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:September 30, 2017March 31, 2019
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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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 [ √ ]
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The registrant had 29.0 million shares of Class A Common Stock and 3.23.3 million shares of Class B Common Stock outstanding as of October 24, 2017.April 17, 2019.
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TABLE OF CONTENTS
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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 | |||
March 31, | |||
2019 | 2018 | ||
Net sales | $251,373 | $223,603 | |
Cost of goods sold | 159,602 | 145,821 | |
Gross profit | 91,771 | 77,782 | |
Selling, general, and administrative expenses | 40,945 | 41,888 | |
Technical and research expenses | 10,249 | 10,317 | |
Restructuring expenses, net | 484 | 8,573 | |
Operating income | 40,093 | 17,004 | |
Interest expense, net | 4,417 | 4,288 | |
Other (income)/expense, net | (1,208) | 1,452 | |
Income before income taxes | 36,884 | 11,264 | |
Income tax expense | 7,476 | 3,365 | |
Net income | 29,408 | 7,899 | |
Net income attributable to the noncontrolling interest | 218 | 237 | |
Net income attributable to the Company | $29,190 | $7,662 | |
Earnings per share attributable to Company shareholders - Basic | $0.90 | $0.24 | |
Earnings per share attributable to Company shareholders - Diluted | $0.90 | $0.24 | |
Shares of the Company used in computing earnings per share: | |||
Basic | 32,272 | 32,220 | |
Diluted | 32,285 | 32,236 | |
Dividends declared per share, Class A and Class B | $0.18 | $0.17 | |
The accompanying notes are an integral part of the consolidated financial statements
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ALBANY INTERNATIONAL CORP. |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) |
(in thousands) |
(unaudited) |
Three Months Ended | |||
March 31, | |||
2019 | 2018 | ||
Net income | $29,408 | $7,899 | |
Other comprehensive income/(loss), before tax: | |||
Foreign currency translation and other adjustments | (2,152) | 17,505 | |
Amortization of pension liability adjustments: | |||
Prior service credit | (1,105) | (1,114) | |
Net actuarial loss | 1,121 | 1,297 | |
Payments and amortization related to interest rate swaps included in earnings | (452) | 180 | |
Derivative valuation adjustment | (3,377) | 5,715 | |
Income taxes related to items of other comprehensive income/(loss): | |||
Amortization of pension liability adjustment | (5) | (55) | |
Payments related to interest rate swaps included in earnings | 115 | (43) | |
Derivative valuation adjustment | 863 | (1,372) | |
Comprehensive income | 24,416 | 30,012 | |
Comprehensive income/(loss) attributable to the noncontrolling interest | 210 | 230 | |
Comprehensive income attributable to the Company | $24,206 | $29,782 |
The accompanying notes are an integral part of the consolidated financial statements
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ALBANY INTERNATIONAL CORP. |
CONSOLIDATED BALANCE SHEETS |
(in thousands, except share data) |
(unaudited) |
March 31, | December 31, | ||
2019 | 2018 | ||
ASSETS | |||
Cash and cash equivalents | $187,385 | $197,755 | |
Accounts receivable, net | 234,127 | 223,176 | |
Contract assets | 57,869 | 57,447 | |
Inventories | 102,379 | 85,904 | |
Income taxes prepaid and receivable | 6,818 | 7,473 | |
Prepaid expenses and other current assets | 23,696 | 21,294 | |
Total current assets | 612,274 | 593,049 | |
Property, plant and equipment, net | 460,520 | 462,055 | |
Intangibles, net | 47,646 | 49,206 | |
Goodwill | 163,438 | 164,382 | |
Deferred income taxes | 63,736 | 62,622 | |
Noncurrent receivables | 45,354 | 45,061 | |
Other assets | 50,313 | 41,617 | |
Total assets | $1,443,281 | $1,417,992 | |
LIABILITIES AND SHAREHOLDERS' EQUITY | |||
Accounts payable | $74,050 | $52,246 | |
Accrued liabilities | 122,342 | 129,030 | |
Current maturities of long-term debt | 19 | 1,224 | |
Income taxes payable | 8,387 | 6,806 | |
Total current liabilities | 204,798 | 189,306 | |
Long-term debt | 491,022 | 523,707 | |
Other noncurrent liabilities | 112,726 | 88,277 | |
Deferred taxes and other liabilities | 8,328 | 8,422 | |
Total liabilities | 816,874 | 809,712 | |
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 37,478,402 in 2019 | |||
and 37,450,329 in 2018 | 37 | 37 | |
Class B Common Stock, par value $.001 per share; | |||
authorized 25,000,000 shares; issued and | |||
outstanding 3,233,998 in 2019 and 2018 | 3 | 3 | |
Additional paid in capital | 430,052 | 430,555 | |
Retained earnings | 613,057 | 589,645 | |
Accumulated items of other comprehensive income: | |||
Translation adjustments | (116,630) | (115,976) | |
Pension and postretirement liability adjustments | (48,596) | (47,109) | |
Derivative valuation adjustment | 1,846 | 4,697 | |
Treasury stock (Class A), at cost; 8,418,620 shares in 2019 | |||
and in 2018 | (256,603) | (256,603) | |
Total Company shareholders' equity | 623,166 | 605,249 | |
Noncontrolling interest | 3,241 | 3,031 | |
Total equity | 626,407 | 608,280 | |
Total liabilities and shareholders' equity | $1,443,281 | $1,417,992 |
The accompanying notes are an integral part of the consolidated financial statements
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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 |
ALBANY INTERNATIONAL CORP. |
CONSOLIDATED STATEMENTS OF CASH |
(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 | |||||||
March 31, | |||||||
2019 | 2018 | ||||||
OPERATING ACTIVITIES | |||||||
Net income | $29,408 | $7,899 | |||||
Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | |||||||
Depreciation | 15,642 | 18,302 | |||||
Amortization | 2,314 | 2,646 | |||||
Change in deferred taxes and other liabilities | (1,065) | (2,028) | |||||
Provision for write-off of property, plant and equipment | 386 | 271 | |||||
Non-cash interest expense | 151 | - | |||||
Compensation and benefits paid or payable in Class A Common Stock | (547) | 289 | |||||
Fair value adjustment on foreign currency option | - | 37 | |||||
Changes in operating assets and liabilities that (used)/provided cash: | |||||||
Accounts receivable | (11,624) | (25,089) | |||||
Contract assets | (481) | 2,116 | |||||
Inventories | (16,662) | (11,753) | |||||
Prepaid expenses and other current assets | (2,804) | (4,063) | |||||
Income taxes prepaid and receivable | 674 | 102 | |||||
Accounts payable | 21,750 | (2,538) | |||||
Accrued liabilities | (11,095) | (1,227) | |||||
Income taxes payable | 1,506 | (3,431) | |||||
Noncurrent receivables | (294) | (2,527) | |||||
Other noncurrent liabilities | (1,679) | (377) | |||||
Other, net | (1,014) | 2,424 | |||||
Net cash provided by/(used in) operating activities | 24,566 | (18,947) | |||||
INVESTING ACTIVITIES | |||||||
Purchases of property, plant and equipment | (20,798) | (15,771) | |||||
Purchased software | (22) | (29) | |||||
Net cash used in investing activities | (20,820) | (15,800) | |||||
FINANCING ACTIVITIES | |||||||
Proceeds from borrowings | 20,000 | 13,011 | |||||
Principal payments on debt | (28,004) | (8,490) | |||||
Principal payments on finance lease liabilities | (400) | - | |||||
Taxes paid in lieu of share issuance | (971) | (1,652) | |||||
Proceeds from options exercised | 44 | 147 | |||||
Dividends paid | (5,808) | (5,474) | |||||
Net cash used in financing activities | (15,139) | (2,458) | |||||
Effect of exchange rate changes on cash and cash equivalents | 1,023 | 4,904 | |||||
Decrease in cash and cash equivalents | (10,370) | (32,301) | |||||
Cash and cash equivalents at beginning of period | 197,755 | 183,727 | |||||
Cash and cash equivalents at end of period | $187,385 | $151,426 |
The accompanying notes are an integral part of the consolidated financial statements
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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.
2.Business Acquisition
On April 8, 2016, the Company acquired the outstanding shares of Harris Corporation’s composite aerostructures business for cash of $187 million, plus the assumption of certain liabilities. The Company funded the cash payable at closing by utilizing proceeds from a $550 million, unsecured credit facility agreement that was completed April 8, 2016. The acquired entity is located in Salt Lake City, Utah (“SLC”) and is part of the Albany Engineered Composites (“AEC”) segment.
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The Consolidated Statement of Income for 2016 includes operational activity of the acquired business for only the period subsequent to the closing, which affects comparability of year to date results. The following table shows total Company pro forma2018. Certain quarterly results for the nine month period ended September 30, 20162018 contained within this report have been revised to correct immaterial errors, as if the acquisition had occurreddescribed in Note 24 of Item 8 in that same Annual Report on Form 10-K.
Effective January 1, 2015.2019, we adopted the provisions of ASC 842,Leases, using theeffective date approach for transition as discussed in Note 3, Leases. Accounting policies have been applied consistently to periods presented, except for the application of ASC 842, as further described in Note 3.
| |||
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3.2. Reportable Segments
In accordance with applicable disclosure guidance for enterprise segments and related information, the internal organization that is used by management for making operating decisions and assessing performance is used as the basis for our reportable segments.
The following tables show data by reportableMachine Clothing (MC) segment reconciled to consolidated totals included in the financial statements:
Three months ended September 30, | Nine months ended September 30, | |||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||
Net sales | ||||||||
Machine Clothing | $150,694 | $143,248 | $440,093 | $437,445 | ||||
Albany Engineered Composites (AEC) | 71,447 | 48,024 | 196,896 | 129,348 | ||||
Consolidated total | $222,141 | $191,272 | $636,989 | $566,793 | ||||
Operating income/(loss) | ||||||||
Machine Clothing | 42,674 | 40,039 | 119,352 | 112,583 | ||||
Albany Engineered Composites | (9,301 | ) | (4,529 | ) | (32,242 | ) | (14,083 | ) |
Corporate expenses | (11,070 | ) | (10,690 | ) | (33,523 | ) | (33,554 | ) |
Operating income | $22,303 | $24,820 | $53,587 | $64,946 | ||||
Reconciling items: | ||||||||
Interest income | (355 | ) | (675 | ) | (801 | ) | (1,347 | ) |
Interest expense | 4,784 | 4,356 | 13,843 | 10,957 | ||||
Other expense/(income), net | (1,155 | ) | 242 | 980 | (2,103 | ) | ||
Income before income taxes | $19,029 | $20,897 | $39,565 | $57,439 |
There were no material changes in the total assets of the reportable segments in the first nine months of 2017.
