2017 |
Raw materials | $39,822 | $42,215 |
Work in process | 44,526 | 65,448 |
Finished goods | 13,311 | 28,856 |
Total inventories | $97,659 | $136,519 |
13.14. Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination.
Determining the fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates, and future market conditions, among others. Goodwill and other long-lived assets are reviewed for impairment whenever events, such as significant changes in the business climate, plant closures, changes in product offerings, or other circumstances indicate that the carrying amount may not be recoverable.
To determine fair value, we utilize two market-based approaches and an income approach. Under the market-based approaches, we utilize information regarding the Company as well as publicly available industry information to determine earnings multiples and sales multiples. Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn.
In the second quarter of 2017,2018, the Company applied the qualitative assessment approach in performing its annual evaluation of goodwill and concluded that no impairment provision was required. There were no amounts at risk due to the large spread between the fair, and carrying value, of each reporting unit.
In the third quarter, the Company decided to discontinue the Bear Claw® line of hydraulic fracturing components used in the oil and gas industry, which was part of the Harris aerostructures business acquired by AEC in 2016. This decision resulted in a non-cash write-off of intangibles for $4.1 million to restructuring expense, which is presented as other changes in the table below for intangible assets and goodwill as of September 30, 2017. The write-off represents the full carrying value of intangible assets associated with the Bear Claw® product line as, based upon anticipated cash flows and the Company’s plan to exit the business, we determined the product line to have no fair value as of September 30, 2017. Due to the decision to exit this product line, management performed an interim assessment of goodwill and concluded that no goodwill was allocable to the Bear Claw® product line, and no impairment provision was required.
18
We are continuing to amortize certain patents, trade names, customer relationships, customer contracts and technology assets that have finite lives. The gross carrying value, accumulated amortization and net values of intangible assets and goodwill as of June 30, 2018 and December 31, 2016 to September 30, 2017, were as follows:
(in thousands) | Weighted average amortization life in years | Gross carrying amount | Accumulated amortization | Net carrying amount | |
Amortized intangible assets: | |||||
AEC trade names | 15 | $43 | $27 | $16 | |
AEC technology | 15 | 228 | 142 | 86 | |
Customer relationships | 15 | 48,528 | 4,956 | 43,572 | |
Customer contracts | 6 | 18,211 | 5,114 | 13,097 | |
Other intangibles | 5 | 742 | 516 | 226 | |
Total amortized intangible assets | $67,752 | $10,755 | $56,997 | ||
Unamortized intangible assets: | |||||
MC Goodwill | $70,280 | $- | $70,280 | ||
AEC Goodwill | 95,730 | - | 95,730 | ||
Total unamortized intangible assets: | $166,010 | $- | $166,010 |
As of December 31, 2016 (in thousands) | Weighted average amortization life in years | Gross carrying amount | Accumulated amortization | Net carrying amount | |
Amortized intangible assets: | |||||
AEC trade names | 15 | $43 | $23 | $20 | |
AEC technology | 15 | 228 | 124 | 104 | |
Customer relationships | 15 | 49,490 | 2,481 | 47,009 | |
Customer contracts | 6 | 20,420 | 2,561 | 17,859 | |
Other intangibles | 5 | 1,720 | 258 | 1,462 | |
Total amortized intangible assets | $71,901 | $5,447 | $66,454 | ||
Unamortized intangible assets: | |||||
MC Goodwill | $64,645 | $- | $64,645 | ||
AEC Goodwill | 95,730 | - | 95,730 | ||
Total unamortized intangible assets: | $160,375 | $- | $160,375 |
30
As of June 30, 2018 (in thousands) | Weighted average amortization life in years | Gross carrying amount | Accumulated amortization | Net carrying amount |
Amortized intangible assets: | ||||
AEC trade names | 15 | $140 | ($127) | $13 |
AEC technology | 15 | 370 | (302) | 68 |
Customer relationships | 15 | 48,421 | (7,269) | 41,152 |
Customer contracts | 6 | 17,471 | (6,559) | 10,912 |
Other intangibles | 5 | 322 | (145) | 177 |
Net amortized intangible assets | $66,724 | ($14,402) | $52,322 | |
Unamortized intangible assets: | ||||
MC Goodwill | $69,744 | $- | $69,744 | |
AEC Goodwill | 95,730 | - | 95,730 | |
Total unamortized intangible assets: | $165,474 | $- | $165,474 |
As of December 31, 2017 (in thousands) | Weighted average amortization life in years | Gross carrying amount | Accumulated amortization | Net carrying amount |
Amortized intangible assets: | ||||
AEC trade names | 15 | $140 | ($125) | $15 |
AEC technology | 15 | 370 | (290) | 80 |
Customer relationships | 15 | 48,421 | (5,654) | 42,767 |
Customer contracts | 6 | 17,471 | (5,102) | 12,369 |
Other intangibles | 5 | 322 | (112) | 210 |
Net amortized intangible assets | $66,724 | ($11,283) | $55,441 | |
Unamortized intangible assets: | ||||
MC Goodwill | $71,066 | $- | $71,066 | |
AEC Goodwill | 95,730 | - | 95,730 | |
Total unamortized intangible assets: | $166,796 | $- | $166,796 |
The changes in intangible assets, net and goodwill from December 31, 20162017 to SeptemberJune 30, 2017,2018, were as follows:
(in thousands) | December 31, 2016 | Amortization | Other Changes | Currency Translation | September 30, 2017 | |||||
Amortized intangible assets: | ||||||||||
AEC trade names | $20 | $(4 | ) | $- | $- | $16 | ||||
AEC technology | 104 | (18 | ) | 0 | - | 86 | ||||
Customer relationships | 47,009 | (2,475 | ) | (962 | ) | - | 43,572 | |||
Customer contracts | 17,859 | (2,553 | ) | (2,209 | ) | - | 13,097 | |||
Other intangibles | 1,462 | (258 | ) | (978 | ) | - | 226 | |||
Total amortized intangible assets | $66,454 | ($5,308 | ) | ($4,149 | ) | $- | $56,997 | |||
Unamortized intangible assets: | ||||||||||
MC Goodwill | $64,645 | $- | $5,635 | $70,280 | ||||||
AEC Goodwill | 95,730 | - | - | 95,730 | ||||||
Total unamortized intangible assets: | $160,375 | $- | $- | $5,635 | $166,010 |
31
(in thousands) | December 31, 2017 | Amortization | Currency Translation | June 30, 2018 |
Amortized intangible assets: | ||||
AEC trade names | $15 | $(2) | $- | $13 |
AEC technology | 80 | (12) | - | 68 |
Customer relationships | 42,767 | (1,615) | - | 41,152 |
Customer contracts | 12,369 | (1,457) | - | 10,912 |
Other intangibles | 210 | (33) | - | 177 |
Net amortized intangible assets | $55,441 | ($3,119) | $- | $52,322 |
Unamortized intangible assets: | ||||
MC Goodwill | $71,066 | $- | $(1,322) | $69,744 |
AEC Goodwill | 95,730 | - | - | 95,730 |
Total unamortized intangible assets: | $166,796 | $- | $(1,322) | $165,474 |
Estimated amortization expense of intangibles for the years ending December 31, 20172018 through 2021,2022, is as follows:
Annual amortization | |
Year | (in thousands) |
2017 | $6,865 |
2018 | 6,232 |
2019 | 6,232 |
2020 | 6,232 |
2021 | 6,162 |
Annual amortization | |
Year | (in thousands) |
2018 | $6,234 |
2019 | 6,234 |
2020 | 6,234 |
2021 | 6,163 |
2022 | 3,949 |
20
14.
15. Financial Instruments
Long-term debt, principally to banks and bondholders, consists of:
(in thousands, except interest rates) | September 30, 2017 | December 31, 2016 | ||
Private placement with a fixed interest rate of 6.84%, final payment was made October 25, 2017 | $50,000 | $50,000 | ||
Revolving credit agreement with borrowings outstanding at an end of period interest rate of 2.74% in 2017 and 2.58% in 2016 (including the effect of interest rate hedging transactions, as described below), due in 2021 | 440,000 | 418,000 | ||
Obligation under capital lease, matures 2022 | 15,343 | 16,584 | ||
Long-term debt | 505,343 | 484,584 | ||
Less: current portion | (51,765 | ) | (51,666 | ) |
Long-term debt, net of current portion | $453,578 | $432,918 |
A note agreement and guaranty (“Prudential Agreement”) was originally entered into in October 2005 with the Prudential Insurance Company of America, and certain other purchasers, with interest at 6.84%. The final principal payment under the Prudential Agreement of $50.0 million was made on October 25, 2017. As of September 30, 2017, the fair value of this debt was $50.9 million.
32
(in thousands, except interest rates) | June 30, 2018 | December 31, 2017 |
Revolving credit agreement with borrowings outstanding at an end of period interest rate of 3.58% in 2018 and 3.40% in 2017 (including the effect of interest rate hedging transactions, as described below), due in 2022 | $511,000 | $501,000 |
Obligation under capital lease, matures 2022 | 14,030 | 14,919 |
Long-term debt | 525,030 | 515,919 |
Less: current portion | (1,844) | (1,799) |
Long-term debt, net of current portion | $523,186 | $514,120 |
On April 8, 2016,November 7, 2017, we entered into a $550$685 million unsecured Five-Year Revolving Credit Facility Agreement (the “Credit Agreement”) which amended and restated the prior $400$550 million Agreement, entered into on June 18, 2015April 8, 2016 (the “Prior Agreement”). Under the Credit Agreement, $440$511 million of borrowings were outstanding as of SeptemberJune 30, 2017.2018. The applicable interest rate for borrowings was LIBOR plus a spread, based on our leverage ratio at the time of borrowing. At the time of the last borrowing on September 25, 2017,June 18, 2018, the spread was 1.500%. The spread was based on a pricing grid, which ranged from 1.250% to 1.750%, based on our leverage ratio. Based on our maximum leverage ratio and our Consolidated EBITDA, and without modification to any other credit agreements, as of SeptemberJune 30, 2017,2018, we would have been able to borrow an additional $110$174 million under the Agreement.
The Credit Agreement contains customary terms, as well as affirmative covenants, negative covenants and events of default comparable to those in the Prior Agreement. The Borrowings are guaranteed by certain of the Company's subsidiaries.
Our ability to borrow additional amounts under the Credit Agreement is conditional upon the absence of any defaults, as well as the absence of any material adverse change (as defined in the Credit Agreement).
The Company has a long-term capital lease obligation for real property in Salt Lake City, Utah. The lease has an implied interest rate of 5.0% and matures in 2022.
21
The following schedule presents future minimum annual lease payments under the capital lease obligation and the present value of the minimum lease payments, as of SeptemberJune 30, 2017.2018.
Years ending December 31, | (in thousands) | |
2017 | $606 | |
2018 | 2,473 | |
2019 | 2,473 | |
2020 | 2,520 | |
2021 | 2,520 | |
Thereafter | 7,373 | |
Total minimum lease payments | 17,965 | |
Less: Amount representing interest | (2,622 | ) |
Present value of minimum lease payments | $15,343 |
33
Years ending December 31, | (in thousands) |
2018 | $1,236 |
2019 | 2,473 |
2020 | 2,520 |
2021 | 2,520 |
2022 | 7,373 |
Total minimum lease payments | 16,122 |
Less: Amount representing interest | (2,092) |
Present value of minimum lease payments | $14,030 |
On November 27, 2017, we terminated our interest rate swap agreements, originally entered into on May 9, 2016, that had effectively fixed the interest rate on $300 million of revolving credit borrowings, in order to enter into a new interest rate swap with a greater notional amount, and the same maturity as the Credit Agreement. We received cash of $6.3 million when the swap agreements were terminated and that payment will be amortized into interest expense through March 2021.
