Albany International(AIN) - 2020 Q2 - Quarterly Report

Part I - Financial Information Financial Statements The company's financial statements for H1 2020 show decreased net sales and income, primarily due to the Albany Engineered Composites segment, with stable assets and reduced operating cash flow, following CECL adoption Consolidated Statements of Income For the six months ended June 30, 2020, net sales decreased to $461.8 million from $525.3 million in 2019, with net income falling to $41.5 million from $63.2 million, resulting in diluted EPS of $1.28 Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $461,754 | $525,321 | -12.1% | | Gross profit | $192,452 | $196,953 | -2.3% | | Operating income | $92,321 | $94,318 | -2.1% | | Net income attributable to the Company | $41,463 | $63,244 | -34.4% | | Diluted EPS | $1.28 | $1.96 | -34.7% | - Dividends declared per share increased to $0.38 for the first six months of 2020, compared to $0.36 for the same period in 2019[6] Consolidated Balance Sheets As of June 30, 2020, total assets were $1.46 billion, a slight decrease from $1.47 billion at year-end 2019, with cash increasing to $204.0 million and total liabilities decreasing to $755.8 million Balance Sheet Summary (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $650,480 | $618,334 | | Total assets | $1,461,960 | $1,474,368 | | Total current liabilities | $177,202 | $202,719 | | Total liabilities | $755,802 | $771,679 | | Total equity | $706,158 | $702,689 | Consolidated Statements of Cash Flows For H1 2020, net cash provided by operating activities was $44.0 million, a significant decrease from $83.1 million in 2019, with net cash used in investing activities at $22.0 million Cash Flow Summary - Six Months Ended June 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $44,034 | $83,096 | | Net cash used in investing activities | ($22,017) | ($35,453) | | Net cash used in financing activities | ($8,224) | ($30,106) | | Increase in cash and cash equivalents | $8,497 | $17,478 | Notes to Consolidated Financial Statements Notes detail accounting policies, CECL adoption, segment performance, CirComp acquisition, restructuring, and contingencies, with AEC revenue impacted by the LEAP program - Effective January 1, 2020, the company adopted ASC 326 (CECL), which resulted in a pre-tax increase in credit loss reserves of $1.8 million and a $1.4 million reduction in Retained Earnings[18] - The company is a defendant in 3,693 asbestos-related claims as of June 30, 2020. Management believes its insurance coverage of approximately $140 million is sufficient for current and future claims and does not anticipate a material adverse effect[73][74] - On November 20, 2019, the Company acquired CirComp GmbH for $32.4 million, which is now part of the AEC segment[28] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 12.1% decline in H1 2020 consolidated net sales, primarily from AEC due to LEAP program impacts, with MC stable, improved gross margins, and sufficient liquidity Business Environment Overview and Trends MC is a stable cash generator, while AEC faces significant headwinds from the Boeing 737 MAX grounding and COVID-19, severely impacting LEAP engine demand - The Machine Clothing (MC) segment is the company's core business and primary cash generator, with industry demand stabilized by packaging and tissue grades[82] - The Albany Engineered Composites (AEC) segment's growth is challenged by the Boeing 737 MAX grounding and reduced air travel, impacting the LEAP engine program. Management expects full-year LEAP revenue to be less than half of 2019 levels[83] Consolidated Results of Operations Consolidated net sales for H1 2020 fell 12.1% to $461.8 million, primarily due to AEC, though gross profit margin improved to 41.7%, with a $14.9 million foreign currency revaluation loss impacting pre-tax income Net Sales by Segment - Six Months Ended June 30 (in thousands) | Segment | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Machine Clothing | $290,035 | $299,349 | (3.1)% | | Albany Engineered Composites | $171,719 | $225,972 | (24.0)% | | Consolidated total | $461,754 | $525,321 | (12.1)% | - Consolidated gross profit as a percentage of sales increased to 41.7% in H1 2020 from 37.5% in H1 2019[90] - For the first six months of 2020, the company recorded a $14.9 million loss from the revaluation of nonfunctional currency balances, primarily due to a weaker Mexican peso affecting an intercompany loan[104] Segment Results of Operations MC segment's H1 2020 operating income increased to $103.7 million