In the third quarter of 2017, the Company decided to discontinue the Bear Claw® line of hydraulic fracturing componentsdesigns and manufactures fabrics and process felts used in the oilmanufacture of all grades of paper products and gas industry, which was partother industrial products. We sell our MC products directly to customer end-users in countries across the globe. Our products, manufacturing processes, and distribution channels for MC are substantially the same in each region of the Harris aerostructures business acquired by AECworld in 2016. This decision resultedwhich we operate. We design, manufacture, and market paper machine clothing (used in the manufacturing of paper, paperboard, tissue and towel) for each section of the paper machine and for every grade of paper. Paper machine clothing products are customized, consumable products of technologically sophisticated design that utilize polymeric materials in a non-cash restructuring charge of $4.5 million for the write-off of intangible assets and equipment, and a $3.2 million charge to Cost of goods sold for the write-off of inventory.
In the second quarter of 2017, the Company recorded a charge to Cost of goods sold of approximately $15.8 million associated with revisions in the estimated profitability of two AEC contracts. The charge was principally due to second-quarter 2017 downward revisions of estimated customer demand for the components manufactured by AEC related to the BR 725 and A380 programs. The charge included a $4.0 million write-off of program inventory costs, and a reserve for future losses of $11.8 million, which is included in Accrued liabilities in the Consolidated Balance Sheets. Total reserves for future contract losses were $11.1 million as of September 30, 2017, and $0.1 million as of December 31, 2016.complex structure.
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, is a designer and manufacturer of advanced materials-based engineered components for jet engine and airframe applications, supporting both commercial and military platforms provides highly engineered, advanced composite structures to customers in the aerospacecommercial and defense aerospace industries. AEC’s largest program relates to CFM International’s LEAP engine. Under this program,
7
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 a 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$56.0 million and $40.8 million in the first quarter $30.1 million in the second quarter,of 2019 and $28.3 million in the third quarter. AEC net sales to Safran in 2016 were $17.1 million in the first quarter, $18.5 million in the second quarter, and $17.4 million in the third quarter.2018, respectively. The
9
total of invoiced receivables, unbilled receivablesContract assets and contractNoncurrent receivables due from Safran amounted to $57.0$107.8 million and $37.1$96.2 million as of September 30, 2017March 31, 2019 and December 31, 2016,2018, respectively.
The following tables show data by reportable segment, reconciled to consolidated totals included in the financial statements:
Three months ended March 31, | ||
(in thousands) | 2019 | 2018 |
Net sales | ||
Machine Clothing | $144,334 | $141,773 |
Albany Engineered Composites | 107,039 | 81,830 |
Consolidated total | $251,373 | $223,603 |
Operating income/(loss) | ||
Machine Clothing | $44,243 | $26,942 |
Albany Engineered Composites | 9,522 | 2,275 |
Corporate expenses | (13,672) | (12,213) |
Operating income | $40,093 | $17,004 |
Reconciling items: | ||
Interest income | (599) | (382) |
Interest expense | 5,016 | 4,670 |
Other (income)/expense, net | (1,208) | 1,452 |
Income before income taxes | $36,884 | $11,264 |
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 March 31, | ||
(in thousands) | 2019 | 2018 |
Machine Clothing | $401 | $8,352 |
Albany Engineered Composites | 83 | 221 |
Total | $484 | $8,573 |
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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 three months ended March 31, 2019 | ||||
(in thousands) | Point in Time Revenue Recognition | Over Time Revenue Recognition | Total | |
Machine Clothing | $143,534 | $800 | $144,334 | |
Albany Engineered Composites | ||||
ASC | - | 55,442 | 55,442 | |
Other AEC | 6,245 | 45,352 | 51,597 | |
Total Albany Engineered Composites | 6,245 | 100,794 | 107,039 | |
Total revenue | $149,779 | $101,594 | $251,373 |
For the three months ended March 31, 2018 | ||||
(in thousands) | Point in Time Revenue Recognition | Over Time Revenue Recognition | Total | |
Machine Clothing | $140,973 | $800 | $141,773 | |
Albany Engineered Composites | ||||
ASC | - | 40,781 | 40,781 | |
Other AEC | 6,040 | 35,009 | 41,049 | |
Total Albany Engineered Composites | 6,040 | 75,790 | 81,830 | |
Total revenue | $147,013 | $76,590 | $223,603 |
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:
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For the three months ended March 31, | |||
(in thousands) | 2019 | 2018 | |
Americas PMC | $75,341 | $67,629 | |
Eurasia PMC | 51,438 | 53,811 | |
Engineered Fabrics | 17,555 | 20,333 | |
Total Machine Clothing Net sales | $144,334 | $141,773 |
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 MC 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. Remaining performance obligations on contracts that had an original duration of greater than one year totaled $90 million and $115 million as of March 31, 2019 and 2018, respectively, and related primarily to firm contracts in the AEC segment. Of the remaining performance obligations as of March 31, 2019 we expect to recognize as revenue approximately $53 million during 2019, with the remainder to be recognized in between 2020 and 2021.
At the January 1, 2019 date of adoption of ASC 842,Leases, MC assets increased by $5.6 million, AEC assets increased by $0.5 million, and Corporate assets increased by $1.0 million.
3. Leases
Effective January 1, 2019, we adopted the provisions of ASC 842,Leases, using the effective date (or modified retrospective) approach for transition. Under this transition method, periods prior to 2019 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, 2019.
The new standard is intended to increase transparency and comparability among organizations by requiring the recognition of right of use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.We applied the new accounting standard to leases existing at the date of initial application on January 1, 2019.
We elected the available package of practical expedients, which permitted us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We implemented processes and internal controls to enable the preparation of financial information on adoption.
The most significant impact resulting from the adoption of the new standard was the recognition of ROU assets and lease liabilities for operating leases on our balance sheet for our real estate and automobile operating leases, in addition to the derecognition and reassessment of assets and liabilities related to our primary manufacturing facility in Salt Lake City, Utah (SLC lease), which had been accounted for as a build-to-suit lease with a failed sale leaseback. For that lease, transitional guidance required the derecognition of existing assets and liabilities and a reassessment of lease classification. We determined that the lease met the criteria for recording as a finance lease and we determined the
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January 1, 2019 values of the ROU asset and lease liability on the basis of that reassessment. The change in the SLC lease-related assets and liabilities resulted in a $0.3 million pre-tax reduction to retained earnings at the date of adoption.
The table below presents the cumulative effect of changes made to our December 31, 2018 Balance Sheet as a result of the adoption of ASC 842, Leases:
ALBANY INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
(unaudited)
As previously reported at December 31, 2018 | Adjustments Increase/ (decrease) | Opening balance, as adjusted, January 1, 2019 | ||||
ASSETS | ||||||
Cash and cash equivalents | $197,755 | $ - | $197,755 | |||
Accounts receivable, net | 223,176 | - | 223,176 | |||
Contract assets | 57,447 | - | 57,447 | |||
Inventories | 85,904 | - | 85,904 | |||
Income taxes prepaid and receivable | 7,473 | - | 7,473 | |||
Prepaid expenses and other current assets | 21,294 | (370) | 20,924 | |||
Total current assets | 593,049 | (370) | 592,679 | |||
Property, plant and equipment, net | 462,055 | (6,144) | 455,911 | |||
Intangibles, net | 49,206 | - | 49,206 | |||
Goodwill | 164,382 | - | 164,382 | |||
Deferred income taxes | 62,622 | (20) | 62,602 | |||
Noncurrent receivables | 45,061 | - | 45,061 | |||
Other assets | 41,617 | 13,615 | 55,232 | |||
Total assets | $1,417,992 | $7,081 | $1,425,073 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
Notes and loans payable | $- | $- | $- | |||
Accounts payable | 52,246 | - | 52,246 | |||
Accrued liabilities | 129,030 | 4,964 | 133,994 | |||
Current maturities of long-term debt | 1,224 | (1,206) | 18 | |||
Income taxes payable | 6,806 | - | 6,806 | |||
Total current liabilities | 189,306 | 3,758 | 193,064 | |||
Long-term debt | 523,707 | (24,680) | 499,027 | |||
Other noncurrent liabilities | 88,277 | 27,968 | 116,245 | |||
Deferred taxes and other liabilities | 8,422 | - | 8,422 | |||
Total liabilities | 809,712 | 7,046 | 816,758 | |||
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 37,450,329 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 | 430,555 | - | 430,555 | |||
Retained earnings | 589,645 | 35 | 589,680 | |||
Accumulated items of other comprehensive income: | ||||||
Translation adjustments | (115,976) | - | (115,976 | ) | ||
Pension and postretirement liability adjustments | (47,109) | - | (47,109 | ) | ||
Derivative valuation adjustment | 4,697 | - | 4,697 | |||
Treasury stock (Class A), at cost 8,418,620 shares in 2018 | ||||||
and 8,431,335 shares in 2017 | (256,603) | - | (256,603 | ) | ||
Total Company shareholders' equity | 605,249 | 35 | 605,284 | |||
Noncontrolling interest | 3,031 | - | 3,031 | |||
Total equity | 608,280 | 35 | 608,315 | |||
Total liabilities and shareholders' equity | $1,417,992 | $7,081 | $1,425,073 |
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Adoption of the standard had no impact to cash from or used in operating, investing, or financing activities in our Consolidated Statements of Cash Flows.
Significant changes to our accounting policies as a result of adopting the new standard are discussed below.
We determine if an arrangement is a lease at inception. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, we would assess whether:
· | The contract involves the use of an identified asset. This may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset, |
· | We have the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use, and |
· | We have the right to direct the use of the asset. We have this right when we have the decision-making rights that are most relevant to changing how and for what purpose the asset is used. |
Judgement is required in the application of ASC 842,Leases, including in determining whether a contract contains a lease, the appropriate classification, allocation of consideration, and the determination of the discount rate for the lease. Key estimates and judgments include how the Company determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) lease term and (3) lease payments.
We are generally the lessee in our lease transactions. For periods ending after December 31, 2018, lessees will be required to recognize a lease liability and an ROU asset for leases with terms greater than 12 months, in accordance with the practical expedient that is available for ongoing accounting.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized on the commencement date based on the present value of lease payments over the lease term, using the rate implicit in the lease. If that rate is not readily determinable, the rate is based on the Company’s incremental borrowing rate. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease. Our ROU assets include the values associated with the additional periods when it is reasonably certain that we will exercise the option. We review the carrying value of ROU assets for impairment whenever events and circumstances indicate that the carrying value of an asset group may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.
We have lease agreements with lease and non-lease components. For most leases, we account for the lease and non-lease components as a single lease component, in accordance with the practical expedient that is available for ongoing accounting. Additionally, for certain leases, such as for vehicles, we apply a portfolio approach. New leases will be classified as financing or operating, with classification affecting the pattern and classification of expense recognition in the income statement. 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 in the income statement.
Operating lease ROU assets are included in Other assets in the Consolidated Balance Sheets and Operating lease liabilities are included in Accrued liabilities and Other noncurrent liabilities in the Consolidated Balance Sheets. Finance lease ROU assets are included in Property, plant, and
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equipment, net in the Consolidated Balance Sheets and Finance lease liabilities are included in Accrued liabilities and Other noncurrent liabilities in the Consolidated Balance Sheets.
We have operating and finance leases for offices, manufacturing facilities, warehouses, vehicles, and certain equipment. Our leases have remaining lease terms of 1 year to 11 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year.