On May 6, 2016, we terminated ourother interest rate swap agreements that had effectively fixed the interest rate on up to $120 million of revolving credit borrowings, in order to enter into a new interest rate swap with a greater notional amount, and the same maturity as the Credit Agreement. We paid $5.2 million to terminate the swap agreements and that cost will be amortized into interest expense through June 2020.
On May 9, 2016,November 28, 2017, we entered into interest rate hedgesswap agreements for the period May 16, 2016December 18, 2017 through March 16, 2021.October 17, 2022. These transactions have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $300$350 million of indebtedness drawn under the Credit Agreement at the rate of 1.245%2.11% during the period. Under the terms of these transactions, we pay the fixed rate of 1.245%2.11% and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly calculation date, which on SeptemberJune 18, 20172018 was 1.245%2.09%, plus the applicable spread, during the swap period. On SeptemberJune 18, 2017,2018, the all-in-rate on the $300$350 million of debt was 2.745%3.61%.
These interest rate swaps are accounted for as a hedge of future cash flows, as further described in Note 1516 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)agreement) of not greater than 3.75 to 1.00 for each fiscal quarter ending prior to (but not including) September 30, 2019, and 3.50 to 1.00 for each fiscal quarter ending on or after September 30, 2019, and minimum interest coverage (as defined) of 3.00 to 1.00.
As of SeptemberJune 30, 2017,2018, our leverage ratio was 2.552.23 to 1.00 and our interest coverage ratio was 9.3810.73 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 woulddoes not exceed 3.50 to 1.00 after giving pro forma effect to any such acquisition.
the limits noted above.
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 SeptemberJune 30, 2017.2018.
34
15.16. Fair-Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting principles establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable
22
inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Level 3 inputs are unobservable data points for the asset or liability, and include situations in which there is little, if any, market activity for the asset or liability. We had no Level 3 financial assets or liabilities at December 31, 20162017 or SeptemberJune 30, 2017.2018.
The following table presents the fair-value hierarchy for our Level 1 and Level 2 financial and non-financial assets and liabilities, which are measured at fair value on a recurring basis:
September 30, 2017 | December 31, 2016 | |||||||
Quoted prices in active markets | Significant other observable inputs | Quoted prices in active markets | Significant other observable inputs | |||||
(in thousands) | (Level 1) | (Level 2) | (Level 1) | (Level 2) | ||||
Fair Value | ||||||||
Assets: | ||||||||
Cash equivalents | $18,246 | $- | $8,468 | $- | ||||
Other Assets: | ||||||||
Common stock of unaffiliated foreign public company | 880 | (a) | - | 762 | (a) | - | ||
Interest rate swaps | - | 5,293 | (b) | - | 5,784 | (c) | ||
June 30, 2018 | December 31, 2017 | ||||||||
Quoted prices in active markets | Significant other observable inputs | Quoted prices in active markets | Significant other observable inputs | ||||||
(in thousands) | (Level 1) | (Level 2) | (Level 1) | (Level 2) | |||||
Fair Value | |||||||||
Assets: | |||||||||
Cash equivalents | $18,728 | $- | $13,601 | $- | |||||
Prepaid expenses and other current assets: | |||||||||
Foreign currency options | 41 | - | - | - | |||||
Other Assets: | |||||||||
Common stock of unaffiliated foreign public company (a) | 962 | 999 | - | ||||||
Interest rate swaps | - | 8,985 | (b) | - | 313 | (c) | |||
(a) | Original cost basis $0.5 million |
(b) | Net of |
(c) | Net of |
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.
35
We operate our business in many regions of the world, and currency rate movements can have a significant effect on operating results. Foreign currency instruments are entered into periodically, and consist of foreign currency option contracts and forward contracts that are valued using quoted prices in active markets obtained from independent pricing sources. These instruments are measured using market foreign exchange prices and are recorded in the Consolidated Balance Sheets as Other current assets and Accounts payable, as applicable. Changes in fair value of these instruments are recorded as gains or losses within Other expense/(income)expense, net.
When exercised, the foreign currency instruments are net settled with the same financial institution that bought or sold them. For all positions, whether options or forward contracts, there is risk from the possible inability of the financial institution to meet the terms of the contracts and the risk of
23
unfavorable changes in interest and currency rates, which may reduce the value of the instruments. We seek to controlmitigate risk by evaluating the creditworthiness of counterparties and by monitoring the currency exchange and interest rate markets while reviewing the hedging risks and contracts to ensure compliance with our internal guidelines and policies.
Changes in exchange rates can result in revaluation gains and losses that are recorded in Selling, General and Administrative expenses or Other expense/(income),expense, net. Revaluation gains and losses occur when our business units have cash, intercompany (recorded in Other expense/(income),expense, net) or third-party trade (recorded in Selling, General and Administrative expenses) receivable or payable balances in a currency other than their local reporting (or functional) currency.
Operating results can also be affected by the translation of sales and costs, for each non-U.S. subsidiary, from the local functional currency to the U.S. dollar. The translation effect on the Consolidated Statements of Income is dependent on our net income or expense position in each non-U.S. currency in which we do business. A net income position exists when sales realized in a particular currency exceed expenses paid in that currency; a net expense position exists if the opposite is true.
The interest rate swaps are accounted for as hedges of future cash flows. The fair value of our interest rate swaps are derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve, and is included in Other assets and/or Other noncurrent liabilities in the Consolidated Balance Sheets. Unrealized gains and losses on the swaps flow through the caption Derivative valuation adjustment in the Shareholders’ equity section of the Consolidated Balance Sheets, to the extent that the hedges are highly effective. As of SeptemberJune 30, 2017,2018, these interest rate swaps were determined to be highly effective hedges of interest rate cash flow risk. Any gains and losses related to the ineffective portion of the hedges will be recognized in the current period in earnings. Amounts accumulated in Other comprehensive income are reclassified as Interest expense, net when the related interest payments (that is, the hedged forecasted transactions), and amortization related to the swap buyouts, affect earnings. Interest expense related to payments under the current swapsactive swap agreements totaled $0.6$0.7 million for the ninesix month period ended SeptemberJune 30, 20172018 and $1.2$0.5 million for the ninesix month period ended SeptemberJune 30, 2016.2017. Additionally, non-cash interest expenseexpense/(income) related to the amortization of swap buyouts totaled $0.6($0.4) million for the ninesix month period ended SeptemberJune 30, 20172018 and $0.5$0.4 million of the ninesix month period ended SeptemberJune 30, 2016.2017.
Gains and lossesGains/(losses) related to changes in fair value of derivative instruments that were recognized in Other expense/(income),expense, net in the Consolidated Statements of Income were as follows:
Three months ended September 30, | Nine months ended September 30, | |||
(in thousands) | 2017 | 2016 | 2017 | 2016 |
Derivatives not designated as hedging instruments | ||||
Foreign currency options (losses)/gains | ($2) | ($218) | ($131) | $237 |
36
Three months ended June 30, | Six months ended June 30, | |||
(in thousands) | 2018 | 2017 | 2018 | 2017 |
Derivatives not designated as hedging instruments | ||||
Foreign currency options losses | ($34) | ($75) | ($71) | ($129) |
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
24
asbestos-containing paper machine clothing synthetic dryer fabrics marketed during the period from 1967 to 1976 and used in certain paper mills.
We were defending 3,7273,677 claims as of SeptemberJune 30, 2017.2018.
The following table sets forth the number of claims filed, the number of claims settled, dismissed or otherwise resolved, and the aggregate settlement amount during the periods presented:
Year ended December 31, | Opening Number of Claims | Claims Dismissed,Settled, or Resolved | New Claims | Closing Number of Claims | Amounts Paid (thousands) to Settle or Resolve |
2012 | 4,446 | 90 | 107 | 4,463 | $530 |
2013 | 4,463 | 230 | 66 | 4,299 | 78 |
2014 | 4,299 | 625 | 147 | 3,821 | 437 |
2015 | 3,821 | 116 | 86 | 3,791 | 164 |
2016 | 3,791 | 148 | 102 | 3,745 | 758 |
2017 (as of September 30) | 3,745 | 75 | 57 | 3,727 | $10 |
Year ended December 31, | Opening Number of Claims | Claims Dismissed,Settled, or Resolved | New Claims | Closing Number of Claims | Amounts Paid (thousands) to Settle or Resolve |
2013 | 4,463 | 230 | 66 | 4,299 | $78 |
2014 | 4,299 | 625 | 147 | 3,821 | 437 |
2015 | 3,821 | 116 | 86 | 3,791 | 164 |
2016 | 3,791 | 148 | 102 | 3,745 | 758 |
2017 | 3,745 | 105 | 90 | 3,730 | 55 |
2018 (as of June 30) | 3,730 | 105 | 52 | 3,677 | $93 |
We anticipate that additional claims will be filed against the Company and related companies in the future, but are unable to predict the number and timing of such future claims. Due to the fact that information sufficient to meaningfully estimate a range of possible loss of a particular claim is typically not available until late in the discovery process, we do not believe a meaningful estimate can be made regarding the range of possible loss with respect to pending or future claims and therefore are unable to estimate a range of reasonably possible loss in excess of amounts already accrued for pending or future claims.
While we believe we have meritorious defenses to these claims, we have settled certain claims for amounts we consider reasonable given the facts and circumstances of each case. Our insurance carrier has defended each case and funded settlements under a standard reservation of rights. As of SeptemberJune 30, 20172018 we had resolved, by means of settlement or dismissal, 37,56437,699 claims. The total cost of resolving all claims was $10.2$10.3 million. Of this amount, almost 100% was paid by our insurance carrier, who has confirmed that we have approximately $140 million of remaining coverage
37
under primary and excess policies that should be available with respect to current and future asbestos claims.
The Company’s subsidiary, Brandon Drying Fabrics, Inc. (“Brandon”), is also a separate defendant in many of the asbestos cases in which Albany is named as a defendant, despite never having manufactured any fabrics containing asbestos. While Brandon was defending against 7,7067,708 claims as of SeptemberJune 30, 2017,2018, only eightten claims have been filed against Brandon since January 1, 2012, and no settlement costs have been incurred since 2001. Brandon was acquired by the Company in 1999, and has its own insurance policies covering periods prior to 1999. Since 2004, Brandon’s insurance carriers have covered 100% of indemnification and defense costs, subject to policy limits and a standard reservation of rights.
In some of these asbestos cases, the Company is named both as a direct defendant and as the “successor in interest” to Mount Vernon Mills (“Mount Vernon”). We acquired certain assets from Mount Vernon in 1993. Certain plaintiffs allege injury caused by asbestos-containing products alleged to have been sold by Mount Vernon many years prior to this acquisition. Mount Vernon is contractually obligated to indemnify the Company against any liability arising out of such products. We deny any liability for products sold by Mount Vernon prior to the acquisition of the Mount Vernon assets. Pursuant to its contractual indemnification obligations, Mount Vernon has assumed the defense of these claims. On this basis, we have successfully moved for dismissal in a number of actions.
We currently do not anticipate, based on currently available information, that the ultimate resolution of the aforementioned proceedings will have a material adverse effect on the financial position, results of operations, or cash flows of the Company. Although we cannot predict the number and timing of future claims, based on the foregoing factors, the trends in claims filed against us, and available insurance, we also do not currently anticipate that potential future claims will have a material adverse effect on our financial position, results of operations, or cash flows.
