Albany International(AIN) - 2019 Q4 - Annual Report

Part I Item 1. Business Albany International Corp. operates through two primary segments: Machine Clothing (MC), supplying consumable belts, and Albany Engineered Composites (AEC), providing advanced composite structures for aerospace - The company operates in two business segments: Machine Clothing (MC) and Albany Engineered Composites (AEC)[8] - The MC segment is the world's largest manufacturer of paper machine clothing, with approximately twice the sales of its nearest competitor[8] - The AEC segment's largest customer is the SAFRAN Group, with sales for the LEAP engine program accounting for about 22% of the company's consolidated net sales in 2019[8] Net Sales by Segment (2017-2019, in thousands) | Segment | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Machine Clothing | $601,254 | $611,858 | $590,357 | | Albany Engineered Composites | $452,878 | $370,621 | $273,360 | | Consolidated Total | $1,054,132 | $982,479 | $863,717 | International Operations The company maintains a significant global manufacturing presence, exposing it to various international trade and financial risks - The Machine Clothing segment has manufacturing facilities in Brazil, Canada, China, France, Italy, Mexico, South Korea, Sweden, the UK, and the US[10] - The AEC segment has manufacturing facilities in the US, France, Mexico, and Germany[10] Working Capital, Customers, Seasonality, and Backlog Working capital is influenced by competitive payment terms, while AEC backlog decreased in 2019 due to the Boeing 737 MAX grounding Segment Backlog (as of Dec 31, in millions) | Segment | 2019 | 2018 | | :--- | :--- | :--- | | Machine Clothing (MC) | $165.6 | $170.5 | | Albany Engineered Composites (AEC) | $288.1 | $393.3 | - The decrease in AEC's backlog reflects the impact of the Boeing 737 MAX grounding[11] - Approximately 95% of AEC backlog and all of MC backlog is expected to be invoiced within the next 12 months[11] Research and Development and Technology The company invests in R&D to maintain technological leadership, utilizing proprietary technologies and protecting intellectual property Company-Funded Research Expenses (in millions) | Year | Amount | | :--- | :--- | | 2019 | $26.9 | | 2018 | $29.8 | | 2017 | $30.7 | - The company's active intellectual property portfolio contains over 2,400 patents, with approximately 250 new patents granted each year[15] Competition The company holds an estimated 30% global market share in MC, competing on technology and price, while AEC competes on performance and price - The company estimates its worldwide market share in paper machine clothing was approximately 30% in 2019[17] - The two largest competitors in the MC segment each have a market share approximately half of Albany's[17] - In the AEC market, the primary competitive factors are product performance and price, with a key focus on achieving lower weight to improve fuel efficiency[19] Item 1A. Risk Factors The company faces diverse material risks, including industry pressures, program delays, supply chain disruptions, and legal proceedings Industry and Market Risks The company is exposed to risks from paper industry consolidation and declining demand for certain paper grades, impacting the MC segment - Consolidation in the paper industry and the decline in demand for newsprint and printing paper due to digital media negatively impact the MC segment[25] - The grounding of the Boeing 737 MAX aircraft poses a risk to the AEC segment, as it could lead to decreased demand for LEAP engines and the company's components for them[25] AEC Segment-Specific Risks The AEC segment faces significant execution risks on new programs, financial risks from long-term contracts, and reliance on MC for funding - AEC faces execution risk related to the ramp-up of key programs, including components for the F-35, Boeing 787, and CH-53K helicopter[25] - Long-term, fixed-price contracts pose risks related to inaccurate cost estimates, which can reduce profitability or lead to losses. A charge of $15.8 million was recorded in Q2 2017 due to revised profitability estimates on the BR725 and A380 programs[28] - AEC's growth is dependent on the MC segment's ability to generate cash to fund necessary investments in equipment and development[27] Customer and Supplier Risks The company faces significant customer concentration, particularly with Safran for AEC, and supply constraints due to limited raw material suppliers - One customer, Safran, accounted for about 50% of AEC's Net sales in 2019, creating significant customer concentration risk[34] - The top ten customers in the MC segment accounted for a significant portion of its Net sales in 2019[34] - There are a limited number of suppliers for key raw materials in both segments, such as polymer fiber for MC and carbon fiber/resin for AEC, creating potential for supply disruptions[35] Operational and Financial Risks Operational risks include business interruptions and cybersecurity threats, while financial risks stem from currency fluctuations, inflation, and debt obligations - Production of key AEC programs like LEAP, F-35, and Boeing 787 components is concentrated in a few facilities, increasing risk from natural disasters[38] - As of December 31, 2019, the company had $424 million in outstanding long-term debt, with a leverage ratio of 1.35 to 1[43] - As of December 31, 2019, net liabilities under defined benefit pension plans were $15.5 million, and the liability for unfunded postretirement welfare benefits was $54.4 million[44] Corporate and Shareholder Risks The Standish Family's significant voting power influences company affairs, and future dividend payments are not guaranteed - The Standish Family holds shares entitling them to approximately 