UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(√) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2015
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 1-10026
ALBANY INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
| Delaware | 14-0462060 | |
| (State or other jurisdiction of | (IRS Employer Identification No.) | |
| incorporation or organization) | ||
| 216 Airport Drive, Rochester, New Hampshire | 03867 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code 518-445-2200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ √ ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ √ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| Large accelerated filer | [ √ ] | Accelerated filer | [ ] |
| Non-accelerated filer | [ ] | Smaller reporting company | [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ √ ]
The registrant had 28.8 million shares of Class A Common Stock and 3.2 million shares of Class B Common Stock outstanding as of April 23, 2015.
ALBANY INTERNATIONAL CORP.
TABLE OF CONTENTS
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments and elimination of intercompany transactions necessary for a fair presentation of results for such periods. Albany International Corp. (“Albany”) consolidates the financial results of its subsidiaries for all periods presented. The results for any interim period are not necessarily indicative of results for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Risk Factors,” “ Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” “Quantitative and Qualitative Disclosures about Market Risk” and the Consolidated Financial Statements and Notes thereto included in Items 1A, 3, 7, 7A and 8, respectively, of the Albany International Corp. Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in Albany International Corp.’s Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates.
2. Noncontrolling Interest
The table below presents a reconciliation of income attributable to the noncontrolling interest and noncontrolling equity:
| Three months ended March 31, | ||
| (in thousands, except percentages) | 2015 | 2014 |
| Net income of Albany Safran Composites, LLC (ASC) | $511 | $967 |
| Return attributable to the Company's preferred holding | (255) | (246) |
| Net income of ASC available for common ownership | 256 | 721 |
| Ownership percentage of noncontrolling shareholder | 10% | 10% |
| Net income attributable to noncontrolling interest | $26 | $72 |
| Noncontrolling interest, beginning of year | $3,699 | $3,482 |
| Net income attributable to noncontrolling interest | 26 | 72 |
| Changes in other comprehensive income attributable to noncontrolling interest | 1 | - |
| Noncontrolling interest, year to date | $3,726 | $3,554 |
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3. Reportable Segments
The following tables show data by reportable segment, reconciled to consolidated totals included in the financial statements:
| Three months ended March 31, | ||
| (in thousands) | 2015 | 2014 |
| Net sales | ||
| Machine Clothing | $158,494 | $164,088 |
| Albany Engineered Composites | 22,830 | 16,219 |
| Consolidated total | $181,324 | $180,307 |
| Operating income | ||
| Machine Clothing | $35,689 | $36,142 |
| Albany Engineered Composites | (3,811) | (3,475) |
| Corporate expenses | (11,729) | (12,066) |
| Operating income before reconciling items | 20,149 | 20,601 |
| Reconciling items: | ||
| Interest income | (340) | (196) |
| Interest expense | 3,016 | 3,114 |
| Other expense/(income), net | (3,285) | (467) |
| Income before income taxes | $20,758 | $18,150 |
The table below presents restructuring costs by reportable segment (also see Note 5):
| Three months ended March 31, | ||
| (in thousands) | 2015 | 2014 |
| Restructuring expense | ||
| Machine Clothing | $9,001 | $862 |
| Albany Engineered Composites | - | 320 |
| Consolidated total | $9,001 | $1,182 |
2015 Machine Clothing restructuring expense was principally related to the announced plan to discontinue manufacturing operations at its press fabric manufacturing facility in Germany. Machine Clothing restructuring costs in 2014 were principally related to restructuring actions in France. Albany Engineered Composites restructuring expense in 2014 was related to organizational changes.
There were no material changes in the total assets of the reportable segments during this period.
4. Pensions and Other Postretirement Benefit Plans
Pension Plans
The Company has defined benefit pension plans covering certain U.S. and non-U.S. employees. The U.S. qualified defined benefit pension plan has been closed to new participants since October 1998 and, as of February 2009, benefits accrued under this plan were frozen. As a result of the freeze, employees covered by the pension plan will receive, at retirement, benefits already accrued through February 2009, but no new benefits accrue after that date. Benefit accruals under the U.S.
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Supplemental Executive Retirement Plan ("SERP") were similarly frozen. The eligibility, benefit formulas, and contribution requirements for plans outside of the U.S. vary by location.
Other Postretirement Benefits
The Company also provides certain postretirement life insurance benefits to retired employees in the U.S. and Canada. The Company accrues the cost of providing postretirement benefits during the active service period of the employees. The Company currently funds the plan as claims are paid.
The composition of the net periodic benefit plan cost for the three months ended March 31, 2015 and 2014 was as follows:
| Pension plans | Other postretirement benefits | |||
| (in thousands) | 2015 | 2014 | 2015 | 2014 |
| Components of net periodic benefit cost: | ||||
| Service cost | $790 | $825 | $83 | $79 |
| Interest cost | 2,013 | 2,359 | 610 | 686 |
| Expected return on assets | (2,235) | (2,371) | - | - |
| Amortization of prior service cost/(credit) | 13 | 13 | (1,122) | (1,122) |
| Amortization of net actuarial loss | 670 | 601 | 835 | 727 |
| Curtailment gain | - | (493) | - | - |
| Net periodic benefit cost | $1,251 | $934 | $406 | $370 |
5. Restructuring
During the first quarter of 2015, the Company announced a plan to discontinue manufacturing operations at its press fabric manufacturing facility in Göppingen, Germany. The restructuring program was driven by the Company’s need to balance manufacturing capacity with demand. In April 2015, we completed negotiations and reached agreement on the restructuring plan with the Works Council. Approximately 50 employees will be terminated under this plan, and the restructuring expense recorded in the first quarter of 2015 reflects our estimate of the severance costs. Manufacturing operations will be discontinued in the second quarter of 2015. It is likely that we will record additional charges for asset impairments, but the amounts are presently not estimable. Whereas the affected employees are related to manufacturing operations, cost savings associated with this action will flow through Cost of goods sold.
Machine Clothing restructuring costs in 2014 were principally related to restructuring actions in France. Albany Engineered Composites restructuring expense in 2014 was related to organizational changes.
The following table summarizes charges reported in the Statements of Income under “Restructuring and other, net”:
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| Three months ended March 31, | ||
| (in thousands) | 2015 | 2014 |
| Machine Clothing | $9,001 | $862 |
| Albany Engineered Composites | - | 320 |
| Total | $9,001 | $1,182 |
| Three months ended March 31, 2015 (in thousands) |
Total
restructuring costs incurred |
Termination and other costs |
Impairment of plant and equipment |
Benefit plan curtailment/ settlement |
| Machine Clothing | $9,001 | $9,001 | $- | $- |
| Albany Engineered Composites | - | - | - | - |
| Total | $9,001 | $9,001 | $- | $- |
| Three months ended March 31, 2014 (in thousands) |
Total restructuring costs incurred |
Termination and other costs |
Impairment of plant and equipment |
Benefit plan curtailment/ settlement |
| Machine Clothing | $862 | $1,355 | $- | ($493) |
| Albany Engineered Composites | 320 | 320 | - | - |
| Total | $1,182 | $1,675 | $- | $(493) |
We expect that substantially all Accrued liabilities for restructuring will be paid within one year. The table below presents year-to-date changes in restructuring liabilities for 2015 and 2014, all of which related to termination costs:
| December 31, | Restructuring | Currency | March 31, | ||
| (in thousands) | 2014 | charges accrued | Payments | translation /other | 2015 |
| Total Termination costs | $1,874 | $9,001 | $(2,122) | $(228) | $8,525 |
| December 31, | Restructuring | Currency | March 31, | ||
| (in thousands) | 2013 | charges accrued | Payments | translation /other | 2014 |
| Total Termination costs | $9,656 | $1,182 | ($4,633) | $481 | $6,686 |
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6. Other (Income)/Expenses, net
The components of Other (income)/expenses, net, are:
| Three months ended March 31, | ||
| (in thousands) | 2015 | 2014 |
| Currency transactions | ($2,427) | ($505) |
| Bank fees and amortization of debt issuance costs | 311 | 312 |
| Gain on sale of investment | (872) | - |
| Other | (297) | (274) |
| Total | ($3,285) | ($467) |
In March 2015, the Company sold its total equity investment in an unaffiliated company. The value of the investment was written off in 2004, resulting in a gain of $0.9 million in the first quarter of 2015.
7. Income Taxes
The following table presents components of income tax expense for the three months ended March 31, 2015 and 2014:
| Three months ended March 31, | ||
| (in thousands) | 2015 | 2014 |
| Income tax based on income from continuing operations, at estimated tax rates of 40.0% and 35.0%, respectively | $8,300 | $6,353 |
| Income tax before discrete items | 8,300 | 6,353 |
| Discrete tax expense: | ||
| Provision for/resolution of tax audits and contingencies, net | 83 | 880 |
| Adjustments to prior period tax liabilities | 45 | 224 |
| Enacted tax legislation | 91 | - |
| Total income tax expense | $8,519 | $7,457 |
The first quarter estimated effective tax rate on continuing operations was 40.0 percent in 2015, as compared to 35.0 percent for the same period in 2014.
The Company records the residual U.S. and foreign taxes on certain amounts of current year foreign earnings that have been targeted for repatriation to the U.S. As a result, such amounts are not considered to be permanently reinvested, and the Company accrued as part of the income tax provision before discrete items, for the residual taxes on these earnings to the extent they cannot be repatriated in a tax-free manner. At March 31, 2015 the Company reported a deferred tax liability of $3.7 million on $59.4 million of prior year non-U.S. earnings that had been targeted for future repatriation to the U.S.