25
38
17.18. Changes in Shareholders’ Equity
The following table summarizes changes in Shareholders’ Equity:
(in thousands) | Common Stock Class A and B | Additional paid in capital | Retained earnings | Accumulated items of other comprehensive income/(loss) | Treasury stock | Noncontrolling Interest | Total Equity | ||||||||||||||
December 31, 2017 | $40 | $428,423 | $534,082 | ($135,901 | ) | ($256,876 | ) | $3,247 | $573,015 | ||||||||||||
Adoption of accounting standards (a),(b) | - | - | (5,085 | ) | - | - | (327 | ) | (5,412 | ) | |||||||||||
Net income | - | - | 40,610 | - | - | 178 | 40,788 | ||||||||||||||
Compensation and benefits paid or payable in shares | - | 1,062 | - | - | 274 | - | 1,336 | ||||||||||||||
Options exercised | - | 150 | - | - | - | 150 | |||||||||||||||
Dividends declared | - | - | (10,968 | ) | - | - | - | (10,968 | ) | ||||||||||||
Cumulative translation adjustments | - | - | - | (15,570 | ) | - | 4 | (15,566 | ) | ||||||||||||
Pension and postretirement liability adjustments | - | - | - | 2,114 | - | - | 2,114 | ||||||||||||||
Derivative valuation adjustment | - | - | - | 6,202 | - | - | 6,202 | ||||||||||||||
June 30, 2018 | $40 | $429,635 | $558,639 | ($143,155 | ) | ($256,602 | ) | $3,102 | $591,659 |
(a) | As described in Note 2, the Company adopted ASC 606 effective January 1, 2018, which resulted in a decrease to Retained earnings of $5.6 million and a $0.3 million decrease to Noncontrolling interest. |
(b) | As described in Note 7, the Company adopted ASU 2016-16 effective January 1, 2018, which resulted in a $0.5 increase to Retained earnings. |
18.
39
19. Recent Accounting Pronouncements
In May 2014, an accounting update was issued that replaces the existing revenue recognition framework regarding contracts with customers. We will adopt the standard on January 1, 2018 using the cumulative effect method for transitioning to the new standard. In our Machine Clothing segment, we currently record revenue for the sale of a product when persuasive evidence of an arrangement exists, delivery has occurred, title has been transferred, the selling price is fixed, and collectability is reasonably assured. In this segment, we often have contracts with customers whereby the Company satisfies its performance obligation related to the manufacture and delivery of a product before title has transferred to the customer. Under the new accounting standard, this will result in earlier recognition of revenue associated with these contracts. The selling price of products may include a performance obligation to provide certain support services for no additional cost. When we adopt the new standard, it is probable that, for some of these arrangements, we will need to allocate a portion of the associated revenue to such services. We currently estimate less than 5% of revenue will be allocated to such services. While we currently expect that the timing of revenue recognition and the line-item description of Machine Clothing revenue will be affected by the new standard, we do not expect a significant effect in total annual Machine Clothing revenue. We are continuing to assess the effect that the new revenue recognition will have on the Albany Engineered Composites (AEC) segment. One change that we anticipate is that we currently use the units-of-delivery method for some long-term contracts, which is considered an output method. Under the new standard, we expect that revenue for these contracts will be recognized over time using an input method as the measure of progress, which is expected to result in earlier recognition of revenue. We are currently unable to determine the full effect that the new standard will have on our financial statements. We are also currently unable to quantify the cumulative effect of adopting the new standard. The new standard will also require some additional footnote disclosures, including footnote disclosure of 2018 results under the current standard.
In January 2016, an accounting update was issued which requires entities to present separately in Other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This accounting
26
update is effective for reporting periods beginning after December 15, 2017. We have not determined the impact of this update on our financial statements.
In February 2016, an accounting update was issued which requireswill require lessees to recognizerecord most operating leases on their balance sheets, but recognize the balance sheet. The update may significantly increase reported assets and liabilities. This accounting update is effective for reporting periods beginning after December 15, 2018. We have not determined the impact of this update on our financial statements.
In March 2016, an accounting update was issued which simplifies several aspects related to the accounting for share-based payment transactions, including the income tax consequences, statutory tax withholding requirements, and classification of excess tax benefits and cash paid to a tax authority in lieu of share issuances to employees on the statements of cash flows. The update also affects presentation in the Statements of Cash Flows of income tax effects of shares withheld for incentive compensation, and the exercise of stock options. We adopted this accounting update on January 1, 2017 and it had an insignificant effect on income tax expense. The updates affecting the Statements of Cash Flows have been applied retrospectively as follows:
In October 2016, an accounting update was issued which modifies the recognition of income tax effects on intracompany transfers of assets, other than inventory. This accounting update is effective for reporting periods beginning after December 15, 2017. We have not determined the effect of this update on our financial statements.
In November 2016, an accounting update was issued which provides clarification of how changes in restricted cash should be reported in the statement of cash flows. This accounting update is effective for reporting periods beginning after December 15, 2017. We do not expect this update to have a material impact on our financial statements.
In January 2017, an accounting update was issued which provides the definition of a business for the purposes of business combination accounting. This accounting update is effective for reporting periods beginning after December 15, 2017 and is to be applied prospectively. Accordingly, there will be no effect on prior business combinations. We have not determined the impact of the update due to the absence of transactions that would be impacted.
In January 2017, an accounting update was issued which simplifies the process for determining the amount of goodwill impairment. We adopted this standard as of January 1, 2017 and it did not have any effect on the conclusions reached in our periodic goodwill impairment assessment.
In March 2017, an accounting update was issued which requires that service cost for defined benefit pension and postretirement plans be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Additionally, the other components of net benefit cost are required to be presentedexpenses in the income statement in a manner similar to current practice. Under the new standard, lessees will be required to recognize a lease liability for the obligation to make lease payments, and an asset for the right to use the underlying asset for the lease term. Expenses related to operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile, in which interest and amortization are presented separately fromin the service cost componentincome statement. The principal effect on the Company’s financial statements will be an increase in assets and outsideliabilities. The Company is evaluating practical expedients that may be used, and a subtotalnew method of income from operations. This accounting update is effective for reporting periods beginning after December 15, 2017. We expecttransitioning to this standard which was recently approved by the FASB, both of which could affect the impact that the principal effect of adopting this standard will be to reclassify a portion of our pension and postretirement costs to Other expense/(income).
27
In May 2017, an accounting update was issued to provide clarity as to when a company must account forhas on the Company’s financial statements. Additionally, we are evaluating changes to stock-based compensation programs as award modifications. Award modifications require an updateour processes and internal controls to ensure we meet the value of the award, resulting in an adjustment to compensation expense. We have not made changes to awards in recent years that would be affected by this update, but such changes are possible in future periods. We are currently evaluating the potential impact of this update. The update is effective for periods beginning after December 15, 2017.
standard’s reporting and disclosure requirements.
In August 2017, an accounting update was issued which simplifies the application of hedge accounting to better align the financial reporting of hedging relationships with a company’s risk management activities. We do not expect a significant impact to our consolidated assets and liabilities, net earnings, or cash flows as a result of adopting this new standard. We plan to adopt the new standard effective January 1, 2019.
In February 2018, an accounting update was issued which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This update is effective for annual and interim periods in fiscal years beginning after December 15, 2018. We are currently evaluating the potential impact of this update, which must be adopted by January 1, 2019, but may be adopted early.update.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes.
This quarterly report and the documents incorporated or deemed to be incorporated by reference in this quarterly report contain statements concerning our future results and performance and other matters that are “forward-looking” statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “anticipate,” ”may,” “plan,” “project,” ”may,” “will,” “should” and variations of such words or similar expressions are intended, but are not the exclusive means, to identify forward-looking statements. Because forward-looking statements are subject to risks and uncertainties, (including, without limitation, those set forth in the Company’s most recent Annual Report on Form 10-K or prior Quarterly Reports on Form 10-Q) actual results may differ materially from those expressed or implied by the forward-looking statements.
40
There are a number of risks, uncertainties, and other important factors that could cause actual results to differ materially from the forward-looking statements, including, but not limited to:
· | Conditions in the industries in which our Machine Clothing and Albany Engineered Composites segments compete, along with the general risks associated with macroeconomic conditions; |
· | In the Machine Clothing segment, |
· | In the Albany Engineered Composites segment, unanticipated reductions in demand, delays, technical difficulties or cancellations in aerospace programs that are expected to drive growth; |
· | Failure to achieve or maintain anticipated profitable growth in our Albany Engineered Composites segment; |
· | Other risks and uncertainties detailed in this report. |
Further information concerning important factors that could cause actual events or results to be materially different from the forward-looking statements can be found in “Business Environment Overview and Trends” sections of this quarterly report, as well as in the “RiskItem 1A-“Risk Factors” section of our most recent Annual Report on Form 10-K. Statements expressing our assessments of the growth potential of the Albany Engineered Composites segment are not intended as forecasts of actual future growth, and should not be relied on as such. While we believe such assessments to have a reasonable basis, such assessments are, by their nature, inherently uncertain. This report sets forth a number of assumptions regarding these assessments, including projected timing and volume of demand for
29
aircraft and for LEAP aircraft engines. Such assumptions could prove incorrect. Although we believe the expectations reflected in our other forward-looking statements are based on reasonable assumptions, it is not possible to foresee or identify all factors that could have a material and negative impact on our future performance. The forward-looking statements included or incorporated by reference in this report are made on the basis of our assumptions and analyses, as of the time the statements are made, in light of our experience and perception of historical conditions, expected future developments, and other factors believed to be appropriate under the circumstances.
Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained or incorporated by reference in this report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Business Environment Overview and Trends
Our reportable segments, Machine Clothing (MC) and Albany Engineered Composites (AEC), draw on the same advanced textiles and materials processing capabilities, and compete on the basis of proprietary, product-based advantage that is grounded in those core capabilities.
The MCMachine 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 marketsit has suffered from well-documented declines in publication grades in the Company’s traditional markets, the paper and paperboard industry is still expected to grow slightly on a global basis, driven by demand for packaging and tissue grades, as well as the expansion of paper consumption and production in Asia and South America.grades. We feel we are now well-positioned in thesekey 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,technical product support, and manufacturing technology. Because of pricing pressures and industry overcapacity, the machine
41
clothing and paper industries will continue to face top line pressure. Nonetheless, the business hasretains the potential to generate consistentfor maintaining stable earnings and cash flow in the future. The businessIt has been a significant generator of cash, and we seek to maintain the cash-generating potential of this business by maintaining the low costs that we achieved through previous restructuring, and competing vigorously by using our differentiated products and servicestechnically superior products to reduce our customers’ total cost of operation and improve their paper quality.
The AEC segment provides significant growth potential for our Company both near and long term. Our strategy is to grow by focusing our proprietary 3D-woven technology, as well as our conventional non-3D technology, on high-value aerospace and defense applications, while at the same time performing successfully on our portfolio of growth programs. AEC (including Albany Safran Composites, LLC (“ASC”)(ASC), in which our customer SAFRAN Group owns a 10 percent noncontrolling interest) supplies a number of customers in the aerospace and defense industry. AEC’s largest aerospace customer is the SAFRAN Group and sales to SAFRAN (consisting primarily of fan blades and cases for CFM’s LEAP engine) accounted for approximately 11%14 percent of the Company’s consolidated net sales in 2016.2017. Through ASC, AEC develops and sells 3D-woven composite aerospace components to SAFRAN, with the most significant current program at present being the production of fan blades and other components for the LEAP engine. AEC, (through ASC)through ASC, also supplies 3D-woven composite fan cases for the GE9X engine. AEC’s current portfolio of non-3D-wovennon-3D programs includes components for the F-35 Joint Strike Fighter, fuselage componentsframes for the Boeing 787, components for the CH-53K helicopter, vacuum waste tanks for Boeing 7-Series aircraft, and missile bodies for Lockheed Martin’s JASSM air-to-surface missiles. AEC is actively engaged in research to develop new applications in theboth commercial and defense aircraft engine airframes, and automotiveairframe markets. In 2017, approximately 30 percent of AEC sales were related to U.S. government contracts or programs.
