Annual Statements Open main menu

ALBANY INTERNATIONAL CORP /DE/ - Quarter Report: 2018 June (Form 10-Q)

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: June 30, 2018

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 603-330-5850

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ √ ] No [    ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ √ ] No [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

       
Large accelerated filer  [ √ ]  Accelerated filer  [    ] 
Non-accelerated filer  [    ]  Smaller reporting company  [    ] 
    Emerging growth company  [    ] 
       

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [    ] No [ √ ]

 

The registrant had 29.0 million shares of Class A Common Stock and 3.2 million shares of Class B Common Stock outstanding as of July 24, 2018.

 

 

 

ALBANY INTERNATIONAL CORP.

TABLE OF CONTENTS

    Page No.
     
Part I Financial information  
     
  Item 1. Financial Statements 3
     Consolidated statements of income – three and six months ended June 30, 2018 and 2017 3
     Consolidated statements of comprehensive income/(loss) – three and six months ended June 30, 2018 and 2017 4
     Consolidated balance sheets as of June 30, 2018 and December 31, 2017 5
     Consolidated statements of cash flows – three and six months ended June 30, 2018 and 2017 6
     Notes to consolidated financial statements 7
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 40
 

Forward-looking statements

Item 3. Quantitative and Qualitative Disclosures about Market Risk

62
  Item 4. Controls and Procedures 62
     
Part II Other Information  
     
  Item 1. Legal Proceedings 63
  Item 1A. Risk Factors 63
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 63
  Item 3. Defaults upon Senior Securities 63
  Item 4. Mine Safety Disclosures 63
  Item 5. Other Information 63
  Item 6. Exhibits 63

 

 

 

  

 

 

 

 

 2

 

ITEM 1. FINANCIAL STATEMENTS

 

ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)

Three Months Ended
June 30,
     Six Months Ended
June 30,
2018  2017     2018  2017
        
$256,225   $215,571   Net sales  $486,206   $414,848 
164,047   152,393   Cost of goods sold  312,377   275,642 
                 
92,178   63,178   Gross profit  173,829   139,206 
36,707   41,314    Selling, general, and administrative expenses  78,637   81,721 
10,198   9,973    Technical and research expenses  20,515   20,235 
2,589   2,036    Restructuring expenses, net  11,162   4,717 
                 
42,684   9,855   Operating income  63,515   32,533 
4,621   4,285    Interest expense, net  8,909   8,613 
726   2,558    Other expense, net  2,178   3,384 
                 
37,337   3,012   Income before income taxes  52,428   20,536 
7,031   1,779    Income tax expense  11,640   8,329 
                 
30,306   1,233   Net income  40,788   12,207 
(59)  116   Net income/(loss) attributable to the noncontrolling interest  178   251 
$30,365   $1,117   Net income attributable to the Company  $40,610   $11,956 
                 
$0.94   $0.03   Earnings per share attributable to Company shareholders - Basic  $1.26   $0.37 
                 
$0.94   $0.03   Earnings per share attributable to Company shareholders - Diluted  $1.26   $0.37 
                 
        Shares of the Company used in computing earnings per share:        
32,257   32,166     Basic  32,239   32,147 
                 
32,273   32,200     Diluted  32,255   32,182 
                 
$0.17   $0.17   Dividends declared per share, Class A and Class B  $0.34   $0.34 

 
The accompanying notes are an integral part of the consolidated financial statements

 

 

 3

 

ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(in thousands)
(unaudited)

 

Three Months Ended
June 30,
     Six Months Ended
June 30,
        
2018  2017     2018  2017
                 
$30,306   $1,233   Net income  $40,788   $12,207 
                 
        Other comprehensive income/(loss), before tax:        
(30,851)  17,436   Foreign currency translation adjustments  (13,346)  27,374 
(518)  -   Pension/postretirement curtailment  (518)  - 
        Amortization of pension liability adjustments:        
(1,113)  (1,113)   Prior service credit  (2,227)  (2,226)
1,291   1,353    Net actuarial loss  2,588   2,700 
54   343   Payments and amortization related to interest rate swaps included in earnings  234   943 
2,211   (1,414)  Derivative valuation adjustment  7,926   (998)
                 
        Income taxes related to items of other comprehensive income/(loss):        
155   -   Pension/postretirement curtailment  155   - 
(53)  (72)  Amortization of pension liability adjustment  (108)  (142)
(13)  (130)  Payments related to interest rate swaps included in earnings  (56)  (358)
(530)  537   Derivative valuation adjustment  (1,902)  379 
939   18,173   Comprehensive income  33,534   39,879 
(48)  124   Comprehensive income attributable to the noncontrolling interest  182   264 
$987   $18,049   Comprehensive income attributable to the Company  $33,352   $39,615 

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

 4

 

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

 

   June 30,  December 31,
   2018  2017
ASSETS        
Cash and cash equivalents  $154,744   $183,727 
 Accounts receivable, net  249,482   202,675 
 Contract assets  59,244   - 
 Inventories  97,659   136,519 
 Income taxes prepaid and receivable  6,087   6,266 
 Prepaid expenses and other current assets  19,559   14,520 
  Total current assets  586,775   543,707 
         
 Property, plant and equipment, net  450,694   454,302 
 Intangibles, net  52,322   55,441 
 Goodwill  165,474   166,796 
 Deferred income taxes  81,237   68,648 
 Noncurrent receivables  36,981   32,811 
 Other assets  48,978   39,493 
  Total assets  $1,422,461   $1,361,198 
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
  Notes and loans payable  $26   $262 
  Accounts payable  54,752   44,899 
  Accrued liabilities  125,255   105,914 
  Current maturities of long-term debt  1,844   1,799 
  Income taxes payable  14,620   8,643 
  Total current liabilities  196,497   161,517 
         
  Long-term debt  523,186   514,120 
  Other noncurrent liabilities  97,563   101,555 
  Deferred taxes and other liabilities  13,556   10,991 
  Total liabilities  830,802   788,183 
         
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 37,447,819 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  429,635   428,423 
  Retained earnings  558,639   534,082 
  Accumulated items of other comprehensive income:        
  Translation adjustments  (102,888)  (87,318)
  Pension and postretirement liability adjustments  (48,422)  (50,536)
  Derivative valuation adjustment  8,155   1,953 
  Treasury stock (Class A), at cost 8,418,620 shares in 2018        
 and 8,431,335 shares in 2017  (256,602)  (256,876)
  Total Company shareholders' equity  588,557   569,768 
  Noncontrolling interest  3,102   3,247 
 Total equity  591,659   573,015 
  Total liabilities and shareholders' equity  $1,422,461   $1,361,198 

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

 5

 

ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
(unaudited)

 

Three Months Ended
June 30, 
          Six Months ended
June 30, 
                     
2018   2017             2018   2017
      OPERATING ACTIVITIES          
$30,306   $1,233 Net income       $40,788   $12,207
      Adjustments to reconcile net income to net cash provided by operating activities:      
        17,114             15,201   Depreciation             35,416           29,845
          2,559               2,632   Amortization               5,205             5,281
           (854)                 (758)   Change in other noncurrent liabilities            (1,231)            (2,354)
         (6,118)              (6,745)   Change in deferred taxes and other liabilities            (6,902)            (7,357)
            853                  534   Provision for write-off of property, plant and equipment           1,124               830
            154                  212   Non-cash interest expense                 154               423
          1,047                  681   Compensation and benefits paid or payable in Class A Common Stock           1,336             1,670
              34                    75   Fair value adjustment on foreign currency option               71               129
                     
       Changes in operating assets and liabilities that (used)/provided cash: 
       (12,903)            (14,395)   Accounts receivable            (44,370)          (15,136)
       (13,877)                      -   Contract assets            (11,761)                    -
         (1,371)               1,655   Inventories              (10,615)          (13,266)
         (1,157)                 (780)   Prepaid expenses and other current assets            (5,220)            (2,697)
               (5)              (2,817)   Income taxes prepaid and receivable                 97            (2,817)
        11,420              (1,459)   Accounts payable               8,882             2,065
          5,853             10,071   Accrued liabilities               4,668              (900)
        10,020               1,978   Income taxes payable               6,589              (508)
         (1,643)              (3,621)   Noncurrent receivables              (4,170)            (7,536)
         (5,745)               4,692   Other, net                (3,321)             3,938
35,687   8,389   Net cash provided by operating activities   16,740   3,817
                     
      INVESTING ACTIVITIES          
       (23,352)            (21,360)   Purchases of property, plant and equipment          (39,123)          (46,405)
             (23)                 (353)   Purchased software                  (52)              (391)
(23,375)   (21,713)   Net cash used in investing activities   (39,175)   (46,796)
                     
      FINANCING ACTIVITIES          
        10,020             16,114   Proceeds from borrowings             23,031           32,259
         (5,653)                 (540)   Principal payments on debt            (14,143)          (21,142)
                 -                      -   Taxes paid in lieu of share issuance            (1,652)            (1,364)
                3                  100   Proceeds from options exercised                 150               175
         (5,482)              (5,467)   Dividends paid            (10,956)          (10,926)
(1,112)   10,207   Net cash (used in)/provided by financing activities (3,570)   (998)
                     
         (7,882)              (1,424) Effect of exchange rate changes on cash and cash equivalents          (2,978)             1,027
                     
          3,318              (4,541) (Decrease)/increase in cash and cash equivalents          (28,983)          (42,950)
      151,426            143,333 Cash and cash equivalents at beginning of period       183,727         181,742
$154,744   $138,792 Cash and cash equivalents at end of period   $154,744   $138,792

 

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

 6

 

ALBANY INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Significant Accounting Policies

Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of results for such periods. Albany International Corp. (Albany, the Registrant, the Company, we, us, or our) consolidates the financial results of its subsidiaries for all periods presented. The results for any interim period are not necessarily indicative of results for the full year.

The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in Albany International Corp.’s Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Risk Factors,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” “Quantitative and Qualitative Disclosures about Market Risk” and the Consolidated Financial Statements and Notes thereto included in Items 1A, 3, 7, 7A and 8, respectively, of the Albany International Corp. Annual Report on Form 10-K for the year ended December 31, 2017.

Effective January 1, 2018, we adopted the provisions of ASC 606, Revenue from contracts with customers, using the modified retrospective method for transition as discussed in Note 2, Revenue Recognition. Accounting policies have been applied consistently to periods presented, except for the application of ASC 606, as further described in Note 2.

 

 

 7

 

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 at January 1, 2018. 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 8

 

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   7,667   210,342 
  Contract assets  -   47,415   47,415 
  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 

 

 

 

 9

 

 

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 performance obligation in 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 agreement containing general terms and conditions applicable to all orders placed under the master 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

 

 10

 

the existing contract. Therefore, such modifications are accounted for as if they were part of the existing contract, and we accumulate the values of such modifications in our estimates of contract value.

 

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 any adjustments of estimated contract revenue or costs is 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

Reporting 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 Queretaro, Mexico
Airframe and engine Components (Other AEC) Composite airframe and engine components for military and commercial aircraft Salt Lake City, UT Boerne, TX Queretaro, Mexico
     

 

 

 

 11

 

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

 

The following table disaggregates revenue for each reporting unit by timing of revenue recognition:

         
    For the Six Months Ended  
    June 30, 2018  
(in thousands) Point in Time Revenue Recognition Over Time Revenue Recognition Total
         
Machine Clothing $309,186 $1,600 $310,786
         
Albany Engineered Composites      
  ASC                       -                   87,806                87,806
  Other AEC                11,744                75,870                87,614
Total Albany Engineered Composites                11,744              163,676              175,420
         
         
Total Revenue $320,930 $165,276 $486,206

 

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

     
    For the Six Months Ended
(in thousands) June 30, 2018
     
Americas PMC $152,686
Eurasia PMC                                    116,500
Engineered Fabrics                                     41,600
Total Machine Clothing Net sales $310,786

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 June 30, 2018 that had an original duration of greater than one year totaled $105 million and relate primarily to firm contracts in the AEC segment. Of that amount, we expect to recognize as revenue approximately $35 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.