We conduct business globally and, as a result, the Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including major jurisdictions such as the United States, Brazil, Canada, France, Germany, Italy, Mexico, and Switzerland. The open tax years in these jurisdictions range from 2000 to 2014. We are currently under audit in the
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U.S. and in other non-U.S. tax jurisdictions, including but not limited to Canada, Germany, Switzerland and Italy.
It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change within a range of a net increase of $8.8 million to a net decrease of $2.4 million, from the reevaluation of uncertain tax positions arising in examinations, in appeals, or in the courts, or from the closure of tax statutes.
The Company recognized current and deferred tax benefits of approximately $25.3 million on their corporate income tax returns filed in Germany related to a 1999 reorganization that have been challenged by the German tax authorities in the course of an audit. In 2008 the German Federal Tax Court (FTC) denied tax benefits to other taxpayers in a case involving German tax laws relevant to our reorganization. One of these cases involved a non-German party, and in the ruling in that case, the FTC acknowledged that the German law in question may be violative of European Union (EU) principles and referred the issue to the European Court of Justice (ECJ) for its determination on this issue. In September 2009, the ECJ issued an opinion in this case that is generally favorable to the other taxpayer and referred the case back to the FTC for further consideration. In May 2010 the FTC released its decision, in which it resolved certain tax issues that may be relevant to our audit and remanded the case to a lower court for further development. In 2012, the lower court decided in favor of the taxpayer and the government appealed the findings to the FTC. On July 2, 2014, The FTC conducted a hearing in the aforementioned case involving the other taxpayer, and the taxpayer lost. The final written decision of the FTC was published during the fourth quarter of 2014. Although the decision of the FTC in the case is not determinative of the outcome in our case, management viewed the conclusion of this matter as an opportunity to approach the German tax authorities with the goal of a settlement agreement. We were required to pay tax and interest of approximately $14.5 million to the German tax authorities in order to pursue our appeal position. In anticipation of a settlement, a portion of the prepaid taxes and interest along with certain deferred tax assets were adjusted downward by $6.3 million in 2014. The recognition of the uncertain tax position in deferred tax assets was partially offset by a reduction in a valuation allowance that offset the deferred tax assets. The remaining tax benefits sustained on the books are related to current tax benefits that were recognized in earlier tax years. Included in the range above is approximately $8.8 million of tax benefits that will continue to be challenged by the German tax authorities.
8. Earnings Per Share
The amounts used in computing earnings per share and the weighted average number of shares of potentially dilutive securities are as follows:
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| Three months ended March 31, | ||
| (in thousands, except market price and earnings per share) | 2015 | 2014 |
| Net income attributable to the Company | $12,213 | $10,621 |
| Weighted average number of shares: | ||
| Weighted average number of shares used in | ||
| calculating basic net income per share | 31,882 | 31,786 |
| Effect of dilutive stock-based compensation plans: | ||
| Stock options | 90 | 106 |
| Weighted average number of shares used in | ||
| calculating diluted net income per share | 31,972 | 31,892 |
| Average market price of common stock used | ||
| for calculation of dilutive shares | $37.36 | $35.68 |
| Earnings per share attributable to Company shareholders: | ||
| Basic | $0.38 | $0.33 |
| Diluted | $0.38 | $0.33 |
9. Accumulated Other Comprehensive Income/(Loss)
The table below presents changes in the components of AOCI for the period December 31, 2014 to March 31, 2015:
| (in thousands) | Translation adjustments |
Pension and postretirement liability adjustments |
Derivative valuation adjustment |
Total Other Comprehensive Income |
| December 31, 2014 | ($55,240) | ($51,666) | ($861) | ($107,767) |
| Other comprehensive income before reclassifications | (37,413) | 1,730 | (675) | (36,358) |
| Interest expense related to swaps reclassified to the Statement of Income, net of tax | 296 | 296 | ||
| Pension and postretirement liability adjustments reclassified to Statement of Income, net of tax | 257 | 257 | ||
| Net current period other comprehensive income | (37,413) | 1,987 | (379) | (35,805) |
| March 31, 2015 | ($92,653) | ($49,679) | ($1,240) | ($143,572) |
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The table below presents changes in the components of AOCI for the period December 31, 2013 to March 31, 2014:
| (in thousands) | Translation adjustments |
Pension and postretirement liability adjustments |
Derivative valuation adjustment |
Total Other Comprehensive Income |
| December 31, 2013 | ($138) | ($48,383) | ($977) | ($49,498) |
| Other comprehensive income before reclassifications | (5,599) | 371 | (220) | (5,448) |
| Interest expense related to swaps reclassified to the Statement of Income, net of tax | 292 | 292 | ||
| Pension and postretirement liability adjustments reclassified to Statement of Income, net of tax | 131 | 131 | ||
| Net current period other comprehensive income | (5,599) | 502 | 72 | (5,025) |
| March 31, 2014 | ($5,737) | ($47,881) | ($905) | ($54,523) |
The table below presents the expense/(income) amounts reclassified, and the line items of the Statement of Income that were affected for the periods March 31, 2015 and 2014.
| Three months ended March 31, | ||
| (in thousands) | 2015 | 2014 |
| Pretax Derivative valuation reclassified from Accumulated Other Comprehensive Income: | ||
| Payments made on interest rate swaps included in Income before taxes(a) | $486 | $478 |
| Income tax effect | (190) | (186) |
| Effect on net income due to items reclassified from Accumulated Other Comprehensive Income | $296 | $292 |
| Pretax pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income: | ||
| Amortization of prior service cost/(credit) | ($1,109) | ($1,109) |
| Amortization of net actuarial loss | 1,505 | 1,328 |
| Total pretax amount reclassified (b) | 396 | 219 |
| Income tax effect | (139) | (88) |
| Effect on net income due to items reclassified from Accumulated Other Comprehensive Income | $257 | $131 |
| (a) | Included in Interest expense. |
| (b) | These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 4). |
10. Accounts Receivable
Accounts receivable includes trade receivables and revenue in excess of progress billings on long-term contracts in the Albany Engineered Composites business. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company determines the allowance based on historical write-off
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experience, customer-specific facts and economic conditions. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
As of March 31, 2015 and December 31, 2014, accounts receivable consisted of the following:
| (in thousands) | March 31, 2015 |
December 31, 2014 |
| Trade and other accounts receivable | $133,219 | $136,479 |
| Bank promissory notes | 17,156 | 17,426 |
| Revenue in excess of progress billings | 20,909 | 13,045 |
| Allowance for doubtful accounts | (7,875) | (8,713) |
| Total accounts receivable | $163,409 | $158,237 |
In connection with certain sales in Asia Pacific, the Company accepts a bank promissory note as customer payment. The notes may be presented for payment at maturity, which is less than one year.
11. Inventories
Inventories are stated at the lower of cost or market, and are valued at average cost, net of reserves. Costs included in inventory are raw materials, labor, supplies, and allocable depreciation and overhead. The Company maintains reserves for possible impairment in the value of inventories. Such reserves can be specific to certain inventory, or general based on judgments about the overall condition of the inventory. General reserves are established based on percentage write-downs applied to aged inventories, or for inventories that are slow-moving. If actual results differ from estimates, additional inventory write-downs may be necessary. These general reserves for aged inventory are relieved through income only when the inventory is sold.
As of March 31, 2015 and December 31, 2014, inventories consisted of the following:
| (in thousands) | March 31, 2015 |
December 31, 2014 |
| Raw materials | $24,612 | $27,006 |
| Work in process | 43,639 | 43,512 |
| Finished goods | 36,569 | 36,756 |
| Total inventories | $104,820 | $107,274 |
12. Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. Our reporting units are consistent with our operating segments.
Determining the fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates, and future market conditions, among others. Goodwill and other long-lived assets are reviewed for impairment whenever
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events, such as significant changes in the business climate, plant closures, changes in product offerings, or other circumstances indicate that the carrying amount may not be recoverable.
To determine fair value, we utilize two market-based approaches and an income approach. Under the market-based approaches, we utilize information regarding the Company as well as publicly available industry information to determine earnings multiples and sales multiples. Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn.
The entire balance of goodwill on our books is attributable to the Machine Clothing business. There were no amounts at risk due to the large spread between the fair and carrying values.