30
Consolidated Results of Operations
On April 8, 2016, the Company acquired the outstanding shares of Harris Corporation’s composite aerostructures business for cash of $187 million, plus the assumption of certain liabilities. The acquired entity is part of the AEC segment.
Since the acquisition occurred early in the second quarter of 2016, the Statement of Income for first nine months of 2016 does not include any operational results of the acquired entity forIn the first quarter of 2016. In order2018, the Company adopted the provisions of ASC 606, “Revenue from contracts with customers”, using the modified retrospective (or cumulative effect) method for transition. Under this transition method, periods prior to assist with comparison of year to date results, the2018 are not restated.
The following table presentssummarizes the effect on various operational resultsmetrics that resulted from the adoption of the acquired business for the first quarter of 2017:ASC 606:
42
| ||
Increase/(decrease) attributable to application of ASC 606 for the three months ended June 30, 2018 (in thousands) | Machine Clothing | Albany Engineered Composites | Income tax and noncontrolling interest effects | Total Company |
Net sales | $857 | ($1,257) | $ - | ($400) |
Gross profit | 1,781 | 123 | - | 1,904 |
Selling, technical, general and research expenses | (5) | - | - | (5) |
Operating income and Income before income taxes | 1,786 | 123 | - | 1,909 |
Income taxes | - | - | 507 | 507 |
Net income | 1,786 | 123 | (507) | 1,402 |
Net income attributable to the noncontrolling interest in ASC | - | - | 27 | 27 |
Net income attributable to the Company | $1,786 | $123 | ($534) | $1,375 |
Increase/(decrease) attributable to application of ASC 606 for the Six Months ended June 30, 2018 (in thousands) | Machine Clothing | Albany Engineered Composites | Income tax and noncontrolling interest effects | Total Company |
Net sales | $5,068 | $2,966 | $ - | $8,034 |
Gross profit | 2,820 | 992 | - | 3,812 |
Selling, technical, general and research expenses | 55 | - | - | 55 |
Operating income and Income before income taxes | 2,765 | 992 | - | 3,757 |
Income taxes | - | - | 1,108 | 1,108 |
Net income | 2,765 | 992 | (1,108) | 2,649 |
Net income attributable to the noncontrolling interest in ASC | - | - | 84 | 84 |
Net income attributable to the Company | $2,765 | $992 | ($1,192) | $2,565 |
Net sales
The following table summarizes our Net sales by business segment:
43
Three months ended June 30, | Six months ended June 30, | |||||
(in thousands, except percentages) | 2018 | 2017 | % Change | 2018 | 2017 | % Change |
Machine Clothing | $162,635 | $146,572 | 11.0% | $310,786 | $289,399 | 7.4% |
Albany Engineered Composites | 93,590 | 68,999 | 35.6% | 175,420 | 125,449 | 39.8% |
Total | $256,225 | $215,571 | 18.9% | $486,206 | $414,848 | 17.2% |
The following table summarizes our netsecond-quarter and year to date 2018 Net sales, by business segment:excluding the impact of ASC 606 and currency translation effects:
(in thousands, except percentages) | Net sales as reported, Q2 2018 | Increase due to ASC 606 | Increase due to changes in currency translation rates | Q2 2018 sales on same basis as Q2 2017 | % Change compared to Q2 2017 |
Machine Clothing | $162,635 | $857 | $3,145 | $158,633 | 8.2% |
Albany Engineered Composites | 93,590 | (1,257) | 1,215 | 93,632 | 35.7% |
Total | $256,225 | ($400) | $4,360 | $252,265 | 17.0% |
Three months ended September 30, | Nine months ended September 30, | |||||
(in thousands, except percentages) | 2017 | 2016 | % Change | 2017 | 2016 | % Change |
Machine Clothing | $150,694 | $143,248 | 5.2% | $440,093 | $437,445 | 0.6% |
Albany Engineered Composites | 71,447 | 48,024 | 48.8% | 196,896 | 129,348 | 52.2% |
Total | $222,141 | $191,272 | 16.1% | $636,989 | $566,793 | 12.4% |
(in thousands, except percentages) | Net sales as reported, first six months of 2018 | Increase due to ASC 606 | Increase due to changes in currency translation rates | Year to date June 30, 2018 sales on same basis as 2017 | % Change compared to 2017 |
Machine Clothing | $310,786 | $5,068 | $9,905 | $295,813 | 2.2% |
Albany Engineered Composites | 175,420 | 2,966 | 3,526 | 168,928 | 34.7% |
Total | $486,206 | $8,034 | $13,431 | $464,741 | 12.0% |
Three month comparison
· | Changes in currency translation rates had the effect of increasing net sales by $4.4 million during the second quarter of 2018, as compared to 2017, principally due to the euro and Chinese renminbi strengthening in 2018. |
· | Excluding the effect of changes in currency translation rates: |
Three
44
Six month comparison
· | Changes in currency translation rates had the effect of increasing net sales by |
· | Excluding the effect of changes in currency translation rates: |
Net sales increased 14.0% compared to the same period in 2017. Excluding the additional effect of ASC 606, Net sales increased 12.0%. |
31
Nine month comparison
Gross Profit
The following table summarizes gross profit by business segment:
Three months ended September 30, | Nine months ended September 30, | |||||||
(in thousands, except percentages) | 2017 | 2016 | 2017 | 2016 | ||||
Machine Clothing | $73,028 | $68,104 | $213,081 | $208,628 | ||||
Albany Engineered Composites | 6,638 | 4,556 | 5,872 | 15,329 | ||||
Corporate expenses | (231 | ) | (240 | ) | (559 | ) | (721 | ) |
Total | $79,435 | $72,420 | $218,394 | $223,236 | ||||
% of Net sales | 35.8 | % | 37.9 | % | 34.3 | % | 39.4 | % |
Three months ended June 30, | Six months ended June 30, | |||
(in thousands, except percentages) | 2018 | 2017 | 2018 | 2017 |
Machine Clothing | $79,607 | $70,832 | $149,788 | $140,050 |
Albany Engineered Composites | 12,626 | (7,599) | 24,150 | (766) |
Corporate expenses | (55) | (55) | (109) | (78) |
Total | $92,178 | $63,178 | $173,829 | $139,206 |
% of Net sales | 36.0% | 29.3% | 35.8% | 33.6% |
Three month comparison
During the third quarter of 2017, the Company decided to discontinue the Bear Claw® line of hydraulic fracking components used in the oil and gas industry, which was part of the Harris aerostructures business acquired by AEC in 2016. This decision resulted in a $3.2 million charge to Cost of goods sold for the write-off of inventory.
The overall increase in 20172018 gross profit, as compared to the same period in 2016,2017, was principally due to the net effect of the following individually significant items:
· | The increase in AEC gross profit of $20.2 million was principally due to the net effect of the following individually significant items: |
· | In the second quarter of 2017, the Company recorded a $15.8 million charge to Cost of goods sold related to revisions in the estimated profitability of two contracts. |
· | The increase in net sales, as described above, and improved labor productivity. |
45
· | An increase in MC gross profit, principally due to higher sales and strong |
32
· |
NineSix month comparison
The decreaseoverall increase in 20172018 gross profit, as compared to the same period in 2016,2017, was principally due to the net effect of the following individually significant items:
· |
· | In the second quarter of 2017, the Company recorded a $15.8 million charge to Cost of goods sold |
· | The |
· | An increase in MC gross profit, principally due to higher sales and increased capacity utilization. |
· | Changes in currency translation rates did not have a significant effect on MC gross profit in 2018. |
Selling, Technical, General, and Research (STG&R)
Selling, Technical, General and Research (STG&R) expenses include; selling, general, administrative, technical and research expenses.
The following table summarizes STG&R expenses by business segment:
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||
(in thousands, except percentages) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||
Machine Clothing | $30,258 | $28,276 | $92,716 | $90,125 | $26,963 | $31,602 | $58,027 | $62,447 | ||||
Albany Engineered Composites | 10,532 | 8,445 | 28,907 | 27,624 | 7,976 | 8,998 | 17,004 | 18,374 | ||||
Corporate expenses | 10,839 | 10,553 | 32,964 | 32,888 | 11,966 | 10,687 | 24,121 | 21,135 | ||||
Total | $51,629 | $47,274 | $154,587 | $150,637 | $46,905 | $51,287 | $99,152 | $101,956 | ||||
% of Net sales | 23.2 | % | 24.7 | % | 24.3 | % | 26.6 | % | 18.3% | 23.8% | 20.4% | 24.6% |
Three month comparison
The increasedecrease in STG&R expenses in 2017,the second quarter of 2018, compared to the same period in 2016,2017, was principally due to the net effect of the following individually significant items:
· | In MC, revaluation of nonfunctional currency assets and liabilities resulted in |
33
NineSix month comparison
46
The increasedecrease in STG&R expenses in 2017,the first six months of 2018, compared to the same period in 2016,2017, was principally due to the net effect of the following individually significant items:
· | In MC, revaluation of nonfunctional currency assets and liabilities resulted in gains of $0.8 million in 2018, and losses of |
· |
Research and Development
The following table is a subset of the STG&R expenses table above and summarizes expenses associated with internally funded research and development by business segment:
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 |
Machine Clothing | $4,229 | $3,937 | $13,273 | $12,695 | $4,211 | $4,525 | $8,629 | $9,044 |
Albany Engineered Composites | 3,828 | 2,656 | 9,683 | 8,247 | 3,183 | 2,778 | 6,331 | 5,854 |
Total | $8,057 | $6,593 | $22,956 | $20,942 | $7,394 | $7,303 | $14,960 | $14,898 |
Restructuring Expense
In addition to the items discussed above affecting gross profit, and STG&R expenses, operating income was affected by restructuring costs of $11.2 million in the first six months of 2018 and $4.7 million for the same period in 2017.
The following table summarizes restructuring expenses by business segment:
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||
Machine Clothing | $96 | ($212 | ) | $1,012 | $5,921 | $1,800 | $805 | $10,152 | $916 | |||
Albany Engineered Composites | 5,407 | 640 | 9,208 | 1,787 | 558 | 1,231 | 779 | 3,801 | ||||
Corporate expenses | - | (102 | ) | - | (55 | ) | 231 | - | 231 | - | ||
Total | $5,503 | $326 | $10,220 | $7,653 | $2,589 | $2,036 | $11,162 | $4,717 |
In the first quarter of 2018, the Company’s proposal to close its Machine Clothing production facility in Sélestat, France was approved by the French Labor Ministry. The restructuring program was driven by the Company’s need to balance manufacturing capacity with demand. In the first six months of 2018, we recorded restructuring expense of $8.6 million, which includes our estimate of the severance and outplacement costs for the approximately 50 positions that will be terminated under this
47
plan. To date, we have recorded $9.7 million of restructuring charges related to this action. The Company continues to assess property, plant and equipment in that location to determine if equipment will be transferred to other facilities, or if the value of the assets can be recovered through a sale. Depending on the outcome of that assessment, additional restructuring charges could be recorded in future periods. Annual cost savings associated with this action will principally result in lower cost of goods sold in 2018.