with a 53.9% gross margin, while AEC operating income dropped to $15.9 million due to decreased LEAP program sales Machine Clothing Segment Performance - Six Months Ended June 30 (in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net sales | $290,035 | $299,349 | | Gross profit | $156,264 | $154,815 | | Operating income | $103,718 | $93,781 | Albany Engineered Composites Segment Performance - Six Months Ended June 30 (in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net sales | $171,719 | $225,972 | | Gross profit | $36,188 | $42,138 | | Operating income | $15,922 | $27,254 | Liquidity and Capital Resources Liquidity is sourced from operations and a $685 million revolving credit facility, with cash from operations decreasing to $44.0 million in H1 2020 due to lower AEC profitability, and reduced capital expenditures - Cash flow from operating activities decreased to $44.0 million in H1 2020 from $83.1 million in H1 2019, mainly due to lower profitability in the AEC LEAP program[130][131] - As of June 30, 2020, the company had $435 million of borrowings outstanding under its $685 million revolving credit facility, with an additional $250 million available to borrow[136] - Capital expenditures for the first six months of 2020 were $22.0 million, down from $35.5 million in the same period of 2019[135] Non-GAAP Measures The company provides non-GAAP measures like Adjusted EBITDA and Adjusted EPS for core operational insight, with Q2 2020 Adjusted EBITDA at $73.7 million and Adjusted EPS at $1.09, and net debt at $231.0 million Adjusted EBITDA Reconciliation (in thousands) | Period | Adjusted EBITDA (non-GAAP) | | :--- | :--- | | Three months ended June 30, 2020 | $73,670 | | Three months ended June 30, 2019 | $72,417 | | Six months ended June 30, 2020 | $132,805 | | Six months ended June 30, 2019 | $130,037 | Adjusted Earnings Per Share Reconciliation | Period | EPS (GAAP) | Adjusted EPS (non-GAAP) | | :--- | :--- | :--- | | Three months ended June 30, 2020 | $1.00 | $1.09 | | Three months ended June 30, 2019 | $1.05 | $1.09 | | Six months ended June 30, 2020 | $1.28 | $1.87 | | Six months ended June 30, 2019 | $1.96 | $1.97 | Quantitative and Qualitative Disclosures about Market Risk The company's disclosures regarding its exposure to market risk, such as interest rate and foreign currency fluctuations, are provided as an exhibit to the Form 10-Q - The discussion of the company's exposure to market risk is included as an exhibit to the Form 10-Q[153] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting, and ongoing CirComp acquisition integration - The principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective[154] - No material changes were made to the internal control over financial reporting during the last fiscal quarter. The integration of internal controls for the CirComp acquisition is ongoing and expected to be completed in 2020[155] Part II - Other Information Legal Proceedings The company refers to Note 17 of the financial statements for information on legal proceedings, which primarily details ongoing asbestos-related litigation - Information regarding legal proceedings is incorporated by reference from Note 17 of the financial statements, which discusses asbestos litigation[156] Risk Factors The company highlights the significant negative impacts of the COVID-19 pandemic as a key risk, including demand declines, severe aerospace disruption, supply chain issues, and increased credit risk - The COVID-19 pandemic is a major risk, causing demand declines for MC products (especially publication paper grades) and significantly impacting the AEC segment due to the downturn in commercial air travel[157][158] - Other pandemic-related risks include supply chain disruptions, adverse foreign currency fluctuations, increased credit risk, and the potential for significant impairment charges on noncurrent assets like goodwill[158] Unregistered Sales of Equity Securities and Use of Proceeds The company made no purchases of its Class A Common Stock during Q2 2020, with an existing authorization to purchase up to 2 million shares - No share purchases were made in Q2 2020. An authorization to purchase up to 2 million shares of Class A Common Stock remains in effect[159] Exhibits This section lists the exhibits filed with the Form 10-Q, including officer certifications, disclosures about market risks, and XBRL data files - Exhibits filed include CEO/CFO certifications (31.2, 32.1), quantitative and qualitative disclosures about market risks (99.1), and various XBRL documents (101 series)[160]