We are continuing to amortize certain patents, trade names, customer contracts and technology assets that have finite lives. The changes in intangible assets and goodwill from December 31, 2014 to March 31, 2015, were as follows:
| December 31, 2014 |
Amortization | Currency Translation |
March 31, 2015 | |
| (in thousands) | ||||
| Amortized intangible assets: | ||||
| AEC trade names | $29 | ($1) | $- | $28 |
| AEC customer contracts | 202 | (50) | - | 152 |
| AEC technology | 154 | (6) | - | 148 |
| Total amortized intangible assets | $385 | ($57) | $- | $328 |
| Unamortized intangible assets: | ||||
| Goodwill | $71,680 | $- | ($5,956) | $65,724 |
Estimated amortization expense of intangibles for the years ending December 31, 2015 through 2019, is as follows:
| Annual amortization | |
| Year | (in thousands) |
| 2015 | $231 |
| 2016 | 29 |
| 2017 | 29 |
| 2018 | 29 |
| 2019 | 29 |
13. Financial Instruments
Long-term debt, principally to banks and bondholders, consists of:
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| (in thousands, except interest rates) | March 31, 2015 | December 31, 2014 |
| Private placement with a fixed interest rate of 6.84%, due 2015 and 2017 | $100,000 | $100,000 |
| Credit agreement with borrowings outstanding at an end of period interest rate of 2.63% in 2015 and 2.69% in 2014 (including the effect of interest rate hedging transactions, as described below), due in 2018 | 182,000 | 172,000 |
| Various notes and mortgages relative to operations principally outside the United States, at an average end of period rate of 5.5% in 2015 and 2014, due in varying amounts through 2021 | 107 | 111 |
| Long-term debt | 282,107 | 272,111 |
| Less: current portion | (50,015) | (50,015) |
| Long-term debt, net of current portion | $232,092 | $222,096 |
A note agreement and guaranty (“Prudential Agreement”) was entered into in October 2005, and was amended and restated as of September 17, 2010 and March 26, 2013, with the Prudential Insurance Company of America, and certain other purchasers with interest at 6.84% and a maturity date of October 25, 2017. The remaining obligation under the Prudential Agreement has a mandatory payment of $50 million due on October 25, 2015, and the final payment is due October 25, 2017. At the noteholders’ election, certain prepayments may also be required in connection with certain asset dispositions or financings. The notes may not otherwise be prepaid without a premium, under certain market conditions. The Prudential Agreement contains customary terms, as well as affirmative covenants, negative covenants, and events of default comparable to those in our current principal credit facility (as described below). For disclosure purposes, we are required to measure the fair value of outstanding debt on a recurring basis. As of March 31, 2015, the fair value of this debt was approximately $109.6 million, and was measured using active market interest rates, which would be considered Level 2 for fair value measurement purposes.
On March 26, 2013, we entered into a $330 million, unsecured Five-Year Revolving Credit Facility Agreement (“Credit Agreement”), under which $182 million of borrowings were outstanding as of March 31, 2015. The Credit Agreement replaces the previous $390 million five-year Credit Agreement made in 2010. The applicable interest rate for borrowings under the Credit Agreement, as well as under the former agreement, is LIBOR plus a spread, based on our leverage ratio at the time of borrowing. At the time of the last borrowing on March 23, 2015, the spread was 1.375%. The spread is based on a pricing grid, which ranges from 1.25% to 1.875%, based on our leverage ratio.
Our ability to borrow additional amounts under the Credit Agreement is conditional upon the absence of any defaults, as well as the absence of any material adverse change. Based on our maximum leverage ratio and our consolidated EBITDA (as defined in the Credit Agreement), and without modification to any other credit agreements, as of March 31, 2015, we would have been able to borrow an additional $148 million under the Credit Agreement.
On July 16, 2010, we entered into interest rate hedging transactions that have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $105 million of
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the indebtedness drawn under the Credit Agreement at the rate of 2.04% until July 16, 2015. Under the terms of these transactions, we pay the fixed rate of 2.04% and the counterparties pay a floating rate based on the three-month LIBOR rate at each quarterly calculation date, which on January 16, 2015 was 0.26%. The net effect is to fix the effective interest rate on $105 million of indebtedness at 2.04%, plus the applicable spread, until these swap agreements expire. On March 31, 2015, the all-in rate on the $105 million of debt was 3.415%.
On May 20, 2013, we entered into interest rate hedging transactions for the period July 16, 2015 through March 16, 2018. These transactions have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $110 million of indebtedness drawn under the Credit Agreement at the rate of 1.414% during this period. Under the terms of these transactions, we pay the fixed rate of 1.414% and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly calculation date, which on March 31, 2015 was 0.17625%. The net effect is to fix the effective interest rate on $110 million of indebtedness at 1.414%, plus the applicable spread, during the swap period.
These interest rate swaps are accounted for as a hedge of future cash flows, as further described in Note 14 of the Notes to Consolidated Financial Statements. No cash collateral was received or pledged in relation to the swap agreements.
Under the Credit Agreement and Prudential Agreement, we are currently required to maintain a leverage ratio (as defined in the agreements) of not greater than 3.50 to 1.00 and minimum interest coverage (as defined) of 3.00 to 1.00.
As of March 31, 2015, our leverage ratio was 1.28 to 1.00 and our interest coverage ratio was 13.94 to 1.00. We may purchase our Common Stock or pay dividends to the extent our leverage ratio remains at or below 3.50 to 1.00, and may make acquisitions with cash provided our leverage ratio would not exceed 3.50 to 1.00 after giving pro forma effect to the acquisition.
Indebtedness under each of the Prudential Agreement and the Credit Agreement is ranked equally in right of payment to all unsecured senior debt.
We were in compliance with all debt covenants as of March 31, 2015.
14. Fair-Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting principles establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Level 3 inputs are unobservable data points for the asset or liability, and include situations in which there is little, if any, market activity for the asset or liability. As of March 31, 2015 and December 31, 2014, we have no Level 3 financial assets or liabilities.
The following table presents the fair-value hierarchy for our Level 1 and Level 2 financial assets and liabilities measured at fair value on a recurring basis:
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| March 31, 2015 | December 31, 2014 | ||||||||
| Quoted prices in active markets |
Significant other observable inputs |
Quoted prices in active markets |
Significant other observable inputs |
||||||
| (in thousands) | (Level 1) | (Level 2) | (Level 1) | (Level 2) | |||||
| Fair Value | |||||||||
| Assets: | |||||||||
| Cash equivalents | $19,391 | $- | $14,096 | $- | |||||
| Prepaid expenses and other current assets: | |||||||||
| Foreign currency options | 286 | - | 69 | - | |||||
| Other Assets: | |||||||||
| Common stock of unaffiliated foreign public company | 735 | - | 701 | - | |||||
| Liabilities: | |||||||||
| Other noncurrent liabilities: | |||||||||
| Interest rate swaps | - | (2,034) | (a) | - | (1,411) | (b) | |||
| (a) | Net of $3.2 million receivable floating leg and $5.2 million liability fixed leg |
| (b) | Net of $4.3 million receivable floating leg and $5.7 million liability fixed leg |
Cash equivalents include short-term securities that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities.
The common stock of the unaffiliated foreign public company is traded in an active market exchange. The shares are measured at fair value using closing stock prices and are recorded in the Consolidated Balance Sheets as Other assets. The securities are classified as available for sale, and as a result any unrealized gain or loss is recorded in the Shareholders’ Equity section of the Consolidated Balance Sheets rather than in the Consolidated Statements of Income. When the security is sold or impaired, gains and losses are reported on the Consolidated Statements of Income. Investments are considered to be impaired when a decline in fair value is judged to be other than temporary.
Foreign currency instruments are entered into periodically, and consist of foreign currency option contracts and forward contracts that are valued using quoted prices in active markets obtained from independent pricing sources. These instruments are measured using market foreign exchange prices and are recorded in the Consolidated Balance Sheets as Other current assets and Accounts payable, as applicable. Changes in fair value of these instruments are recorded as gains or losses within Other (income)/expenses, net.
When exercised, the foreign currency instruments are net settled with the same financial institution that bought or sold them. For all positions, whether options or forward contracts, there is risk from the possible inability of the financial institution to meet the terms of the contracts and the risk of unfavorable changes in interest and currency rates, which may reduce the value of the instruments. We seek to control risk by evaluating the creditworthiness of counterparties and by monitoring the currency exchange and interest rate markets while reviewing the hedging risks and contracts to ensure compliance with our internal guidelines and policies.
We operate our business in many regions of the world, and currency rate movements can have a significant effect on operating results.
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Changes in exchange rates can result in revaluation gains and losses that are recorded in Selling, General and Administrative expenses or Other (income)/expenses, net. Revaluation gains and losses occur when our business units have cash, intercompany (recorded in Other (income)/expenses, net) or third-party trade (recorded in Selling, General and Administrative expenses) receivable or payable balances in a currency other than their local reporting (or functional) currency.
Operating results can also be affected by the translation of sales and costs, for each non-U.S. subsidiary, from the local functional currency to the U.S. dollar. The translation effect on the Consolidated Statement of Income is dependent on our net income or expense position in each non-U.S. currency in which we do business. A net income position exists when sales realized in a particular currency exceed expenses paid in that currency; a net expense position exists if the opposite is true.
The interest rate swaps are accounted for as hedges of future cash flows. The fair value of our interest rate swaps are derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve, and is included in Other assets and Other noncurrent liabilities in the Consolidated Balance Sheets. Unrealized gains and losses on the swaps will flow through the caption Derivative valuation adjustment in the Shareholders’ equity section of the Consolidated Balance Sheets, to the extent that the hedges are highly effective. As of March 31, 2015, these interest rate swaps were determined to be 100% effective hedges of interest rate cash flow risk. Gains and losses related to the ineffective portion of the hedges will be recognized in the current period in earnings. Amounts accumulated in Other comprehensive income are reclassified as Interest expense, net when the related interest payments (that is, the hedged forecasted transactions) affect earnings. Interest expense related to the swaps totaled $0.5 million for each of the three month periods ended March 31, 2015 and 2014.