The components of lease expense were as follows:
(in thousands) | For the three months ended March 31, 2019 |
Finance lease | |
Amortization of right-of-use asset | $ 253 |
Interest on lease liabilities | 399 |
Operating lease | |
Fixed lease cost | 1,217 |
Variable lease cost | 57 |
Short-term lease cost | 332 |
Total lease expense | $ 2,258 |
Lease expense for the same period of 2018 was $2.1 million.
Supplemental cash flow information related to leases was as follows:
(in thousands) | For the three months ended March 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ 1,191 |
Operating cash flows from finance leases | 399 |
Financing cash flows from finance leases | 400 |
Right-of-use assets obtained in exchange for lease obligations: | |
Operating leases | $ 412 |
Finance leases | - |
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Supplemental balance sheet information related to leases was as follows:
(in thousands) | March 31, 2019 |
Operating leases | |
Right of use assets included in Other assets | $ 12,969 |
Lease liabilities included in | |
Accrued liabilities | $ 4,182 |
Other noncurrent liabilities | 8,935 |
Total operating lease liabilities | $ 13,117 |
Finance leases | |
Right of use assets included in Property, plant and equipment, net | $ 10,890 |
Lease liabilities included in | |
Accrued liabilities | $ 1,216 |
Other noncurrent liabilities | 18,564 |
Total finance lease liabilities | $ 19,780 |
Additional information for leases existing at March 31, 2019 was as follows:
Weighted average remaining lease term | |
Operating leases | 5 years |
Finance leases | 11 years |
Weighted average discount rate | |
Operating leases | 6.1% |
Finance leases | 8.0% |
Maturities of lease liabilities as of March 31, 2019 were as follows:
(in thousands) | Operating leases | Finance lease |
Year ending December 31, | ||
2019 | $ 3,487 | $ 2,057 |
2020 | 4,068 | 2,790 |
2021 | 2,033 | 2,790 |
2022 | 1,419 | 2,838 |
2023 | 1,346 | 3,004 |
Thereafter | 3,047 | 15,512 |
Total lease payments | 15,400 | 28,991 |
Less imputed interest | (2,283) | (9,211) |
Total | $ 13,117 | $ 19,780 |
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The finance lease liability includes the SLC lease described above, but excludes additional manufacturing space that was included in the September 2018 modification of that lease. We will take control of the additional space during the fourth quarter of 2019, which will be the commencement of this lease component, at which time the lease liability and ROU asset will be recorded. We will have control of the additional space through 2029 and the additional space will increase gross cash outflows during that period by $6.1 million.
As of December 31, 2018, future rental payments required under operating leases with initial or remaining non-cancelable lease terms in excess of one year, were: 2019, $4.6 million; 2020, $3.2 million; 2021, $2.1 million; 2022, $1.5 million; and 2023 and thereafter, $6.5 million.
As of December 31, 2018, the following schedule presents future minimum annual payments under the SLC lease finance obligation, and the present value of the minimum payments:
(in thousands) | |
Year ending December 31, | |
2019 | $ 2,451 |
2020 | 2,974 |
2021 | 2,990 |
2022 | 3,054 |
2023 | 3,277 |
Thereafter | 18,930 |
Total minimum payments | 33,676 |
Less imputed interest | (7,790) |
Total | $ 25,886 |
As of December 31, 2018, the capitalized value associated with the SLC lease was included in Property, plant, and equipment, net at a value of $17.3 million, which included a gross cost of $20.8 million, and Accumulated depreciation of $3.5 million.
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.have been frozen since February 2009. 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.
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The composition of the net periodic benefit plan cost for the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, was as follows:
Pension plans | Other postretirement benefits | Pension plans | Other postretirement benefits | |||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | ||||
Components of net periodic benefit cost: | Components of net periodic benefit cost: | |||||||||||
Service cost | $1,960 | $1,991 | $183 | $190 | $632 | $699 | $47 | $58 | ||||
Interest cost | 5,507 | 6,110 | 1,660 | 1,832 | 1,794 | 1,820 | 528 | 507 | ||||
Expected return on assets | (6,004 | ) | (6,763 | ) | - | - | (2,057) | (2,247) | - | - | ||
Curtailment gain | - | (130 | ) | - | - | |||||||
Amortization of prior service cost/(credit) | 27 | 28 | (3,366 | ) | (3,366 | ) | 17 | 8 | (1,122) | (1,122) | ||
Amortization of net actuarial loss | 1,943 | 1,756 | 2,107 | 2,114 | 564 | 558 | 557 | 739 | ||||
Net periodic benefit cost | $3,433 | $2,992 | $584 | $770 | $950 | $838 | $10 | $182 |
Service cost for defined benefit pension and postretirement plans are reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net periodic benefit cost are presented in the income statement separately from the service cost component and outside a subtotal of income from operations, in the line item Other (income)/expense, net in the Consolidated Statements of Income.
5. Restructuring
Machine ClothingMC restructuring costscharges include expenses for the first ninethree months of 2017 were principally2019 and 2018 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 activitiesdiscontinued operations at theits MC production facility in Sélestat, France.
In October 2017,2018, the Company announcedplan was approved by the initiationFrench Labor Ministry which led to restructuring expense of discussions with the local works council regarding a proposal to discontinue operations at its Machine Clothing production facility in Sélestat, France. The consultations are subject to applicable law and are ongoing. At this time, the Company has not recorded any restructuring charge related to this proposal.
AEC incurred restructuring charges of $9.2$8.1 million in the first ninethree months of 2017.2018 for severance and outplacement costs for the approximately 50 positions that were terminated under this plan. In the thirdfirst quarter of 2017, the Company decided to discontinue the Bear Claw® line of hydraulic fracturing components used in the oil and gas industry, which led to non-cash2019, restructuring charges totaling $4.5were $0.4 million. Since 2017, we have recorded $12.1 million relating to the impairment of long-lived assets. Other restructuring charges in 2017 principallyrelated to this action.
AEC restructuring charges include expenses for the first three months of 2019 and 2018 related to work force reductions in AEC locations in Salt Lake City, Utah and Rochester, New Hampshire.
AEC The restructuring charges for the first three months of 2019 and 2018 include expenses in 2016 were principally related to the consolidation of legacy programs into Boerne, Texas.$0.1 million and $0.2 million, respectively.
The following table summarizes charges reported in the Consolidated Statements of Income under “Restructuring expenses, net”:
Three months ended March 31, | ||
(in thousands) | 2019 | 2018 |
Machine Clothing | $401 | $8,352 |
Albany Engineered Composites | 83 | 221 |
Corporate expenses | - | - |
Total | $484 | $8,573 |
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Three months ended March 31, 2019 | Total restructuring costs incurred | Termination and other costs |
(in thousands) | ||
Machine Clothing | $401 | $401 |
Albany Engineered Composites | 83 | 83 |
Corporate expenses | - | - |
Total | $484 | $484 |
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 |
We expect that approximately $4.0 millionsubstantially all of Accrued liabilities for restructuring at September 30, 2017March 31, 2019 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 20172019 and 2016,2018, all of which related to termination costs:
December 31, | Restructuring | Currency | September 30, | December 31, | Restructuring | Currency | March 31, | |||
(in thousands) | 2016 | charges accrued | Payments | translation /other | 2017 | 2018 | charges accrued | Payments | translation /other | 2019 |
Total termination and other costs | $5,559 | $5,185 | ($6,370) | $24 | $4,398 | $5,570 | $484 | ($876) | $23 | $5,201 |
December 31, | Restructuring | Currency | September 30, | ||
(in thousands) | 2015 | charges accrued | Payments | translation /other | 2016 |
Total termination and other costs | $10,177 | $7,194 | ($9,862) | $2 | $7,511 |
December 31, | Restructuring | Currency | March 31, | ||
(in thousands) | 2017 | charges accrued | Payments | translation /other | 2018 |
Total termination and other costs | $3,326 | $8,573 | ($2,051) | $25 | $9,873 |
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6. Other Expense/(Income),/Expense, net
The components of other expense/(income),Other (Income)/Expense, net are:
Three months ended September 30, | Nine months ended September 30, | Three months ended March 31, | ||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | ||||
Currency transaction losses/(gains) | $261 | ($312 | ) | $2,310 | ($2,361 | ) | ||||
Currency transaction (gains)/losses | ($2,038) | $690 | ||||||||
Bank fees and amortization of debt issuance costs | 116 | 106 | 375 | 652 | 109 | 108 | ||||
Gain on insurance recovery | (2,000 | ) | - | (2,000 | ) | - | ||||
Components of net periodic pension and postretirement cost other than service | 281 | 263 | ||||||||
Other | 468 | 448 | 295 | (394 | ) | 440 | 391 | |||
Total | ($1,155 | ) | $242 | $980 | ($2,103 | ) | ($1,208) | $1,452 |
In the third quarter of 2017, the Company recorded an insurance recovery gain of $2.0 million related to the theft in Japan that was reported in the fourth quarter of 2016.
7. Income Taxes
The following table presents components of income tax expense for the three and nine months ended September 30, 2017March 31, 2019 and 2016:2018:
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 |
Three months ended | |||||
March 31, | |||||
(in thousands, except percentages) | 2019 | 2018 | |||
Income tax based on income from continuing operations, at estimated tax | |||||
rates of 29.4% and 32.5%, respectively | $10,847 | $3,656 | |||
Income tax before discrete items | 10,847 | 3,656 | |||
Discrete tax expense: | |||||
Exercise of U.S. stock options | (50) | (123) | |||
Adjustments to prior period tax liabilities | 194 | (46) | |||
Provision for resolution of tax audits and contingencies, net | (2,232) | 5 | |||
Adjustment related to prior period change in opening valuation allowance | (1,346) | - | |||
Other | 63 | (127) | |||
Total income tax expense | $7,476 | $3,365 |
The third quarterfirst-quarter estimated annual effective tax rate on continuing operations was 36.429.4 percent in 2017,2019, compared to 37.532.5 percent for the same period in 2016.2018.
Income tax expense for the quarter was computed in accordance with ASC 740-270 “Income Taxes – Interim Reporting”. Under this method, loss jurisdictions, which cannot recognize a tax benefit with regard to their generated losses, are excluded from the annual effective tax rate (AETR) calculation and their taxes will be recorded discretely in each quarter.
The Company’s tax rate is affected by recurring items such as the income tax rate in the U.S. and in non-U.S. jurisdictions and the mix of income earned in those jurisdictions, including changes in losses and income from excluded loss jurisdictions, and the impact of discrete items in the respective quarter.
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 $159.2 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$4.1 million on $62.8and state income taxes of $3.3 million of non-U.S. earnings thatwhich have already been targeted for future repatriation to the U.S.recorded.
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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 2016.2019. The Company is currently under audit in non-U.S. tax jurisdictions, including but not limited to CanadaItaly.
In the first quarter of 2019, the Company recorded a net benefit of $2.2 million for tax audit settlements with Canada. The Canadian Revenue Agency agreed to accept the Company’s appeal of all protested issues. The Company has begun to receive refunds from the Canadian Revenue Agency and Italy.