 

 12

 

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 June 30, 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 June 30, 2018   Adjustments to reverse effects of ASC 606   As adjusted for the Three Months Ended June 30, 2018 to exclude adoption of ASC 606    As reported for the Six Months Ended June 30, 2018   Adjustments to reverse effects of ASC 606   As adjusted for the Six Months Ended June 30, 2018 to exclude adoption of ASC 606 
                     
$256,225   $400   $256,625 Net sales $486,206   ($8,034)   $478,172
164,047   2,304   166,351 Cost of goods sold 312,377   (4,222)   308,155
                     
        92,178            (1,904)           90,274 Gross profit 173,829   (3,812)   170,017
        36,707                   5           36,712    Selling, general, and administrative expenses 78,637   (55)   78,582
        10,198                    -           10,198    Technical and research expenses 20,515                    -   20,515
          2,589                    -             2,589    Restructuring expenses, net 11,162                    -   11,162
                     
        42,684            (1,909)           40,775 Operating income 63,515   (3,757)   59,758
          4,621                    -             4,621    Interest expense, net 8,909                    -   8,909
            726                    -               726    Other expense, net           2,178                    -             2,178
                     
        37,337            (1,909)           35,428 Income before income taxes  52,428   (3,757)   48,671
7,031   (507)   6,524    Income tax expense 11,640   (1,108)   10,532
                     
        30,306            (1,402)           28,904  Net income          40,788            (2,649)           38,139
             (59)                (27)                (86) Net income/(loss) attributable to the noncontrolling interest             178                (84)                 94
$30,365   ($1,375)   $28,990  Net income attributable to the Company  $40,610   ($2,565)   $38,045
                     
$0.94   ($0.04)   $0.90 Earnings per share attributable to Company shareholders - Basic $1.26   ($0.08)   $1.18
                     
$0.94   ($0.04)   $0.90 Earnings per share attributable to Company shareholders - Diluted $1.26   ($0.08)   $1.18

 

 

 

 

 

 13

 

ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(LOSS)
(in thousands)
(unaudited)
                     
                     
As reported for the Three Months Ended June 30, 2018   Adjustments to reverse effects of ASC 606   As adjusted for the Three Months Ended June 30, 2018 to exclude adoption of ASC 606    As reported for the Six Months Ended June 30, 2018   Adjustments to reverse effects of ASC 606   As adjusted for the Six Months Ended June 30, 2018 to exclude adoption of ASC 606 
                     
$30,306   ($1,402)   $28,904 Net income $40,788   ($2,649)   $38,139
                       
          Other comprehensive income/(loss), before tax:          
      (30,851)              839         (30,012) Foreign currency translation adjustments       (13,346)              531         (12,815)
          (518)                  -             (518) Pension/postretirement curtailment           (518)                  -             (518)
          Amortization of pension liability adjustments:          
       (1,113)                  -          (1,113)    Prior service credit        (2,227)                  -          (2,227)
        1,291                  -           1,291    Net actuarial loss         2,588                  -           2,588
             54                  -                54 Payments and amortization related to interest rate swaps included in earnings            234                  -              234
        2,211                  -           2,211 Derivative valuation adjustment         7,926                  -           7,926
                     
          Income taxes related to items of other comprehensive income/(loss):          
           155                  -              155 Pension/postretirement curtailment            155                  -              155
            (53)                  -               (53) Amortization of pension liability adjustment           (108)                  -             (108)
            (13)                  -               (13) Payments related to interest rate swaps included in earnings             (56)                  -               (56)
          (530)                  -             (530) Derivative valuation adjustment        (1,902)                  -          (1,902)
           939             (563)              376 Comprehensive income        33,534          (2,118)          31,416
            (48)               (27)               (75) Comprehensive income attributable to the noncontrolling interest            182               (84)                98
$987   ($536)   $451 Comprehensive income attributable to the Company $33,352   ($2,034)   $31,318

 

 

 

 

 

 

 

 

 14

 

ALBANY INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
(unaudited)

 

      
      
   As reported June 30, 2018  Adjustments to reverse effects of ASC 606  As adjusted for June 30, 2018 to exclude adoption of ASC 606
ASSETS            
  Cash and cash equivalents  $154,744   $-   $154,744 
  Accounts receivable, net  249,482   (4,286)  245,196 
  Contract assets  59,244   (59,244)  - 
  Inventories  97,659   51,736   149,395 
  Income taxes prepaid and receivable  6,087   -   6,087 
  Prepaid expenses and other current assets  19,559   -   19,559 
      Total current assets  586,775   (11,794)  574,981 
             
  Property, plant and equipment, net  450,694   -   450,694 
  Intangibles, net  52,322   -   52,322 
  Goodwill  165,474   -   165,474 
  Deferred income taxes  81,237   (648)  80,589 
  Noncurrent receivables  36,981   -   36,981 
  Other assets  48,978   (1,256)  47,722 
      Total assets  $1,422,461   ($13,698)  $1,408,763 
             
LIABILITIES AND SHAREHOLDERS' EQUITY            
  Notes and loans payable  $26   $-   $26 
  Accounts payable  54,752   -   54,752 
  Accrued liabilities  125,255   (17,485)  107,770 
  Current maturities of long-term debt  1,844   -   1,844 
  Income taxes payable  14,620   -   14,620 
      Total current liabilities  196,497   (17,485)  179,012 
             
  Long-term debt  523,186   -   523,186 
  Other noncurrent liabilities  97,563   -   97,563 
  Deferred taxes and other liabilities  13,556   (52)  13,504 
      Total liabilities  830,802   (17,537)  813,265 
             
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 37,447,819 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  429,635   -   429,635 
  Retained earnings  558,639   $3,065   561,704 
  Accumulated items of other comprehensive income:            
    Translation adjustments  (102,888)  531   (102,357)
    Pension and postretirement liability adjustments  (48,422)  -   (48,422)
    Derivative valuation adjustment  8,155   -   8,155 
  Treasury stock (Class A), at cost 8,418,620 shares in 2018            
   and 8,431,335 shares in 2017  (256,602)  -   (256,602)
      Total Company shareholders' equity  588,557   3,596   592,153 
  Noncontrolling interest  3,102   243   3,345 
 Total equity  591,659   3,839   595,498 
      Total liabilities and shareholders' equity  $1,422,461   ($13,698)  $1,408,763 

 

 

 

 

 15

 

ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOW
(in thousands)
(unaudited)

 

                             
                             
As reported for the Three Months Ended June 30, 2018   Adjustments to reverse effects of ASC 606   As adjusted for the Three Months Ended June 30, 2018 to exclude adoption of ASC 606           As reported for the Six Months Ended June 30, 2018   Adjustments to reverse effects of ASC 606   As adjusted for the Six Months Ended June 30, 2018 to exclude adoption of ASC 606
          OPERATING ACTIVITIES              
$30,306   ($1,402)   $28,904 Net income       $40,788   ($2,649)   $38,139
          Adjustments to reconcile net income to net cash provided by operating activities:
 17,114     -    17,114   Depreciation      35,416     -    35,416
 2,559     -    2,559   Amortization      5,205     -    5,205
   (854)     -      (854)   Change in other noncurrent liabilities     (1,231)     -     (1,231)
  (6,118)      (507)     (6,625)   Change in deferred taxes and other liabilities     (6,902)     (1,108)     (8,010)
  853     -     853   Provision for write-off of property, plant and equipment  1,124     -    1,124
  154     -     154   Non-cash interest expense       154     -     154
 1,047     -    1,047   Compensation and benefits paid or payable in Class A Common Stock  1,336     -    1,336
  34     -     34   Fair valule adjustment on foreign currency option   71     -     71
                             
           Changes in operating assets and liabilities that (used)/provided cash: 
  (12,903)     (14,277)     (27,180)   Accounts receivable       (44,370)     (3,727)     (48,097)
  (13,877)    13,877     -   Contract assets       (11,761)    11,761     -
  (1,371)    2,304     933   Inventories         (10,615)     (4,222)     (14,837)
  (1,157)     -     (1,157)   Prepaid expenses and other current assets     (5,220)     -     (5,220)
  (5)     -     (5)   Income taxes prepaid and receivable     97     -     97
 11,420     -    11,420   Accounts payable      8,882     -    8,882
 5,853      5    5,858   Accrued liabilities      4,668      (55)    4,613
 10,020     -    10,020   Income taxes payable      6,589     -    6,589
  (1,643)     -     (1,643)   Noncurrent receivables       (4,170)     -     (4,170)
  (5,745)     -     (5,745)   Other, net         (3,321)     -     (3,321)
35,687     -   35,687   Net cash provided by operating activities   16,740     -   16,740
                             
(23,375)     -    (23,375)   Net cash used in investing activities   (39,175)     -    (39,175)
(1,112)     -    (1,112)   Net cash used in financing activities   (3,570)     -    (3,570)
                             
  (7,882)     -     (7,882) Effect of exchange rate changes on cash and cash equivalents   (2,978)     -     (2,978)
                             
 3,318     -    3,318 (Decrease)/increase in cash and cash equivalents     (28,983)     -      (28,983)
  151,426     -      151,426 Cash and cash equivalents at beginning of period   183,727     -      183,727
$154,744    $   -    $154,744 Cash and cash equivalents at end of period   $154,744    $   -    $154,744

 

 

3. Reportable Segments

As described in Note 2, the Company adopted the provisions of ASC 606, “Revenue from contracts with customers”, effective January 1, 2018, using the cumulative effect method for transition. Periods prior to 2018 have not been restated. The following tables show data by reportable segment, reconciled to consolidated totals, and the impact that ASC 606 had on the three- and six-month periods ended June 30, 2018:

 

 16

 

         
  Three months ended June 30,   Three months ended
June 30, 2018
(in thousands) 2018 2017   Increase/(decrease)
attributable to application of ASC 606
Net sales        
Machine Clothing $162,635 $146,572   $857
Albany Engineered Composites         93,590       68,999                (1,257)
Consolidated total $256,225 $215,571   ($400)
Operating income/(loss)        
Machine Clothing  $50,843 $38,425   $1,786
Albany Engineered Composites            4,092      (17,828)                    123
Corporate expenses        (12,251)      (10,742)    
Operating income  $42,684 $9,855   $1,909
Reconciling items:        
Interest income             (438)           (340)                      -   
Interest expense           5,059         4,625                      -   
Other expense, net              726         2,558                      -   
Income before income taxes $37,337 $3,012   $1,909

         
  Six months ended June 30,   Six months ended
June 30, 2018
(in thousands) 2018 2017   Increase/(decrease)
attributable to application of ASC 606
Net sales        
Machine Clothing $310,786 $289,399   $5,068
Albany Engineered Composites       175,420      125,449                 2,966
Consolidated total $486,206 $414,848   $8,034
Operating income/(loss)        
Machine Clothing  $81,613 $76,688   $2,765
Albany Engineered Composites            6,366      (22,942)                    992
Corporate expenses        (24,464)      (21,213)                      -   
Operating income  $63,515 $32,533   $3,757
Reconciling items:        
Interest income             (820)           (447)                      -   
Interest expense           9,729         9,060                      -   
Other expense, net           2,178         3,384                      -   
Income before income taxes $52,428 $20,536   $3,757

 

 17

 

At the January 1, 2018 date of adoption of ASC 606, Machine Clothing assets increased by $22 million, and AEC assets decreased by $13 million. Except for the effect of adopting ASC 606, there were no material changes in the total assets of the reportable segments for the six months ended June 30, 2018.

As described in Note 4, effective January 1, 2018, the Company adopted an accounting update that affects the classification of components of pension and postretirement benefit costs. As a result of adopting that update, some costs that were previously included in operating expenses shall now be included in Other expense, net. Periods prior to 2018 have been restated to conform to the current year presentation (see Note 4).

The Albany Engineered Composites (AEC) segment, including Albany Safran Composites, LLC (ASC), in which our customer SAFRAN Group (Safran) owns a 10 percent noncontrolling interest, provides highly engineered, advanced composite structures to customers in the aerospace and defense industries. AEC’s largest program relates to CFM International’s LEAP engine. Under this program, AEC through ASC, is the exclusive supplier of advanced composite fan blades and cases under a long-term supply contract. The manufacturing spaces used for the production of parts under the long-term supply agreement are owned by Safran, and leased to the Company at either market rent or a minimal cost. All lease expense is reimbursable by Safran to the Company due to the cost-plus nature of the supply agreement. AEC net sales to Safran were $88.4 million in the first six months of 2018 and $56.8 million in the first six months of 2017. The total of Accounts receivables, Contract assets and Noncurrent receivables due from Safran amounted to $96.8 million and $58.6 million as of June 30, 2018 and December 31, 2017, respectively.

In the second quarter of 2017, the Company recorded a charge to Cost of goods sold of approximately $15.8 million associated with revisions in the estimated profitability of two AEC contracts. The charge was principally due to second-quarter 2017 downward revisions of estimated customer demand for the components manufactured by AEC related to the BR 725 and A380 programs. The charge included a $4.0 million write-off of program inventory costs, and a reserve for future losses of $11.8 million, which is included in Accrued liabilities in the Consolidated Balance Sheets.

The table below presents restructuring costs by reportable segment (also see Note 5):

         
  Three months ended June 30, Six months ended
June 30,
(in thousands) 2018 2017 2018 2017
Machine Clothing  $1,800 $805 $10,152 $916
Albany Engineered Composites               558       1,231            779         3,801
Corporate expenses              231            -               231              -   
 Total   $2,589 $2,036 $11,162 $4,717

 

 

 18

 

 

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. Supplemental Executive Retirement Plan ("SERP") were similarly frozen. The eligibility, benefit formulas, and contribution requirements for plans outside of the U.S. vary by location.

Other Postretirement Benefits

The Company also provides certain postretirement benefits to retired employees in the U.S. and Canada. The Company accrues the cost of providing postretirement benefits during the active service period of the employees. The Company currently funds the plans as claims are paid.