34.5% of the combined stockholder votes, giving them considerable influence over management and corporate transactions[51] - The company may not pay cash dividends in the future, and the ability to do so depends on financial position, results of operations, and other factors determined by the board[52] Item 2. Properties The company operates approximately 5.6 million square feet of manufacturing facilities globally, with adequate capacity for anticipated 2020 production - The company's operating facilities total approximately 2.0 million square feet in the U.S. and 3.6 million square feet internationally[55] - The majority of the company's facility space, both in the U.S. and internationally, is owned rather than leased[55] Part II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's Class A Common Stock trades on the NYSE, with a 5-year cumulative total return outperforming benchmarks, and an unused 2 million share repurchase authorization Quarterly Cash Dividends and Class A Stock Prices (2019) | Quarter Ended | Cash Dividends per Share | High Price | Low Price | | :--- | :--- | :--- | :--- | | March 31 | $0.18 | $78.45 | $60.82 | | June 30 | $0.18 | $82.91 | $69.29 | | September 30 | $0.18 | $91.51 | $78.41 | | December 31 | $0.19 | $90.30 | $75.92 | - The company's 5-year cumulative total return of 214.02% outperformed the Russell 2000 (148.49%) and a custom peer group (185.25%)[60][62] - A board authorization from August 2006 to purchase up to 2 million shares of Class A Common Stock remains active, with no shares purchased under it to date[63] Item 6. Selected Financial Data This section provides a five-year summary of key financial data, including net sales, operating income, net income, EPS, total assets, and long-term debt Selected Financial Data (2015-2019, in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $1,054,132 | $982,479 | $863,717 | $779,839 | $709,868 | | Operating income | $193,576 | $137,408 | $78,676 | $94,132 | $67,128 | | Net income attributable to the Company | $132,398 | $82,891 | $33,111 | $52,733 | $57,279 | | Diluted EPS | $4.10 | $2.57 | $1.03 | $1.64 | $1.79 | | Total assets | $1,474,368 | $1,417,992 | $1,361,198 | $1,263,433 | $1,009,562 | | Long-term debt | $424,009 | $523,707 | $514,120 | $432,918 | $265,080 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting MC as a cash generator and AEC as a growth driver, with consolidated net sales up 7.3% in 2019 and strong operating cash flow Business Environment Overview and Trends The MC segment serves as a stable cash generator, while the AEC segment drives growth through high-value aerospace applications like the CFM LEAP engine - The MC segment is the company's long-established core business and primary cash generator, focusing on growth in packaging and tissue grades to offset declines in publication grades[74] - The AEC segment provides significant growth potential, with its largest program being the supply of fan blades and cases for CFM's LEAP engine[74] Consolidated Results of Operations Consolidated net sales increased 7.3% in 2019, driven by AEC growth, leading to improved gross profit and operating income, with a 25.2% effective tax rate Consolidated Net Sales (2018 vs. 2019, in thousands) | Metric | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,054,132 | $982,479 | 7.3% | - Excluding currency effects, 2019 consolidated net sales increased 8.8%, with AEC sales growing 23.4% while MC sales were flat[77] Consolidated Gross Profit (2018 vs. 2019, in thousands) | Metric | 2019 | 2018 | % of Net Sales (2019) | % of Net Sales (2018) | | :--- | :--- | :--- | :--- | :--- | | Gross Profit | $397,701 | $349,749 | 37.7% | 35.6% | Consolidated Operating Income (2018 vs. 2019, in thousands) | Metric | 2019 | 2018 | | :--- | :--- | | Operating Income | $193,576 | $137,408 | Segment Results of Operations MC operating income increased due to lower costs, while AEC operating income surged from sales growth and favorable contract adjustments Machine Clothing (MC) Segment Performance (in thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net sales | $601,254 | $611,858 | | Gross profit | $309,641 | $297,416 | | Operating income | $191,965 | $169,836 | Albany Engineered Composites (AEC) Segment Performance (in thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net sales | $452,878 | $370,621 | | Gross profit | $88,060 | $52,550 | | Operating income/(loss) | $55,520 | $16,647 | - AEC operating income in 2019 was favorably impacted by a net $10.8 million adjustment to the estimated profitability of long-term contracts, compared to a negative adjustment of $2.0 million in 2018[129] Liquidity and Capital Resources The company demonstrated strong liquidity in 2019, with operating cash flow increasing to $200.4 million, enabling debt reduction and maintaining significant credit availability Cash Flow Summary (in thousands) | Activity | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $200,352 | $132,485 | $64,216 | | Net cash used in investing activities | ($98,748) | ($82,886) | ($87,637) | | Net cash (used in)/provided by financing activities | ($100,307) | ($27,258) | $12,867 | - Capital expenditures totaled $68.0 million in 2019, down from $82.9 million in 2018[137] - As of Dec 31, 2019, the company had $424 million in borrowings outstanding under its $685 million credit facility and was in compliance with all debt covenants[138] Non-GAAP Measures The company provides non-GAAP metrics like Adjusted EBITDA and Adjusted EPS to offer additional insight into core operational performance, showing improvements in 2019 Adjusted EBITDA Reconciliation (Consolidated, in thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net income (GAAP) | $133,383 | $83,019 | $32,585 | | Interest, taxes, depr. & amort. | $132,545 | $129,388 | $111,170 | | EBITDA (non-GAAP) | $265,928 | $212,407 | $143,755 | | Restructuring, revaluation, & other adjustments | ($494) | $16,526 | $25,619 | | Adjusted EBITDA (non-GAAP) | $265,434 | $228,933 | $169,374 | Adjusted EPS Reconciliation | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Earnings per share (GAAP) | $4.10 | $2.57 | $1.03 | | Adjustments, after tax | $0.01 | $0.37 | $0.50 | | Adjusted earnings per share (non-GAAP) | $4.11 | $2.94 | $1.53 | Net Debt Calculation (in thousands) | As of December 31, | 2019 | 2018 | | :--- | :--- | :--- | | Total debt | $424,029 | $524,931 | | Less: Cash and cash equivalents | $195,540 | $197,755 | | Net debt | $228,489 | $327,176 | Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from foreign currency and interest rates, which it manages using financial instruments - The company is subject to foreign currency risk on approximately $570.2 million of net assets in non-U.S. operations. A hypothetical 10% adverse change in exchange rates could cause a $57.0 million loss in fair value[162] - The company has $74.0 million in variable rate debt. A one percentage point increase in interest rates would increase annual interest expense by $0.7 million[163] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2017-2019 and the independent auditor's unqualified report Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting, identifying critical audit matters related to revenue recognition - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[166][171] - Critical audit matters included evaluating cost estimates for AEC's long-term contracts and the timing of revenue recognition for the MC segment's point-in-time sales[170] Consolidated Financial Statements The consolidated financial statements show 2019 net sales of $1.054 billion, net income of $132.4 million, diluted EPS of $4.10, and total assets of $1.474 billion Key Financial Statement Highlights (Year Ended Dec 31, 2019, in thousands) | Metric | Amount | | :--- | :--- | | Net Sales | $1,054,132 | | Gross Profit | $397,701 | | Operating Income | $193,576 | | Net Income Attributable to Company | $132,398 | | Balance Sheet (as of Dec 31, 2019) | | | Total Assets | $1,474,368 | | Total Liabilities | $771,679 | | Total Equity | $702,689 | Notes to Consolidated Financial Statements The notes detail critical accounting policies, segment data, pension liabilities, and legal contingencies, including the 2019 acquisition of CirComp GmbH - The company adopted ASC 606 (Revenue) in 2018 and ASC 842 (Leases) in 2019, with both adoptions impacting the financial statements[183][196] - On November 20, 2019, the company acquired CirComp GmbH for $32.4 million, adding $17.3 million in goodwill and $10.0 million in amortizable intangible assets[271][310] - The company is a defendant in 3,708 asbestos-related claims as of December 31, 2019. It anticipates that the ultimate resolution will not have a material adverse effect due to meritorious defenses and approximately $140 million of remaining insurance coverage[294][295] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, having remediated prior material weaknesses - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[319] - Management concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO 2013 framework[322] - Material weaknesses identified in 2018 related to controls over certain point-in-time revenue transactions were successfully remediated as of December 31, 2019[323][324] Part III Item 10. Directors, Executive Officers and Corporate Governance This section incorporates information from the 2020 Proxy Statement, noting the appointment of A. William Higgins as President and CEO on January 20, 2020 - On January 20, 2020, A. William Higgins was appointed President and Chief Executive Officer, succeeding Olivier M. Jarrault[328] - Information regarding directors, the audit committee financial expert, and the code of ethics is incorporated by reference from the 2020 Proxy Statement[327][328] Item 11. Executive Compensation All information regarding executive and director compensation is incorporated by reference from the company's 2020 Proxy Statement - Detailed information on executive and director compensation is incorporated by reference from the 2020 Proxy Statement[329] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference, with a table detailing equity compensation plans and securities available for future issuance Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted Avg. Exercise Price (b) | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 11,950 | $18.93 | 1,115,472 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 11,950 | $18.93 | 1,115,472 | Item 13. Certain Relationships, Related Transactions and Director Independence All information concerning related party transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2020 Proxy Statement[333] Item 14. Principal Accountant Fees and Services All information regarding principal accountant fees and services is incorporated by reference from the 2020 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2020 Proxy Statement[334] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including corporate documents, compensation plans, and required certifications - Lists key corporate documents such as the Certificate of Incorporation, Bylaws, and the $685 Million Five-Year Revolving Credit Facility Agreement[335] - Includes various executive compensation and incentive plan documents, such as the 2011 and 2017 Incentive Plans, severance agreements, and employment agreements for key executives[335][336] - Contains required filings such as CEO/CFO certifications (Rules 13a-14(a) and 13a-14(b)), consent of the independent registered public accounting firm, and a list of company subsidiaries[336]