AEC incurred restructuring charges of $9.2 million in the first ninesix months of 2017. In the third quarter of 2017, the Company decided to discontinue the Bear Claw® line of hydraulic fracturing components used in the oil2018 and gas industry, which led to non-cash restructuring charges totaling $4.5
34
million relating to the impairment of long-lived assets. Other restructuring charges in 2017 principally relatedrelate to work force reductions in Salt Lake City, Utah and Rochester, New Hampshire.
AEC To date, we have recorded $5.8 million of restructuring expenses in 2016 were principallycharges related to the consolidationthese actions. Cost savings associated with this action will result, principally, in lower costs of legacy programs into Boerne, Texas.
Machine Clothing restructuring costs for the first nine months of 2017 were principally related to additional costs for restructuring actions takengoods sold in 2016. Machine Clothing restructuring costs in 2016 were principally related to plant closure costs in Göppingen, Germany and the cessation of research and development activities at the production facility in Sélestat, France.
In October 2017, the Company announced the initiation of discussions with the local works council regarding a proposal to discontinue operations at its Machine Clothing production facility in Sélestat, France. The consultations are subject to applicable law and are ongoing. At this time, the Company has not recorded any restructuring charge related to this proposal.2018.
For more information on our restructuring charges, see Note 5 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.
Operating Income
The following table summarizes operating income/(loss) by business segment:
Three months ended September 30, | Nine months ended September 30, | |||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||
Machine Clothing | $42,674 | $40,039 | $119,352 | $112,583 | ||||
Albany Engineered Composites | (9,301 | ) | (4,529 | ) | (32,242 | ) | (14,083 | ) |
Corporate expenses | (11,070 | ) | (10,690 | ) | (33,523 | ) | (33,554 | ) |
Total | $22,303 | $24,820 | $53,587 | $64,946 |
Three months ended June 30, | Six months ended June 30, | |||
(in thousands) | 2018 | 2017 | 2018 | 2017 |
Machine Clothing | $50,843 | $38,425 | $81,613 | $76,688 |
Albany Engineered Composites | 4,092 | (17,828) | 6,366 | (22,942) |
Corporate expenses | (12,251) | (10,742) | (24,464) | (21,213) |
Total | $42,684 | $9,855 | $63,515 | $32,533 |
Other Earnings Items
Three months ended September 30, | Nine months ended September 30, | |||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||
Interest expense, net | $4,429 | $3,681 | $13,042 | $9,610 | ||||
Other expense/(income), net | (1,155 | ) | 242 | 980 | (2,103 | ) | ||
Income tax expense | 3,809 | 7,488 | 12,138 | 20,613 | ||||
Net income/(loss) attributable to the noncontrolling interest | (49 | ) | 340 | 202 | (111 | ) |
Three months ended June 30, | Six months ended June 30, | |||
(in thousands) | 2018 | 2017 | 2018 | 2017 |
Interest expense, net | $4,621 | $4,285 | $8,909 | $8,613 |
Other expense, net | 726 | 2,558 | 2,178 | 3,384 |
Income tax expense | 7,031 | 1,779 | 11,640 | 8,329 |
Net income/(loss) attributable to the noncontrolling interest | (59) | 116 | 178 | �� 251 |
Interest Expense, net
Interest expense, net, increased $3.4 million in the first nine months of 20172018, principally due to borrowingsan increase in average debt outstanding. The higher debt balances related to fundfunding expansion of the 2016 acquisition, and the interest associated with the capital lease obligation assumed in the acquisition.AEC business. See the Capital Resources section for further discussion of borrowings and interest rates.
35
Other Expense/Income,Expense, net
The changedecrease in Other expense/(income),expense, net included the following individually significant items:
48
Three month comparison
· | For the |
NineSix month comparison
· | For the first |
Income Tax
The Company has operations which constitute a taxable presence in 18 countries outside of the United States. AllCountries outside of these countriesthe United States had income tax rates that were both above and below the United States’ federal tax rate of 35%21% during the periods reported. The jurisdictional location of earnings is a significant component of our effective tax rate each year. The rate impact of this component is influenced by the specific location of non-U.S. earnings and the level of our total earnings. From period to period, the jurisdictional mix of earnings can vary as a result of operating fluctuations in the normal course of business, as well as the extent and location of other income and expense items, such as pension settlement and restructuring charges.
Three month comparison
The Company’s effective tax raterates for the thirdsecond quarter of 2018 and 2017 were 18.8% and 2016 were 20.0% and 35.8%59.1%, 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 rate in the thirdsecond quarter of 20172018 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 |
· | A |
· | A ($1.1) million [-2.9%] tax benefit from the impact of the mandatory repatriations. |
· | Expense of $2.4 million [6.5%] due to changes of uncertain tax positions. |
· | A |
· | A |
Significant items that impacted the tax rate in the thirdsecond quarter of 20162017 tax rate included the following:
· | The income tax rate on continuing operations, excluding discrete items, was |
36
· |
· | Expense of $0.2 million [6.3%] related to the true-up of prior years’ estimated taxes. |
· | Expense of $0.1 million |
NineSix month comparison
49
The Company’s effective tax rates for the first nine-month periodshalf of 2018 and 2017 were 22.2% and 2016 were 30.7% and 35.9%40.6%, 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 2017 tax rate in the first six months of 2018 included the following (percentages reflect the effect of each item as a percentage of incomeIncome before income taxes):
· | The income tax rate on continuing operations, excluding discrete items, was |
· | A |
· | A |
· | Expense of 2.4 million [4.7%] due to |
· | A |
· | A |
Significant items that impacted the 2016 tax rate in the first six months of 2017 included the following (percentages reflect the effect of each item as a percentage of income excluding the building insurance gain and before income taxes):following:
· | The income tax rate on continuing operations, excluding discrete items, was |
· |
· |
· | Expense of $0.1 million |
Segment Results of Operations
Machine Clothing Segment
Business Environment and Trends
MCMachine Clothing is our primary business segment and accounted for 77%70% of our consolidated revenues during the first ninesix months of 2017. MC2018. 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%1 percent over the next five years, driven primarily by secular demand increasesglobal growth in Asiapackaging and South America, with stabilizationtissue, which is expected to be greater than expected declines in publication grades.
While 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, primarilyMC business has suffered from well-documented declines in publication grades in the Company’s traditional markets, the paper and paperboard industry is still expected to grow slightly on a global basis, driven by demand for packaging and tissue grades. We feel we are now well-positioned in key markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, of Europe and North America. At the same time, the newest, most efficient machines are being installedcontinued strength in areas of growing demand,
37
including Asianew product development, technical product support, and South America generally, as well as tissue and towel paper grades in all regions.manufacturing technology. Recent technological advances in paper machine clothing, while contributing to the papermaking efficiency of customers, have lengthened the useful life of many of our products and had an adverse impact on overall paper machine clothing demand.
The Company’s manufacturing and product platforms position us well to meet these shifting demands across product grades and geographic regions. Our strategy for meeting these challenges continues to be to grow share in all markets, with new products and technology, and to maintain our manufacturing footprint to align with global demand, while we offset the effects of inflation through continuous productivity improvement.
50
We have incurred significant restructuring charges in recent periods as we reduced MCMachine Clothing manufacturing capacity and administrative positions in the United States, Germany France, Canada, and Sweden.France.
MC Review of Operations
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||
(in thousands, except percentages) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||
Net sales | $150,694 | $143,248 | $440,093 | 437,445 | $162,635 | $146,572 | $310,786 | 289,399 | ||||
Gross profit | 73,028 | 68,104 | 213,081 | 208,628 | 79,607 | 70,832 | 149,788 | 140,050 | ||||
% of net sales | 48.5 | % | 47.5 | % | 48.4 | % | 47.7 | % | 48.9% | 48.3% | 48.2% | 48.4% |
STG&R expenses | 30,258 | 28,276 | 92,716 | 90,125 | 26,963 | 31,602 | 58,027 | 62,447 | ||||
Operating income | 42,674 | 40,039 | 119,352 | 112,583 | 50,843 | 38,425 | 81,613 | 76,688 |
Net Sales
Three month comparison
· | Net sales increased by |
· | Changes in currency translation rates had the effect of increasing |
· |
NineSix month comparison
· | Net sales increased by |
· | Changes in currency translation rates had the effect of |
· |
38
Gross Profit
Three month comparison
· | The increase in MC gross profit was principally due to higher |
· | The increase in MC gross profit as a percentage of sales was principally due to strong capacity utilization. |
· | Changes in currency translation rates did not have a significant effect on gross profit for the second quarter of 2018. |
Nine 51
Six month comparison
· | The increase in MC gross profit was principally due to higher sales. |
· | The increase in MC gross profit as a percentage of sales |
· | Changes in currency translation rates did not have a significant effect on gross profit for the first six months of 2018. |
Operating Income
Three month comparison
The increase in operating income was principally due to the net effect of the following individually significant items:
· |
· | STG&R expenses decreased $4.6 million due to: |
o | In MC, revaluation of nonfunctional currency assets and liabilities resulted in second-quarter gains of $2.3 million in 2018, and losses of $1.7 million in 2017. |
Nine
· | Restructuring charges were $1.8 million in the second-quarter of 2018, compared to $0.8 million in the same period in 2017. |
Six month comparison
The increase in operating income was principally due to the net effect of the following individually significant items:
· |
· | STG&R expenses decreased $4.4 million due to: |
o | In MC, revaluation of nonfunctional currency assets and liabilities resulted in |
· | Restructuring charges were $10.2 million in the first six months of 2018, compared to $0.9 million in the same period in 2017. |
Albany Engineered Composites Segment
Business Environment and Trends
The Albany Engineered Composites (AEC) segment, including Albany Safran Composites, LLC (ASC), in which our customer SAFRAN Group owns a 10 percent noncontrolling interest, provides highly engineered advanced composite structures to customers primarily in the aerospace and defense industries. AEC’s largest program relates to CFM International’s LEAP engine. AEC, through ASC, is the exclusive supplier of advanced composite fan blades and cases for this program under a long-term supply contract. Other significant AEC programs include components for the F-35 Joint Strike Fighter, fuselage frame componentsframes for the Boeing 787, and the fan case for the GE9X engine. The AEC segment also includes the Company’s April 2016 acquisition of Harris Corporation’s composite aerostructures business for cash of $187 million, plus the assumption of certain liabilities.
AEC Review of Operations
Three months ended September 30, | Nine months ended September 30, | |||||||
(in thousands, except percentages) | 2017 | 2016 | 2017 | 2016 | ||||
Net sales | $71,447 | $48,024 | $196,896 | $129,348 | ||||
Gross profit/(loss) | 6,638 | 4,556 | 5,872 | 15,329 | ||||
% of net sales | 9.3 | % | 9.5 | % | 3.0 | % | 11.9 | % |
STG&R expenses | 10,532 | 8,445 | 28,907 | 27,624 | ||||
Operating loss | (9,301 | ) | (4,529 | ) | (32,242 | ) | (14,083 | ) |
39
52
Three months ended June 30, | Six months ended June 30, | |||
(in thousands, except percentages) | 2018 | 2017 | 2018 | 2017 |
Net sales | $93,590 | $68,999 | $175,420 | $125,449 |
Gross profit | 12,626 | (7,599) | 24,150 | (766) |
% of net sales | 13.5% | -11.0% | 13.8% | -0.6% |
STG&R expenses | 7,976 | 8,998 | 17,004 | 18,374 |
Operating income/(loss) | 4,092 | (17,828) | 6,366 | (22,942) |
Net Sales
Three month comparison
Nine month comparison
NetThe increase in net sales increased $67.5 million in 2017,was principally due to the net effect of the following individually significant items:
· |
Six month comparison
The increase in net sales was principally due to the net effect of the following individually significant items:
· | Excluding the effect of changes in currency translation rates, Net sales increased 37.0%. Excluding the additional effect of adopting ASC 606, Net sales increased 34.7%, primarily driven by growth in the LEAP, Boeing 787, F-35, and CH-53K programs. |
Gross Profit
Three month comparison
Nine month comparisonThe increase in gross profit of $20.2 million was principally due to the net effect of the following individually significant items:
· | In the second quarter of 2017, the Company recorded a $15.8 million charge to Cost of goods sold |
· | The |
Six month comparison
The increase in gross profit of $24.9 million was principally due to the net effect of the following individually significant items:
· | In the second quarter of 2017, the Company recorded a $15.8 million charge to Cost of goods sold related to revisions in the estimated profitability of two contracts. |
· | The increase in net sales, as described above, and improved labor productivity. |
53
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.cost-plus fee agreement. Revenue earned under these arrangements accounted for approximately 4350 and 4145 percent of segment revenue for the first ninesix months of 2018 and 2017, and 2016, respectively.