The composition of the net periodic benefit plan cost for the six months ended June 30, 2018 and 2017, was as follows:

         
  Pension plans Other postretirement benefits
(in thousands) 2018 2017 2018 2017
Components of net periodic benefit cost:        
Service cost $1,391 $1,307 $116 $122
Interest cost           3,621         3,671           1,013         1,107
Expected return on assets          (4,470)        (4,003)                  -
Curtailment gain             (518)                -                  -                -
Amortization of prior service cost/(credit)               17              18          (2,244)        (2,244)
Amortization of net actuarial loss           1,110         1,295           1,478         1,405
Net periodic benefit cost $1,151 $2,288 $363 $390

In 2018, the Company adopted the provisions of ASU 2017-07, “Compensation – Retirement Benefits: improving the presentation of net periodic pension cost and net periodic postretirement benefit cost”. This accounting update requires that service cost for defined benefit pension and postretirement plans be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Additionally, the other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The Company elected to report the components of net periodic benefit cost other than the service component in the line item, Other expense, net in the Consolidated Statements of Income.

We restated 2017 expenses using the application of a practical expedient, which permits the usage of amounts disclosed in the prior year Pension and Other Postretirement benefit plans footnote as the estimation basis for applying the retrospective presentation requirements. The tables below show the 2017 amounts reclassified by segment and financial statement line item that resulted from adopting this update:

 

Effect by segment operating expenses:

 

 

 19

 

   
(in thousands)  Increase/(decrease) in expense for the six months ended June 30, 2017
Machine Clothing ($9)
Albany Engineered Composites                                                           -   
Corporate expenses                                                     (1,240)
Total operating expenses ($1,249)
   
Other expense, net $1,249

 

Effect by Statement of Income line item:

 

   
(in thousands)  Increase/(decrease) in expense for the six months ended June 30, 2017
Cost of goods sold ($247)
Selling, general and administrative expenses                                                      (1,002)
Total operating expenses  ($1,249)
   
Other expense, net $1,249

 

 

5. Restructuring

On October 5, 2017, the Company filed a form 8-K to announce the initiation of discussions regarding a proposal to discontinue operations at its Machine Clothing production facility in Sélestat, France. During 2017, we incurred $1.1 million of restructuring expense associated with this proposal but were unable to reasonably estimate the total costs for severance and other charges associated with the proposal as there was no assurance, at that time, that approval for the proposal would be obtained. In the first quarter of 2018 the plan was approved by the French Labor Ministry. The restructuring program was driven by the Company’s need to balance manufacturing capacity with demand. In the first six months of 2018, we recorded restructuring expense of $8.6 million, which includes our estimate of the severance and outplacement costs for the approximately 50 positions that will be terminated under this plan. To date, we have recorded $9.7 million of restructuring charges related to this action. The Company continues to assess property, plant and equipment in that location to determine if equipment will be transferred to other facilities, or if the value of the assets can be recovered through a sale. Depending on the outcome of that assessment, additional restructuring charges could be recorded in future periods.

AEC restructuring charges for the first six months of 2018 and 2017 principally relate to work force reductions in Salt Lake City, Utah and Rochester, New Hampshire. To date, we have recorded $5.8 million of restructuring charges related to these actions.

The following table summarizes charges reported in the Consolidated Statements of Income under “Restructuring expenses, net”:

 

 

 20

 

 

         
  Three months ended June 30, Six months ended
June 30,
(in thousands) 2018 2017 2018 2017
Machine Clothing  $1,800 $805 $10,152 $916
Albany Engineered Composites               558       1,231            779         3,801
Corporate expenses              231            -               231              -   
 Total   $2,589 $2,036 $11,162 $4,717

       
Six months ended June 30, 2018 Total restructuring costs incurred    Termination and other costs   Impairment of  assets
(in thousands)      
Machine Clothing   $10,152  $10,152  $-
Albany Engineered Composites          779      779         -
Corporate expenses         231      231         -
Total    $11,162  $11,162  $-

       
Six months ended June 30, 2017 Total restructuring costs incurred    Termination
and other
costs  
Impairment
of assets
(in thousands)      
Machine Clothing   $916  $916  $-
Albany Engineered Composites        3,801       3,356        445
Corporate expenses          -         -           - 
Total   $4,717 $4,272 $445

We expect that approximately $8.4 million of Accrued liabilities for restructuring at June 30, 2018 will be paid within one year and approximately $0.4 million will be paid in the following year. The table below presents the year-to-date changes in restructuring liabilities for 2018 and 2017, all of which related to termination costs:

           
  December 31, Restructuring   Currency June 30, 
(in thousands) 2017 charges accrued Payments translation
/other
2018
           
Total termination and other costs $3,326 $11,162 ($5,323) ($378)  $8,787

 

 21

 

           
  December 31, Restructuring   Currency June 30,
(in thousands) 2016 charges accrued Payments translation
/other
2017
           
Total termination and other costs $5,559 $4,272 ($4,513) $65  $5,383

 

 

6. Other expense, net

 

The components of Other expense, net are:

         
  Three months ended
June 30,
Six months ended
June 30,
(in thousands)   2018 2017 2018 2017
Currency transaction (gains)/losses ($9) $1,948 $681 $2,049
Bank fees                96              111              204            259
Components of net periodic pension and postretirement cost other than service              259              627              525         1,249
Other                380             (128)              768           (173)
Total   $726 $2,558 $2,178 $3,384

In 2018, the Company adopted the provisions of ASU 2017-07. This accounting update affected the classification of components of net periodic benefit cost, other than service cost, to be reported separately from the service cost component and outside of operating income. The Company elected to report other components of net periodic pension and postretirement cost in Other expense, net. The comparative consolidated statement of income was restated as required by this update. Further detail of this accounting update is disclosed in Note 4.

 

7. Income Taxes

The following table presents components of income tax expense for the three and six months ended June 30, 2018 and 2017:

 

 22

 

  Three months ended
June 30,
Six months ended
June 30,
(in thousands) 2018 2017 2018 2017
Income tax based on income from continuing operations, at estimated tax rates of 30.1% and 32.8%, respectively $11,239 $989 $15,779 $6,744
Provision for change in estimated tax rate          (359)            36               -                 -
Income tax before discrete items       10,880        1,025      15,779          6,744
         
Discrete tax expense:        
     Exercise of US Stock Options              (3)               - (126)             (55)
     Impact of mandatory repatriation        (1,099)               - (1,099)                 -
Adjustments to prior period tax liabilities          (206)          189          (252)            189
Provision for/resolution of tax audits and contingencies, net         2,443          599        2,448          1,451
Changes in valuation allowance        (4,986)               -       (4,986)                 -
Other               2           (34)          (124)                 -
Total income tax expense $7,031 $1,779 $11,640 $8,329

The second quarter estimated effective tax rate on continuing operations was 30.1 percent in 2018, compared to 32.8 percent for the same period in 2017.

Income tax expense for the quarter was computed in accordance with ASC 740-270 “Income Taxes – Interim Reporting”. Under this method, loss jurisdictions which cannot recognize a tax benefit with regard to their generated losses are excluded from the annual effective tax rate (AETR) calculation and their taxes are recorded discretely in each quarter.

The Company’s tax rate is affected by recurring items such as the income tax rate in the U.S. and in non-U.S. jurisdictions and the mix of income earned in those jurisdictions, including changes in losses and income from excluded loss jurisdictions, and the impact of discrete items in the respective quarter. Additionally, tax adjustments resulting from the 2017 Tax Cut and Jobs Act (TCJA) have affected the Company’s 2018 AETR, including the global intangible low-taxed income (GILTI) inclusion, the foreign-derived intangible income (FDII) deduction and the corporate U.S. tax rate reduction from 35% to 21%.

The TCJA significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing a transition tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.

In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (SAB 118), which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the TCJA. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. The Company elected to apply the measurement period guidance provided in SAB 118.

Deferred tax assets and liabilities: At December 31, 2017, the Company re-measured certain deferred tax assets and liabilities based on the federal rate of 21%. However, the Company is still analyzing certain aspects of the TCJA, such as IRC section 162(m), and refining its calculations which

 

 23

 

could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. As such, no adjustment has been recorded to the provisional amount previously recorded in 2017.

Foreign tax effects: At December 31, 2017, the Company recorded a provisional federal tax charge due to the transition tax on deemed repatriation of foreign earnings. As of June 30, 2018, the Company is still analyzing its U.S. tax attributes such as foreign earnings and profits, foreign tax paid, and other tax components involved in foreign tax credit calculations, however, the Company has recorded a net $1.1 million reduction to the provisional transition tax in Q2 2018. The $1.1 million adjustment is comprised of a $1.9 million federal tax benefit attributable to adjustments discovered while analyzing the Post 1986 E&P and tax pools through 2016 and a $0.8 million state tax charge based on interpretive guidance issued by various states during the quarter on how the deemed mandatory repatriation would be taxed in those jurisdictions. These amounts are still considered provisional as the Company continues to analyze guidance and legislation published by the taxing jurisdictions.

The Company has elected to account for the global intangible low-taxed income (GILTI) as a current-period expense when incurred (the “period cost method”). The estimated net GILTI inclusion calculated by the Company (including the gross up on the GILTI Inclusion and the apportioned foreign tax credits applied to GILTI) was $18 million and increased the AETR by 2.3%. The Company also calculated an estimated foreign-derived intangible income (FDII) deduction of $9 million which decreased the AETR by 2.1%. Because of the complexity of the GILTI and FDII tax rules and the lack of legislative guidance, the Company continues to evaluate these provisions of the TCJA and the application of ASC 740, Income Taxes. The final impact on the Company from the TCJA’s GILTI and FDII tax legislation may differ from the estimate calculated by the Company. Such differences could be material, due to, among other things, changes in interpretations of the TCJA, future legislative action to address questions that arise because of the TCJA, changes in accounting standards for income taxes or related interpretations in response to the TCJA, or any updates or changes to estimates the Company has utilized to calculate the GILTI inclusion and FDII deduction.

The Company continues to believe that the Base Erosion Anti-Abuse Tax (BEAT) does not apply under the Company’s current policies. Therefore no adjustments for BEAT have been recorded.

The Company records the residual U.S. and foreign taxes on certain amounts of foreign earnings that have been targeted for repatriation to the U.S. These amounts are not considered to be indefinitely reinvested, and the Company accrued for the tax cost on these earnings to the extent they cannot be repatriated in a tax-free manner. The Company has targeted for repatriation $92.9 million of current year and prior year earnings of the Company’s foreign operations. If these earnings were distributed, the Company would be subject to foreign withholding taxes of $2.2 million which have already been recorded.

The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including major jurisdictions such as the United States, Brazil, Canada, France, Germany, Italy, Mexico, and Switzerland. The open tax years in these jurisdictions range from 2007 to 2018. The Company is currently under audit in non-U.S. tax jurisdictions, including but not limited to Canada and Italy. During the second quarter of 2018, the Company recorded a charge for additional uncertain tax positions of $2.4 million as a result of developments in ongoing tax audits.

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 nil to a net decrease of $0.7 million, from the

 

 24

 

reevaluation of uncertain tax positions arising in examinations, in appeals, or in the courts, or from the closure of tax statutes of limitations.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of June 2018, management determined that there was sufficient positive evidence to conclude that it is more likely than not that deferred tax assets in Germany are realizable. Therefore, the Company reversed the previously recorded valuation allowance in the second quarter of 2018 which resulted in a discrete tax benefit of $5.0 million.

In October 2016, an accounting update, ASU 2016-16 was issued which modifies the recognition of income tax effects on intercompany transfers of assets, other than inventory. The Company adopted this update effective January 1, 2018, which resulted in a decrease of $0.5 million to deferred taxes liabilities, with an offsetting increase to retained earnings.