Gains/ (losses) related to changes in fair value of derivative instruments that were recognized in Other (income)/expenses, net in the Statements of Income were as follows:
| Three months ended March 31, | ||
| (in thousands) | 2015 | 2014 |
| Derivatives not designated as hedging instruments | ||
| Forward currency options | $217 | $74 |
15. Contingencies
Asbestos Litigation
Albany International Corp. is a defendant in suits brought in various courts in the United States by plaintiffs who allege that they have suffered personal injury as a result of exposure to asbestos-containing products that we previously manufactured. We produced asbestos-containing paper machine clothing synthetic dryer fabrics marketed during the period from 1967 to 1976 and used in certain paper mills. Such fabrics generally had a useful life of three to twelve months.
We were defending 3,813 claims as of March 31, 2015.
The following table sets forth the number of claims filed, the number of claims settled, dismissed or otherwise resolved, and the aggregate settlement amount during the periods presented:
| 20 |
| Year ended December 31, |
Opening Number of Claims |
Claims Dismissed, Settled, or Resolved |
New Claims | Closing Number of Claims |
Amounts Paid (thousands) to Settle or Resolve |
| 2005 | 29,411 | 6,257 | 1,297 | 24,451 | $504 |
| 2006 | 24,451 | 6,841 | 1,806 | 19,416 | 3,879 |
| 2007 | 19,416 | 808 | 190 | 18,798 | 15 |
| 2008 | 18,798 | 523 | 110 | 18,385 | 52 |
| 2009 | 18,385 | 9,482 | 42 | 8,945 | 88 |
| 2010 | 8,945 | 3,963 | 188 | 5,170 | 159 |
| 2011 | 5,170 | 789 | 65 | 4,446 | 1,111 |
| 2012 | 4,446 | 90 | 107 | 4,463 | 530 |
| 2013 | 4,463 | 230 | 66 | 4,299 | 78 |
| 2014 | 4,299 | 625 | 147 | 3,821 | 437 |
| As of March 31, 2015 | 3,821 | 22 | 14 | 3,813 | $69 |
We anticipate that additional claims will be filed against the Company and related companies in the future, but are unable to predict the number and timing of such future claims.
Exposure and disease information sufficient to meaningfully estimate a range of possible loss of a particular claim is typically not available until late in the discovery process, and often not until a trial date is imminent and a settlement demand has been received. For these reasons, we do not believe a meaningful estimate can be made regarding the range of possible loss with respect to pending or future claims.
While we believe we have meritorious defenses to these claims, we have settled certain claims for amounts we consider reasonable given the facts and circumstances of each case. Our insurer, Liberty Mutual, has defended each case and funded settlements under a standard reservation of rights. As of March 31, 2015 we had resolved, by means of settlement or dismissal, 37,247 claims. The total cost of resolving all claims was $9.3 million. Of this amount, almost 100% was paid by our insurance carrier. The Company’s insurer has confirmed that although the coverage limits under two (of approximately 23) primary insurance policies have been exhausted, there still remains approximately $3 million in coverage limits under other applicable primary policies, and $140 million in coverage under excess umbrella coverage policies that should be available with respect to current and future asbestos claims.
Brandon Drying Fabrics, Inc. (“Brandon”), a subsidiary of Geschmay Corp., which is a subsidiary of the Company, is also a separate defendant in many of the asbestos cases in which Albany is named as a defendant. Brandon was defending against 7,730 claims as of March 31, 2015.
The following table sets forth the number of claims filed, the number of claims settled, dismissed or otherwise resolved, and the aggregate settlement amount during the periods presented:
| 21 |
| Year ended December 31, |
Opening Number of Claims |
Claims Dismissed, Settled, or Resolved |
New Claims | Closing Number of Claims |
Amounts Paid (thousands) to Settle or Resolve |
| 2005 | 9,985 | 642 | 223 | 9,566 | $- |
| 2006 | 9,566 | 1,182 | 730 | 9,114 | - |
| 2007 | 9,114 | 462 | 88 | 8,740 | - |
| 2008 | 8,740 | 86 | 10 | 8,664 | - |
| 2009 | 8,664 | 760 | 3 | 7,907 | - |
| 2010 | 7,907 | 47 | 9 | 7,869 | - |
| 2011 | 7,869 | 3 | 11 | 7,877 | - |
| 2012 | 7,877 | 12 | 2 | 7,867 | - |
| 2013 | 7,867 | 55 | 3 | 7,815 | - |
| 2014 | 7,815 | 87 | 2 | 7,730 | |
| As of March 31, 2015 | 7,730 | - | - | 7,730 | $- |
We acquired Geschmay Corp., formerly known as Wangner Systems Corporation, in 1999. Brandon is a wholly owned subsidiary of Geschmay Corp. In 1978, Brandon acquired certain assets from Abney Mills (“Abney”), a South Carolina textile manufacturer. Among the assets acquired by Brandon from Abney were assets of Abney’s wholly owned subsidiary, Brandon Sales, Inc. which had sold, among other things, dryer fabrics containing asbestos made by its parent, Abney. Although Brandon manufactured and sold dryer fabrics under its own name subsequent to the asset purchase, none of such fabrics contained asbestos. Because Brandon did not manufacture asbestos-containing products, and because it does not believe that it was the legal successor to, or otherwise responsible for obligations of Abney with respect to products manufactured by Abney, it believes it has strong defenses to the claims that have been asserted against it. As of March 31, 2015, Brandon has resolved, by means of settlement or dismissal, 9,875 claims for a total of $0.2 million. Brandon’s insurance carriers initially agreed to pay 88.2% of the total indemnification and defense costs related to these proceedings, subject to the standard reservation of rights. The remaining 11.8% of the costs had been borne directly by Brandon. During 2004, Brandon’s insurance carriers agreed to cover 100% of indemnification and defense costs, subject to policy limits and the standard reservation of rights, and to reimburse Brandon for all indemnity and defense costs paid directly by Brandon related to these proceedings.
For the same reasons set forth above with respect to Albany’s claims, as well as the fact that no amounts have been paid to resolve any Brandon claims since 2001, we do not believe a meaningful estimate can be made regarding the range of possible loss with respect to these remaining claims.
In some of these asbestos cases, the Company is named both as a direct defendant and as the “successor in interest” to Mount Vernon Mills (“Mount Vernon”). We acquired certain assets from Mount Vernon in 1993. Certain plaintiffs allege injury caused by asbestos-containing products alleged to have been sold by Mount Vernon many years prior to this acquisition. Mount Vernon is contractually obligated to indemnify the Company against any liability arising out of such products. We deny any liability for products sold by Mount Vernon prior to the acquisition of the Mount Vernon assets. Pursuant to its contractual indemnification obligations, Mount Vernon has assumed the defense of these claims. On this basis, we have successfully moved for dismissal in a number of actions.
Although we do not believe, based on currently available information and for the reasons stated above, that a meaningful estimate of a range of possible loss can be made with respect to such claims, based on our understanding of the insurance policies available, how settlement amounts have been allocated to various policies, our settlement experience, the absence of any judgments against
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the Company or Brandon, the ratio of paper mill claims to total claims filed, and the defenses available, we currently do not anticipate any material liability relating to the resolution of the aforementioned pending proceedings in excess of existing insurance limits.
Consequently, we currently do not anticipate, based on currently available information, that the ultimate resolution of the aforementioned proceedings will have a material adverse effect on the financial position, results of operations, or cash flows of the Company. Although we cannot predict the number and timing of future claims, based on the foregoing factors and the trends in claims against us to date, we do not anticipate that additional claims likely to be filed against us in the future will have a material adverse effect on our financial position, results of operations, or cash flows. We are aware that litigation is inherently uncertain, especially when the outcome is dependent primarily on determinations of factual matters to be made by juries.
16. Changes in Shareholders’ Equity
The following table summarizes changes in Shareholders’ Equity:
| (in thousands) | Common
Stock Class A and B |
Additional
paid in capital |
Retained
earnings |
Accumulated
items of other comprehensive income |
Treasury
stock |
Noncontrolling
Interest |
Total
Shareholders’ Equity |
| December 31, 2014 | $40 | $418,972 | $456,105 | ($107,767) | ($257,481) | $3,699 | $513,568 |
| Compensation and benefits paid or payable in shares | - | 575 | - | - | - | - | 575 |
| Options exercised | - | 946 | - | - | - | - | 946 |
| Net income attributable to the Company | - | - | 12,213 | - | - | 26 | 12,239 |
| Dividends declared | - | - | (5,080) | - | - | - | (5,080) |
| Cumulative translation adjustments | - | - | - | (37,413) | - | 1 | (37,412) |
| Pension and postretirement liability adjustments | - | - | - | 1,987 | - | - | 1,987 |
| Derivative valuation adjustment | - | - | - | (379) | - | - | (379) |
| March 31, 2015 | $40 | $420,493 | $463,238 | ($143,572) | ($257,481) | $3,726 | $486,444 |
17. Recent Accounting Pronouncements
In April 2014, an accounting update was issued regarding which disposals qualify for reporting as discontinued operations. Additionally, new disclosures will apply for discontinued operations. This accounting update was adopted in 2015 and had no effect on our financial statements.
In June 2014, an accounting update was issued that replaces the existing revenue recognition framework regarding contracts with customers. In April 2015, the FASB proposed a one year delay in the required adoption date. We have not determined the impact of this update on our financial statements.
