Revenue Recognition

3 Months Ended

Mar. 31, 2018

Revenue Recognition [Abstract]

Revenue Recognition

2. Revenue Recognition

Effective January 1, 2018, the Company adopted the provisions of ASC 606, Revenue from contracts with customers, using the modified retrospective (or cumulative effect) method for transition. Under this transition method, periods prior to 2018 have not been restated and the cumulative effect of initially applying the new standard was recorded as an adjustment to Retained earnings. The standard replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single model for recognizing revenue from contracts with customers. We applied the new accounting standard to contracts which were not completed by December 31, 2017.

In our Machine Clothing (MC) business segment, prior to 2018, we recorded revenue from the sale of a product when persuasive evidence of an arrangement existed, delivery had occurred, title was transferred, the selling price was fixed, and collectability was reasonably assured. Under the new standard, we recognize MC revenue when we satisfy our performance obligations related to the manufacture and delivery of a product, which, in certain cases, results in earlier recognition of revenue associated with these contracts. For the MC segment, the cumulative effect of adopting ASC 606 included an increase to Accounts receivable, a decrease to Inventories, and an increase to Retained earnings.

In our Albany Engineered Composites (AEC) business segment, revenue from a number of long-term contracts was, prior to 2018, recorded on the basis of the units of delivery method, which is considered an output method. Under the new standard, revenue from most of these contracts is recognized over time using an input method as the measure of progress, which generally results in earlier recognition of revenue. Prior to adoption of the new standard, the classification of revenue in excess of progress billings on long-term contracts was included in Accounts receivable. Under the new standard, such assets are considered Contract assets, which are rights to consideration that are conditional on something other than the passage of time, such as completion of remaining performance obligations. As a result of adoption of the new standard, such assets were reclassified at transition from Accounts receivable to Contract assets. In addition, under the new standard, we are required to limit our estimate of contract values to the period of the legally enforceable contract, which in many cases is considerably shorter than the contract period used under the former standard. While certain contracts are expected to be profitable over the course of the program life when including expected renewals, under the new standard, our estimate of contract revenues and costs is limited to the estimated value of enforceable rights and obligations, excluding anticipated renewals. In some cases, this shorter contract period may result in a loss contract provision, and our transition adjustment included such loss accruals. Expected losses on projects includes losses on contract options that are probable of exercise, excluding profitable options that often follow. For AEC, the cumulative effect of adopting ASC 606 included increases to Contract assets and Accrued liabilities, and decreases to Accounts receivable, Inventories and Retained earnings.

The table below presents the cumulative effect of changes made to our December 31, 2017 Consolidated Balance Sheet as the result of adoption of ASC 606:

ALBANY INTERNATIONAL CORP.

CONSOLIDATED BALANCE SHEET

(in thousands, except share data)

(unaudited)