In addition, AEC has long-term contracts in which the total contractselling price is fixed. In accounting for those contracts, we estimate the profit margin expected at the completion of the contract and recognize a pro-rata share of that profit during the course of the contract using a cost-to-cost 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.
40
Changes in contract estimates resulted in a decrease to gross profit of $1.6 million for the first six months of 2018. In the second quarterfirst six months of 2017, the Companywe recorded a charge of approximatelythe $15.8 million charge associated with revisionsthe revision in the estimated profitability of two AEC contracts. The charge was principally due to second-quarter 2017 downward revisions of estimated customer demand for the components manufactured by AEC related to the two contracts.
AEC has a contract for the manufacture of composite components for the Rolls-Royce BR 725 engine, which powers Gulfstream’s G-650 business jet. The contract obligates AEC to supply these components for the life of the BR 725 program. Duringand A380 contracts. Changes in other contract estimates in the second quarterfirst six months of 2017 the Company revised its estimateresulted in a decrease to gross profit of the profitability$0.4 million.
Operating Income/(Loss)
Three and Six month comparison
The increase in operating income of this contract and determined that a charge of $10.2 million should be recorded as a provision for anticipated losses through the end of the program. The charge is driven primarily by a reduction in the estimated future demand for these components. The Company previously recorded a charge of $14$21.9 million in the second quarter of 2015 for this program, including $112018 and $29.3 million for the write-off of development costs for nonrecurring engineering and tooling, and $3 million for anticipated future losses.
AEC’s subsidiary, Albany Aerospace Composites LLC, has a contract for the manufacture of composite struts for the Airbus A380, under which it is obligated to supply composite wing box struts through 2020 and floor beam struts through 2023. During the second quarter of 2017, the Company revised its estimate of the profitability of this contract and determined that a charge of $5.6 million should be recorded as a provision for anticipated losses through contract completion. The revision is driven by a decrease in estimated demand for these components during the contract term, as well as by program inefficiencies.
Other than the charges noted above, changes in contract estimates increased gross profit by $0.3 million in the first ninesix months of 2017, and decreased gross profit by $1.2 million for the same period of 2016.
The value of fixed price contracts increased significantly2018 was principally due to the acquisition. The table below provides a summarynet effect of long-term fixed price contracts that were in process at the end of each period.
(in thousands) | September 30, 2017 |
December 31, 2016 |
Revenue earned year-to-date on incomplete long-term contracts | $76,671 | $77,190 |
Contracts in process as of period end: | ||
Total value of contracts | 562,487 | 351,779 |
Revenue recognized to date | 131,707 | 55,091 |
Revenue to be recognized in future periods | 430,780 | 296,688 |
Operating Loss
Three month comparisonfollowing individually significant items:
· |
41
· |
Nine month comparison
Liquidity and Capital Resources
Cash Flow Summary
Nine months ended September 30, | ||||
(in thousands) | 2017 | 2016 | ||
Net income | $27,427 | $36,826 | ||
Depreciation and amortization | 53,256 | 51,224 | ||
Changes in working capital | (54,390 | ) | (32,476 | ) |
Changes in other noncurrent liabilities and deferred taxes | (13,142 | ) | (5,650 | ) |
Other operating items | 8,564 | 3,291 | ||
Net cash provided by operating activities | 21,715 | 53,215 | ||
Net cash used in investing activities | (62,262 | ) | (231,869 | ) |
Net cash provided by financing activities | 3,395 | 184,982 | ||
Effect of exchange rate changes on cash and cash equivalents | 8,875 | 4,729 | ||
(Decrease)/increase in cash and cash equivalents | (28,277 | ) | 11,057 | |
Cash and cash equivalents at beginning of year | 181,742 | 185,113 | ||
Cash and cash equivalents at end of period | $153,465 | $196,170 |
54
Six months ended June 30, | ||||
(in thousands) | 2018 | 2017 | ||
Net income | $40,788 | $12,207 | ||
Depreciation and amortization | 40,621 | 35,126 | ||
Changes in working capital | (53,215 | ) | (37,743 | ) |
Changes in other noncurrent liabilities and deferred taxes | (8,133 | ) | (9,711 | ) |
Other operating items | (3,321 | ) | 3,938 | |
Net cash provided in operating activities | 16,740 | 3,817 | ||
Net cash used in investing activities | (39,175 | ) | (46,796 | ) |
Net cash used in financing activities | (3,570 | ) | (998 | ) |
Effect of exchange rate changes on cash and cash equivalents | (2,978 | ) | 1,027 | |
Decrease in cash and cash equivalents | (28,983 | ) | (42,950 | ) |
Cash and cash equivalents at beginning of year | 183,727 | 181,742 | ||
Cash and cash equivalents at end of period | $154,744 | $138,792 |
Operating activities
Cash flow fromprovided by operating activities was $21.7$16.7 million and $3.8 million for the first ninesix months of 2017, compared to $53.2 million of2018 and 2017. The net increase in cash provided by operating activities in 2018 was due to increased profitability in both MC and AEC, partially offset by increases in working capital. The increase in use of cash in 2018 for the same period of 2016. The decrease in 2017working capital was principally due to higher levelsthe ramp of Accounts receivable and Inventoriesseveral key programs in the AEC segment, reflecting growth in key programs. AEC.
Cash paid for income taxes was $21.7$14.0 million and $18.2$18.3 million for the first ninesix months of 2018 and 2017, respectively. The reduction in cash taxes paid is primarily due to lower Corporate income tax payments in 2018 compared to 2017 in jurisdictions like the US, Mexico and 2016, respectively.
China.
At SeptemberJune 30, 2017,2018, we had $153.5$154.7 million of cash and cash equivalents, of which $140.8$129.7 million was held by subsidiaries outside of the United States. The Company records the residual U.S. and foreign taxes on certain amounts of foreign earnings that have been targeted for repatriation to the U.S. These amounts are not considered to be permanently reinvested, and the Company accrued for the tax cost on these earnings to the extent they cannot be repatriated in a tax-free manner. At September 30, 2017, the Company calculated a deferred tax liability of $3.7 million on $62.8 million of non-U.S. earnings that have been targeted for future repatriation to the U.S. 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
42
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 and Financing Activities
Capital expenditures for the first ninesix months were $62.3$39.2 million in 20172018 and $51.3$46.8 million in 2016. The increase in 2017 was primarily related to the ramp in AEC programs.
On April 8, 2016, the Company acquired the outstanding shares of Harris Corporation’s composite aerostructures business for cash of $187 million, plus the assumption of certain liabilities. The Company funded the cash payable at closing by utilizing proceeds from a $550 million, unsecured credit facility agreement that was completed April 8, 2016.
2017.
Dividends have been declared each quarter since the fourth quarter of 2001. Decisions with respect to whether a dividend will be paid, and the amount of the dividend, are made by the Board of Directors each quarter. To the extent the Board declares cash dividends in the future, we expect to pay such dividends out of operating cash flows. Future cash dividends will also depend on debt covenants and on the Board’s assessment of our ability to generate sufficient cash flows.
Capital Resources
We finance our business activities primarily with cash generated from operations and borrowings, largely through our revolving credit agreement as discussed below. Our subsidiaries outside of the United States may also maintain working capital lines with local banks, but borrowings under such local facilities tend not to be significant. Substantially all of our cash balance at SeptemberJune 30, 20172018 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 SeptemberJune 30, 2017.2018.
55
On April 8, 2016,November 7, 2017, we entered into a $550$685 million unsecured Five-Year Revolving Credit Facility Agreement (the “Credit Agreement”) which amended and restated the Prior $400prior $550 million Agreement, entered into on June 18, 2015April 8, 2016 (the “Prior Agreement”). Under the Credit Agreement, $440$511 million of borrowings were outstanding as of SeptemberJune 30, 2017.2018. The applicable interest rate for borrowings was LIBOR plus a spread, based on our leverage ratio at the time of borrowing. At the time of the last borrowing on September 25, 2017,June 18, 2018, the spread was 1.500%. The spread was based on a pricing grid, which ranged from 1.250% to 1.750%, based on our leverage ratio. Based on our maximum leverage ratio and our Consolidated EBITDA, and without modification to any other credit agreements, as of SeptemberJune 30, 2017,2018, we would have been able to borrow an additional $110$174 million under the Agreement.
On November 27, 2017, we terminated our interest rate swap agreements, originally entered into on May 9, 2016, that had effectively fixed the interest rate on $300 million of revolving credit borrowings, in order to enter into a new interest rate swap with a greater notional amount, and the same maturity as the Credit Agreement. We received cash of $6.3 million to terminate when the swap agreements were terminated and that payment will be amortized into interest expense through March 2021.
On May 6, 2016, we terminated ourother interest rate swap agreements that had effectively fixed the interest rate on up to $120 million of revolving credit borrowings, in order to enter into a new interest rate swap with a greater notional amount, and the same maturity as the Credit Agreement. We paid $5.2 million to terminate the swap agreements and that cost will be amortized into interest expense through June 2020.
On May 9, 2016,November 28, 2017, we entered into interest rate hedgesswap agreements for the period May 16, 2016December 18, 2017 through March 16, 2021.October 17, 2022. These transactions have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $300$350 million of indebtedness drawn under the Credit Agreement at the rate of 1.245%2.11% during the period. Under the terms of these transactions, we pay the fixed rate of 1.245%2.11% and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly
43
calculation date, which on SeptemberJune 18, 20172018 was 1.245%2.09%, plus the applicable spread, during the swap period. On SeptemberJune 18, 2017,2018, the all-in-rate on the $300$350 million of debt was 2.745%3.61%.
As of SeptemberJune 30, 2017,2018, our leverage ratio was 2.552.23 to 1.00 and our interest coverage ratio was 9.3810.73 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 woulddoes not exceed 3.50 to 1.00 after giving pro forma effect to any such acquisition.
the limits noted above.
For more information, see Note 1415 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.
Off-Balance Sheet Arrangements
As of SeptemberJune 30, 2017,2018, we have no off-balance sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.
Recent Accounting Pronouncements
The information set forth under Note 1819 contained in Item 1, “Notes to Consolidated Financial Statements”, which is incorporated herein by reference.
Non-GAAP Measures
56
Non-GAAP Measures
This Form 10-Q contains certain non-GAAP metrics, including: net sales, and percent change in net sales excluding the impact of ASC 606 and/or currency ratetranslation effects (for each segment and the Company as a whole); EBITDA and Adjusted EBITDA (for each segment and the Company as a whole)whole represented in dollars or as a percentage of net sales); net debt; and net income per share attributable to the Company, excluding adjustments. Such items are provided because management believes that, when reconciled from the GAAP items to which they relate, they provide additional useful information to investors regarding the Company’s operational performance.