In June 2014, an accounting update was issued relating to accounting for share-based payments with a performance target that could be achieved after the requisite service period. The adoption of this accounting guidance will be effective for reporting periods beginning after December 15, 2015. We do not expect the adoption of this update to have a significant effect on our financial statements.
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In August 2014, an accounting update was issued relating to how management assesses conditions and events that could raise substantial doubt about an entity’s ability to continue as a going concern. This accounting update is effective for reporting periods beginning after December 15, 2016. We do not expect the adoption of this update to have a significant effect on our financial statements.
In January 2015, an accounting update was issued which simplifies the income statement presentation by eliminating the concept of extraordinary items from U.S. GAAP. The concept of separately presenting an extraordinary item after income from continuing operations will no longer be required. This accounting update is effective for reporting periods beginning after December 15, 2015. We do not expect this update to have a significant effect on our financial statements, absent any future transactions that would have qualified for extraordinary item presentation under the prior guidance.
In February 2015, amended accounting guidance was issued which changes the evaluation of variable interest entities (VIE) regarding whether they should consolidate limited partnerships and similar entities, or whether fees are paid to a decision maker or service provider, or whether they are held by related parties. This accounting update is effective for reporting periods beginning after December 15, 2015. We do not expect the adoption of this update to have a significant effect on our financial statements.
In April 2015, an accounting update was issued which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction of that debt, which will result in a minor netting down of our assets and liabilities. This accounting update is effective January 1, 2016; early adoption is permitted.
In April 2015, an accounting update was issued which clarifies that if a license is acquired as part of fees paid in a cloud computing arrangement, then the license should be accounted for in the same manner as other software licenses. This accounting update is effective for reporting periods beginning after January 1, 2016. We do not expect the adoption of this update to have a significant effect on our financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes.
This quarterly report and the documents incorporated or deemed to be incorporated by reference in this quarterly report contain statements concerning our future results and performance and other matters that are “forward-looking” statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “expect,” “intend,” “estimate,” “anticipate,” ”may,” “plan,” “project,” “will,” “should” and variations of such words or similar expressions are intended, but are not the exclusive means, to identify forward-looking statements. Because forward-looking statements are subject to risks and uncertainties, (including, without limitation, those set forth in the Company’s most recent Annual Report on Form 10-K or prior Quarterly Reports on Form 10-Q) actual results may differ materially from those expressed or implied by the forward-looking statements.
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There are a number of risks, uncertainties, and other important factors that could cause actual results to differ materially from the forward-looking statements, including, but not limited to:
| · | Conditions in the industries in which our Machine Clothing segment competes, including the paper industry, along with general risks associated with economic downturns; |
| · | Recent declines in demand for paper in certain regions and market segments could continue at a rate that is greater than anticipated, and growth in demand in other segments or regions could be lower or slower than anticipated; |
| · | Failure to achieve or maintain anticipated profitable growth in our Albany Engineered Composites segment; and |
| · | Other risks and uncertainties detailed in this report. |
Further information concerning important factors that could cause actual events or results to be materially different from the forward-looking statements can be found in “Business Environment and Trends” section of this quarterly report, as well as in the “Risk Factors”, section of our most recent Annual Report on Form 10-K. While we believe such assessments to have a reasonable basis, such assessments are, by their nature, inherently uncertain. This report sets forth a number of assumptions regarding these assessments, including projected timing and volume of demand for aircraft and for LEAP aircraft engines. Such assumptions could prove incorrect. Although we believe the expectations reflected in our forward-looking statements are based on reasonable assumptions, it is not possible to foresee or identify all factors that could have a material and negative impact on our future performance. The forward-looking statements included or incorporated by reference in this report are made on the basis of our assumptions and analyses, as of the time the statements are made, in light of our experience and perception of historical conditions, expected future developments, and other factors believed to be appropriate under the circumstances.
Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained or incorporated by reference in this report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Overview
Our reportable segments: Machine Clothing (MC) and Albany Engineered Composites (AEC) draw on many of the same advanced textiles and materials processing capabilities, and compete on the basis of proprietary, product-based advantage that is grounded in those core capabilities. As a result, technology and manufacturing advances in one tend to benefit the other.
The Machine Clothing segment is the Company’s long-established core business and primary generator of cash. While the paper and paperboard industry in our traditional geographic markets has suffered from well-documented overcapacity in publication grades, especially newsprint, the industry is still expected to grow on a global basis, driven by demand for packaging and tissue grades, as well as the expansion of paper consumption and production in Asia and South America. We feel we are now well-positioned in these markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, field services, and manufacturing technology. Although we consider the market for Machine Clothing as having flat growth potential, the business has been a significant generator of cash, and we seek to maintain the cash-generating potential of this business by maintaining the low costs that we achieved
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through restructuring, and competing vigorously by using our differentiated products and services to reduce our customers’ total cost of operation and improve their paper quality.
We believe that AEC provides the greatest growth potential, both near and long term, for our Company. Our strategy is to grow organically by focusing our proprietary technology on high-value aerospace and defense applications that cannot be served effectively by conventional composites. We are also pursuing opportunities outside of aerospace, such as applications for the automotive industry. AEC (including Albany Safran Composites, LLC (“ASC”), in which our customer SAFRAN Group owns a 10 percent noncontrolling interest) supplies a number of customers in the aerospace industry. AEC’s largest aerospace customer is the SAFRAN Group. Through ASC, AEC develops and sells composite aerospace components to SAFRAN, with the most significant program at present being the production of fan blades and other components for the LEAP engine. AEC (through ASC and otherwise) is also developing other new and potentially significant composite products for aerospace (engine and airframe) applications.
Consolidated Results of Operations
Net sales
The following table summarizes our net sales by business segment:
| Three months ended March 31, |
% Change | ||
| (in thousands, except percentages) | 2015 | 2014 | |
| Machine Clothing | $158,494 | $164,088 | -3.4% |
| Albany Engineered Composites | 22,830 | 16,219 | 40.8% |
| Total | $181,324 | $180,307 | 0.6% |
Net sales were affected by the following:
| · | Changes in currency translation rates had the effect of decreasing net sales by $11.7 million during the first quarter of 2015 as compared to 2014. |
| · | MC sales were strong in every region, particularly in Europe and Asia. |
| AEC sales increased due to growth in the LEAP programs as compared to 2014 when sales were negatively affected by a change in invoicing terms, resulting in a build-up of inventory and an associated temporary lag in sales. |
| · | Excluding the effect of changes in currency translation rates: |
| · | Net sales increased 7.0% compared to the same period in 2014 |
| · | Net sales in MC increased 3.5% |
| · | Net sales in AEC increased 42.8% |
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Gross Profit
The following table summarizes gross profit by business segment:
| Three months ended March 31, | ||
| (in thousands, except percentages) | 2015 | 2014 |
| Machine Clothing | $75,260 | $73,870 |
| Albany Engineered Composites | 1,815 | 1,293 |
| Corporate expenses | (391) | (354) |
| Total | $76,684 | $74,809 |
| % of Net sales | 42.3% | 41.5% |
The increase in gross profit, compared to the same period in 2014, was principally due to the net effect of the following:
| · | MC gross profit increased principally due to higher sales volume, favorable product mix, and the impact of cost-reduction activities. |
| AEC gross profit increased due to higher sales. |
Selling, Technical, General, and Research (STG&R)
The following table summarizes STG&R by business segment:
| Three months ended March 31, | ||
| (in thousands, except percentages) | 2015 | 2014 |
| Machine Clothing | $30,570 | $36,865 |
| Albany Engineered Composites | 5,626 | 4,449 |
| Corporate expenses | 11,338 | 11,712 |
| Total | $47,534 | $53,026 |
| % of Net sales | 26.2% | 29.4% |
STG&R expenses decreased $5.5 million, compared to the same period in 2014, principally due to the net effect of the following:
| · | Revaluation of nonfunctional currency assets and liabilities resulted in gains of $2.9 million during the first quarter of 2015 and losses of $0.2 million in the comparable quarter of 2014. |
| · | Currency translation decreased 2015 STG&R expenses by $3.9 million. |
| · | AEC STG&R increased $1.2 million, principally due to research activity. |
Research and Development
The following table summarizes expenses associated with internally funded research and development by business segment:
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| Three months ended March 31, | ||
| (in thousands) | 2015 | 2014 |
| Machine Clothing | $4,796 | $4,838 |
| Albany Engineered Composites | 2,873 | 2,318 |
| Corporate expenses | 294 | 192 |
| Total | $7,963 | $7,348 |
Restructuring Expense
In addition to the items discussed above affecting gross profit and STG&R, operating income was affected by restructuring costs of $9.0 million in the first quarter of 2015 and $1.2 million in the first quarter of 2014.
The following table summarizes restructuring expense by business segment:
| Three months ended March 31, | ||
| (in thousands) | 2015 | 2014 |
| Machine Clothing | $9,001 | $862 |
| Albany Engineered Composites | - | 320 |
| Total | $9,001 | $1,182 |
During the first quarter of 2015, the Company announced a plan to discontinue manufacturing operations at its press fabric manufacturing facility in Göppingen, Germany. The restructuring program was driven by the Company’s need to balance manufacturing capacity with demand. In April 2015, we completed negotiations and reached agreement on the restructuring plan with the Works Council. Approximately 50 employees will be terminated under this plan, and the restructuring expense recorded in the first quarter of 2015 reflects our estimate of the severance costs. Manufacturing operations will be discontinued in the second quarter of 2015. It is likely that we will record additional charges for asset impairments, but the amounts are presently not estimable. Whereas the affected employees are related to manufacturing operations, cost savings associated with this action will flow through Cost of goods sold. We expect the annual cost savings associated with this restructuring, expected to be realized by the first quarter of 2016, to be approximately $4 to $5 million.