	As previously reported at December 31, 2017		Adjustments Increase/(decrease)		Opening balance, as adjusted, January 1, 2018
ASSETS
Cash and cash equivalents	$183,727		$     -		$183,727
Accounts receivable, net	202,675		10,210		212,885
Contract assets	-		44,872		44,872
Inventories	136,519		(47,054	)	89,465
Income taxes prepaid and receivable	6,266		-		6,266
Prepaid expenses and other current assets	14,520		-		14,520
Total current assets	543,707		8,028		551,735
Property, plant and equipment, net	454,302		-		454,302
Intangibles, net	55,441		-		55,441
Goodwill	166,796		-		166,796
Deferred income taxes	68,648		1,756		70,404
Noncurrent receivables	32,811		-		32,811
Other assets	39,493		1,119		40,612
Total assets	$1,361,198		$10,903		$1,372,101
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes and loans payable	$262		$     -		$262
Accounts payable	44,899		-		44,899
Accrued liabilities	105,914		16,808		122,722
Current maturities of long-term debt	1,799		-		1,799
Income taxes payable	8,643		-		8,643
Total current liabilities	161,517		16,808		178,325
Long-term debt	514,120		-		514,120
Other noncurrent liabilities	101,555		-		101,555
Deferred taxes and other liabilities	10,991		52		11,043
Total liabilities	788,183		16,860		805,043
SHAREHOLDERS' EQUITY
Preferred stock, par value $5.00 per share;
authorized 2,000,000 shares; none issued	-		-		-
Class A Common Stock, par value $.001 per share;
authorized 100,000,000 shares; issued 37,395,753 in
2017 and 37,319,266 in 2016	37		-		37
Class B Common Stock, par value $.001 per share;
authorized 25,000,000 shares; issued and
outstanding 3,233,998 in 2017 and 2016	3		-		3
Additional paid in capital	428,423		-		428,423
Retained earnings	534,082		(5,630	)	528,452
Accumulated items of other comprehensive income:
Translation adjustments	(87,318	)	-		(87,318	)
Pension and postretirement liability adjustments	(50,536	)	-		(50,536	)
Derivative valuation adjustment	1,953		-		1,953
Treasury stock (Class A), at cost 8,431,335 shares in
2017 and 8,443,444 shares in 2016	(256,876	)	-		(256,876	)
Total Company shareholders' equity	569,768		(5,630	)	564,138
Noncontrolling interest	3,247		(327	)	2,920
Total equity	573,015		(5,957	)	567,058
Total liabilities and shareholders' equity	$1,361,198		$10,903		$1,372,101

Significant changes to our accounting policies as a result of adopting the new standard are discussed below.

For periods ending after December 31, 2017, we account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.Revenue is measured based on the consideration specified in the contract with the customer, and excludes any amounts collected on behalf of third parties. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service, or a series of distinct goods or services, to the customer which occurs either at a point in time, or over time, depending on the contract. A performance obligation is a promise in the contract to transfer a distinct good or service to the customer, and is the unit of account under the new revenue standard. “Control” refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from the product. A contract’s transaction price is allocated to each material distinct performance obligation and is recognized as revenue when, or as, the performance obligation is satisfied.

In our Machine Clothing segment, our primary performance obligation in most contracts is to provide solution-based, custom-designed fabrics and belts to the customer. We satisfy this performance obligation upon transferring control of the product to the customer at a specific point in time. Generally, the customer obtains control when the product has been received at the location specified by the customer, at which time the only remaining obligations under the contract are fulfillment costs, which are accrued when control of the product is transferred.

In the Machine Clothing segment, some contracts with certain customers may also obligate us to provide various product-related services at no additional cost to the customer. When this obligation is material in the context of the contract with the customer, we recognize a separate performance obligation and allocate revenue to those services based on their estimated standalone selling price. The standalone selling price for these services is determined based upon an analysis of the services offered and an assessment of the price we might charge for such services as a separate offering. As we typically provide such services on a stand ready-basis, we recognize this revenue over time. Revenue allocated to such service performance obligations is the only Machine Clothing revenue that is recognized over time.

In our Albany Engineered Composites (AEC) business segment, we primarily enter into contracts to manufacture and deliver highly engineered advanced composite products to our customers. The majority of AEC revenue is from short duration, firm-fixed-price orders that are placed under a master contract containing general terms and conditions applicable to all orders placed under the agreement. To determine the proper revenue recognition method, we evaluate whether two or more orders or contracts should be combined and accounted for as one single contract, and whether the combined or single contract contains single or multiple performance obligations. This evaluation requires significant judgment, and the decision to combine a group of contracts, or to allocate revenue from the combined or single contract among multiple performance obligations could have a significant impact on the amount of revenue and profit recorded in a given period. For most AEC contracts, the nature of our promise (or our performance obligation) to the customer is to manage the contract and provide a significant service of integrating a complex set of tasks and components into a single project or capability, which will often result in the delivery of multiple highly interdependent and interrelated units.