Presenting sales and increases or decreases in sales, after currency effects and/or ASC 606 impacts are excluded, can give management and investors insight into underlying sales trends. EBITDA, or net income with interest, taxes, depreciation, and amortization added back, is a common indicator of financial performance used, among other things, to analyze and compare core profitability between companies and industries because it eliminates effects due to differences in financing, asset bases and taxes. An understanding of the impact in a particular quarter of specific restructuring costs, acquisition expenses, currency revaluation, inventory write-offs associated with discontinued businesses, or other gains and losses, on net income (absolute as well as on a per-share basis), operating income or EBITDA can give management and investors additional insight into core financial performance, especially when compared to quarters in which such items had a greater or lesser effect, or no effect. Restructuring expenses in the MC segment, while frequent in recent years, are reflective of significant reductions in manufacturing capacity and associated headcount in response to shifting markets, and not of the profitability of the business going forward as restructured. Net debt is, in the opinion of the Company, helpful to investors wishing to understand what the Company’s debt position would be if all available cash were applied to pay down indebtedness. EBITDA, Adjusted EBITDA and net income per share attributable to the Company, excluding adjustments, are performance measures that relate to the Company’s continuing operations.
PercentNet sales, or percent changes in net sales, excluding currency rate effects, are calculated by converting amounts reported in local currencies into U.S. dollars at the exchange rate of a prior period. ThatThe impact of ASC 606 is determined by calculating what GAAP net sales could have been under the prior ASC 605 standard, and comparing that amount isto the amount reported under the new ASC 606 standard. These amounts are then compared to the U.S. dollar amount as reported in the current period. The Company calculates EBITDA by removing the following from Net income: Interest expense net, Income tax
44
expense, Depreciation and amortization. Adjusted EBITDA is calculated by: adding to EBITDA costs associated with restructuring, and inventory write-offs associated with discontinued businesses and pension settlement charges;businesses; adding (or subtracting) revaluation losses (or gains); subtracting (or adding) gains (or losses) from the sale of buildings or investments; subtracting insurance recovery gains in excess of previously recorded losses; and subtracting (or adding) Income (or loss) attributable to the non-controlling interest in Albany Safran Composites (ASC); and adding expenses related to the Company’s acquisition of Harris Corporation’s composite aerostructures division.. Adjusted EBITDA may also be presented as a percentage of net sales by dividing it by net sales. Net income per share attributable to the Company, excluding adjustments, is calculated by adding to (or subtracting from) net income attributable to the Company per share, on an after-tax basis: restructuring charges; inventory write-offs associated with discontinued businesses; discrete tax charges (or gains) and the effect of changes in the income tax rate; foreign currency revaluation losses (or gains); acquisition expenses; and losses (or gains) from the sale of investments.
EBITDA, Adjusted EBITDA, and net income per share attributable to the Company, excluding adjustments, as defined by the Company, may not be similar to similarly named measures of other companies. Such measures are not considered measurements under GAAP, and should be considered in addition to, but not as substitutes for, the information contained in the Company’s statements of income.
57
The following tables show the calculation of EBITDA and Adjusted EBITDA:
Three months ended June 30, 2018 | ||||||||
(in thousands) | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | ||||
Operating income/(loss) (GAAP) | $50,843 | $4,092 | ($12,251 | ) | $42,684 | |||
Interest, taxes, other income/expense | - | - | (12,378 | ) | (12,378 | ) | ||
Net income/(loss) (GAAP) | 50,843 | 4,092 | (24,629 | ) | 30,306 | |||
Interest expense, net | - | - | 4,621 | 4,621 | ||||
Income tax expense | - | - | 7,031 | 7,031 | ||||
Depreciation and amortization | 8,182 | 10,247 | 1,244 | 19,673 | ||||
EBITDA (non-GAAP) | 59,025 | 14,339 | (11,733 | ) | 61,631 | |||
Restructuring expenses, net | 1,800 | 558 | 231 | 2,589 | ||||
Foreign currency revaluation (gains)/losses | (2,331 | ) | 116 | (188 | ) | (2,403 | ) | |
Pretax loss attributable to the noncontrolling interest in ASC | - | 121 | - | 121 | ||||
Adjusted EBITDA (non-GAAP) | $58,494 | $15,134 | ($11,690 | ) | $61,938 |
Three months ended September 30, 2017 | ||||||||
(in thousands) | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | ||||
Operating income/(loss) (GAAP) | $42,674 | ($9,301 | ) | ($11,070 | ) | $22,303 | ||
Interest, taxes, other income/expense | - | - | (7,083 | ) | (7,083 | ) | ||
Net income/(loss) (GAAP) | 42,674 | (9,301 | ) | (18,153 | ) | 15,220 | ||
Interest expense, net | - | - | 4,429 | 4,429 | ||||
Income tax expense | - | - | 3,809 | 3,809 | ||||
Depreciation and amortization | 8,380 | 8,591 | 1,159 | 18,130 | ||||
EBITDA (non-GAAP) | 51,054 | (710 | ) | (8,756 | ) | 41,588 | ||
Restructuring expenses, net | 96 | 5,407 | - | 5,503 | ||||
Foreign currency revaluation losses | 1,114 | 137 | 266 | 1,517 | ||||
Write-off of inventory in a discontinued product line | - | 3,155 | - | 3,155 | ||||
Pretax loss attributable to the noncontrolling interest in ASC | - | 136 | - | 136 | ||||
Adjusted EBITDA (non-GAAP) | $52,264 | $8,125 | ($8,490 | ) | $51,899 |
45
Three months ended September 30, 2016 | ||||||||||||||||
Three months ended June 30, 2017 | ||||||||||||||||
(in thousands) | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | ||||||||
Operating income/(loss) (GAAP) | $40,039 | ($4,529 | ) | ($10,690 | ) | $24,820 | $38,425 | ($17,828 | ) | ($10,742 | ) | $9,855 | ||||
Interest, taxes, other income/expense | - | - | (11,411 | ) | (11,411 | ) | - | - | (8,622 | ) | (8,622 | ) | ||||
Net income/(loss) (GAAP) | 40,039 | (4,529 | ) | (22,101 | ) | 13,409 | 38,425 | (17,828 | ) | (19,364 | ) | 1,233 | ||||
Interest expense, net | - | - | 3,681 | 3,681 | - | - | 4,285 | 4,285 | ||||||||
Income tax expense | - | - | 7,488 | 7,488 | - | - | 1,779 | 1,779 | ||||||||
Depreciation and amortization | 9,032 | 8,027 | 1,386 | 18,445 | 8,431 | 8,218 | 1,184 | 17,833 | ||||||||
EBITDA (non-GAAP) | 49,071 | 3,498 | (9,546 | ) | 43,023 | 46,856 | (9,610 | ) | (12,116 | ) | 25,130 | |||||
Restructuring expenses, net | (212 | ) | 640 | (102 | ) | 326 | 805 | 1,231 | - | 2,036 | ||||||
Foreign currency revaluation (gains)/losses | 86 | - | (308 | ) | (222 | ) | 1,650 | (63 | ) | 1,950 | 3,537 | |||||
Pretax income attributable to the noncontrolling interest in ASC | - | (428 | ) | - | (428 | ) | - | (144 | ) | - | (144 | ) | ||||
Adjusted EBITDA (non-GAAP) | $48,945 | $3,710 | ($9,956 | ) | $42,699 | $49,311 | ($8,586 | ) | ($10,166 | ) | $30,559 |
Nine months ended September 30, 2017 | ||||||||
(in thousands) | Machine Clothing | Albany Engineered Composites* | Corporate expenses and other | Total Company | ||||
Operating income/(loss) (GAAP) | $119,352 | ($32,242 | ) | ($33,523 | ) | $53,587 | ||
Interest, taxes, other income/expense | - | - | (26,160 | ) | (26,160 | ) | ||
Net income/(loss) (GAAP) | 119,352 | (32,242 | ) | (59,683 | ) | 27,427 | ||
Interest expense, net | - | - | 13,042 | 13,042 | ||||
Income tax expense | - | - | 12,138 | 12,138 | ||||
Depreciation and amortization | 25,098 | 24,613 | 3,545 | 53,256 | ||||
EBITDA (non-GAAP) | 144,450 | (7,629 | ) | (30,958 | ) | 105,863 | ||
Restructuring expenses, net | 1,012 | 9,208 | - | 10,220 | ||||
Foreign currency revaluation losses | 4,427 | 171 | 2,318 | 6,916 | ||||
Write-off of inventory in a discontinued product line | - | 3,155 | - | 3,155 | ||||
Pretax income attributable to the noncontrolling interest in ASC | - | (178 | ) | - | (178 | ) | ||
Adjusted EBITDA(non-GAAP) | $149,889 | $4,727 | ($28,640 | ) | $125,976 |
* Includes charge of $15.8 million related to revisions in the estimated profitability of two long-term contracts.
46
58
Nine months ended September 30, 2016 | ||||||||
(in thousands) | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | ||||
Operating income/(loss) (GAAP) | $112,583 | ($14,083 | ) | ($33,554 | ) | $64,946 | ||
Interest, taxes, other income/expense | - | - | (28,120 | ) | (28,120 | ) | ||
Net income/(loss) (GAAP) | 112,583 | (14,083 | ) | (61,674 | ) | 36,826 | ||
Interest expense, net | - | - | 9,610 | 9,610 | ||||
Income tax expense | - | - | 20,613 | 20,613 | ||||
Depreciation and amortization | 27,845 | 17,778 | 5,601 | 51,224 | ||||
EBITDA (non-GAAP) | 140,428 | 3,695 | (25,850 | ) | 118,273 | |||
Restructuring expenses, net | 5,921 | 1,787 | (55 | ) | 7,653 | |||
Foreign currency revaluation (gains)/losses | 1,646 | 5 | (2,355 | ) | (704 | ) | ||
Acquisition expenses | - | 5,367 | - | 5,367 | ||||
Pretax loss attributable to the noncontrolling interest in ASC | - | 36 | - | 36 | ||||
Adjusted EBITDA (non-GAAP) | $147,995 | $10,890 | ($28,260 | ) | $130,625 |
Six months ended June 30, 2018 | ||||||||
(in thousands) | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | ||||
Operating income/(loss) (GAAP) | $81,613 | $6,366 | ($24,464 | ) | $63,515 | |||
Interest, taxes, other income/expense | - | - | (22,727 | ) | (22,727 | ) | ||
Net income/(loss) (GAAP) | 81,613 | 6,366 | (47,191 | ) | 40,788 | |||
Interest expense, net | - | - | 8,909 | 8,909 | ||||
Income tax expense | - | - | 11,640 | 11,640 | ||||
Depreciation and amortization | 16,544 | 21,404 | 2,673 | 40,621 | ||||
EBITDA (non-GAAP) | 98,157 | 27,770 | (23,969 | ) | 101,958 | |||
Restructuring expenses, net | 10,152 | 779 | 231 | 11,162 | ||||
Foreign currency revaluation (gains)/losses | (813 | ) | 301 | 499 | (13 | ) | ||
Pretax income attributable to the noncontrolling interest in ASC | - | (222 | ) | - | (222 | ) | ||
Adjusted EBITDA (non-GAAP) | $107,496 | $28,628 | ($23,239 | ) | $112,885 |
Six months ended June 30, 2017 | ||||||||
(in thousands) | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | ||||
Operating income/(loss) (GAAP) | $76,688 | ($22,942 | ) | ($21,213 | ) | $32,533 | ||
Interest, taxes, other income/expense | - | - | (20,326 | ) | (20,326 | ) | ||
Net income/(loss) (GAAP) | 76,688 | (22,942 | ) | (41,539 | ) | 12,207 | ||
Interest expense, net | - | 8,613 | 8,613 | |||||
Income tax expense | - | 8,329 | 8,329 | |||||
Depreciation and amortization | 16,718 | 16,022 | 2,386 | 35,126 | ||||
EBITDA (non-GAAP) | 93,406 | (6,920 | ) | (22,211 | ) | 64,275 | ||
Restructuring expenses, net | 916 | 3,801 | - | 4,717 | ||||
Foreign currency revaluation losses | 3,313 | 34 | 2,052 | 5,399 | ||||
Pretax income attributable to the noncontrolling interest in ASC | - | (314 | ) | - | (314 | ) | ||
Adjusted EBITDA (non-GAAP) | $97,635 | ($3,399 | ) | ($20,159 | ) | $74,077 |
The Company discloses certain income and expense items on a per-share basis. The Company believes that such disclosures provide important insight into underlying quarterly earnings and are financial performance metrics commonly used by investors. The Company calculates the quarterly per-share amount for items included in continuing operations by using the income tax rate based on income from continuing operations and the weighted-average number of shares outstanding for each period. Year-to-date earnings per-share effects are determined by adding the amounts calculated at each reporting period.