 

8. Earnings Per Share

The amounts used in computing earnings per share and the weighted average number of shares of potentially dilutive securities are as follows:

         
  Three months ended
June 30,
Six months ended
June 30,
(in thousands, except market price and earnings per share) 2018 2017 2018 2017
         
Net income attributable to the Company $30,365 $1,117 $40,610 $11,956
         
Weighted average number of shares:        
Weighted average number of shares used in        
calculating basic net income per share       32,257       32,166       32,239       32,147
Effect of dilutive stock-based compensation plans:        
Stock options              16              34              16              35
         
Weighted average number of shares used in        
calculating diluted net income per share       32,273       32,200       32,255       32,182
         
Average market price of common stock used        
for calculation of dilutive shares $61.86 $48.44 $62.83 $47.47
         
Net income per share:        
Basic $0.94 $0.03 $1.26 $0.37
Diluted $0.94 $0.03 $1.26 $0.37

 

9. Noncontrolling Interest

The table below presents a reconciliation of income attributable to the noncontrolling interest and noncontrolling equity in the Company’s subsidiary Albany Safran Composites, LLC, and the impact that the ASC 606 revenue standard had on Company results for the first six months of 2018, included in the consolidated financial statements:

 

 

 25

 

     
  Six months ended
June 30,
(in thousands) 2018 2017
Net income of Albany Safran Composites (ASC)  $2,419  $3,029
Less: Return attributable to the Company's preferred holding            635         515
Net income of ASC available for common ownership  $1,784  $2,514
Ownership percentage of noncontrolling shareholder 10% 10%
Net income attributable to noncontrolling interest  $178  $251
     
Noncontrolling interest, beginning of year  $3,247  $3,767
Decrease attributable to application of ASC 606           (327)            -   
Net income attributable to noncontrolling interest            178         251
Changes in other comprehensive income attributable to noncontrolling interest                4           13
Noncontrolling interest  $3,102  $4,031

 

10. Accumulated Other Comprehensive Income (AOCI)

The table below presents changes in the components of AOCI for the period December 31, 2017 to June 30, 2018:

         
(in thousands) Translation adjustments Pension and postretirement liability adjustments Derivative valuation adjustment Total Other Comprehensive Income
December 31, 2017 ($87,318) ($50,536) $1,953 ($135,901)
Other comprehensive income/(loss) before reclassifications            (15,570)               2,224          6,024                (7,322)
Pension/postretirement curtailment gain, net of tax                   (363)                     (363)
Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax                178                    178
Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax                    253                      253
Net current period other comprehensive income            (15,570)               2,114          6,202                (7,254)
June 30, 2018 ($102,888) ($48,422) $8,155 ($143,155)

The table below presents changes in the components of AOCI for the period December 31, 2016 to June 30, 2017:

 

 26

 

         
(in thousands) Translation adjustments Pension and postretirement liability adjustments Derivative valuation adjustment Total Other Comprehensive Income
December 31, 2016 ($133,298) ($51,719) $828 ($184,189)
Other comprehensive income/(loss) before reclassifications             28,453              (1,079)           (619)               26,755
Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax                585                    585
Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax                    332                      332
Net current period other comprehensive income             28,453                 (747)             (34)               27,672
June 30, 2017 ($104,845) ($52,466) $794 ($156,517)

The table below presents the expense/(income) amounts reclassified, and the line items of the Consolidated Statements of Income that were affected for the periods ended June 30, 2018 and 2017.

         
  Three months ended June 30,  Six months ended
June 30, 
(in thousands) 2018 2017 2018 2017
Pretax Derivative valuation reclassified from Accumulated Other Comprehensive Income:        
Expense related to interest rate swaps included in Income
before taxes (a)
$54 $343 $234 $943
Income tax effect (13) (130) (56) (358)
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income $41 $213 $178 $585
         
Pretax pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income:        
Pension/postretirement curtailment ($518)  $-    ($518)  $-   
Amortization of prior service credit (b)        (1,113)     (1,113)         (2,227)      (2,226)
Amortization of net actuarial loss (b)         1,291      1,353          2,588       2,700
Total pretax amount reclassified (340) 240 (157) 474
Income tax effect 102 (72) 47 (142)
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income ($238) $168 ($110) $332

 

(a)Included in Interest expense are payments related to the interest rate swap agreements and amortization of swap buyouts (see Note 16).
(b)These accumulated other comprehensive income components are included in Other expense, net (see Note 4). The curtailment adjustment was included in restructuring expenses, net.

 

11. Accounts Receivable

 

 27

 

Accounts receivable includes trade receivables and bank promissory notes. As a result of adopting ASC 606, Revenue in excess of progress billings on long-term contracts in the Albany Engineered Composites segment was reclassified to Contract assets in 2018. Including that reclassification, the cumulative effect from the adoption of ASC 606 was an increase to Accounts receivable of $7.7 million as Accounts receivable recorded in the cumulative adjustment exceeded that reclassification.

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 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 June 30, 2018 and December 31, 2017, Accounts receivable consisted of the following:

     
(in thousands)   June 30,
 2018
December 31,
 2017
Trade and other accounts receivable $238,763 $152,375
Bank promissory notes 18,070 20,255
Revenue in excess of progress billings                       - 37,964
Allowance for doubtful accounts               (7,351)               (7,919)
Total accounts receivable $249,482 $202,675

In connection with certain sales in Asia, the Company accepts a bank promissory note as customer payment. The notes may be presented for payment at maturity, which is less than one year.

The Company also has Noncurrent receivables in the AEC segment that represent revenue earned which has extended payment terms. The Noncurrent receivables will be invoiced to the customer, with 2% interest, over a 10-year period starting in 2020.

As of June 30, 2018 and December 31, 2017, Noncurrent receivables consisted of the following:

     
(in thousands)   June 30,
 2018
December 31,
 2017
Noncurrent receivables $36,981 $32,811

 

12. Contract Assets and Liabilities

Beginning in 2018, Contract assets includes unbilled amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is utilized, and revenue recognized exceeds the amount billed to the customer. For periods prior to 2018, that asset was included in Accounts receivable. At the date of adoption of ASC 606, we recorded Contract assets of $47.4 million, which included the amount that was in Accounts receivable as of December 31, 2017, and additional transition adjustments that resulted from the retrospective application of ASC 606 to contracts in process at the time of adoption.

 

 28

 

Contract assets are transferred to Accounts receivable, net when the entitlement to pay becomes unconditional. Contract liabilities include advance payments and billings in excess of revenue recognized. Contract liabilities are included in Accrued liabilities in the Consolidated Balance Sheet.

Contract assets and Contract liabilities are reported on the Consolidated Balance Sheets in a net position on a contract-by-contract basis at the end of each reporting period. Contract assets and contract liabilities were as follows:

     
(in thousands)   June 30,
 2018
December 31,
 2017
Contract assets $59,244 $  -
Contract liabilities 4,220 -

Contract assets increased $11.8 million during the six month period ended June 30, 2018 as compared to the January 1, 2018 opening balance sheet, as adjusted for the adoption of ASC 606 (see Note 2). The increase was primarily due to an increase in unbilled revenue related to the satisfaction of performance obligations, in excess of the amounts billed to customers. There were no impairment losses related to our Contract assets during the six month period ended June 30, 2018.

Contract liabilities increased $3.5 million during the six month period ended June 30, 2018, as compared to the January 1, 2018 opening balance sheet, as adjusted for the adoption of ASC 606, primarily due to increased billings in excess of revenue recognized. Revenue recognized for the six month period ended June 30, 2018, that was included in the Contract liability balance at the beginning of the year was less than $1 million, and represented revenue primarily in the ASC reporting unit.

 

13. Inventories

Costs included in inventories are raw materials, labor, supplies and allocable depreciation and overhead. Raw material inventories are valued on an average cost basis. Other inventory cost elements are valued at cost, using the first-in, first-out method. The Company writes down the inventories for estimated obsolescence, and to lower of cost or net realizable value based upon assumptions about future demand and market conditions. If actual demand or market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related write-down represents the new cost basis of such inventories. The decrease in Inventories in 2018, compared to the balances as of December 31, 2017, was principally due to the cumulative effect of adopting ASC 606 (see Note 2) which decreased Inventories by $47.1 million.

As of June 30, 2018 and December 31, 2017, inventories consisted of the following:

 

 29

 

     
(in thousands)   June 30,  2018 December 31, 2017
Raw materials $39,822 $42,215
Work in process       44,526               65,448
Finished goods       13,311               28,856
Total inventories $97,659 $136,519

 

14. Goodwill and Other Intangible Assets

 

Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination.

Determining the fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates, and future market conditions, among others. Goodwill and other long-lived assets are reviewed for impairment whenever events, such as significant changes in the business climate, plant closures, changes in product offerings, or other circumstances indicate that the carrying amount may not be recoverable.

To determine fair value, we utilize two market-based approaches and an income approach. Under the market-based approaches, we utilize information regarding the Company as well as publicly available industry information to determine earnings multiples and sales multiples. Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn.

In the second quarter of 2018, the Company applied the qualitative assessment approach in performing its annual evaluation of goodwill and concluded that no impairment provision was required. There were no amounts at risk due to the large spread between the fair, and carrying value, of each reporting unit.

We are continuing to amortize certain patents, trade names, customer relationships, customer contracts and technology assets that have finite lives. The gross carrying value, accumulated amortization and net values of intangible assets and goodwill as of June 30, 2018 and December 31, 2017, were as follows:

 

 

 

 30

 

         
As of June 30, 2018
(in thousands)
 Weighted average amortization life in years Gross carrying amount Accumulated amortization Net carrying amount
         
Amortized intangible assets:        
AEC trade names 15 $140 ($127) $13
AEC technology 15 370 (302) 68
Customer relationships 15         48,421 (7,269) 41,152
Customer contracts 6         17,471 (6,559) 10,912
Other intangibles 5             322 (145) 177
Net amortized intangible assets   $66,724 ($14,402) $52,322
                           
Unamortized intangible assets:        
MC Goodwill   $69,744  $- $69,744
AEC Goodwill           95,730                           -              95,730
Total unamortized intangible assets:   $165,474  $- $165,474

 

         
As of December 31, 2017
(in thousands)
Weighted average amortization life in years Gross carrying amount Accumulated amortization Net carrying amount
         
Amortized intangible assets:        
AEC trade names 15 $140 ($125) $15
AEC technology 15 370 (290)                    80
Customer relationships 15         48,421 (5,654)              42,767
Customer contracts 6         17,471 (5,102)              12,369
Other intangibles 5             322 (112)                   210
Net amortized intangible assets   $66,724 ($11,283) $55,441
                           
Unamortized intangible assets:        
MC Goodwill   $71,066  $- $71,066
AEC Goodwill           95,730                           -              95,730
Total unamortized intangible assets: $166,796  $- $166,796

 

 

The changes in intangible assets, net and goodwill from December 31, 2017 to June 30, 2018, were as follows:

 

 31

 

         
(in thousands) December
31, 2017
Amortization Currency Translation June 30, 2018
         
Amortized intangible assets:        
AEC trade names $15  $(2)  $- $13
AEC technology 80 (12)                      - 68
Customer relationships              42,767 (1,615)                      - 41,152
Customer contracts              12,369 (1,457)                      - 10,912
Other intangibles                   210 (33)                      - 177
Net amortized intangible assets $55,441 ($3,119)  $- $52,322
                     
Unamortized intangible assets:        
MC Goodwill $71,066  $-  $(1,322) $69,744
AEC Goodwill              95,730                        -                      - 95,730
Total unamortized intangible assets: $166,796  $-  $(1,322) $165,474

Estimated amortization expense of intangibles for the years ending December 31, 2018 through 2022, is as follows:

   
  Annual amortization
Year (in thousands)
2018 $6,234
2019                         6,234
2020                         6,234
2021                         6,163
2022                         3,949

 

 

15. Financial Instruments

 

Long-term debt, principally to banks and bondholders, consists of:

 

 

 32

 

     
(in thousands, except interest rates)  June 30, 2018 December 31, 2017
     
Revolving credit agreement with borrowings outstanding at an end of period interest rate of 3.58% in 2018 and 3.40% in 2017 (including the effect of interest rate hedging transactions, as described below), due in 2022 $511,000 $501,000
     
Obligation under capital lease, matures 2022                   14,030             14,919
     
Long-term debt 525,030 515,919
     
Less: current portion (1,844) (1,799)
     
Long-term debt, net of current portion $523,186 $514,120

On November 7, 2017, we entered into a $685 million unsecured Five-Year Revolving Credit Facility Agreement (the “Credit Agreement”) which amended and restated the prior $550 million Agreement, entered into on April 8, 2016 (the “Prior Agreement”). Under the Credit Agreement, $511 million of borrowings were outstanding as of June 30, 2018. The applicable interest rate for borrowings was LIBOR plus a spread, based on our leverage ratio at the time of borrowing. At the time of the last borrowing on June 18, 2018, the spread was 1.500%. The spread was based on a pricing grid, which ranged from 1.250% to 1.750%, based on our leverage ratio. Based on our maximum leverage ratio and our Consolidated EBITDA, and without modification to any other credit agreements, as of June 30, 2018, we would have been able to borrow an additional $174 million under the Agreement.

The Credit Agreement contains customary terms, as well as affirmative covenants, negative covenants and events of default comparable to those in the Prior Agreement. The Borrowings are guaranteed by certain of the Company's subsidiaries.

Our ability to borrow additional amounts under the Credit Agreement is conditional upon the absence of any defaults, as well as the absence of any material adverse change (as defined in the Credit Agreement).

The Company has a long-term capital lease obligation for real property in Salt Lake City, Utah. The lease has an implied interest rate of 5.0% and matures in 2022.

The following schedule presents future minimum annual lease payments under the capital lease obligation and the present value of the minimum lease payments, as of June 30, 2018.