At the inception of a contract we estimate the transaction price based on our current rights, and do not contemplate future modifications (including unexercised options) or follow-on contracts until they become legally enforceable. Many AEC contracts are subsequently modified to include changes in specifications, requirements or price, which may create new or change existing enforceable rights and obligations. Depending on the nature of the modification, we consider whether to account for the modification as an adjustment to the existing contract or as a separate contract. Generally, we are able to conclude that such modifications are not distinct from the existing contract, due to the significant integration of the obligations, and the interrelated nature of tasks, provided for in the modification and the existing contract. Therefore, such modifications are accounted for as if they were part of the existing contract, and recognized as a cumulative adjustment to revenue.

Revenue is recognized over time for a large portion of our contracts in AEC as most of our contracts have provisions that, under the guidance in ASC 606, are deemed to transfer control to the customer over time. Revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress toward completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of assets to the customer which occurs as we incur costs to produce the contract deliverables. Under the cost-to-cost measure of progress, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenue, including profit, is recorded proportionally as costs are incurred. Accounting for long-term contracts requires significant judgment and estimation, which could be considerably different if the underlying circumstances were to change. When adjustments in estimated contract revenue or costs are required, any changes from prior estimates are included in revenues or earnings in the period in which the change occurs.

In other AEC contracts, revenue is recognized at a point in time because the products are offered to multiple customers, or do not have an enforceable right to payment until the product is shipped or delivered to the location specified by the customer in the contract.

AEC’s largest source of revenue is derived from the LEAP contract (see Note 3) under a cost- plus-fee agreement. Beginning in 2018, the fee is variable based on our success in achieving certain cost targets. Revenue is recognized over time as costs are incurred. Under this contract, there is significant judgment involved in determining applicable contract costs and expected margin, and therefore in determining the amount of revenue to be recognized.

Payment terms granted to MC and AEC customers reflect general competitive practices. Terms vary with product, competitive conditions, and the country of operation.

The following table provides a summary of the composition of each business segment:

Segment	Unit	Principal Product or Service	Principal Locations
Machine Clothing (MC)	Machine Clothing	Paper machine clothing: Permeable and impermeable belts used in the manufacture of paper, paperboard, tissue and towel, and pulp Engineered fabrics: Belts used in the manufacture of nonwovens, fiber cement and several other industrial applications	World-wide
Albany Engineered Composites (AEC)	Albany Safran Composites (ASC)	3D-woven, injected composite components for aircraft engines	Rochester, NH, Commercy, France, Queretero, Mexico
	Airframe and engine  Components (Other AEC)	Composite airframe and engine components for military and commercial aircraft	Salt Lake City, UT Boerne, TX Queretero, Mexico

We disaggregate revenue earned from contracts with customers for each of our business segments based on the timing of revenue recognition, and groupings used for internal review purposes.

The following table disaggregates revenue for each business segment by timing of revenue recognition:

	For the Three Months Ended
	March 31, 2018
(in thousands)	Point in Time Revenue Recognition	Over Time Revenue Recognition	Total
Machine Clothing	$147,351	$800	$148,151
Albany Engineered Composites
ASC	-	40,781	40,781
Other AEC	6,040	35,009	41,049
Total Albany Engineered Composites	6,040	75,790	81,830
Total Revenue	$153,391	$76,590	$229,981

The following table disaggregates MC segment revenue by significant product or service (paper machine clothing (PMC) and engineered fabrics), and, for PMC, the geographical region to which the paper machine clothing was sold:

	For the Three Months Ended
(in thousands)	March 31, 2018
Americas PMC	$69,858
Eurasia PMC	56,933
Engineered Fabrics	21,360
Total Machine Clothing Net sales	$148,151

In accordance with ASC 606-10-50-14, we do not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less. Contracts in the Machine Clothing segment are generally for periods of less than a year. Most contracts in the AEC segment are short duration firm-fixed price orders representing performance obligations with an original maturity of less than one year. Performance obligations as of March 31, 2018 that had an original duration of greater than one year totaled $115 million and relate primarily to firm contracts in the AEC segment. Of that amount, we expect to recognize as revenue approximately $50 million during 2018, with the remainder to be recognized between 2019 and 2021.