For more information on our restructuring charges, see Note 5 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.
Operating Income
The following table summarizes operating income by business segment:
| 28 |
| Three months ended March 31, | ||
| (in thousands) | 2015 | 2014 |
| Machine Clothing | $35,689 | $36,142 |
| Albany Engineered Composites | (3,811) | (3,475) |
| Corporate expenses | (11,729) | (12,066) |
| Total | $20,149 | $20,601 |
Other Earnings Items
| Three months ended March 31, | ||
| (in thousands) | 2015 | 2014 |
| Interest expense, net | $2,676 | $2,918 |
| Other (income)/expenses, net | (3,285) | (467) |
| Income tax expense | 8,519 | 7,457 |
| Net income attributable to the noncontrolling interest | 26 | 72 |
Interest Expense, net
First quarter Interest expense, net, decreased $0.2 million principally due to lower debt. For more information on borrowings and interest rates, see Note 13 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.
Other (Income)/Expenses, net
Other (income)/expenses, net included the following:
| · | Foreign currency revaluations of intercompany balances resulted in gains of $2.4 million during the first quarter of 2015 and gains of $0.5 million in the first quarter of 2014. |
| · | Sale of the Company’s total equity investment in an unaffiliated company resulted in a gain of $0.9 million. |
Income Tax
The Company has operations which constitute a taxable presence in 19 countries outside of the United States. All of these countries except one had income tax rates that were lower than the United States federal tax rate of 35% during the periods reported. The jurisdictional location of earnings is a significant component of our effective tax rate each year and therefore on our overall income tax expense.
The Company’s effective tax rates for the first quarter of 2015 and 2014 were 41.0% and 41.1%, respectively. The tax rate is affected by recurring items, such as the income tax rate in the U.S. and in non-U.S. jurisdictions and the mix of income earned in those jurisdictions. The tax rate is also affected by U.S. tax costs on foreign earnings that have been or will be repatriated to the U.S., and by discrete items that may occur in any given year but are not consistent from year to year.
Significant items that impacted the tax rates in the first quarter of 2015 included the following (percentages reflect the effect of each item as a percentage of Income before income taxes):
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| · | The income tax rate on continuing operations, excluding discrete items, was 40.0%. |
| · | The increase in the tax rate on continuing operations was due primarily to the impact of restructuring charges in Germany, where the Company is unable to record a tax benefit related to the expense. |
| · | Other discrete charges of $0.2 million (1.0%) were recognized. |
Significant items that impacted the first quarter 2014 tax rate included the following:
| · | The income tax rate on continuing operations, excluding discrete items, was 35.0%. |
| · | A discrete charge of $0.9 million (4.9%) related to provision for tax audits and contingencies. |
| · | A $0.2 million (1.2%) net tax expense related to other discrete items. |
Segment Results of Operations
Machine
Clothing Segment
Business Environment and Trends
MC is our primary business segment and accounted for nearly 90% of our consolidated revenues during the first three months of 2015. Machine clothing products are purchased primarily by manufacturers of paper and paperboard.
According to RISI, Inc., global production of paper and paperboard is expected to grow at an annual rate of approximately 2% over the next five years, driven primarily by secular demand increases in Asia and South America, with stabilization in the mature markets of Europe and North America.
Shifting demand for paper, across different paper grades as well as across geographical regions, continues to drive the elimination of papermaking capacity in areas with significant established capacity, primarily in the mature markets of Europe and North America. At the same time, the newest, most efficient machines are being installed in areas of growing demand, including Asia and South America generally, as well as tissue and towel paper grades in all regions. Recent technological advances in paper machine clothing, while contributing to the papermaking efficiency of customers, have lengthened the useful life of many of our products and had an adverse impact on overall paper machine clothing demand.
The Company’s manufacturing and product platforms position us well to meet these shifting demands across product grades and geographic regions. Our strategy for meeting these challenges continues to be to grow share in all markets, with new products and technology, and to maintain our manufacturing footprint to align with global demand, while we offset the effects of inflation through continuous productivity improvement.
We have incurred significant restructuring charges in recent periods as we reduced Machine Clothing manufacturing capacity in the United States, Germany, France, and Sweden.
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Review of Operations
| Three months ended March 31, | ||||||||
| (in thousands, except percentages) | 2015 | 2014 | ||||||
| Net sales | $ | 158,494 | $ | 164,088 | ||||
| Gross profit | 75,260 | 73,870 | ||||||
| % of net sales | 47.5 | % | 45.0 | % | ||||
| Operating income | 35,689 | 36,142 | ||||||
Net Sales
Net sales were affected by the following:
| · | Sales were strong in every region, particularly in Europe and Asia. |
| · | Changes in currency translation rates had the effect of decreasing 2015 sales by $11.3 million. |
| · | Excluding the effect of changes in currency translation rates, sales increased 3.5% compared to the same period in 2014. |
Gross Profit
| · | The increase in gross profit was principally due to higher sales volume, favorable product mix, and the impact of cost-reduction activities. |
Operating Income
Despite the increase in gross profit, operating income decreased principally due to the net effect of the following:
| · | Restructuring charges of $9.0 million in the first quarter of 2015, compared to $0.9 million in 2014. |
| · | Revaluation of nonfunctional currency assets and liabilities resulted in first quarter gains of $2.9 million in 2015, compared to losses of $0.2 million in 2014. |
| · | Lower STG&R expenses principally resulting from the effect of changes in currency translation rates which lowered STG&R by $3.3 million. |
Albany
Engineered Composites Segment
Business Environment and Trends
AEC, including ASC, provides highly engineered advanced composite structures based on proprietary technology to customers in the aerospace and defense industries. AEC’s largest program relates to CFM International’s LEAP engine, which is scheduled to enter into service in 2016. AEC, through ASC, is the exclusive supplier of advanced composite fan blades and cases for this program under a long-term supply contract. In 2014, approximately 20 percent of this segment’s sales were related to U.S. government contracts or programs.
Review of Operations
| 31 |
| Three months ended March 31, | ||||||||
| (in thousands, except percentages) | 2015 | 2014 | ||||||
| Net sales | $ | 22,830 | $ | 16,219 | ||||
| Gross profit | 1,815 | 1,293 | ||||||
| % of net sales | 8.0 | % | 8.0 | % | ||||
| Operating income/(loss) | (3,811 | ) | (3,457 | ) | ||||
Net Sales
| · | AEC sales increased $6.6 million compared to the first quarter of 2014 and were principally due to growth in the LEAP program. |
| · | Approximately half of AEC sales were related to LEAP production activities, which were $4.6 million ahead of a weak Q1 2014, when sales were affected by a temporary lag due to start-up and inventory effects. |
Gross Profit
The increase in gross profit is attributable to the sales increase noted above.
Long-term contracts
AEC has contracts with certain customers, including its contract for the LEAP program, where revenue is determined by cost, plus a defined profit margin. Revenue earned under these arrangements accounted for approximately 49 percent and 40 percent of total revenue for the first three months of 2015 and 2014, respectively.
In addition, AEC has long-term fixed price contracts. In accounting for those contracts, we estimate the profit margin expected at the completion of the contract and recognize a pro-rata share of that profit during the course of the contract using a cost-to-cost or units of delivery approach. Changes in estimated contract profitability will affect revenue and gross profit when the change occurs, which could have a significant favorable or unfavorable effect on revenue and gross profit in any reporting period. Changes in contract estimates had minimal impact on gross profit in the first quarter of 2015, but reduced gross profit by $0.6 million in the same period of 2014.
The table below provides a summary of long-term fixed price contracts that were in process at the end of each period.
| Three months ended March 31, | ||
| (in thousands) | 2015 | 2014 |
| Revenue earned during period | $5,198 | $2,661 |
| Total value of contracts in process | 34,892 | 26,465 |
| Revenue recognized to date | 23,329 | 12,262 |
| Revenue to be recognized in future periods | 11,563 | 14,203 |
One of the important projects for our operations in Boerne, Texas, which has been in development for several years, is the production of composite components for the BR 725, which is
| 32 |
the engine that powers the Gulfstream 650. We have now entered what is anticipated to be a very long production period. As of March 31, 2015, we have capitalized development costs of $9.6 million which will be allocated to future deliveries. We are currently delivering parts on time, and are meeting all customer requirements. The contract for the BR725 program, which was signed in 2007, sets very aggressive pricing levels. We will have to pay careful attention in the coming quarters to the projected life-of-program profitability as we gain more production experience.