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ItOntario for taxes that were pre-paid at the time of protests. As such, the Company determined that it is reasonably possiblemore likely than not that over the next twelve months the amount ofliability for unrecognized tax benefits may decrease up to $0.2of $2.2 million from the reevaluationthat was recorded as of uncertain tax positions arising in examinations, in appeals, orDecember 31, 2018 was no longer warranted and thus it was reduced in the courts, or from the closurefirst quarter of 2019, resulting in a $2.2 million discrete tax statutes of limitations.benefit.
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 asThere was no evidence obtained during the first quarter 2019 that would require the Company achieved three yearsto make any changes to its view of cumulative pretax income in Canada and Japan, management determined that there was sufficient positive evidence to conclude that it is more likely than not that additionalthe future realization of deferred tax assets of $3.4 million in Canada and $0.4 million in Japan are realizable. Therefore, inassets. In the thirdfirst quarter of 2017, we reversed previously2019, the Company recorded valuation allowances which resulted in a discrete tax benefit of $3.8 million.
In March 2016, an accounting update was issued which simplifies several aspects$1.3 million out-of-period immaterial adjustment related to accounting for share-based payment transactions, including the incomea German tax consequences. The income tax consequences which relate to accounting for excess tax benefits have been adopted prospectively, resulting in recognition of excess tax benefits against income tax expense, rather than additional paid-in capital, of $0.1 million for the nine months ended September 30, 2017. No adjustment was necessary related to the deferred tax balances. The Company adopted this update on January 1, 2017.
valuation allowance.
8. Earnings Per Share
The amounts used in computing earnings per share and the weighted average number of shares of potentially dilutive securities are as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||
(in thousands, except market price and earnings per share) | 2017 | 2016 | 2017 | 2016 | ||||
Net income attributable to the Company | $15,269 | $13,069 | $27,225 | $36,937 | ||||
Weighted average number of shares: | ||||||||
Weighted average number of shares used in | ||||||||
calculating basic net income per share | 32,187 | 32,104 | 32,160 | 32,079 | ||||
Effect of dilutive stock-based compensation plans: | ||||||||
Stock options | 27 | 37 | 33 | 39 | ||||
Weighted average number of shares used in | ||||||||
calculating diluted net income per share | 32,214 | 32,141 | 32,193 | 32,118 | ||||
Average market price of common stock used | ||||||||
for calculation of dilutive shares | $53.49 | $42.03 | $49.49 | $38.97 | ||||
Net income per share: | ||||||||
Basic | $0.47 | $0.41 | $0.85 | $1.15 | ||||
Diluted | $0.47 | $0.41 | $0.85 | $1.15 |
Three months ended March 31, | ||
(in thousands, except market price and earnings per share) | 2019 | 2018 |
Net income attributable to the Company | $29,190 | $7,662 |
Weighted average number of shares: | ||
Weighted average number of shares used in | ||
calculating basic net income per share | 32,272 | 32,220 |
Effect of dilutive stock-based compensation plans: | ||
Stock options | 13 | 16 |
Weighted average number of shares used in | ||
calculating diluted net income per share | 32,285 | 32,236 |
Average market price of common stock used | ||
for calculation of dilutive shares | $71.24 | $63.86 |
Net income attributable to the Company per share: | ||
Basic | $0.90 | $0.24 |
Diluted | $0.90 | $0.24 |
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9. Noncontrolling Interest
The table below presents a reconciliation of income attributable to the noncontrolling interest and noncontrolling equity:
Nine months ended September 30, | ||||
(in thousands) | 2017 | 2016 | ||
Net income/(loss) of Albany Safran Composites, LLC ("ASC") | $2,805 | ($374 | ) | |
Less: Return attributable to the Company's preferred holding | 782 | 732 | ||
Net income/(loss) of ASC available for common ownership | $2,023 | ($1,106 | ) | |
Ownership percentage of noncontrolling shareholder | 10 | % | 10 | % |
Net income/(loss) attributable to noncontrolling interest | $202 | ($111 | ) | |
Noncontrolling interest, beginning of year | $3,767 | $3,690 | ||
Net income/(loss) attributable to noncontrolling interest | 202 | (111 | ) | |
Changes in other comprehensive income attributable to noncontrolling interest | 19 | (1 | ) | |
Noncontrolling interest | $3,988 | $3,578 |
10. Accumulated Other Comprehensive Income (AOCI)
The table below presents changes in the components of AOCI for the period December 31, 20162018 to September 30, 2017:March 31, 2019:
(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, 2018 | ($115,976) | ($47,109) | $4,697 | ($158,388) |
Other comprehensive income/(loss) before reclassifications | (654) | (152) | (2,514) | (3,320) |
Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax | - | - | (337) | (337) |
Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax | - | 11 | - | 11 |
Adjustment related to prior period change in opening valuation allowance | - | (1,346) | - | (1,346) |
Net current period other comprehensive income | (654) | (1,487) | (2,851) | (4,992) |
March 31, 2019 | ($116,630) | ($48,596) | $1,846 | ($163,380) |
The table below presents changes in the components of AOCI for the period December 31, 20152017 to September 30, 2016:March 31, 2018:
(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, 2017 | ($87,318) | ($50,536) | $1,953 | ($135,901) |
Other comprehensive income/(loss) before reclassifications | 17,646 | (141) | 4,343 | 21,848 |
Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax | - | - | 137 | 137 |
Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax | - | 128 | - | 128 |
Net current period other comprehensive income | 17,646 | (13) | 4,480 | 22,113 |
March 31, 2018 | ($69,672) | ($50,549) | $6,433 | ($113,788) |
The components of our Accumulated Other Comprehensive Income that are reclassified to the Statement of Income relate to our pension and postretirement plans and interest rate swaps.
The table below presents the expense/(income) amounts reclassified, and the line items of the Consolidated Statements of Income that were affected for the periodsthree months ended September 30, 2017March 31, 2019 and 2016.2018.
Three months ended September 30, | Nine months ended September 30, | Three months ended March 31, | ||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | ||||
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 | ||||||
Expense related to interest rate swaps included in Income before taxes (a) | ($452) | $180 | ||||||||
Income tax effect | (112 | ) | (418 | ) | (470 | ) | (641 | ) | 115 | (43) |
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income | $183 | $682 | $768 | $1,045 | ($337) | $137 | ||||
Pretax pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income: | ||||||||||
Amortization of prior service credit | ($1,113 | ) | ($1,113 | ) | ($3,339 | ) | ($3,338 | ) | (1,105) | (1,114) |
Amortization of net actuarial loss | 1,350 | 1,296 | 4,050 | 3,870 | 1,121 | 1,297 | ||||
Total pretax amount reclassified (b) | 237 | 183 | 711 | 532 | 16 | 183 | ||||
Income tax effect | (71 | ) | (55 | ) | (213 | ) | (160 | ) | (5) | (55) |
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income | $166 | $128 | $498 | $372 | $11 | $128 |
(a) | Included in Interest expense, net, are payments related to the interest rate swap agreements and amortization of swap buyouts (see |
(b) | These accumulated other comprehensive income components are included in the computation of net periodic |
10. Noncontrolling Interest
Effective October 31, 2013, Safran S.A. (Safran) acquired a 10 percent equity interest in a new Albany subsidiary, Albany Safran Composites, LLC (ASC). Under the terms of the transaction agreements, ASC is the exclusive supplier to Safran of advanced 3D-woven composite parts for use in aircraft and rocket engines, thrust reversers and nacelles, and aircraft landing and braking systems (the “Safran Applications”). AEC may develop and supply parts other than advanced 3D-woven composite parts for all aerospace applications, as well as advanced 3D-woven composite parts for any aerospace applications that are not Safran Applications (such as airframe applications) and any non-aerospace applications.
The agreement provides Safran an option to purchase Albany’s remaining 90 percent interest upon the occurrence of certain bankruptcy or performance default events, or if Albany’s Engineered Composites business is sold to a direct competitor of Safran. The purchase price is based initially on the same valuation of ASC used to determine Safran’s 10 percent equity interest, and increases over time as LEAP production increases.
In accordance with the operating agreement, Albany received a $28 million preferred holding in ASC which includes a preferred return based on the Company’s revolving credit agreement. The common shares of ASC are owned 90 percent by Albany and 10 percent by Safran.
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The table below presents a reconciliation of income attributable to the noncontrolling interest and noncontrolling equity in the Company’s subsidiary Albany Safran Composites, LLC:
Three months ended March 31, | ||
(in thousands) | 2019 | 2018 |
Net income of Albany Safran Composites (ASC) | $2,510 | $2,681 |
Less: Return attributable to the Company's preferred holding | 328 | 312 |
Net income of ASC available for common ownership | $2,182 | $2,369 |
Ownership percentage of noncontrolling shareholder | 10% | 10% |
Net income attributable to noncontrolling interest | $218 | $237 |
Noncontrolling interest, beginning of year | $3,031 | $3,247 |
Decrease attributable to 2018 adoption of ASC 606 | - | (327) |
Net income attributable to noncontrolling interest | 218 | 237 |
Changes in other comprehensive income attributable to noncontrolling interest | (8) | (7) |
Noncontrolling interest | $3,241 | $3,150 |
11. Accounts Receivable
Accounts receivable includes trade receivables and revenuereceivables.
In connection with certain sales in excess of progress billings on long-term contracts inAsia, the Albany Engineered Composites segment.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 maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company determines the allowance based on historical write-off experience, customer-specific facts and economic conditions. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
As of September 30, 2017March 31, 2019 and December 31, 2016,2018, Accounts receivable consisted of the following:
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.
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As of September 30, 2017March 31, 2019 and December 31, 2016, Contract2018, Noncurrent receivables consisted of the following:
(in thousands) | September 30, 2017 | December 31, 2016 | March 31, 2019 | December 31, 2018 |
Contract receivable | $29,688 | $14,045 | ||
Noncurrent receivables | $45,354 | $45,061 |
12. Contract Assets and Liabilities
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. 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 Sheets.
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. As of March 31, 2019 and December 31, 2018 Contract assets and contract liabilities consisted of the following:
(in thousands) | March 31, 2019 | December 31, 2018 |
Contract assets | $57,869 | $57,447 |
Contract liabilities | 9,865 | 9,025 |
Contract assets increased $0.4 million during the three month period ended March 31, 2019. 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 three month period ended March 31, 2019.
Contract liabilities increased $0.8 million during the three month period ended March 31, 2019, primarily due to increased billings in excess of revenue recognized. Revenue recognized for the three month period ended March 31, 2019, that was included in the Contract liability balance as of December 31, 2018 was $3.7 million, and included revenue in the MC and AEC segments.
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 under which we incur engineering and development costs that are allocable to parts that will be delivered over multiple years. These costs are included in Work in process in the table below.
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As of September 30, 2017March 31, 2019 and December 31, 2016, inventories2018, 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 |
(in thousands) | March 31, 2019 | December 31, 2018 |
Raw materials | $47,820 | $40,489 |
Work in process | 37,582 | 33,181 |
Finished goods | 16,977 | 12,234 |
Total inventories | $102,379 | $85,904 |
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.
Our reportable segments are consistent with our operating segments.
Determining the fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates, and future market conditions, among others. Goodwill and other long-lived assets are reviewed for impairment whenever events, such as significant changes in the business climate, plant closures, changes in product offerings, or other circumstances indicate that the carrying amount may not be recoverable.