 

 

 33

 

   
Years ending December 31, (in thousands)
2018 $1,236
2019 2,473
2020 2,520
2021 2,520
2022 7,373
Total minimum lease payments 16,122
Less:  Amount representing interest (2,092)
   
Present value of minimum lease payments $14,030

On November 27, 2017, we terminated our interest rate swap agreements, originally entered into on May 9, 2016, that had effectively fixed the interest rate on $300 million of revolving credit borrowings, in order to enter into a new interest rate swap with a greater notional amount, and the same maturity as the Credit Agreement. We received cash of $6.3 million when the swap agreements were terminated and that payment will be amortized into interest expense through March 2021.

On May 6, 2016, we terminated other interest rate swap agreements that had effectively fixed the interest rate on $120 million of revolving credit borrowings, in order to enter into a new interest rate swap with a greater notional amount, and the same maturity as the Credit Agreement. We paid $5.2 million to terminate the swap agreements and that cost will be amortized into interest expense through June 2020.

On November 28, 2017, we entered into interest rate swap agreements for the period December 18, 2017 through October 17, 2022. These transactions have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $350 million of indebtedness drawn under the Credit Agreement at the rate of 2.11% during the period. Under the terms of these transactions, we pay the fixed rate of 2.11% and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly calculation date, which on June 18, 2018 was 2.09%, during the swap period. On June 18, 2018, the all-in-rate on the $350 million of debt was 3.61%.

These interest rate swaps are accounted for as a hedge of future cash flows, as further described in Note 16 of the Notes to Consolidated Financial Statements. No cash collateral was received or pledged in relation to the swap agreements.

Under the Credit Agreement, we are currently required to maintain a leverage ratio (as defined in the agreement) of not greater than 3.75 to 1.00 for each fiscal quarter ending prior to (but not including) September 30, 2019, and 3.50 to 1.00 for each fiscal quarter ending on or after September 30, 2019, and minimum interest coverage (as defined) of 3.00 to 1.00.

As of June 30, 2018, our leverage ratio was 2.23 to 1.00 and our interest coverage ratio was 10.73 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 does not exceed the limits noted above.

Indebtedness under 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 June 30, 2018.

 

 

 34

 

16. Fair-Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting principles establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Level 3 inputs are unobservable data points for the asset or liability, and include situations in which there is little, if any, market activity for the asset or liability. We had no Level 3 financial assets or liabilities at December 31, 2017 or June 30, 2018.

The following table presents the fair-value hierarchy for our Level 1 and Level 2 financial and non-financial assets and liabilities, which are measured at fair value on a recurring basis:

 

    June 30, 2018 December 31, 2017
       
    Quoted prices in active markets   Significant other observable inputs   Quoted prices in active markets   Significant other observable inputs  
(in thousands)   (Level 1)   (Level 2)   (Level 1)   (Level 2)  
Fair Value                  
Assets:                  
Cash equivalents    $18,728    $-    $13,601    $-  
Prepaid expenses and other current assets:                  
   Foreign currency options                    41                   -                      -                       -     
Other Assets:                  
Common stock of unaffiliated foreign public company (a)                  962                     999                    -     
Interest rate swaps                     -                 8,985 (b)                 -                    313 (c)
                   

 

(a)Original cost basis $0.5 million
(b)Net of $39.8 million receivable floating leg and $30.8 million liability fixed leg
(c)Net of $34.9 million receivable floating leg and $34.6 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.

 

 35

 

We operate our business in many regions of the world, and currency rate movements can have a significant effect on operating results. Foreign currency instruments are entered into periodically, and consist of foreign currency option contracts and forward contracts that are valued using quoted prices in active markets obtained from independent pricing sources. These instruments are measured using market foreign exchange prices and are recorded in the Consolidated Balance Sheets as Other current assets and Accounts payable, as applicable. Changes in fair value of these instruments are recorded as gains or losses within Other expense, 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 mitigate risk by evaluating the creditworthiness of counterparties and by monitoring the currency exchange and interest rate markets while reviewing the hedging risks and contracts to ensure compliance with our internal guidelines and policies.

Changes in exchange rates can result in revaluation gains and losses that are recorded in Selling, General and Administrative expenses or Other expense, net. Revaluation gains and losses occur when our business units have cash, intercompany (recorded in Other expense, 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 Statements of Income is dependent on our net income or expense position in each non-U.S. currency in which we do business. A net income position exists when sales realized in a particular currency exceed expenses paid in that currency; a net expense position exists if the opposite is true.

The interest rate swaps are accounted for as hedges of future cash flows. The fair value of our interest rate swaps are derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve, and is included in Other assets and/or Other noncurrent liabilities in the Consolidated Balance Sheets. Unrealized gains and losses on the swaps flow through the caption Derivative valuation adjustment in the Shareholders’ equity section of the Consolidated Balance Sheets, to the extent that the hedges are highly effective. As of June 30, 2018, these interest rate swaps were determined to be highly effective hedges of interest rate cash flow risk. Any gains and losses related to the ineffective portion of the hedges will be recognized in the current period in earnings. Amounts accumulated in Other comprehensive income are reclassified as Interest expense, net when the related interest payments (that is, the hedged forecasted transactions), and amortization related to the swap buyouts, affect earnings. Interest expense related to payments under the active swap agreements totaled $0.7 million for the six month period ended June 30, 2018 and $0.5 million for the six month period ended June 30, 2017. Additionally, non-cash interest expense/(income) related to the amortization of swap buyouts totaled ($0.4) million for the six month period ended June 30, 2018 and $0.4 million of the six month period ended June 30, 2017.

Gains/(losses) related to changes in fair value of derivative instruments that were recognized in Other expense, net in the Consolidated Statements of Income were as follows:

 

 

 36

 

         
  Three months ended   June  30, Six months ended   June 30,
(in thousands) 2018 2017 2018 2017
         
Derivatives not designated as hedging instruments        
Foreign currency options losses ($34) ($75) ($71) ($129)

 

17. 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 paper machine clothing synthetic dryer fabrics marketed during the period from 1967 to 1976 and used in certain paper mills.

We were defending 3,677 claims as of June 30, 2018.

The following table sets forth the number of claims filed, the number of claims settled, dismissed or otherwise resolved, and the aggregate settlement amount during the periods presented:

Year ended December 31, Opening Number of Claims Claims Dismissed,Settled, or Resolved New Claims Closing Number of Claims Amounts Paid (thousands) to Settle or Resolve
2013 4,463 230 66 4,299 $78
2014 4,299 625 147 3,821 437
2015 3,821 116 86 3,791 164
2016 3,791 148 102 3,745 758
2017 3,745 105 90 3,730 55
2018 (as of June 30) 3,730 105 52 3,677 $93

We anticipate that additional claims will be filed against the Company and related companies in the future, but are unable to predict the number and timing of such future claims. Due to the fact that information sufficient to meaningfully estimate a range of possible loss of a particular claim is typically not available until late in the discovery process, we do not believe a meaningful estimate can be made regarding the range of possible loss with respect to pending or future claims and therefore are unable to estimate a range of reasonably possible loss in excess of amounts already accrued for pending or future claims.

While we believe we have meritorious defenses to these claims, we have settled certain claims for amounts we consider reasonable given the facts and circumstances of each case. Our insurance carrier has defended each case and funded settlements under a standard reservation of rights. As of June 30, 2018 we had resolved, by means of settlement or dismissal, 37,699 claims. The total cost of resolving all claims was $10.3 million. Of this amount, almost 100% was paid by our insurance carrier, who has confirmed that we have approximately $140 million of remaining coverage

 

 37

 

under primary and excess policies that should be available with respect to current and future asbestos claims.

The Company’s subsidiary, Brandon Drying Fabrics, Inc. (“Brandon”), is also a separate defendant in many of the asbestos cases in which Albany is named as a defendant, despite never having manufactured any fabrics containing asbestos. While Brandon was defending against 7,708 claims as of June 30, 2018, only ten claims have been filed against Brandon since January 1, 2012, and no settlement costs have been incurred since 2001. Brandon was acquired by the Company in 1999, and has its own insurance policies covering periods prior to 1999. Since 2004, Brandon’s insurance carriers have covered 100% of indemnification and defense costs, subject to policy limits and a standard reservation of rights.

In some of these asbestos cases, the Company is named both as a direct defendant and as the “successor in interest” to Mount Vernon Mills (“Mount Vernon”). We acquired certain assets from Mount Vernon in 1993. Certain plaintiffs allege injury caused by asbestos-containing products alleged to have been sold by Mount Vernon many years prior to this acquisition. Mount Vernon is contractually obligated to indemnify the Company against any liability arising out of such products. We deny any liability for products sold by Mount Vernon prior to the acquisition of the Mount Vernon assets. Pursuant to its contractual indemnification obligations, Mount Vernon has assumed the defense of these claims. On this basis, we have successfully moved for dismissal in a number of actions.

We currently do not anticipate, based on currently available information, that the ultimate resolution of the aforementioned proceedings will have a material adverse effect on the financial position, results of operations, or cash flows of the Company. Although we cannot predict the number and timing of future claims, based on the foregoing factors, the trends in claims filed against us, and available insurance, we also do not currently anticipate that potential future claims will have a material adverse effect on our financial position, results of operations, or cash flows.

 

 38

 

 

18. 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/(loss)  Treasury stock  Noncontrolling Interest  Total Equity
December 31, 2017  $40   $428,423   $534,082   ($135,901)  ($256,876)  $3,247   $573,015 
Adoption of accounting standards (a),(b)  -   -   (5,085)  -   -   (327)  (5,412)
Net income  -   -   40,610   -   -   178   40,788 
Compensation and benefits paid or payable in shares  -   1,062   -   -   274   -   1,336 
Options exercised  -   150       -   -   -   150 
Dividends declared  -   -   (10,968)  -   -   -   (10,968)
Cumulative translation adjustments  -   -   -   (15,570)  -   4   (15,566)
Pension and postretirement liability adjustments  -   -   -   2,114   -   -   2,114 
Derivative valuation adjustment  -   -   -   6,202   -   -   6,202 
June 30, 2018  $40   $429,635   $558,639   ($143,155)  ($256,602)  $3,102   $591,659 

 

(a)As described in Note 2, the Company adopted ASC 606 effective January 1, 2018, which resulted in a decrease to Retained earnings of $5.6 million and a $0.3 million decrease to Noncontrolling interest.
(b)As described in Note 7, the Company adopted ASU 2016-16 effective January 1, 2018, which resulted in a $0.5 increase to Retained earnings.

 

 

 

 39

 

 

19. Recent Accounting Pronouncements

 

In February 2016, an accounting update was issued which will require lessees to record most operating leases on their balance sheets, but recognize the expenses in the income statement in a manner similar to current practice. Under the new standard, lessees will be required to recognize a lease liability for the obligation to make lease payments, and an asset for the right to use the underlying asset for the lease term. Expenses related to operating leases will be recognized on a straight-line basis, while those determined to be financing leases will be recognized following a front-loaded expense profile, in which interest and amortization are presented separately in the income statement. The principal effect on the Company’s financial statements will be an increase in assets and liabilities. The Company is evaluating practical expedients that may be used, and a new method of transitioning to this standard which was recently approved by the FASB, both of which could affect the impact that the standard has on the Company’s financial statements. Additionally, we are evaluating changes to our processes and internal controls to ensure we meet the standard’s reporting and disclosure requirements.

In August 2017, an accounting update was issued which simplifies the application of hedge accounting to better align the financial reporting of hedging relationships with a company’s risk management activities. We do not expect a significant impact to our consolidated assets and liabilities, net earnings, or cash flows as a result of adopting this new standard. We plan to adopt the new standard effective January 1, 2019.

In February 2018, an accounting update was issued which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This update is effective for annual and interim periods in fiscal years beginning after December 15, 2018. We are currently evaluating the impact of this update.

 

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.

 

Forward-looking statements

This quarterly report and the documents incorporated or deemed to be incorporated by reference in this quarterly report contain statements concerning our future results and performance and other matters that are “forward-looking” statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “project,” ”may,” “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.

 

 40

 

There are a number of risks, uncertainties, and other important factors that could cause actual results to differ materially from the forward-looking statements, including, but not limited to:

·Conditions in the industries in which our Machine Clothing and Albany Engineered Composites segments compete, along with the general risks associated with macroeconomic conditions;
·In the Machine Clothing segment, greater than anticipated declines in the demand for publication grades of paper or, lower than anticipated growth in other paper grades;
·In the Albany Engineered Composites segment, unanticipated reductions in demand, delays, technical difficulties or cancellations in aerospace programs that are expected to drive growth;
·Failure to achieve or maintain anticipated profitable growth in our Albany Engineered Composites segment; 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 Overview and Trends” sections of this quarterly report, as well as in Item 1A-“Risk Factors” section of our most recent Annual Report on Form 10-K. Statements expressing our assessments of the growth potential of the Albany Engineered Composites segment are not intended as forecasts of actual future growth, and should not be relied on as such. While we believe such assessments to have a reasonable basis, such assessments are, by their nature, inherently uncertain. This report sets forth a number of assumptions regarding these assessments, including projected timing and volume of demand for aircraft and for LEAP aircraft engines. Such assumptions could prove incorrect. Although we believe the expectations reflected in our other forward-looking statements are based on reasonable assumptions, it is not possible to foresee or identify all factors that could have a material and negative impact on our future performance. The forward-looking statements included or incorporated by reference in this report are made on the basis of our assumptions and analyses, as of the time the statements are made, in light of our experience and perception of historical conditions, expected future developments, and other factors believed to be appropriate under the circumstances.

Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained or incorporated by reference in this report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

Business Environment Overview and Trends

 Our reportable segments, Machine Clothing (MC) and Albany Engineered Composites (AEC), draw on the same advanced textiles and materials processing capabilities, and compete on the basis of product-based advantage that is grounded in those core capabilities.

 

The Machine Clothing segment is the Company’s long-established core business and primary generator of cash. While it has suffered from well-documented declines in publication grades in the Company’s traditional markets, the paper and paperboard industry is still expected to grow slightly on a global basis, driven by demand for packaging and tissue grades. We feel we are now well-positioned in key markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, technical product support, and manufacturing technology. Because of pricing pressures and industry overcapacity, the machine

 

 41

 

clothing and paper industries will continue to face top line pressure. Nonetheless, the business retains the potential for maintaining stable earnings in the future. It has been a significant generator of cash, and we seek to maintain the cash-generating potential of this business by maintaining the low costs that we achieved through previous restructuring, and competing vigorously by using our differentiated and technically superior products to reduce our customers’ total cost of operation and improve their paper quality.

The AEC segment provides significant growth potential for our Company both near and long term. Our strategy is to grow by focusing our proprietary 3D-woven technology, as well as our conventional non-3D technology, on high-value aerospace and defense applications, while at the same time performing successfully on our portfolio of growth programs. 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 and defense industry. AEC’s largest aerospace customer is the SAFRAN Group and sales to SAFRAN (consisting primarily of fan blades and cases for CFM’s LEAP engine) accounted for approximately 14 percent of the Company’s consolidated net sales in 2017. Through ASC, AEC develops and sells 3D-woven composite aerospace components to SAFRAN, with the most significant current program being the production of fan blades and other components for the LEAP engine. AEC, through ASC, also supplies 3D-woven composite fan cases for the GE9X engine. AEC’s current portfolio of non-3D programs includes components for the F-35 Joint Strike Fighter, fuselage frames for the Boeing 787, components for the CH-53K helicopter, vacuum waste tanks for Boeing 7-Series aircraft, and missile bodies for Lockheed Martin’s JASSM air-to-surface missiles. AEC is actively engaged in research to develop new applications in both commercial and defense aircraft engine and airframe markets. In 2017, approximately 30 percent of AEC sales were related to U.S. government contracts or programs.

 

Consolidated Results of Operations

In the first quarter of 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 are not restated.

The following table summarizes the effect on various operational metrics that resulted from the adoption of ASC 606:

 

 

 42

 

Increase/(decrease) attributable to application of ASC 606 for the three months ended June 30, 2018

(in thousands)
Machine Clothing Albany Engineered Composites Income tax and noncontrolling interest effects Total Company
Net sales  $857 ($1,257)  $ - ($400)
Gross profit   1,781   123   -      1,904
Selling, technical, general and research expenses   (5)   -      -      (5)
Operating income and Income before income taxes   1,786   123   -      1,909
Income taxes   -      -      507   507
Net income   1,786   123   (507)   1,402
Net income attributable to the noncontrolling interest in ASC   -      -      27   27
Net income attributable to the Company $1,786 $123 ($534) $1,375

Increase/(decrease) attributable to application of ASC 606 for the Six Months ended June 30, 2018

(in thousands)
Machine Clothing Albany Engineered Composites Income tax and noncontrolling interest effects Total Company
Net sales  $5,068 $2,966  $ - $8,034
Gross profit   2,820   992   -      3,812
Selling, technical, general and research expenses   55   -      -      55
Operating income and Income before income taxes   2,765   992   -      3,757
Income taxes   -      -      1,108   1,108
Net income   2,765   992   (1,108)   2,649
Net income attributable to the noncontrolling interest in ASC   -      -      84   84
Net income attributable to the Company $2,765 $992 ($1,192) $2,565

Net sales

The following table summarizes our Net sales by business segment:

 

 

 

 43

 

 

  Three months ended
June 30, 
  Six months ended    June 30,  
(in thousands, except percentages) 2018 2017 %
Change
2018 2017 % Change
Machine Clothing  $162,635 $146,572 11.0% $310,786 $289,399 7.4%
Albany Engineered Composites          93,590       68,999 35.6%    175,420      125,449 39.8%
Total $256,225 $215,571 18.9% $486,206 $414,848 17.2%

 

The following table summarizes second-quarter and year to date 2018 Net sales, excluding the impact of ASC 606 and currency translation effects:

(in thousands, except percentages) Net sales as reported, Q2 2018 Increase due to ASC 606 Increase due to changes in currency translation rates Q2 2018 sales on same basis as Q2 2017 % Change compared to Q2 2017
Machine Clothing  $162,635 $857 $3,145 $158,633 8.2%
Albany Engineered Composites          93,590        (1,257)            1,215        93,632 35.7%
Total $256,225 ($400) $4,360 $252,265 17.0%

 

 

(in thousands, except percentages) Net sales as reported, first six months of 2018 Increase due to ASC 606 Increase due to changes in currency translation rates Year to date June 30, 2018 sales on same basis as  2017 % Change compared to  2017
Machine Clothing  $310,786 $5,068 $9,905 $295,813 2.2%
Albany Engineered Composites        175,420         2,966            3,526      168,928 34.7%
Total $486,206 $8,034 $13,431 $464,741 12.0%

 

Three month comparison

·Changes in currency translation rates had the effect of increasing net sales by $4.4 million during the second quarter of 2018, as compared to 2017, principally due to the euro and Chinese renminbi strengthening in 2018.
·Excluding the effect of changes in currency translation rates:
Net sales increased 16.8% compared to the same period in 2017. Excluding the additional effect of ASC 606, Net sales increased 17.0%.
Net sales in MC increased 8.8%. Excluding the additional effect of adopting ASC 606, Net sales increased 8.2%, principally due to global growth in sales for packaging and tissue grades.

 

 

 

 44

 

 

Net sales in AEC increased 33.9%. Excluding the additional effect of adopting ASC 606, Net sales increased 35.7%, primarily driven by growth in the LEAP, Boeing 787, F-35, and CH-53K programs.

 

Six month comparison

 

·Changes in currency translation rates had the effect of increasing net sales by $13.4 million during the first six months of 2018, as compared to 2017, principally due to the euro and Chinese renminbi strengthening in 2018.
·Excluding the effect of changes in currency translation rates:
Net sales increased 14.0% compared to the same period in 2017. Excluding the additional effect of ASC 606, Net sales increased 12.0%.
Net sales in MC increased 4.0%. Excluding the additional effect of adopting ASC 606, Net sales increased 2.2%, principally due to global growth in sales for packaging and tissue grades.
Net sales in AEC increased 37.0%. Excluding the additional effect of adopting ASC 606, Net sales increased 34.7%, primarily driven by growth in the LEAP, Boeing 787, F-35, and CH-53K programs.

 

 

Gross Profit

 

The following table summarizes gross profit by business segment:

 

  Three months ended
June 30, 
Six months ended
June 30,
(in thousands, except percentages) 2018 2017 2018 2017
Machine Clothing  $79,607 $70,832 $149,788 $140,050
Albany Engineered Composites         12,626        (7,599)      24,150         (766)
Corporate expenses              (55)             (55)         (109)           (78)
Total $92,178 $63,178 $173,829 $139,206
% of Net sales 36.0% 29.3% 35.8% 33.6%

 

Three month comparison

 

The overall increase in 2018 gross profit, as compared to the same period in 2017, was principally due to the net effect of the following individually significant items:

 

·The increase in AEC gross profit of $20.2 million was principally due to the net effect of the following individually significant items:
·In the second quarter of 2017, the Company recorded a $15.8 million charge to Cost of goods sold related to revisions in the estimated profitability of two contracts.
·The increase in net sales, as described above, and improved labor productivity.

 

 

 45

 
·An increase in MC gross profit, principally due to higher sales and strong capacity utilization.
·Changes in currency translation rates did not have a significant effect on MC gross profit in 2018.

 

Six month comparison

 

The overall increase in 2018 gross profit, as compared to the same period in 2017, was principally due to the net effect of the following individually significant items:

 

·The increase in AEC gross profit of $24.9 million was principally due to the effect of the following individually significant items:
·In the second quarter of 2017, the Company recorded a $15.8 million charge to Cost of goods sold related to revisions in the estimated profitability of two contracts.
·The increase in net sales, as described above, and improved labor productivity.

 

·An increase in MC gross profit, principally due to higher sales and increased capacity utilization.
·Changes in currency translation rates did not have a significant effect on MC gross profit in 2018.

 

 

Selling, Technical, General, and Research (STG&R)

 

Selling, Technical, General and Research (STG&R) expenses include; selling, general, administrative, technical and research expenses.

The following table summarizes STG&R expenses by business segment:

         
  Three months ended
June 30,
Six months ended
June 30,
(in thousands, except percentages) 2018 2017 2018 2017
Machine Clothing  $26,963 $31,602 $58,027 $62,447
Albany Engineered Composites            7,976         8,998      17,004      18,374
Corporate expenses         11,966       10,687      24,121      21,135
Total $46,905 $51,287 $99,152 $101,956
% of Net sales 18.3% 23.8% 20.4% 24.6%

 

Three month comparison

 

The decrease in STG&R expenses in the second quarter of 2018, compared to the same period in 2017, was principally due to the net effect of the following individually significant items:

·In MC, revaluation of nonfunctional currency assets and liabilities resulted in second-quarter gains of $2.3 million in 2018, and losses of $1.7 million in 2017.

 

Six month comparison

 

 

 46

 

The decrease in STG&R expenses in the first six months of 2018, compared to the same period in 2017, was principally due to the net effect of the following individually significant items:

·In MC, revaluation of nonfunctional currency assets and liabilities resulted in gains of $0.8 million in 2018, and losses of $3.3 million in 2017.
·Corporate STG&R expenses increased by approximately $3.0 million principally due to higher costs for information systems to support continued growth in AEC.

 

Research and Development

 

The following table is a subset of the STG&R expenses table above and summarizes expenses associated with internally funded research and development by business segment:

  Three months ended
June 30,
Six months ended
June 30,
(in thousands) 2018 2017 2018 2017
Machine Clothing $4,211 $4,525 $8,629 $9,044
Albany Engineered Composites           3,183         2,778      6,331      5,854
Total $7,394 $7,303 $14,960 $14,898

 

Restructuring Expense

 

In addition to the items discussed above affecting gross profit, and STG&R expenses, operating income was affected by restructuring costs of $11.2 million in the first six months of 2018 and $4.7 million for the same period in 2017.

 

The following table summarizes restructuring expenses by business segment:

  Three months ended
June 30,
Six months ended
June 30,
(in thousands) 2018 2017 2018 2017
Machine Clothing $1,800 $805 $10,152 $916
Albany Engineered Composites              558         1,231         779      3,801
Corporate expenses              231                -         231             -
Total $2,589 $2,036 $11,162 $4,717

 

In the first quarter of 2018, the Company’s proposal to close its Machine Clothing production facility in Sélestat, France was approved by the French Labor Ministry. The restructuring program was driven by the Company’s need to balance manufacturing capacity with demand. In the first six months of 2018, we recorded restructuring expense of $8.6 million, which includes our estimate of the severance and outplacement costs for the approximately 50 positions that will be terminated under this

 

 47

 

plan. To date, we have recorded $9.7 million of restructuring charges related to this action. The Company continues to assess property, plant and equipment in that location to determine if equipment will be transferred to other facilities, or if the value of the assets can be recovered through a sale. Depending on the outcome of that assessment, additional restructuring charges could be recorded in future periods. Annual cost savings associated with this action will principally result in lower cost of goods sold in 2018.

AEC restructuring charges in the first six months of 2018 and 2017 principally relate to work force reductions in Salt Lake City, Utah and Rochester, New Hampshire. To date, we have recorded $5.8 million of restructuring charges related to these actions. Cost savings associated with this action will result, principally, in lower costs of goods sold in 2018.

For more information on our restructuring charges, see Note 5 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.