The following tables show the earnings per share effect of certain income and expense items:
Three months ended September 30, 2016 | Pre tax | Tax | After tax | Per Share |
(in thousands, except per share amounts) | Amounts | Effect | Effect | Effect |
Restructuring expenses, net | $326 | $122 | $204 | $0.01 |
Foreign currency revaluation gains | 222 | 83 | 139 | 0.00 |
Favorable effect of change in income tax rate | - | 425 | 425 | 0.01 |
Net discrete income tax charge | - | 74 | 74 | 0.00 |
59
Three months ended June 30, 2018 | Pre tax | Tax | After tax | Per Share |
(in thousands, except per share amounts) | Amounts | Effect | Effect | Effect |
Restructuring expenses, net | $2,589 | $779 | $1,810 | $0.06 |
Foreign currency revaluation gains | 2,403 | 723 | 1,680 | 0.05 |
Favorable effect of change in income tax rate | - | 359 | 359 | 0.01 |
Net discrete income tax benefit | - | 3,849 | 3,849 | 0.12 |
Favorable effect of applying ASC 606 | 1,909 | 534* | 1,375 | 0.04 |
* includes tax and noncontrolling interest effects |
Nine months ended September 30, 2017 | Pre tax | Tax | After tax | Per Share |
(in thousands, except per share amounts) | Amounts | Effect | Effect | Effect |
Restructuring expenses, net | $10,220 | $3,721 | $6,499 | $0.20 |
Foreign currency revaluation losses | 6,916 | 2,516 | 4,400 | 0.14 |
Write-off of inventory in a discontinued product line | 3,155 | 1,167 | 1,988 | 0.06 |
Net discrete income tax benefit | - | 2,281 | 2,281 | 0.07 |
Charge for revision to estimated profitability of AEC contracts | 15,821 | 5,854 | 9,967 | 0.31 |
Three months ended June 30, 2017 | Pre tax | Tax | After tax | Per Share |
(in thousands, except per share amounts) | Amounts | Effect | Effect | Effect |
Restructuring expenses, net | $2,036 | $739 | $1,297 | $0.04 |
Foreign currency revaluation losses | 3,537 | 1,284 | 2,253 | 0.07 |
Unfavorable effect of change in income tax rate | - | 36 | 36 | 0.00 |
Net discrete income tax charge | - | 754 | 754 | 0.02 |
Charge for revision to estimated profitability of AEC contracts | 15,821 | 5,854 | 9,967 | 0.31 |
Six months ended June 30, 2018 | Pre tax | Tax | After tax | Per Share |
(in thousands, except per share amounts) | Amounts | Effect | Effect | Effect |
Restructuring expenses, net | $11,162 | $3,565 | $7,597 | $0.24 |
Foreign currency revaluation gains | 13 | 54 | 67 | 0.00 |
Net discrete income tax charge | - | 4,139 | 4,139 | 0.13 |
Favorable effect of applying ASC 606 | 3,757 | 1192* | 2,565 | 0.08 |
*includes tax and noncontrolling interest effects |
Six months ended June 30, 2017 | Pre tax | Tax | After tax | Per Share |
(in thousands, except per share amounts) | Amounts | Effect | Effect | Effect |
Restructuring expenses, net | $4,717 | $1,718 | $2,999 | $0.09 |
Foreign currency revaluation losses | 5,399 | 1,964 | 3,435 | 0.11 |
Net discrete income tax charge | - | 1,585 | 1,585 | 0.05 |
Charge for revision to estimated profitability of AEC contracts | 15,821 | 5,854 | 9,967 | 0.31 |
The following table contains the calculation of net income per share attributable to the Company, excluding adjustments:
Three months ended September 30, | Nine months ended September 30, | |||||||
Per share amounts (Basic) | 2017 | 2016 | 2017* | 2016 | ||||
Net income attributable to the Company (GAAP) | $0.47 | $0.41 | $0.85 | $1.15 | ||||
Adjustments: | ||||||||
Restructuring expenses, net | 0.11 | 0.01 | 0.20 | 0.15 | ||||
Discrete tax adjustments and effect of change in income tax rate | (0.10 | ) | (0.01 | ) | (0.07 | ) | (0.03 | ) |
Foreign currency revaluation losses/(gains) | 0.03 | - | 0.14 | (0.01 | ) | |||
Write-off of inventory in a discontinued product line | 0.06 | - | 0.06 | - | ||||
Acquisition expenses | - | - | - | 0.11 | ||||
Net income attributable to the Company, excluding adjustments (non-GAAP) | $0.57 | $0.41 | $1.18 | $1.37 |
60
Three months ended June 30, | Six months ended June 30, | |||||||
Per share amounts (Basic) | 2018 | 2017* | 2018 | 2017* | ||||
Net income attributable to the Company (GAAP) | $0.94 | $0.03 | $1.26 | $0.37 | ||||
Adjustments: | ||||||||
Restructuring expenses, net | 0.06 | 0.04 | 0.24 | 0.09 | ||||
Discrete tax adjustments and effect of change in income tax rate | (0.13 | ) | 0.02 | (0.13 | ) | 0.05 | ||
Foreign currency revaluation (gains)/losses | (0.05 | ) | 0.07 | - | 0.11 | |||
Net income attributable to the Company, excluding adjustments (non-GAAP) | $0.82 | $0.16 | $1.37 | $0.62 |
* Includes charge of $0.31 per share for revisions in estimated profitability of two AEC contracts.
The following table contains the calculation of AEC Adjusted EBITDA margin:as a percentage of sales:
For the three month periods ending: | For the three month periods ended: | |||||||||||
(in thousands, except percentages) | September 30, 2017 | June 30, | March 31, | September 30, 2016 | June 30, 2018 | June 30, 2017 * | ||||||
AEC Adjusted EBITDA (non-GAAP) | $8,125 | ($8,586 | ) | $5,188 | $3,710 | $15,134 | ($8,586 | ) | ||||
AEC Net sales (GAAP) | 71,447 | 68,999 | 56,450 | 48,024 | 93,590 | 68,999 | ||||||
AEC Adjusted EBITDA margin (non-GAAP) | 11.4 | % | -12.4 | % | 9.2 | % | 7.7 | % | ||||
AEC Adjusted EBITDA as a percentage of sales (non-GAAP) | 16.2 | % | -12.4 | % |
* Includes charge of $15.8 million in Q2 2017 for revisions in estimated profitability of two AEC contracts.
48
The following table contains the calculation of net debt:
(in thousands) | June 30, 2018 | December 31, 2017 | June 30, 2017 |
Notes and loans payable | $26 | $262 | $249 |
Current maturities of long-term debt | 1,844 | 1,799 | 51,732 |
Long-term debt | 523,186 | 514,120 | 444,030 |
Total debt | 525,056 | 516,181 | 496,011 |
Cash and cash equivalents | 154,744 | 183,727 | 138,792 |
Net debt | $370,312 | $332,454 | $357,219 |
The following table contains the reconciliation of MC 2018 projected Adjusted EBITDA to MC 2018 projected net income:
61
Machine Clothing Full-Year 2018 Outlook (in millions) | Actual, Six months ended June 30, 2018 | Results for last two quarters of year to meet low end of range | Results for last two quarters of year to meet high end of range | Estimated range for full-year | ||||
Net income/(loss) (GAAP) | $81 | $56 | $71 | $137-$152 | ||||
Depreciation and amortization | 17 | 17 | 17 | 34 | ||||
EBITDA (non-GAAP) | $98 | $73 | $88 | $171-$186 | ||||
Restructuring expenses, net | 10 | * | * | * | ||||
Foreign currency revaluation gains | (1 | ) | * | * | * | |||
Adjusted EBITDA (non-GAAP) | $107 | $73 | $88 | $180-$195 |
*Due to the uncertainty of these items, management is currently unable to project restructuring expenses and foreign currency revaluation gains/losses for 2018
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 officer 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 were notare 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.
Remediation Plans for Material Weaknesses in Internal Control over Financial Reporting
In the fourth quarter of 2016, and as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2016, we identified material weaknesses in our internal control over financial reporting as described below:
The Company did not establish effective reporting lines, appropriate authorities, responsibilities and monitoring activities for financial reporting processes and internal controls, as well as the assignment of banking signatory authorities, limits and responsibilities, at its subsidiary in Japan and certain other foreign locations. As a result, the Company lacked effective written entity and process level controls over initiation, authorization, processing and recording of transactions and safeguarding of assets managed by a third party service provider at the Japan location. In addition, the Company did not have effective management review controls over the assessment of a potential reserve for a loss contract due to a failure to understand and document the design requirements and operation of an effective management review control.
49
Beginning in the fourth quarter of 2016, we immediately commenced active steps towards remediating the material weaknesses. These efforts include:
We are working to remediate the material weaknesses as quickly and efficiently as possible and believe that such efforts will effectively remediate the reported material weaknesses by the end of 2017. However, the material weaknesses will not be considered remediated until the remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Notwithstanding the material weaknesses described above, our management has concluded that the financial statements included elsewhere in this quarterly report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with generally accepted accounting principles.
(b) | Changes in internal control over financial reporting. |
During the second quarter of 2018, the Company implemented additional controls and modified other controls related to revenue recognition and the Company’s adoption of ASC 606. There were no other changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the last fiscal quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
62
The information set forth above under Note 1617 in Item 1, “Notes to Consolidated Financial Statements” is incorporated herein by reference.
There have been no material changes in risks since December 31, 2016.2017. For discussion of risk factors, refer to Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.2017.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We made no share purchases during the thirdsecond quarter of 2017.2018. We remain authorized by the Board of Directors to purchase up to 2 million shares of our Class A Common Stock.
50
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Not Applicable.
Exhibit No. | Description |
10(u) | Employment Agreement |
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 |
99.1 | Quantitative and qualitative disclosures about market risks as reported at |
101 | The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
|
63
(i) | Consolidated Statements of Income for the three and |
(ii) | Consolidated Statements of Comprehensive Income/(Loss) for the three and |
(iii) | Consolidated Balance Sheets at |
(iv) | Consolidated Statements of Cash Flows for the three and |
(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.
51
64
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: October 31, 2017August 7, 2018
By | /s/ John B. Cozzolino | |
John B. Cozzolino | ||
Chief Financial Officer and Treasurer | ||
(Principal Financial Officer) |
65
52