To determine fair value, we utilize two market-based approaches and an income approach. Under the market-based approaches, we utilize information regarding the Company as well as publicly available industry information to determine earnings multiples and sales multiples. Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn.
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,values, 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.
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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 March 31, 2019 and December 31, 2016 to September 30, 2017,2018, were as follows:
(in thousands) | Weighted average amortization life in years | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||
As of March 31, 2019 (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 | 15 | $140 | ($131) | $9 | |
AEC technology | 15 | 228 | 142 | 86 | 15 | 370 | (321) | 49 | |
Customer relationships | 15 | 48,528 | 4,956 | 43,572 | 15 | 48,421 | (9,690) | 38,731 | |
Customer contracts | 6 | 18,211 | 5,114 | 13,097 | 6 | 17,471 | (8,743) | 8,728 | |
Other intangibles | 5 | 742 | 516 | 226 | 5 | 322 | (193) | 129 | |
Total amortized intangible assets | $67,752 | $10,755 | $56,997 | ||||||
Net amortized intangible assets | $66,724 | ($19,078) | $47,646 | ||||||
Unamortized intangible assets: | |||||||||
MC Goodwill | $70,280 | $- | $70,280 | $67,708 | $- | $67,708 | |||
AEC Goodwill | 95,730 | - | 95,730 | 95,730 | - | 95,730 | |||
Total unamortized intangible assets: | $166,010 | $- | $166,010 | $163,438 | $- | $163,438 |
As of December 31, 2016 (in thousands) | Weighted average amortization life in years | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||
As of December 31, 2018 (in thousands) | Weighted average amortization life in years | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||
Amortized intangible assets: | |||||||||
AEC trade names | 15 | $43 | $23 | $20 | 15 | $140 | ($129) | $11 | |
AEC technology | 15 | 228 | 124 | 104 | 15 | 370 | (314) | 56 | |
Customer relationships | 15 | 49,490 | 2,481 | 47,009 | 15 | 48,421 | (8,883) | 39,538 | |
Customer contracts | 6 | 20,420 | 2,561 | 17,859 | 6 | 17,471 | (8,015) | 9,456 | |
Other intangibles | 5 | 1,720 | 258 | 1,462 | 5 | 322 | (177) | 145 | |
Total amortized intangible assets | $71,901 | $5,447 | $66,454 | ||||||
Net amortized intangible assets | $66,724 | ($17,518) | $49,206 | ||||||
Unamortized intangible assets: | |||||||||
MC Goodwill | $64,645 | $- | $64,645 | $68,652 | $- | $68,652 | |||
AEC Goodwill | 95,730 | - | 95,730 | 95,730 | - | 95,730 | |||
Total unamortized intangible assets: | $160,375 | $- | $160,375 | $164,382 | $- | $164,382 |
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The changes in intangible assets, net and goodwill from December 31, 20162018 to September 30, 2017,March 31, 2019, 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 |
(in thousands) | December 31, 2018 | Amortization | Currency Translation | March 31,2019 |
Amortized intangible assets: | ||||
AEC trade names | $11 | ($2) | $- | $9 |
AEC technology | 56 | (7) | - | 49 |
Customer relationships | 39,538 | (807) | - | 38,731 |
Customer contracts | 9,456 | (728) | - | 8,728 |
Other intangibles | 145 | (16) | - | 129 |
Net amortized intangible assets | $49,206 | ($1,560) | $- | $47,646 |
Unamortized intangible assets: | ||||
MC Goodwill | $68,652 | $- | ($944) | $67,708 |
AEC Goodwill | 95,730 | - | - | 95,730 |
Total unamortized intangible assets: | $164,382 | $- | ($944) | $163,438 |
Estimated amortization expense of intangibles for the years ending December 31, 20172019 through 2021,2023, is as follows:
Annual amortization | |
Year | (in thousands) |
2017 | $6,865 |
2018 | 6,232 |
2019 | 6,232 |
2020 | 6,232 |
2021 | 6,162 |
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Annual amortization | |
Year | (in thousands) |
2019 | $6,234 |
2020 | 6,234 |
2021 | 6,163 |
2022 | 3,949 |
2023 | 3,228 |
14.15. Financial Instruments
Long-term debt, principally to banks and bondholders,noteholders, 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.
(in thousands, except interest rates) | March 31, 2019 | December 31, 2018 | |
Revolving credit agreement with borrowings outstanding at an end of period interest rate of 3.61% in 2019 and 3.69% in 2018 (including the effect of interest rate hedging transactions, as described below), due in 2022 | $491,000 | $499,000 | |
Finance obligation | - | 25,886 | |
Other debt, at an average end of period rate of 5.50% in both 2019 and 2018, due in varying amounts through 2021 | 41 | 45 | |
Long-term debt | 491,041 | 524,931 | |
Less: current portion | (19) | (1,224) | |
Long-term debt, net of current portion | $491,022 | $523,707 |
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
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$491 million of borrowings were outstanding as of September 30, 2017.March 31, 2019. 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,March 18, 2019, the spread was 1.500%1.375%. The spread was based on a pricing grid, which ranged from 1.250% to 1.750%, based on our leverage ratio. Based on our maximum leverage ratio and our Consolidated EBITDA, and without modification to any other credit agreements, as of September 30, 2017,March 31, 2019, we would have been able to borrow an additional $110$194 million under the Agreement.
The Credit Agreement contains customary terms, as well as affirmative covenants, negative covenants and events of default that are comparable to those in the Prior Agreement. The Borrowings are guaranteed by certain of the Company'sCompany’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 hasDue to the implementation of ASC 842,Leases,on January 1, 2019, as further described in Note 3 the finance obligation that had a long-term capitalbalance of $25.9 million as of December 31, 2018, was eliminated and replaced with a finance lease obligation for real propertythat is included in Salt Lake City, Utah. The lease has an impliedOther noncurrent liabilities and Accrued liabilities.
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 5.0% and maturesrevolving credit borrowings, in 2022.
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The following schedule presents future minimum annual lease payments under the capital lease obligationorder to enter into a new interest rate swap with a greater notional amount, and the present value ofsame maturity as the minimum lease payments, as of September 30, 2017.
Years ending December 31, | (in thousands) | |
2017 | $606 | |
2018 | 2,473 | |
2019 | 2,473 | |
2020 | 2,520 | |
2021 | 2,520 | |
Thereafter | 7,373 | |
Total minimum lease payments | 17,965 | |
Less: Amount representing interest | (2,622 | ) |
Present value of minimum lease payments | $15,343 |
Credit Agreement. We received $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 SeptemberMarch 18, 20172019 was 1.245%2.49%, plus the applicable spread, during the swap period. On SeptemberMarch 18, 2017,2019, 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 15 of the Notes to Consolidated Financial Statements.16. 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 September 30, 2017,March 31, 2019, our leverage ratio was 2.551.79 to 1.00 and our interest coverage ratio was 9.3812.08 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.
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Indebtedness under each of the Prudential Agreement and the Credit Agreement is ranked equally in right of payment to all unsecured senior debt.
We were in compliance with all debt covenants as of September 30, 2017.March 31, 2019.
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
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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 March 31, 2019, or at December 31, 2016 or September 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) | ||
March 31, 2019 | December 31, 2018 | |||||||||
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 | $13,897 | $- | $14,234 | $- | ||||||
Other Assets: | ||||||||||
Common stock of unaffiliated foreign public company (a) | 743 | - | 731 | - | ||||||
Interest rate swaps | - | 822 | (b) | - | 4,548 | (c) | ||||
(a) | Original cost basis $0.5 |
(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 recordedChanges in the Shareholders’ Equity sectionfair value of the Consolidated Balance Sheets rather thaninvestment are reported in the Consolidated Statements of Income. When the security is sold or impaired, gains and losses are reported on the Consolidated Statements of Income. Investments are considered to be impaired when a decline in fair value is judged to be other than temporary.
We operate our business in many regions of the world, and currency rate movements can have a significant effect on operating results. Foreign currency instruments are entered into periodically, and consist of foreign currency option contracts and forward contracts that are valued using quoted prices in active markets obtained from independent pricing sources. These instruments are measured using market foreign exchange prices and are recorded in the Consolidated Balance
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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
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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, Generalgeneral and Administrativeadministrative 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, Generalselling, general and Administrativeadministrative 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.Sheets. As of September 30, 2017,March 31, 2019, 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($0.3) million for the ninethree month period ended September 30, 2017March 31, 2019, and $1.2$0.5 million for the ninethree month period ended September 30, 2016.March 31, 2018. Additionally, non-cash interest expenseincome related to the amortization of swap buyouts totaled $0.6$0.1 million for the ninethree month period ended September 30, 2017March 31, 2019 and $0.5$0.2 million offor the ninethree month period ended September 30, 2016.March 31, 2018.
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, | Three months ended March 31, | ||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 |
Derivatives not designated as hedging instruments | Derivatives not designated as hedging instruments | |||||
Foreign currency options (losses)/gains | ($2) | ($218) | ($131) | $237 | ||
Foreign currency options (losses) | $ - | ($37) |
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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 3,7273,688 claims as of September 30, 2017.March 31, 2019.
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 | 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 | 4,299 | 625 | 147 | 3,821 | $437 |
2015 | 3,821 | 116 | 86 | 3,791 | 164 | 3,821 | 116 | 86 | 3,791 | 164 |
2016 | 3,791 | 148 | 102 | 3,745 | 758 | 3,791 | 148 | 102 | 3,745 | 758 |
2017 (as of September 30) | 3,745 | 75 | 57 | 3,727 | $10 | |||||
2017 | 3,745 | 105 | 90 | 3,730 | 55 | |||||
2018 | 3,730 | 152 | 106 | 3,684 | 100 | |||||
2019 (as of March 31) | 3,684 | 13 | 17 | 3,688 | $- |
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 September 30, 2017March 31, 2019 we had resolved, by means of settlement or dismissal, 37,56437,759 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 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 7,7067,709 claims as of September 30, 2017,March 31, 2019, only eighteleven 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
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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.
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17.18. Changes in Shareholders’ Equity
The following table summarizes changes in Shareholders’ Equity:Equity for the period December 31, 2018 to March 31, 2019:
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The following table summarizes changes in Shareholders’ Equity for the period December 31, 2017 to March 31, 2018:
(in thousands, except per share amounts) | Common 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 (b),(c) | - | - | (5,068) | - | - | (327) | (5,395) |
Net income | - | - | 7,662 | - | - | 237 | 7,899 |
Compensation and benefits paid or payable in shares | - | 289 | - | - | - | - | 289 |
Options exercised | - | 147 | - | - | - | - | 147 |
Dividends declared: | |||||||
Class A Common Stock, $0.17 per share | - | - | (5,483) | - | - | - | (5,483) |
Class B Common Stock, $0.17 per share | - | - | - | - | - | - | - |
Cumulative translation adjustments | - | - | - | 17,646 | - | (7) | 17,639 |
Pension and postretirement liability adjustments | - | - | - | (13) | - | - | (13) |
Derivative valuation adjustment | - | - | - | 4,480 | - | - | 4,480 |
March 31, 2018 | $40 | $428,859 | $531,193 | ($113,788) | ($256,876) | $3,150 | $592,578 |
(a) | As described in Note 3, the Company adopted ASC 842,Leases effective January 1, 2019, which resulted in an increase to Retained earnings of less than $0.1 million. | |
(b) | 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. | |
(c) | The Company adopted ASU 2016-16 effective January 1, 2018, which resulted in a $0.5 million increase to Retained earnings. |
18.19. 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 JanuaryJune 2016, an accounting update was issued which requireschanges the way entities recognize impairment of many financial assets by requiring immediate recognition of credit losses expected to present separately in Other comprehensive incomeoccur over their remaining life. We are continuing to evaluate 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
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update is effective for reporting periods beginning after December 15, 2017. We have not determined theexpected impact of this update on our consolidated financial statements.statements and related disclosures. We will adopt the new standard effective January 1, 2020.