Operating Income/(Loss)
| · | The operating loss increased in 2015 due to higher STG&R expenses. |
Liquidity and Capital Resources
Cash Flow Summary
| Three months ended March 31, | ||
| (in thousands) | 2015 | 2014 |
| Net income | $12,239 | $10,693 |
| Depreciation and amortization | 15,354 | 15,908 |
| Changes in working capital | (20,318) | (18,043) |
| Gain on disposition of assets | (1,056) | - |
| Changes in long-term liabilities, deferred taxes and other credits | (277) | (214) |
| Other operating items | 467 | 504 |
| Net cash provided by operating activities | 6,409 | 8,848 |
| Net cash used in investing activities | (9,447) | (14,897) |
| Net cash provided by/(used in) financing activities | 5,679 | (6,681) |
| Effect of exchange rate changes on cash flows | (11,605) | (1,557) |
| Decrease in cash and cash equivalents | (8,964) | (14,287) |
| Cash and cash equivalents at beginning of year | 179,802 | 222,666 |
| Cash and cash equivalents at end of period | $170,838 | $208,379 |
Operating activities
Cash provided by operating activities was $6.4 million for the first three months of 2015, compared to $8.8 million in the same period last year. First quarter changes in working capital resulted in a use of cash totaling $20.3 million in 2015 and $18.0 million in 2014. Compared to the first quarter of 2014, changes in Accounts receivable used $24.6 million of cash flow, while the cash flows from Inventories improved $6.0 million. Changes in Accrued liabilities resulted in a use of cash of $1.6 million in 2015 compared to $12.8 million in 2014. In the first quarter of each year, we make payments related to incentive compensation which generally cause cash flows related to accrued liabilities to be negative. In the first quarter of 2015, that negative amount was partially offset by new restructuring accruals. Cash paid for income taxes was $7.1 million and $6.7 million for the first three months of 2015 and 2014, respectively.
At March 31, 2015, we had $171 million of cash and cash equivalents, of which $158 million was held by subsidiaries outside of the United States. As disclosed in Note 7 contained in Item 1, “Notes to Consolidated Financial Statements”, we determined that all but $59.4 million of this amount
| 33 |
(which represents the amount of prior year earnings to be repatriated to the United States at some point in the future) is intended to be utilized by these non-U.S. operations for an indefinite period of time. Our current plans do not anticipate that we will need funds generated from foreign operations to fund our domestic operations or satisfy debt obligations in the United States. In the event that such funds were to be needed to fund operations in the U.S., and if associated accruals for U.S. tax have not already been provided, we would be required to accrue and pay additional U.S. taxes to repatriate these funds.
Investing Activities
Capital spending for equipment and software was $12.2 million for the first three months of 2015, including $6.2 million for AEC. The Company expects full-year capital expenditure spending of $65 to $75 million.
Financing Activities
Dividends have been declared each quarter since the fourth quarter of 2001. Decisions with respect to whether a dividend will be paid, and the amount of the dividend, are made by the Board of Directors each quarter. To the extent the Board declares cash dividends in the future, we expect to pay such dividends out of operating cash flows. Future cash dividends will also depend on debt covenants and on the Board’s assessment of our ability to generate sufficient cash flows.
Capital Resources
We finance our business activities primarily with cash generated from operations and borrowings, largely through our revolving credit agreement as discussed below. Our subsidiaries outside of the United States may also maintain working capital lines with local banks, but borrowings under such local facilities tend not to be significant. Substantially all of our cash balance at March 31, 2015 was held by non-U.S. subsidiaries. Based on cash on hand and credit facilities, we anticipate that the Company has sufficient capital resources to operate for the foreseeable future. We were in compliance with all debt covenants as of March 31, 2015.
On March 26, 2013, we entered into a $330 million, unsecured Five-Year Revolving Credit Facility Agreement ("Credit Agreement"), under which $182 million of borrowings were outstanding as of March 31, 2015. The applicable interest rate for borrowings under the Credit Agreement is LIBOR plus a spread, based on our leverage ratio at the time of borrowing. At the time of the last borrowing on March 23, 2015, the spread was 1.375%. The spread is based on a pricing grid, which ranges from 1.25% to 1.875%, based on our leverage ratio.
On July 16, 2010, we entered into interest rate hedging transactions that have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $105 million of the indebtedness drawn under the Credit Agreement at the rate of 2.04% until July 16, 2015. Under the terms of these transactions, we pay the fixed rate of 2.04% and the counterparties pay a floating rate based on the three-month LIBOR rate at each quarterly calculation date, which on January 16, 2015 was 0.26%. The net effect is to fix the effective interest rate on $105 million of indebtedness at 2.04%, plus the applicable spread, until these swap agreements expire. On March 31, 2015, the all-in rate on the $105 million of debt was 3.415%.
On May 20, 2013, we entered into interest rate hedging transactions for the period July 16, 2015 through March 16, 2018. These transactions have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $110 million of indebtedness drawn under the
| 34 |
Credit Agreement at the rate of 1.414% during this period. Under the terms of these transactions, we pay the fixed rate of 1.414% and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly calculation date, which on March 31, 2015 was 0.17625%. The net effect is to fix the effective interest rate on $110 million of indebtedness at 1.414%, plus the applicable spread, during the swap period.
As of March 31, 2015, our leverage ratio was 1.28 to 1.00 and our interest coverage ratio was 13.94 to 1.00. We may purchase our Common Stock or pay dividends to the extent our leverage ratio remains at or below 3.50 to 1.00, and may make acquisitions with cash provided our leverage ratio would not exceed 3.50 to 1.00 after giving pro forma effect to the acquisition.
These interest rate swaps are accounted for as hedges of future cash flows. For more information on our interest rate swaps, see Note 13 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.
Off-Balance Sheet Arrangements
As of March 31, 2015, we have no off-balance sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.
Recent Accounting Pronouncements
The information set forth under Note 17 contained in Item 1, “Notes to Consolidated Financial Statements”, which is incorporated herein by reference.
Non-GAAP Measures
This Form 10-Q contains certain items, such as earnings before interest, taxes, depreciation and amortization (EBITDA), Adjusted EBITDA, sales excluding currency effects, income tax rate excluding adjustments, net debt, net income attributable to the Company, excluding adjustments (on an absolute and per-share basis), and certain income and expense items on a per- share basis that could be considered non-GAAP financial measures. Such items are provided because management believes that, when presented together with the GAAP items to which they relate, they provide additional useful information to investors regarding the Company’s operational performance. Presenting increases or decreases in sales, after currency effects are excluded, can give management and investors insight into underlying sales trends. An understanding of the impact in a particular period of specific restructuring costs, or other gains and losses, on operating income or EBITDA can give management and investors additional insight into period performance, especially when compared to periods in which such items had a greater or lesser effect, or no effect. All non-GAAP financial measures in this report relate to the Company’s continuing operations.
The effect of changes in currency translation rates is calculated by converting amounts reported in local currencies into U.S. dollars at the exchange rate of a prior period. That amount is then compared to the U.S. dollar amount reported in the current period. The Company calculates Income tax adjustments by adding discrete tax items to the effect of a change in tax rate for the reporting period. The Company calculates its income tax rate, exclusive of income tax adjustments, by removing income tax adjustments from total income tax expense, then dividing that result by income before income taxes. The Company calculates EBITDA by removing the following from Net income: Interest expense net, Income tax expense, and Depreciation and amortization. Adjusted EBITDA is calculated
| 35 |
by: adding to EBITDA costs associated with restructuring; adding (or subtracting) revaluation losses (or gains); subtracting (or adding) gains (or losses) from the sale of investments; and subtracting Income attributable to the noncontrolling interest in Albany Safran Composites, LLC (ASC). The Company believes that EBITDA and Adjusted EBITDA provide useful information to investors because they provide an indication of the strength and performance of the Company's ongoing business operations, including its ability to fund discretionary spending such as capital expenditures and strategic investments, as well as its ability to incur and service debt. While depreciation and amortization are operating costs under GAAP, they are non-cash expenses equal to current period allocation of costs associated with capital and other long-lived investments made in prior periods. While restructuring expenses, foreign currency revaluation losses or gains, and gains or losses from sales of investments have an impact on the Company's net income, removing them from EBITDA can provide, in the opinion of the Company, a better measure of operating performance. EBITDA is also a calculation commonly used by investors and analysts to evaluate and compare the periodic and future operating performance and value of companies. EBITDA, as defined by the Company, may not be similar to EBITDA measures of other companies. Such EBITDA measures may not be considered measurements under GAAP, and should be considered in addition to, but not as substitutes for, the information contained in the Company’s Consolidated Statements of Income.
The following tables show the calculation of EBITDA and Adjusted EBITDA:
| Three months ended March 31, 2015 | ||||
| (in thousands) | Machine Clothing |
AEC | Corporate expenses and other |
Total Company |
| Net income | $35,689 | ($3,811) | ($19,639) | $12,239 |
| Interest expense, net | - | - | 2,676 | 2,676 |
| Income tax expense | - | - | 8,519 | 8,519 |
| Depreciation and amortization | 10,205 | 2,995 | 2,154 | 15,354 |
| EBITDA | 45,894 | (816) | (6,290) | 38,788 |
| Restructuring and other, net | 9,001 | - | - | 9,001 |
| Foreign currency revaluation (gains)/losses | (2,923) | (17) | (2,431) | (5,371) |
| Gain on sale of investment | - | - | (872) | (872) |
| Pretax income attributable to noncontrolling interest in ASC | - | (26) | - | (26) |
| Adjusted EBITDA | $51,972 | ($859) | ($9,593) | $41,520 |
| Three months ended March 31, 2014 | ||||
| (in thousands) | Machine Clothing |
AEC | Corporate expenses and other |
Total Company |
| Net income | $36,142 | ($3,475) | ($21,974) | $10,693 |
| Interest expense, net | - | - | 2,918 | 2,918 |
| Income tax expense | - | - | 7,457 | 7,457 |
| Depreciation and amortization | 11,455 | 2,322 | 2,131 | 15,908 |
| EBITDA | 47,597 | (1,153) | (9,468) | 36,976 |
| Restructuring and other, net | 862 | 320 | - | 1,182 |
| Foreign currency revaluation (gains)/losses | 152 | 38 | (505) | (315) |
| Pretax income attributable to noncontrolling interest in ASC | - | (59) | - | (59) |
| Adjusted EBITDA | $48,611 | ($854) | ($9,973) | $37,784 |
The Company discloses certain income and expense items on a per-share basis. The Company believes that such disclosures provide important insight into the underlying quarterly
| 36 |
earnings and are financial performance metrics commonly used by investors. The Company calculates the quarterly per-share amount for items included in continuing operations by using the estimated effective annual tax rate and the weighted average number of shares outstanding for each period. The year-to-date earnings per-share effects are determined by adding the amounts calculated at each reporting period.