For some AEC contracts, we perform pre-production or nonrecurring engineering services. These costs are normally considered a fulfillment activity, rather than a performance obligation. Fulfillment activities that create resources that will be used in satisfying performance obligations in the future, and are expected to be recovered, are capitalized to Other Assets, which is classified as a noncurrent asset in the Consolidated Balance Sheets. The capitalized costs are amortized into Cost of goods sold over the period over which the asset is expected to contribute to future cash flows.

As a result of applying the cumulative effect method for transition to ASC 606, we are required to disclose the effect of the new standard on each line of the consolidated financial statements. The following tables show the balances as reported for the period ended March 31, 2018, and how the consolidated financial statements would have appeared if we had not adopted ASC 606.

ALBANY INTERNATIONAL CORP.

CONSOLIDATED STATEMENT OF INCOME

(in thousands, except per share amounts)

(unaudited)

	As reported for the Three Months Ended March 31, 2018	Adjustments to reverse effects of ASC 606		As adjusted for the Three months ended March 31, 2018 to exclude adoption of ASC 606
Net Sales	$229,981	($8,434	)	$221,547
Cost of goods sold	148,330	(6,526	)	141,804
Gross profit	81,651	(1,908	)	79,743
Selling, general, and administrative expenses	41,930	(60	)	41,870
Technical and research expenses	10,317	-		10,317
Restructuring expenses, net	8,573	-		8,573
Operating income	20,831	(1,848	)	18,983
Interest expense, net	4,288	-		4,288
Other expense, net	1,452	-		1,452
Income before income taxes	15,091	(1,848	)	13,243
Income tax expense	4,609	(601	)	4,008
Net income	10,482	(1,247	)	9,235
Net income attributable to the noncontrolling interest	237	(57	)	180
Net income attributable to the Company	$10,245	($1,190	)	$9,055
Earnings per share attributable to Company shareholders - Basic	$0.32	($0.04	)	$0.28
Earnings per share attributable to Company shareholders - Diluted	$0.32	($0.04	)	$0.28

ALBANY INTERNATIONAL CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(LOSS)

(in thousands)

(unaudited)

	As reported for the Three Months Ended March 31, 2018		Adjustments to reverse effects of ASC 606		As adjusted for the Three months ended March 31, 2018 to exclude adoption of ASC 606
Net income	$10,482		($1,247	)	$9,235
Other comprehensive income/(loss), before tax:
Foreign currency translation adjustments	17,505		(308	)	17,197
Amortization of pension liability adjustments:
Prior service credit	(1,114	)	-		(1,114	)
Net actuarial loss	1,297		-		1,297
Payments related to interest rate swaps included in earnings	180		-		180
Derivative valuation adjustment	5,715		-		5,715
Income taxes related to items of other comprehensive income/(loss):
Pension/postretirement plan remeasurement	-		-		-
Amortization of pension liability adjustment	(55	)	-		(55	)
Payments related to interest rate swaps included in earnings	(43	)	-		(43	)
Derivative valuation adjustment	(1,372	)	-		(1,372	)
Comprehensive income	32,595		(1,555	)	31,040
Comprehensive income attributable to the noncontrolling interest	230		(57	)	173
Comprehensive income attributable to the Company	$32,365		($1,498	)	$30,867

ALBANY INTERNATIONAL CORP.

CONSOLIDATED BALANCE SHEET

(in thousands, except share data)

(unaudited)