In February 2016,August 2018, an accounting update was issued which requires lesseesaims to recognize most leases onimprove the balance sheet. The update may significantly increase reportedoverall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing defined benefit plan disclosures. We do not expect a significant impact to our consolidated assets and liabilities. This accounting update isliabilities, net earnings, or cash flows as a result of adopting this new standard. We plan to adopt the new standard effective for reporting periods beginning after December 15, 2018. We have not determined the impact of this update on our financial statements.January 1, 2020.
In March 2016,August 2018, an accounting update was issued which simplifies several aspects relatedaims to improve the accounting for share-based payment transactions, includingoverall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing fair value measurement disclosures. We are currently evaluating the income tax consequences, statutory tax withholding requirements, and classificationimpact of excess tax benefits and cash paid to a tax authority in lieu of share issuances to employees onthis update. We will adopt 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 onnew standard effective 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:2020.
In October 2016,November 2018, 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 reportedclarifies when transactions between collaborative arrangement participants are in the statementscope of cash flows. This accountingASC 606. The update is effective for reporting periods beginning after December 15, 2017. We do not expect this update to have a material impactalso provides some guidance 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 absencepresentation 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 componentsscope of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This accounting update is effective for reporting periods beginning after December 15, 2017. We expect that the principal effect of adopting this standard will be to reclassify a portion of our pension and postretirement costs to Other expense/(income).
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In May 2017, an accounting update was issued to provide clarity as to when a company must account for changes to stock-based compensation programs as award modifications. Award modifications require an update to the value of the award, resulting in an adjustment to compensation expense. We have not made changes to awards in recent years that would be affected by this update, but such changes are possible in future periods.ASC 606. We are currently evaluating the potential impact of this update. The update isWe will adopt the new standard effective for periods beginning after December 15, 2017.
In August 2017, an accounting update was issued which simplifies the application of hedge accounting to better align the financial reporting of hedging relationships with a company’s risk management activities. We are currently evaluating the potential impact of this update, which must be adopted by January 1, 2019, but may be adopted early.
2020.
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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,“project,” ”may,” “plan,” “project,”look for,” “will,” “should” and variations of such words or similar expressions are intended, butidentify forward-looking statements, which generally are not the exclusive means, to identify forward-looking statements.historical in nature. Because forward-looking statements are subject to certain 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 thesuch forward-looking statements.
There are a number of risks, uncertainties, and other important factors that could cause actual results to differ materially from the forward-looking statements, including, but not limited to:
· | Conditions in the industries in which our Machine Clothing and Albany Engineered Composites segments compete, along with the general risks associated with macroeconomic conditions; |
· | In the Machine Clothing segment, |
· | 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
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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
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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 MC 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. 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 clothing and paper industries will continue to face top line pressure. NonethelessDespite continued market pressure on revenue, 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 restructuring,continuous focus on cost reduction initiatives, 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 capabilities, on high-value aerospace (both commercial and defensedefense) 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 industry. AEC’s largest aerospace customer is the SAFRAN Group and sales to SAFRAN, through ASC, (consisting primarily of fan blades and cases for CFM’s LEAP engine) accounted for approximately 11%19 percent of the Company’s consolidated net sales in 2016. Through2018. AEC, through ASC, AEC develops and sells 3D-woven composite aerospace components to SAFRAN, with the most significant program at present being the production of fan blades and other components for the LEAP engine. AEC (through ASC) 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 components for the Boeing 787, components for the CH-53K helicopter, vacuum waste tanks for Boeing 7-Series aircraft, and missile bodies for Lockheed Martin’s JASSM air-to-surface missiles. AEC is actively engaged in research to develop new applications in theboth commercial and defense aircraft engine airframes, and automotiveairframe markets.
In 2018, approximately 25 percent of AEC sales were related to U.S. government contracts or programs.
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ConsolidatedResults 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 for the first quarter of 2016. In order to assist with comparison of year to date results, the following table presents operational results of the acquired business for the first quarter of 2017:
| ||
Net sales
The following table summarizes our Net sales by business segment:
Three months ended March 31, | |||
(in thousands, except percentages) | 2019 | 2018 | % Change |
Machine Clothing | $144,334 | $141,773 | 1.8% |
Albany Engineered Composites | 107,039 | 81,830 | 30.8% |
Total | $251,373 | $223,603 | 12.4% |
The following table summarizes our netfirst-quarter 2019 Net sales, by business segment:excluding the impact of currency translation effects:
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, Q1 2019 | Decrease due to changes in currency translation rates | Q1 2019 sales on same basis as Q1 2018 | Net sales as reported, Q1 2018 | % Change compared to Q1 2018, excluding currency rate effects |
Machine Clothing | $144,334 | $4,241 | $148,575 | $141,773 | 4.8% |
Albany Engineered Composites | 107,039 | 1,887 | 108,926 | 81,830 | 33.1% |
Total | $251,373 | $6,128 | $257,501 | $223,603 | 15.2% |
Three month comparison
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Nine month comparison
· | Changes in currency translation rates had the effect of decreasing net sales by |
· | Excluding the effect of changes in currency translation rates: | |
· | Net sales increased |
· | Net sales in MC increased |
· | Net sales in AEC increased |
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Gross Profit
The following table summarizes grossGross 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 March 31, | ||
(in thousands, except percentages) | 2019 | 2018 |
Machine Clothing | $74,528 | $66,312 |
Albany Engineered Composites | 17,243 | 11,524 |
Corporate expenses | - | (54) |
Total | $91,771 | $77,782 |
% of Net sales | 36.5% | 34.8% |
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 20172019 gross profit, as compared to the same period in 2016,2018, was principally due to the net effect of the following individually significant items:
· | An increase in MC gross profit, principally due to higher sales and |
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· | An increase in |
Nine month comparison
The decrease in 2017 gross profit, as compared to the same period in 2016, was principally due to the net effect of the following individually significant items:
· |
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 March 31, | ||||||||
(in thousands, except percentages) | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | ||||
Machine Clothing | $30,258 | $28,276 | $92,716 | $90,125 | $29,886 | $31,018 | ||||
Albany Engineered Composites | 10,532 | 8,445 | 28,907 | 27,624 | 7,637 | 9,028 | ||||
Corporate expenses | 10,839 | 10,553 | 32,964 | 32,888 | 13,671 | 12,159 | ||||
Total | $51,629 | $47,274 | $154,587 | $150,637 | $51,194 | $52,205 | ||||
% of Net sales | 23.2 | % | 24.7 | % | 24.3 | % | 26.6 | % | 20.4% | 23.3% |
Three month comparison
The increaseoverall decrease in STG&R expenses in 2017,the first quarter of 2019, compared to the same period in 2016,2018, was principally due to the net effect of the following individually significant items:
· | In MC, revaluation of nonfunctional currency assets and liabilities and resulted in |
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· | In AEC, lower compensation and |
· |
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Nine month comparison
The increase in STG&R expenses in 2017, compared to the same period in 2016, was principally due to the net effect of the following individually significant items:
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 March 31, | ||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 |
Machine Clothing | $4,229 | $3,937 | $13,273 | $12,695 | $4,422 | $4,418 |
Albany Engineered Composites | 3,828 | 2,656 | 9,683 | 8,247 | 3,116 | 3,148 |
Total | $8,057 | $6,593 | $22,956 | $20,942 | $7,538 | $7,566 |
Restructuring Expense
Restructuring ExpenseIn addition to the items discussed above affecting gross profit, and STG&R expenses, operating income was affected by restructuring costs of $0.5 million in the first three months of 2019, and $8.6 million for the same period in 2018.
The following table summarizes restructuring expenses by business segment:
Three months ended September 30, | Nine months ended September 30, | Three months ended March 31, | ||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | ||||
Machine Clothing | $96 | ($212 | ) | $1,012 | $5,921 | $401 | $8,352 | |||
Albany Engineered Composites | 5,407 | 640 | 9,208 | 1,787 | 83 | 221 | ||||
Corporate expenses | - | (102 | ) | - | (55 | ) | - | - | ||
Total | $5,503 | $326 | $10,220 | $7,653 | $484 | $8,573 | ||||
In 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 three months of 2018, we recorded restructuring expense of $8.1 million for severance and outplacement costs for the approximately 50 positions that will be terminated under this plan. Since 2017, we have recorded $12.1 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
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that assessment, additional restructuring charges could be recorded in future periods. Annual cost savings associated with this action has resulted in lower cost of goods sold.
AEC incurred restructuring charges of $9.2 million ininclude expenses for the first ninethree 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 oil2019 and gas industry, which led to non-cash restructuring charges totaling $4.5
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million relating to the impairment of long-lived assets. Other restructuring charges in 2017 principally2018 related to work force reductions in AEC locations in Salt Lake City, Utah and Rochester, New Hampshire.
AEC restructuring expenses in 2016 were principally related to the consolidation of legacy programs into Boerne, Texas.
Machine Clothing restructuring costs for the first nine months of 2017 were principally related to additional costs for restructuring actions taken in 2016. Machine Clothing restructuring costs in 2016 were principally related to plant closure costs in Göppingen, Germany and the cessation of research and development activities at the production facility in Sélestat, France.
In October 2017, the Company announced the initiation of discussions with the local works council regarding a proposal to discontinue operations at its Machine Clothing production facility in Sélestat, France. The consultations are subject to applicable law and are ongoing. At this time, the Company has not recorded any restructuring charge related to this proposal.
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, | Three months ended March 31, | ||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | ||||
Machine Clothing | $42,674 | $40,039 | $119,352 | $112,583 | $44,243 | $26,942 | ||||
Albany Engineered Composites | (9,301 | ) | (4,529 | ) | (32,242 | ) | (14,083 | ) | 9,522 | 2,275 |
Corporate expenses | (11,070 | ) | (10,690 | ) | (33,523 | ) | (33,554 | ) | (13,672) | (12,213) |
Total | $22,303 | $24,820 | $53,587 | $64,946 | $40,093 | $17,004 |
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 March 31, | ||
(in thousands) | 2019 | 2018 |
Interest expense, net | $4,417 | $4,288 |
Other (income)/expense, net | (1,208) | 1,452 |
Income tax expense | 7,476 | 3,365 |
Net income attributable to the noncontrolling interest | 218 | 237 |
Interest Expense, net
Interest expense, net, increased $3.4 million in the first nine months of 20172019, 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.