Operating Income

The following table summarizes operating income/(loss) by business segment:

  Three months ended
   June 30, 
Six months ended
   June 30, 
(in thousands) 2018 2017 2018 2017
Machine Clothing  $50,843 $38,425 $81,613 $76,688
Albany Engineered Composites            4,092      (17,828)       6,366    (22,942)
Corporate expenses         (12,251)      (10,742)     (24,464)    (21,213)
Total $42,684 $9,855 $63,515 $32,533

 

Other Earnings Items

 

  Three months ended June 30, Six months ended June 30,
(in thousands) 2018 2017 2018 2017
Interest expense, net $4,621 $4,285 $8,909 $8,613
Other expense, net              726         2,558      2,178      3,384
Income tax expense           7,031         1,779     11,640      8,329
Net income/(loss) attributable to the noncontrolling interest              (59)            116         178         251

 

Interest Expense, net

Interest expense, net, increased in 2018, principally due to an increase in average debt outstanding. The higher debt balances related to funding expansion of the AEC business. See the Capital Resources section for further discussion of borrowings and interest rates.

 

Other Expense, net

The decrease in Other expense, net included the following individually significant items:

 

 

 48

 

Three month comparison

 

·For the second quarter of each year, revaluation of nonfunctional currency cash and intercompany balances resulted in a negligible gain in 2018 and a loss of $1.9 million in 2017.

 

 

Six month comparison

 

·For the first six months of each year, revaluation nonfunctional currency cash and intercompany balances resulted in a loss of $0.7 million in 2018, and a loss of $2.0 million in 2017.

 

 

Income Tax

The Company has operations which constitute a taxable presence in 18 countries outside of the United States. Countries outside of the United States had income tax rates that were both above and below the United States’ federal tax rate of 21% during the periods reported. The jurisdictional location of earnings is a significant component of our effective tax rate each year. The rate impact of this component is influenced by the specific location of non-U.S. earnings and the level of our total earnings. From period to period, the jurisdictional mix of earnings can vary as a result of operating fluctuations in the normal course of business, as well as the extent and location of other income and expense items, such as pension settlement and restructuring charges.

 

Three month comparison

 

The Company’s effective tax rates for the second quarter of 2018 and 2017 were 18.8% and 59.1%, 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, and by discrete items that may occur in any given year but are not consistent from year to year.

Significant items that impacted the tax rate in the second quarter of 2018 included the following (percentages reflect the effect of each item as a percentage of Income before income taxes):

·The income tax rate on continuing operations, excluding discrete items, was 30.1%.
·A ($0.2) million [-0.6%] tax benefit related to the true-up of prior years’ estimated taxes.
·A ($1.1) million [-2.9%] tax benefit from the impact of the mandatory repatriations.
·Expense of $2.4 million [6.5%] due to changes of uncertain tax positions.
·A ($5.0) million [-13.4%] tax benefit due to a change in a valuation allowance.
·A ($0.4) million [-0.9%] tax benefit for other tax adjustments.

Significant items that impacted the second quarter of 2017 tax rate included the following:

·The income tax rate on continuing operations, excluding discrete items, was 32.8%.
·Expense of $0.5 million [16.3%] due to changes of uncertain tax positions.
·Expense of $0.2 million [6.3%] related to the true-up of prior years’ estimated taxes.
·Expense of $0.1 million [3.7%] for other tax adjustments.

Six month comparison

 

 

 49

 

The Company’s effective tax rates for the first half of 2018 and 2017 were 22.2% and 40.6%, 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, and by discrete items that may occur in any given year but are not consistent from year to year.

Significant items that impacted the tax rate in the first six months of 2018 included the following (percentages reflect the effect of each item as a percentage of Income before income taxes):

·The income tax rate on continuing operations, excluding discrete items, was 30.1%.
·A ($0.3) million [-0.5%] tax benefit related to the true-up of prior years’ estimated taxes.
·A ($1.1) million [-2.1%] tax benefit from the impact of the mandatory repatriations.
·Expense of 2.4 million [4.7%] due to changes of uncertain tax positions.
·A ($5.0) million [-9.5%] tax benefit due to changes in valuation allowance.
·A ($0.3) million [-0.5%] net tax benefit for other tax adjustments.

Significant items that impacted the tax rate in the first six months of 2017 included the following:

·The income tax rate on continuing operations, excluding discrete items, was 32.8%.
·Expense of $0.5 million [2.4%] due to changes of uncertain tax positions.
·Expense of $1.0 million [4.7%] related to the true-up of prior years’ estimated taxes.
·Expense of $0.1 million [0.7%] for other tax adjustments.

 

Segment Results of Operations

 

Machine Clothing Segment

 

Machine Clothing is our primary business segment and accounted for 70% of our consolidated revenues during the first six months of 2018. 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 1 percent over the next five years, driven primarily by global growth in packaging and tissue, which is expected to be greater than expected declines in publication grades.

While the MC business has suffered from well-documented declines in publication grades in the Company’s traditional markets, the paper and paperboard industry is still expected to grow slightly on a global basis, driven by demand for packaging and tissue grades. We feel we are now well-positioned in key markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, technical product support, and manufacturing technology. Recent technological advances in paper machine clothing, while contributing to the papermaking efficiency of customers, have lengthened the useful life of many of our products and had an adverse impact on overall paper machine clothing demand.

The Company’s manufacturing and product platforms position us well to meet these shifting demands across product grades and geographic regions. Our strategy for meeting these challenges continues to be to grow share in all markets, with new products and technology, and to maintain our manufacturing footprint to align with global demand, while we offset the effects of inflation through continuous productivity improvement.

 

 

 50

 

We have incurred significant restructuring charges in recent periods as we reduced Machine Clothing manufacturing capacity and administrative positions in the United States, Germany and France.

 

Review of Operations

 

Three months ended         

June 30,

Six months ended
June 30,
(in thousands, except percentages) 2018 2017 2018 2017
Net sales $162,635 $146,572 $310,786   289,399
Gross profit         79,607       70,832    149,788   140,050
% of net sales 48.9% 48.3% 48.2% 48.4%
STG&R expenses         26,963       31,602      58,027     62,447
Operating income         50,843       38,425      81,613     76,688

 

Net Sales

 

Three month comparison

·Net sales increased by 11.0%.
·Changes in currency translation rates had the effect of increasing second-quarter 2018 sales by $3.1 million compared to the same period in 2017. That currency translation effect was principally due to the euro and Chinese renminbi strengthening in 2018.
·Excluding the effect of changes in currency translation rates, Net sales in MC increased 8.8%. Excluding the additional effect of adopting ASC 606, Net sales increased 8.2%, principally due to global growth in sales for the packaging and tissue grades.

 

Six month comparison

·Net sales increased by 7.4%.
·Changes in currency translation rates had the effect of increasing the first six months of 2018 sales by $9.9 million compared to the same period in 2017. That currency translation effect was principally due to the euro and Chinese renminbi strengthening in 2018.
·Excluding the effect of changes in currency translation rates, Net sales in MC increased 4.0%. Excluding the additional effect of adopting ASC 606, Net sales increased 2.2%, principally due to global growth in sales for the packaging and tissue grades.

 

 

Gross Profit

 

Three month comparison

 

·The increase in MC gross profit was principally due to higher sales.
·The increase in MC gross profit as a percentage of sales was principally due to strong capacity utilization.
·Changes in currency translation rates did not have a significant effect on gross profit for the second quarter of 2018.

 

 51

 

 

Six month comparison

 

·The increase in MC gross profit was principally due to higher sales.
·The increase in MC gross profit as a percentage of sales was principally due to strong capacity utilization.
·Changes in currency translation rates did not have a significant effect on gross profit for the first six months of 2018.

 

 

Operating Income

 

Three month comparison

The increase in operating income was principally due to the net effect of the following individually significant items:

 

·Gross profit increased $8.8 million due to increased sales, including the impact of ASC 606, as described above.

 

·STG&R expenses decreased $4.6 million due to:
oIn MC, revaluation of nonfunctional currency assets and liabilities resulted in second-quarter gains of $2.3 million in 2018, and losses of $1.7 million in 2017.

 

·Restructuring charges were $1.8 million in the second-quarter of 2018, compared to $0.8 million in the same period in 2017.

 

Six month comparison

The increase in operating income was principally due to the net effect of the following individually significant items:

 

·Gross profit increased $9.7 million due to increased sales, including the impact of ASC 606, as described above.
·STG&R expenses decreased $4.4 million due to:
oIn MC, revaluation of nonfunctional currency assets and liabilities resulted in gains of $0.8 million in 2018, and losses of $3.3 million in 2017.
·Restructuring charges were $10.2 million in the first six months of 2018, compared to $0.9 million in the same period in 2017.

 

Albany Engineered Composites Segment

 

The Albany Engineered Composites (AEC) segment, including Albany Safran Composites, LLC (ASC), in which our customer SAFRAN Group owns a 10 percent noncontrolling interest, provides highly engineered advanced composite structures to customers primarily in the aerospace and defense industries. AEC’s largest program relates to CFM International’s LEAP engine. AEC, through ASC, is the exclusive supplier of advanced composite fan blades and cases for this program under a long-term supply contract. Other significant AEC programs include components for the F-35 Joint Strike Fighter, fuselage frames for the Boeing 787, and the fan case for the GE9X engine.

 

Review of Operations

 

 

 

 52

 

  Three months ended
June 30,
Six months ended
June 30,
(in thousands, except percentages) 2018 2017 2018 2017
Net sales $93,590 $68,999 $175,420 $125,449
Gross profit         12,626        (7,599)      24,150          (766)
% of net sales 13.5% -11.0% 13.8% -0.6%
STG&R expenses            7,976         8,998      17,004      18,374
Operating income/(loss) 4,092 (17,828) 6,366 (22,942)

 

 

Net Sales

 

Three month comparison

The increase in net sales was principally due to the net effect of the following individually significant items:

·Excluding the effect of changes in currency translation rates, Net sales increased 33.9%. Excluding the additional effect of adopting ASC 606, Net sales increased 35.7%, primarily driven by growth in the LEAP, Boeing 787, F-35, and CH-53K programs.

 

Six month comparison

The increase in net sales was principally due to the net effect of the following individually significant items:

·Excluding the effect of changes in currency translation rates, Net sales increased 37.0%. Excluding the additional effect of adopting ASC 606, Net sales increased 34.7%, primarily driven by growth in the LEAP, Boeing 787, F-35, and CH-53K programs.

 

Gross Profit

 

Three month comparison

The increase in gross profit of $20.2 million was principally due to the net effect of the following individually significant items:

 

·In the second quarter of 2017, the Company recorded a $15.8 million charge to Cost of goods sold related to revisions in the estimated profitability of two contracts.
·The increase in net sales, as described above, and improved labor productivity.

 

Six month comparison

The increase in gross profit of $24.9 million was principally due to the net effect of the following individually significant items:

 

·In the second quarter of 2017, the Company recorded a $15.8 million charge to Cost of goods sold related to revisions in the estimated profitability of two contracts.
·The increase in net sales, as described above, and improved labor productivity.

 

 

 

 53

 

Long-term contracts

AEC has contracts with certain customers, including its contract for the LEAP program, where revenue is determined by a cost-plus fee agreement. Revenue earned under these arrangements accounted for approximately 50 and 45 percent of segment revenue for the first six months of 2018 and 2017, respectively.

In addition, AEC has long-term contracts in which the selling price is fixed. In accounting for those contracts, we estimate the profit margin expected at the completion of the contract and recognize a pro-rata share of that profit during the course of the contract using a cost-to-cost 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 resulted in a decrease to gross profit of $1.6 million for the first six months of 2018. In the first six months of 2017, we recorded the $15.8 million charge associated with the revision in the estimated profitability of the BR 725 and A380 contracts. Changes in other contract estimates in the first six months of 2017 resulted in a decrease to gross profit of $0.4 million.

 

Operating Income/(Loss)

 

Three and Six month comparison

 

The increase in operating income of $21.9 million in the second quarter of 2018 and $29.3 million for the first six months of 2018 was principally due to the net effect of the following individually significant items:

·In the second quarter of 2017, the Company recorded a $15.8 million charge to Cost of goods sold related to revisions in the estimated profitability of two contracts.

 

·AEC operating income increased due to higher sales and strong productivity, as described above.

 

Liquidity and Capital Resources

 

Cash Flow Summary

 

 

 54

 

  Six months ended
June 30,
(in thousands) 2018 2017
Net income $40,788  $12,207 
Depreciation and amortization 40,621  35,126 
Changes in working capital (53,215) (37,743)
Changes in other noncurrent liabilities and deferred taxes (8,133) (9,711)
Other operating items (3,321) 3,938 
Net cash provided in operating activities 16,740  3,817 
Net cash used in investing activities (39,175) (46,796)
Net cash used in financing activities (3,570) (998)
Effect of exchange rate changes on cash and cash equivalents (2,978) 1,027 
Decrease in cash and cash equivalents (28,983) (42,950)
Cash and cash equivalents at beginning of year 183,727  181,742 
Cash and cash equivalents at end of period $154,744  $138,792 

 

Operating activities

 

Cash flow provided by operating activities was $16.7 million and $3.8 million for the first six months of 2018 and 2017. The net increase in cash provided by operating activities in 2018 was due to increased profitability in both MC and AEC, partially offset by increases in working capital. The increase in use of cash in 2018 for working capital was principally due to the ramp of several key programs in AEC.