The following tables show the earnings per share effect of certain income and expense items:
| Three months ended March 31, 2015 | Pre tax | Tax | After tax | Per Share |
| (in thousands, except per share amounts) | Amounts | Effect | Effect | Effect |
| Restructuring and other, net | $9,001 | $3,420 | $5,581 | $0.18 |
| Foreign currency revaluation gains | 5,371 | 2,041 | 3,330 | 0.10 |
| Gain on sale of investment | 872 | 331 | 541 | 0.02 |
| Net discrete income tax charge | - | 219 | 219 | 0.01 |
| Three months ended March 31, 2014 | Pre tax | Tax | After tax | Per Share |
| (in thousands, except per share amounts) | Amounts | Effect | Effect | Effect |
| Restructuring and other, net | $1,182 | $414 | $768 | $0.02 |
| Foreign currency revaluation gains | 315 | 110 | 205 | 0.01 |
| Net discrete income tax charge | - | 1,104 | 1,104 | 0.03 |
The following table contains the calculation of net income per share attributable to the Company, excluding adjustments:
| Three months ended March 31, | ||
| Per share amounts (Basic) | 2015 | 2014 |
| Net income attributable to the Company | $0.38 | $0.33 |
| Adjustments: | ||
| Restructuring and other, net | 0.18 | 0.02 |
| Discrete tax charges/(benefits) | 0.01 | 0.03 |
| Foreign currency revaluation (gains)/losses | (0.10) | (0.01) |
| Gain on sale of investment | (0.02) | - |
| Net income attributable to the Company, excluding adjustments | $0.45 | $0.37 |
The following table contains the calculation of net debt:
| 37 |
| (in thousands) | March 31, 2015 |
December 31, 2014 |
December 31, 2013 |
December 31, 2012 |
| Notes and loans payable | $496 | $661 | $625 | $586 |
| Current maturities of long-term debt | 50,015 | 50,015 | 3,764 | 83,276 |
| Long-term debt | 232,092 | 222,096 | 300,111 | 235,877 |
| Total debt | 282,603 | 272,772 | 304,500 | 319,739 |
| Cash | 170,838 | 179,802 | 222,666 | 190,718 |
| Net debt | $111,765 | $92,970 | $81,834 | $129,021 |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For discussion of our exposure to market risk, refer to “Quantitative and Qualitative Disclosures About Market Risk”, which is included as an exhibit to this Form 10-Q.
Item 4. Controls and Procedures
| a) | Disclosure controls and procedures. |
The principal executive officers and principal financial officer, based on their evaluation of disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that the Company’s disclosure controls and procedures are effective for ensuring that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in filed or submitted reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.
| (b) | Changes in internal control over financial reporting. |
There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
The information set forth above under Note 15 in Item 1, “Notes to Consolidated Financial Statements” is incorporated herein by reference.
There have been no material changes in risks since December 31, 2014. For discussion of risk factors, refer to Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.
| 38 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We made no share purchases during the first quarter of 2015. We remain authorized by the Board of Directors to purchase up to 2 million shares of our Class A Common Stock.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
None.
| Exhibit No. | Description | ||
| 31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act. | ||
| 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act. | ||
| 32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code). | ||
| 99.1 | Quantitative and qualitative disclosures about market risks as reported at March 31, 2015. | ||
| 101 | The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, formatted in eXtensible Business Reporting Language (XBRL), filed herewith: | ||
| (i) | Consolidated Statements of Income for the three months ended March 31, 2015 and 2014. | ||
| (ii) | Consolidated Statements of Comprehensive Income/(Loss) for the three months ended March 31, 2015 and 2014. | ||
| (iii) | Consolidated Balance Sheets at March 31, 2015 and December 31, 2014. | ||
| (iv) | Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014. | ||
| (v) | Notes to Consolidated Financial Statements. | ||
| As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act and Section 18 of the Securities Exchange Act or otherwise subject to liability under those sections. | |||
| 39 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ALBANY INTERNATIONAL CORP. | ||
| (Registrant) | ||
| Date: May 5, 2015 | ||
| By | /s/ John B. Cozzolino | |
| John B. Cozzolino | ||
| Chief Financial Officer and Treasurer | ||
| (Principal Financial Officer) | ||
| 40 |
EXHIBIT (31.1)
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph G. Morone, certify that:
| 1. | I have reviewed this report on Form 10-Q of Albany International Corp.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| 5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: May 5, 2015
| By | /s/ Joseph G. Morone | |
| Joseph G. Morone | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) |
EXHIBIT (31.2)
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John B. Cozzolino, certify that:
| 1. | I have reviewed this report on Form 10-Q of Albany International Corp.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
| 5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: May 5, 2015
| By | /s/ John B. Cozzolino | |
| John B. Cozzolino | ||
| Chief Financial Officer and Treasurer | ||
| (Principal Financial Officer) | ||
EXHIBIT (32.1)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT
TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Albany International Corp. (the Company) on Form 10-Q for the period ending March 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the Report), Joseph G. Morone, President and Chief Executive Officer, and John B. Cozzolino, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: May 5, 2015
/s/ Joseph G. Morone
Joseph G. Morone
President and Chief Executive Officer
(Principal Executive Officer)
/s/ John B. Cozzolino
John B. Cozzolino
Chief Financial Officer and Treasurer
(Principal Financial Officer)
EXHIBIT (99.1)
MARKET RISK SENSITIVITY – AS OF March 31, 2015
We have market risk with respect to foreign currency exchange rates and interest rates. The market risk is the potential loss arising from adverse changes in these rates as discussed below.
Foreign Currency Exchange Rate Risk
We have manufacturing plants and sales transactions worldwide and therefore are subject to foreign currency risk. This risk is composed of both potential losses from the translation of foreign currency financial statements and the remeasurement of foreign currency transactions. To manage this risk, we periodically enter into forward exchange contracts either to hedge the net assets of a foreign investment or to provide an economic hedge against future cash flows. The total net assets of non-U.S. operations and long-term intercompany loans denominated in nonfunctional currencies subject to potential loss amount to approximately $530.5 million. The potential loss in fair value resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounts to $53.0 million. Furthermore, related to foreign currency transactions, we have exposure to various nonfunctional currency balances totaling $132.2 million. This amount includes, on an absolute basis, exposures to assets and liabilities held in currencies other than our local entity’s functional currency. On a net basis, we had $77.3 million of foreign currency liabilities as of March 31, 2015. As currency rates change, these nonfunctional currency balances are revalued, and the corresponding adjustment is recorded in the income statement. A hypothetical change of 10% in currency rates could result in an adjustment to the income statement of approximately $7.7 million. Actual results may differ.
Interest Rate Risk
We are exposed to interest rate fluctuations with respect to our variable rate debt, depending on general economic conditions.
On March 31, 2015, we had the following variable rate debt:
| (in thousands, except interest rates) | |||
| Short-term debt | |||
| Notes payable, end of period interest rate of 1.5% | $496 | ||
| Long-term debt | |||
| Credit agreement with borrowings outstanding, net of fixed rate portion, at an end of period interest rate of 1.56% in 2015, due in 2018 | 77,000 | ||
| Total | $77,496 |
Assuming borrowings were outstanding for an entire year, an increase of one percentage point in weighted average interest rates would increase interest expense by $0.8 million. To manage interest rate risk, we may periodically enter into interest rate swap agreements to effectively fix the interest rates on variable debt to a specific rate for a period of time.
|
Goodwill and Other Intangible Assets (Schedule of Changes in Intangible Assets and Goodwill) (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended |
|---|---|
|
Mar. 31, 2015
|
|
| Amortized intangible assets: | |
| Beginning balance | $ 385 |
| Amortization | (57) |
| Currency Translation | |
| Ending balance | 328 |
| Goodwill | |
| Beginning balance | 71,680 |
| Amortization | |
| Currency translation | (5,956) |
| Ending balance | 65,724 |
| AEC Trade Names [Member] | |
| Amortized intangible assets: | |
| Beginning balance | 29 |
| Amortization | (1) |
| Currency Translation | |
| Ending balance | 28 |
| AEC Customer Contracts [Member] | |
| Amortized intangible assets: | |
| Beginning balance | 202 |
| Amortization | (50) |
| Currency Translation | |
| Ending balance | 152 |
| AEC Technology [Member] | |
| Amortized intangible assets: | |
| Beginning balance | 154 |
| Amortization | (6) |
| Currency Translation | |
| Ending balance | $ 148 |