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Other Expense/Income,(income)/expense, net
The changedecrease in Other expense/(income),/expense, net included the following individually significant items:
Three month comparison
· | For the |
Nine month comparison
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Income Tax
The Company has operations which constitute a taxable presence in 18 countries outside of the United States. AllThe majority of these countries had income tax rates that were beloware above the United States’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 thirdfirst quarter of 20172019 and 20162018 were 20.0%20.3% and 35.8%29.9%, 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 third quarter of 2017 included the following (percentages reflect the effect of each item as a percentage of Income before income taxes):
Significant items that impacted the tax rate in the third quarter of 2016 included the following:
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Nine month comparison
The Company’s2019 effective tax rates for the first nine-month periods of 2017 and 2016 were 30.7% and 35.9% 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 discrete items that may occur in any year but are not consistent from year to year.
Significant items that impacted the 2017 tax rate 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 $1.3 million [-3.6%] tax benefit from an adjustment related to a prior period change in a valuation allowance. | |
· | A $0.2 million | |
Significant items that impacted the |
Significant items that impacted the 2016 tax rate included the following (percentages reflect the effect of each item as a percentage of income excluding the building insurance gain and before income taxes):
· | The income tax rate on continuing operations, excluding discrete items, was |
· | A |
· | A |
Segment Results of Operations
Machine Clothing Segment
Business Environment and Trends
MCMachine Clothing is our primary business segment and accounted for 77%57% of our consolidated revenues during the first ninethree months of 2017.2019. MC 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 the mature markets of Europe and North America.publication grades.
Shifting demand for paper, across different paper grades as well as across geographical regions, continues to driveWhile 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
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well-positioned in these 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,
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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.
We have incurred significant restructuring charges in recent periods as we reduced MC 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, | |||||||
(in thousands, except percentages) | 2017 | 2016 | 2017 | 2016 | ||||
Net sales | $150,694 | $143,248 | $440,093 | 437,445 | ||||
Gross profit | 73,028 | 68,104 | 213,081 | 208,628 | ||||
% of net sales | 48.5 | % | 47.5 | % | 48.4 | % | 47.7 | % |
STG&R expenses | 30,258 | 28,276 | 92,716 | 90,125 | ||||
Operating income | 42,674 | 40,039 | 119,352 | 112,583 |
Three months ended March 31, | ||
(in thousands, except percentages) | 2019 | 2018 |
Net sales | $144,334 | $141,773 |
Gross profit | 74,528 | 66,312 |
% of Net sales | 51.6% | 46.8% |
STG&R expenses | 29,886 | 31,018 |
Operating income | 44,243 | 26,942 |
Net Sales
Three month comparison
Nine month comparison
· | Net |
· | Changes in currency translation rates had the effect of decreasing |
· |
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Gross Profit
Three month comparison
· | The increase in MC |
Nine month comparison
· |
Operating Income
Three month comparison
Nine month comparisonThe increase in operating income was principally due to the net effect of the following individually significant items:
· |
· | STG&R expenses decreased $1.1 million principally due to |
· | Restructuring charges were $0.4 million in the first-quarter of 2019, compared to $8.4 million in the same period in 2018. |
Albany Engineered Composites Segment
Business Environment and Trends
The Albany Engineered Composites (AEC)AEC segment, including Albany Safran Composites, LLC (ASC), in which our customer, the SAFRAN Group, owns a 10 percent noncontrolling interest, provides highly engineered advanced composite structures to customers primarily in the aerospace (both commercial and defense industries.defense) industry. 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. LEAP engines are currently used on the Boeing 737 Max, Airbus A320neo and COMAC aircraft. Other significant AEC programs include components for the F-35, Joint Strike Fighter, fuselage frameframes for the Boeing 787, components for the Boeing 787,CH53-K helicopter, and the fan case for the GE9X engine. The AEC segment also includes
A number of countries, including theUnited States, have recently issued orders grounding Boeing 737 Max 8 and/or Max 9 aircraft. If these recentgroundings cause a decrease in demand for, or production of, this aircraft, it could have an adverse impact ondemand for LEAP engines, which could in turn have an adverse impact on demand for our LEAP engineparts. Based on recent communications by Boeing and the Company’s April 2016 acquisition of Harris Corporation’s composite aerostructures business for cash of $187 million, plus the assumption of certain liabilities.SAFRAN Group, we are currently not projecting any change to our production forecast.
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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 | ) |
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Three months ended March 31, | ||
(in thousands, except percentages) | 2019 | 2018 |
Net sales | $107,039 | $81,830 |
Gross profit | 17,243 | 11,524 |
% of Net sales | 16.1% | 14.1% |
STG&R expenses | 7,637 | 9,028 |
Operating income/(loss) | 9,522 | 2,275 |
Net Sales
Three month comparison
The increase in |
Nine month comparison
Net sales increased $67.5 million in 2017,was principally due to the net effect of the following individually significant items:
· |
· |
Gross Profit
Three month comparison
Nine month comparison
The increase in gross profit of $5.7 million was principally due to the increase in Net sales, as described above, improved labor productivity, and the effect of changes in the estimated profitability of long-term contracts which increased Gross profit by $0.6 million in the first quarter of 2019, compared to a reduction of $0.7 million in 2018.
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 43 and 4150 percent of segment revenue for each of the first ninethree months of 20172019 and 2016, respectively.2018.
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.
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In the second quarterChanges in contract estimates resulted in an increase to gross profit of 2017, the Company recorded a charge 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 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. During the second quarter of 2017, the Company revised its estimate of the profitability 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 million in the second quarter of 2015 for this program, including $11$0.6 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 secondfirst quarter of 2017, the Company revised its estimate of the profitability of this2019. Changes in other 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 nine monthsquarter of 2017, and decreased2018 resulted in a decrease to gross profit by $1.2 million for the same period of 2016.$0.7 million.
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The value of fixed price contracts increased significantly due to the acquisition. The table below provides a summary 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 LossIncome/(Loss)
Three month comparison
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Nine month comparisonThe increase in operating income of $7.3 million in the first quarter of 2019 was principally due to the net effect of the following individually significant items:
· |
· |
Liquidity and Capital Resources
Cash Flow Summary
Three months ended March 31, | ||
(in thousands) | 2019 | 2018 |
Net income | $29,408 | $7,899 |
Depreciation and amortization | 17,956 | 20,948 |
Changes in working capital (a) | (7,017) | (37,264) |
Changes in other noncurrent liabilities and deferred taxes | (2,744) | (2,405) |
Other operating items | (13,037) | (8,125) |
Net cash provided by/(used in) operating activities | 24,566 | (18,947) |
Net cash used in investing activities | (20,820) | (15,800) |
Net cash used in financing activities | (15,139) | (2,458) |
Effect of exchange rate changes on cash and cash equivalents | 1,023 | 4,904 |
Decrease in cash and cash equivalents | (10,370) | (32,301) |
Cash and cash equivalents at beginning of year | 197,755 | 183,727 |
Cash and cash equivalents at end of period | $187,385 | $151,426 |
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 |
(a) | Includes Accounts receivable, Contract assets, Inventories, and Accounts payable. |
Operating activities
Cash flow fromprovided by operating activities was $21.7$24.6 million for the first ninethree months of 2017, compared to $53.22019, cash flow used by operating activities was $18.9 million for the first three months of 2018. The net increase in cash provided by operating activities for the same period of 2016. The decrease in 20172019 was principally due to higher levelsincreased profitability in both MC and AEC, and improved management of Accounts receivable and Inventories in the AEC segment, reflecting growth in key programs. working capital that resulted from a number of improvement initiatives.
Cash paid for income taxes was $21.7$8.0 million and $18.2$8.2 million for the first ninethree months of 20172019 and 2016,2018, respectively.
At September 30, 2017,March 31, 2019, we had $153.5$187.4 million of cash and cash equivalents, of which $140.8$157.7 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
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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 ninethree months were $62.3$20.8 million in 20172019 and $51.3$15.8 million in 2016. The increase in 2017 was primarily related to the ramp in AEC programs.2018.
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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.
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 September 30, 2017March 31, 2019 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 September 30, 2017.March 31, 2019.
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$491 million of borrowings were outstanding as of September 30, 2017.March 31, 2019. 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,March 18, 2019, the spread was 1.500%1.375%. The spread was based on a pricing grid, which ranged from 1.250% to 1.750%, based on our leverage ratio. Based on our maximum leverage ratio and our Consolidated EBITDA, and without modification to any other credit agreements, as of September 30, 2017,March 31, 2019, we would have been able to borrow an additional $110$194 million under the Agreement.
On May 6, 2016, we terminated our interest rate swap agreements that had effectively fixed the interest rate on up to $120 million of revolving credit borrowings, in order to enter into a new interest rate swap with a greater notional amount, and the same maturity as the Credit Agreement. We paid $5.2 million to terminate the swap agreements and that cost will be amortized into interest expense through June 2020.
On May 9, 2016, we entered into interest rate hedges for the period May 16, 2016 through March 16, 2021. These transactions have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $300 million of indebtedness drawn under the Credit Agreement at the rate of 1.245% during the period. Under the terms of these transactions, we pay the fixed rate of 1.245% and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly
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calculation date, which on September 18, 2017 was 1.245%, plus the applicable spread, during the swap period. On September 18, 2017, the all-in-rate on the $300 million of debt was 2.745%.
As of September 30, 2017, our leverage ratio was 2.55 to 1.00 and our interest coverage ratio was 9.38 to 1.00. We may purchase our Common Stock or pay dividends to the extent our leverage ratio remains at or below 3.50 to 1.00, and may make acquisitions with cash provided our leverage ratio would not exceed 3.50 to 1.00 after giving pro forma effect to any such acquisition.
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 September 30, 2017,March 31, 2019, 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
This Form 10-Q contains certain non-GAAP metrics,measures, including: net sales, and percent change in net sales, excluding the impact of currency ratetranslation effects (for each segment and the Company ason a whole)consolidated basis); EBITDA and Adjusted EBITDA (for each segment and the Companyon a consolidated basis represented in dollars or as a whole)percentage of net sales); net debt;Net debt and net incomechanges in Net debt excluding reductions due to the effect of changes to the treatment of leases due to the adoption of ASC 842; and Adjusted earnings per share attributable to the Company, excluding adjustments.(or Adjusted EPS). 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.
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Presenting Net sales and increases or decreases in Net sales, after currency effects are excluded, can give management and investors insight into underlying sales trends. Net sales, or percent changes in net sales, excluding currency rate effects, are calculated by converting amounts reported in local currencies into U.S. dollars at the exchange rate of a prior period. These amounts are then compared to the U.S. dollar amount as reported in the current period.