	As reported March 31, 2018		Adjustments to reverse effects of ASC 606		As adjusted for the Three months ended March 31, 2018 to exclude adoption of ASC 606
ASSETS
Cash and cash equivalents	$151,426		$    -		$151,426
Accounts receivable, net	248,538		(21,720	)	226,818
Contract assets	42,895		(42,895	)	-
Inventories	100,034		53,752		153,786
Income taxes prepaid and receivable	6,132		-		6,132
Prepaid expenses and other current assets	18,675		-		18,675
Total current assets	567,700		(10,863	)	556,837
Property, plant and equipment, net	459,388		-		459,388
Intangibles, net	53,881		-		53,881
Goodwill	168,311		-		168,311
Income taxes receivable and deferred	70,174		(1,155	)	69,019
Noncurrent receivables	35,338		-		35,338
Other assets	45,543		(1,256	)	44,287
Total assets	$1,400,335		($13,274	)	$1,387,061
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes and loans payable	$226		$    -		$226
Accounts payable	45,694		-		45,694
Accrued liabilities	122,103		(17,624	)	104,479
Current maturities of long-term debt	1,821		-		1,821
Income taxes payable	5,182		-		5,182
Total current liabilities	175,026		(17,624	)	157,402
Long-term debt	518,656		-		518,656
Other noncurrent liabilities	100,170		-		100,170
Deferred taxes and other liabilities	11,339		(51	)	11,288
Total liabilities	805,191		(17,675	)	787,516
SHAREHOLDERS' EQUITY
Preferred stock, par value $5.00 per share;
authorized 2,000,000 shares; none issued	-		-		-
Class A Common Stock, par value $.001 per share;
authorized 100,000,000 shares; issued 37,447,669 in 2018
and 37,395,753 in 2017	37		-		37
Class B Common Stock, par value $.001 per share;
authorized 25,000,000 shares; issued and
outstanding 3,233,998 in 2018 and 2017	3		-		3
Additional paid in capital	428,859				428,859
Retained earnings	533,759		4,439		538,198
Accumulated items of other comprehensive income:
Translation adjustments	(69,672	)	(308	)	(69,980	)
Pension and postretirement liability adjustments	(50,549	)	-		(50,549	)
Derivative valuation adjustment	6,433		-		6,433
Treasury stock (Class A), at cost 8,431,335 shares in 2018
and 2017	(256,876	)	-		(256,876	)
Total Company shareholders' equity	591,994		4,131		596,125
Noncontrolling interest	3,150		270		3,420
Total equity	595,144		4,401		599,545
Total liabilities and shareholders' equity	$1,400,335		($13,274	)	$1,387,061

ALBANY INTERNATIONAL CORP.

CONSOLIDATED STATEMENT OF CASH FLOW

(in thousands)

(unaudited)

	As reported for the Three Months ended March 31, 2018		Adjustments to reverse effects of ASC 606		As adjusted for the Three months ended March 31, 2018 to exclude adoption of ASC 606
OPERATING ACTIVITIES
Net income	$10,482		($1,247	)	$9,235
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation	18,302		-		18,302
Amortization	2,646		-		2,646
Change in other noncurrent liabilities	(377	)	-		(377	)
Change in deferred taxes and other liabilities	(784	)	1,103		319
Provision for write-off of property, plant and equipment	271		-		271
Non-cash interest expense	-		-		-
Compensation and benefits paid or payable in Class A Common Stock	289		-		289
Fair value adjustment on foreign currency option	37		-		37
Changes in operating assets and liabilities that (used)/provided cash:
Accounts receivable	(31,467	)	7,324		(24,143	)
Contract assets	2,116		(2,116	)	-
Inventories	(9,244	)	(8,023	)	(17,267	)
Prepaid expenses and other current assets	(4,063	)	-		(4,063	)
Income taxes prepaid and receivable	102		-		102
Accounts payable	(2,538	)	-		(2,538	)
Accrued liabilities	(1,185	)	(250	)	(1,435	)
Income taxes payable	(3,431	)	-		(3,431	)
Noncurrent receivables	2,527		-		2,527
Other, net	(2,630	)	3,209		579
Net cash provided by operating activities	(18,947	)	-		(18,947	)
Net cash used in investing activities	(15,800	)			(15,800	)
Net cash used in financing activities	(2,458	)	-		(2,458	)
Effect of exchange rate changes on cash and cash equivalents	4,904		-		4,904
Decrease in cash and cash equivalents	(32,301	)	-		(32,301	)
Cash and cash equivalents at beginning of period	183,727		-		183,727
Cash and cash equivalents at end of period	$151,426		$-		$151,426