EBITDA, Adjusted EBITDA and Adjusted EPS are performance measures that relate to the Company’s continuing operations. 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. The Company calculates EBITDA by removing the following from Net income: Interest expense net, Income tax expense, Depreciation and amortization. Adjusted EBITDA is calculated by: adding to EBITDA costs associated with restructuring, and inventory write-offs associated with discontinued businesses; charges and credits related to pension plan settlements; adding (or subtracting) revaluation losses (or gains); subtracting (or adding) gains (or losses) from the sale of buildings or investments; subtracting insurance recovery gains in excess of previously recorded losses; and subtracting (or adding) Income (or loss) attributable to the non-controlling interest in Albany Safran Composites (ASC). Adjusted EBITDA may also be presented as a percentage of net sales by dividing it by net sales. 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 incomeearnings per share excluding adjustments, are performance measures that relate to the Company’s continuing operations.
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. That amount is then compared to the U.S. dollar amount reported in the current period. The Company calculates EBITDA by removing the following from Net income: Interest expense net, Income tax
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expense, Depreciation and amortization. Adjusted EBITDA is calculated by: adding to EBITDA costs associated with restructuring, inventory write-offs associated with discontinued businesses and pension settlement charges; 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; 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,(Adjusted EPS) is calculated by adding to (or subtracting from) net income attributable to the Company per share, on an after-tax basis: restructuring charges; charges and credits related to pension plan settlements and curtailments; 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,Adjusted EPS, 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.
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The following tables show the calculation of EBITDA and Adjusted EBITDA:
Three months ended March 31, 2019 | ||||
(in thousands) | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company |
Operating income/(loss) (GAAP) | $44,243 | $9,522 | ($13,672) | $40,093 |
Interest, taxes, other income/(expense) | - | - | (10,685) | (10,685) |
Net income/(loss) (GAAP) | 44,243 | 9,522 | (24,357) | 29,408 |
Interest expense, net | - | - | 4,417 | 4,417 |
Income tax expense | - | - | 7,476 | 7,476 |
Depreciation and amortization expense | 5,919 | 10,902 | 1,135 | 17,956 |
EBITDA (non-GAAP) | 50,162 | 20,424 | (11,329) | 59,257 |
Restructuring expenses, net | 401 | 83 | - | 484 |
Foreign currency revaluation (gains)/losses | (32) | 235 | (2,036) | (1,833) |
Pretax income attributable to the noncontrolling interest in ASC | - | (290) | - | (290) |
Adjusted EBITDA (non-GAAP) | $50,531 | $20,452 | ($13,365) | $57,618 |
Three months ended March 31, 2018 | ||||
(in thousands) | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company |
Operating income/(loss) (GAAP) | $26,942 | $2,275 | ($12,213) | $17,004 |
Interest, taxes, other income/(expense) | - | - | (9,105) | (9,105) |
Net income/(loss) (GAAP) | 26,942 | 2,275 | (21,318) | 7,899 |
Interest expense, net | - | - | 4,288 | 4,288 |
Income tax expense | - | - | 3,365 | 3,365 |
Depreciation and amortization expense | 8,362 | 11,156 | 1,430 | 20,948 |
EBITDA (non-GAAP) | 35,304 | 13,431 | (12,235) | 36,500 |
Restructuring expenses, net | 8,352 | 221 | - | 8,573 |
Foreign currency revaluation (gains)/losses | 1,517 | 186 | 687 | 2,390 |
Pretax income attributable to the noncontrolling interest in ASC | - | (343) | - | (343) |
Adjusted EBITDA (non-GAAP) | $45,173 | $13,495 | ($11,548) | $47,120 |
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 |
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Three months ended September 30, 2016 | ||||||||
(in thousands) | Machine Clothing | Albany Engineered Composites | Corporate expenses and other | Total Company | ||||
Operating income/(loss) (GAAP) | $40,039 | ($4,529 | ) | ($10,690 | ) | $24,820 | ||
Interest, taxes, other income/expense | - | - | (11,411 | ) | (11,411 | ) | ||
Net income/(loss) (GAAP) | 40,039 | (4,529 | ) | (22,101 | ) | 13,409 | ||
Interest expense, net | - | - | 3,681 | 3,681 | ||||
Income tax expense | - | - | 7,488 | 7,488 | ||||
Depreciation and amortization | 9,032 | 8,027 | 1,386 | 18,445 | ||||
EBITDA (non-GAAP) | 49,071 | 3,498 | (9,546 | ) | 43,023 | |||
Restructuring expenses, net | (212 | ) | 640 | (102 | ) | 326 | ||
Foreign currency revaluation (gains)/losses | 86 | - | (308 | ) | (222 | ) | ||
Pretax income attributable to the noncontrolling interest in ASC | - | (428 | ) | - | (428 | ) | ||
Adjusted EBITDA (non-GAAP) | $48,945 | $3,710 | ($9,956 | ) | $42,699 |
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.
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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 |
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. Beginning in 2019, the Company no longer includes discrete tax adjustments or the effect of changes in income tax rates in its calculation of Adjusted EPS. Prior year results have been revised to conform to this calculation.
The following tables show the earnings per share effect of certain income and expense items:
Three months ended March 31, 2019 | Pre tax | Tax | After tax | Per share |
(in thousands, except per share amounts) | Amounts | Effect | Effect | Effect |
Restructuring expenses, net | $484 | $142 | $342 | $0.01 |
Foreign currency revaluation (gains)/losses | (1,833) | (539) | (1,294) | (0.04) |
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Three months ended March 31, 2018 | Pre tax | Tax | After tax | Per share |
(in thousands, except per share amounts) | Amounts | Effect | Effect | Effect |
Restructuring expenses, net | $8,573 | $2,786 | $5,787 | $0.18 |
Foreign currency revaluation (gains)/losses | 2,390 | 777 | 1,613 | 0.05 |
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 |
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 |
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 |
* 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:EPS:
Three months ended March 31, | ||
Per share amounts (Basic) | 2019 | 2018 |
Earnings per share (GAAP) | $0.90 | $0.24 |
Adjustments: | ||
Restructuring expenses, net (after-tax) | 0.01 | 0.18 |
Foreign currency revaluation (gains)/losses (after-tax) | (0.04) | 0.05 |
Adjusted Earnings per share | $0.87 | $0.47 |
For the three month periods ending: | ||||||||
(in thousands, except percentages) | September 30, 2017 | June 30, | March 31, | September 30, 2016 | ||||
AEC Adjusted EBITDA (non-GAAP) | $8,125 | ($8,586 | ) | $5,188 | $3,710 | |||
AEC Net sales (GAAP) | 71,447 | 68,999 | 56,450 | 48,024 | ||||
AEC Adjusted EBITDA margin (non-GAAP) | 11.4 | % | -12.4 | % | 9.2 | % | 7.7 | % |
* Includes chargeNet debt is, in the opinion of $15.8 million in Q2 2017 for revisions in estimated profitabilitythe 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. The Company calculates Net debt by subtracting Cash and cash equivalents from Total debt. Total debt is calculated by adding Long-term debt, Current maturities of two AEC contracts.long-term debt, and Notes and loans payable, if any.
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The following table contains the calculation of net debt:
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The following table contains the reconciliation of forecasted full-year 2019 Adjusted EBITDA and Adjusted EPS (non-GAAP measures) to comparable GAAP measures:
Total Company | Machine Clothing | |||
Forecast of full year 2019 Adjusted EBITDA (in millions) | Low | High | Low | High |
Net income attributable to the Company (GAAP) | $99 | $109 | $173 | $181 |
Interest expense, net | 17 | 16 | - | - |
Income tax expense | 40 | 41 | - | - |
Depreciation and amortization | 70 | 75 | 22 | 24 |
EBITDA (non-GAAP) | 226 | 241 | 195 | 205 |
Restructuring expenses (a) | 1 | 1 | - | - |
Foreign currency revaluation gains/(losses) (a) | (2) | (2) | - | - |
Pretax income attributable to the noncontrolling interest | - | - | - | - |
Adjusted EBITDA (non-GAAP) | $225 | $240 | $195 | $205 |
Total Company | ||||
Forecast of full year 2019 Adjusted Earnings Per Share (b) | ||||
Per share amounts- Basic (b) | Low | High | ||
Earnings per share (GAAP) | $3.08 | $3.38 | ||
Restructuring expenses, net (a) | 0.01 | 0.01 | ||
Foreign currency revaluation gains/(losses) (a) | (0.04) | (0.04) | ||
Adjusted Earnings per share (non-GAAP) | $3.05 | $3.35 |
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 2016,2018, and as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2016,2018, we identified a material weaknessesweakness in our internal control over financial reporting as described below:
The Company did not establishconduct an effective reporting lines, appropriate authorities, responsibilitiesrisk assessment process over the design and monitoring activities forimplementation of the systems development plan affecting the 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 entityprocess and process level controls over initiation, authorization, processing and recordingimpacted by the adoption of ASC 606,Revenue from contracts with customers, for certain revenue transactions and safeguarding of assets managed byin the Company’s Machine Clothing business that are recognized at a third party service provider at the Japan location.point-in-time. In addition, the Company did not have effective management reviewreconciliation controls over the assessment of a potential reserve for a loss contract dueunbilled accounts receivable and inventory accounts related to a failure to understand and document the design requirements and operation of an effective management review control.those point-in-time transactions.
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Beginning inDuring the fourth quarter of 2016,2018, we immediately commenced active steps towards remediating the material weaknesses.weakness. These efforts include:
(a) Improving our risk assessment process related to pre-production and post-implementation testing and documentation of conclusions for significant systems development changes affecting financial reporting and internal controls; and,
(b)Revising our financial reporting processes and related reconciliation controls over the unbilled accounts receivable and inventory accounts related to those point-in-time transactions.
We are working to remediate the material weaknessesweakness as quickly and efficiently as possible and believe that such efforts will effectively remediate the reported material weaknessesweakness by the end of 2017.2019. However, the material weaknessesweakness 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 weaknessesweakness 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.
|
There wereIn the first quarter of 2019, the Company implemented additional controls related to accounting for leases and the Company’s adoption of ASC 842, Leases.
Other than the items noted above, no changes occurred 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 has materially affected, or areis reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
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, 2016.2018. For discussion of risk factors, refer to Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We made no share purchases during the thirdfirst quarter of 2017.2019. We remain authorized by the Board of Directors to purchase up to 2 million shares of our Class A Common Stock.
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Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Exhibit No. | Description |
10 (u)(ii) | Second amendment, dated March 15, 2019, to amend the employment agreement between the Company and Olivier Jarrault. |
10 (l)(xii) | Form of Restricted Stock Unit Award for units granted on April 1, 2019. |
10 (n)(iii) | Form of Incentive Award granted April 1, 2019. |
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 |
(i) | Consolidated Statements of Income for the three |
(ii) | Consolidated Statements of Comprehensive Income/(Loss) for the three |
(iii) | Consolidated Balance Sheets |
(iv) | Consolidated Statements of Cash Flows for the three |
(v) | Notes to Consolidated Financial Statements. |
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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.
The following exhibit list was included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. However, certain hyperlinks in that filing were nonfunctioning. Accordingly, in accordance with Instruction 2 to Rule 105(d) of Regulation S-T, we have included below that exhibit list the appropriate [corrected] hyperlinks.
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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)
ALBANY INTERNATIONAL CORP. | |
(Registrant) |
Date: October 31, 2017May 1, 2019
By | /s/ | |
Chief Financial Officer and Treasurer | ||
(Principal Financial Officer) |
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