Cash paid for income taxes was $14.0 million and $18.3 million for the first six months of 2018 and 2017, respectively. The reduction in cash taxes paid is primarily due to lower Corporate income tax payments in 2018 compared to 2017 in jurisdictions like the US, Mexico and China.

At June 30, 2018, we had $154.7 million of cash and cash equivalents, of which $129.7 million was held by subsidiaries outside of the United States.

 

Investing and Financing Activities

 

Capital expenditures for the first six months were $39.2 million in 2018 and $46.8 million in 2017.

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 June 30, 2018 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 June 30, 2018.

 

 55

 

On November 7, 2017, we entered into a $685 million unsecured Five-Year Revolving Credit Facility Agreement (the “Credit Agreement”) which amended and restated the prior $550 million Agreement, entered into on April 8, 2016 (the “Prior Agreement”). Under the Credit Agreement, $511 million of borrowings were outstanding as of June 30, 2018. The applicable interest rate for borrowings was LIBOR plus a spread, based on our leverage ratio at the time of borrowing. At the time of the last borrowing on June 18, 2018, the spread was 1.500%. The spread was based on a pricing grid, which ranged from 1.250% to 1.750%, based on our leverage ratio. Based on our maximum leverage ratio and our Consolidated EBITDA, and without modification to any other credit agreements, as of June 30, 2018, we would have been able to borrow an additional $174 million under the Agreement.

On November 27, 2017, we terminated our interest rate swap agreements, originally entered into on May 9, 2016, that had effectively fixed the interest rate on $300 million of revolving credit borrowings, in order to enter into a new interest rate swap with a greater notional amount, and the same maturity as the Credit Agreement. We received cash of $6.3 million to terminate when the swap agreements were terminated and that payment will be amortized into interest expense through March 2021.

On May 6, 2016, we terminated other interest rate swap agreements that had effectively fixed the interest rate on $120 million of revolving credit borrowings, in order to enter into a new interest rate swap with a greater notional amount, and the same maturity as the Credit Agreement. We paid $5.2 million to terminate the swap agreements and that cost will be amortized into interest expense through June 2020.

On November 28, 2017, we entered into interest rate swap agreements for the period December 18, 2017 through October 17, 2022. These transactions have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $350 million of indebtedness drawn under the Credit Agreement at the rate of 2.11% during the period. Under the terms of these transactions, we pay the fixed rate of 2.11% and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly calculation date, which on June 18, 2018 was 2.09%, during the swap period. On June 18, 2018, the all-in-rate on the $350 million of debt was 3.61%.

As of June 30, 2018, our leverage ratio was 2.23 to 1.00 and our interest coverage ratio was 10.73 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 does not exceed the limits noted above.

For more information, see Note 15 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.

Off-Balance Sheet Arrangements

As of June 30, 2018, 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 19 contained in Item 1, “Notes to Consolidated Financial Statements”, which is incorporated herein by reference.

Non-GAAP Measures

 

 

 56

 

 

This Form 10-Q contains certain non-GAAP metrics, including: net sales, and percent change in net sales excluding the impact of ASC 606 and/or currency translation effects (for each segment and the Company as a whole); EBITDA and Adjusted EBITDA (for each segment and the Company as a whole represented in dollars or as a percentage of net sales); net debt; and net income per share attributable to the Company, excluding adjustments. Such items are provided because management believes that, when reconciled from the GAAP items to which they relate, they provide additional useful information to investors regarding the Company’s operational performance.

Presenting sales and increases or decreases in sales, after currency effects and/or ASC 606 impacts are excluded, can give management and investors insight into underlying sales trends. EBITDA, or net income with interest, taxes, depreciation, and amortization added back, is a common indicator of financial performance used, among other things, to analyze and compare core profitability between companies and industries because it eliminates effects due to differences in financing, asset bases and taxes. An understanding of the impact in a particular quarter of specific restructuring costs, currency revaluation, inventory write-offs associated with discontinued businesses, or other gains and losses, on net income (absolute as well as on a per-share basis), operating income or EBITDA can give management and investors additional insight into core financial performance, especially when compared to quarters in which such items had a greater or lesser effect, or no effect. Restructuring expenses in the MC segment, while frequent in recent years, are reflective of significant reductions in manufacturing capacity and associated headcount in response to shifting markets, and not of the profitability of the business going forward as restructured. Net debt is, in the opinion of the Company, helpful to investors wishing to understand what the Company’s debt position would be if all available cash were applied to pay down indebtedness. EBITDA, Adjusted EBITDA and net income per share attributable to the Company, excluding adjustments, are performance measures that relate to the Company’s continuing operations.

Net sales, or percent changes in net sales, excluding currency rate effects, are calculated by converting amounts reported in local currencies into U.S. dollars at the exchange rate of a prior period. The impact of ASC 606 is determined by calculating what GAAP net sales could have been under the prior ASC 605 standard, and comparing that amount to the amount reported under the new ASC 606 standard. These amounts are then compared to the U.S. dollar amount as reported in the current period. The Company calculates EBITDA by removing the following from Net income: Interest expense net, Income tax expense, Depreciation and amortization. Adjusted EBITDA is calculated by: adding to EBITDA costs associated with restructuring, and inventory write-offs associated with discontinued businesses; adding (or subtracting) revaluation losses (or gains); subtracting (or adding) gains (or losses) from the sale of buildings or investments; subtracting insurance recovery gains in excess of previously recorded losses; and subtracting (or adding) Income (or loss) attributable to the non-controlling interest in Albany Safran Composites (ASC). Adjusted EBITDA may also be presented as a percentage of net sales by dividing it by net sales. Net income per share attributable to the Company, excluding adjustments, is calculated by adding to (or subtracting from) net income attributable to the Company per share, on an after-tax basis: restructuring charges; inventory write-offs associated with discontinued businesses; discrete tax charges (or gains) and the effect of changes in the income tax rate; foreign currency revaluation losses (or gains); acquisition expenses; and losses (or gains) from the sale of investments.

EBITDA, Adjusted EBITDA, and net income per share attributable to the Company, excluding adjustments, as defined by the Company, may not be similar to similarly named measures of other companies. Such measures are not considered measurements under GAAP, and should be considered in addition to, but not as substitutes for, the information contained in the Company’s statements of income.

 

 57

 

The following tables show the calculation of EBITDA and Adjusted EBITDA:

Three months ended June 30, 2018
(in thousands) Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company
Operating income/(loss) (GAAP) $50,843  $4,092  ($12,251) $42,684 
Interest, taxes, other income/expense -  -  (12,378) (12,378)
Net income/(loss) (GAAP) 50,843  4,092  (24,629) 30,306 
Interest expense, net -  -  4,621  4,621 
Income tax expense -  -  7,031  7,031 
Depreciation and amortization 8,182  10,247  1,244  19,673 
EBITDA (non-GAAP) 59,025  14,339  (11,733) 61,631 
Restructuring expenses, net 1,800  558  231  2,589 
Foreign currency revaluation (gains)/losses (2,331) 116  (188) (2,403)
Pretax loss attributable to the noncontrolling interest in ASC -  121  -  121 
Adjusted EBITDA (non-GAAP) $58,494  $15,134  ($11,690) $61,938 

 

 

 

Three months ended June 30, 2017
(in thousands) Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company
Operating income/(loss) (GAAP) $38,425  ($17,828) ($10,742) $9,855 
Interest, taxes, other income/expense -  -  (8,622) (8,622)
Net income/(loss)  (GAAP) 38,425  (17,828) (19,364) 1,233 
Interest expense, net -  -  4,285  4,285 
Income tax expense -  -  1,779  1,779 
Depreciation and amortization 8,431  8,218  1,184  17,833 
EBITDA (non-GAAP) 46,856  (9,610) (12,116) 25,130 
Restructuring expenses, net 805  1,231  -  2,036 
Foreign currency revaluation (gains)/losses 1,650  (63) 1,950  3,537 
Pretax income attributable to the noncontrolling interest in ASC -  (144) -  (144)
Adjusted EBITDA (non-GAAP) $49,311  ($8,586) ($10,166) $30,559 

 

 

 

 58

 

 

Six months ended June 30, 2018
(in thousands) Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company
Operating income/(loss) (GAAP) $81,613  $6,366  ($24,464) $63,515 
Interest, taxes, other income/expense -  -  (22,727) (22,727)
Net income/(loss) (GAAP) 81,613  6,366  (47,191) 40,788 
Interest expense, net -  -  8,909  8,909 
Income tax expense -  -  11,640  11,640 
Depreciation and amortization 16,544  21,404  2,673  40,621 
EBITDA (non-GAAP) 98,157  27,770  (23,969) 101,958 
Restructuring expenses, net 10,152  779  231  11,162 
Foreign currency revaluation (gains)/losses (813) 301  499  (13)
Pretax income attributable to the noncontrolling interest in ASC -  (222) -  (222)
Adjusted EBITDA (non-GAAP) $107,496  $28,628  ($23,239) $112,885 

 

Six months ended June 30, 2017
(in thousands) Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company
Operating income/(loss) (GAAP) $76,688  ($22,942) ($21,213) $32,533 
Interest, taxes, other income/expense -  -  (20,326) (20,326)
Net income/(loss) (GAAP) 76,688  (22,942) (41,539) 12,207 
Interest expense, net    -  8,613  8,613 
Income tax expense    -  8,329  8,329 
Depreciation and amortization 16,718  16,022  2,386  35,126 
EBITDA (non-GAAP) 93,406  (6,920) (22,211) 64,275 
Restructuring expenses, net 916  3,801  -  4,717 
Foreign currency revaluation losses 3,313  34  2,052  5,399 
Pretax income attributable to the noncontrolling interest in ASC -  (314) -  (314)
Adjusted EBITDA (non-GAAP) $97,635  ($3,399) ($20,159) $74,077 

The Company discloses certain income and expense items on a per-share basis. The Company believes that such disclosures provide important insight into underlying quarterly earnings and are financial performance metrics commonly used by investors. The Company calculates the quarterly per-share amount for items included in continuing operations by using the income tax rate based on income from continuing operations and the weighted-average number of shares outstanding for each period. Year-to-date earnings per-share effects are determined by adding the amounts calculated at each reporting period.

The following tables show the earnings per share effect of certain income and expense items:

 

 

 59

 

Three months ended June 30, 2018 Pre tax Tax After tax Per Share
(in thousands, except per share amounts) Amounts Effect Effect Effect
Restructuring expenses, net $2,589 $779 $1,810 $0.06
Foreign currency revaluation gains           2,403              723       1,680             0.05
Favorable effect of change in income tax rate                  -              359          359             0.01
Net discrete income tax benefit                  -           3,849       3,849             0.12
Favorable effect of applying ASC 606           1,909  534*        1,375             0.04
* includes tax and noncontrolling interest effects        

 

 

Three months ended June 30, 2017 Pre tax Tax After tax Per Share
(in thousands, except per share amounts) Amounts Effect Effect Effect
Restructuring expenses, net $2,036 $739 $1,297 $0.04
Foreign currency revaluation losses           3,537           1,284 2,253 0.07
Unfavorable effect of change in income tax rate                  -               36 36 0.00
Net discrete income tax charge                  -              754 754 0.02
Charge for revision to estimated profitability of AEC contracts         15,821           5,854       9,967 0.31

 

Six months ended June 30, 2018 Pre tax Tax After tax Per Share
(in thousands, except per share amounts) Amounts Effect Effect Effect
Restructuring expenses, net $11,162 $3,565 $7,597 $0.24
Foreign currency revaluation gains               13               54           67 0.00
Net discrete income tax charge                  -           4,139       4,139 0.13
Favorable effect of applying ASC 606           3,757  1192*        2,565 0.08
*includes tax and noncontrolling interest effects        

Six months ended June 30, 2017 Pre tax Tax After tax Per Share
(in thousands, except per share amounts) Amounts Effect Effect Effect
Restructuring expenses, net $4,717 $1,718 $2,999 $0.09
Foreign currency revaluation losses           5,399           1,964       3,435 0.11
Net discrete income tax charge                  -           1,585       1,585 0.05
Charge for revision to estimated profitability of AEC contracts         15,821           5,854       9,967 0.31

The following table contains the calculation of net income per share attributable to the Company, excluding adjustments:

 

 60

 

 
  Three months ended
June 30,
Six months ended
June 30,
Per share amounts (Basic) 2018 2017* 2018 2017*
Net income attributable to the Company  (GAAP) $0.94  $0.03  $1.26  $0.37 
Adjustments:            
Restructuring expenses, net 0.06  0.04  0.24  0.09 
Discrete tax adjustments and effect of change in income tax rate (0.13) 0.02  (0.13) 0.05 
Foreign currency revaluation (gains)/losses (0.05) 0.07  -  0.11 
Net income attributable to the Company, excluding adjustments  (non-GAAP) $0.82  $0.16  $1.37  $0.62 

* Includes charge of $0.31 per share for revisions in estimated profitability of two AEC contracts.    

 

The following table contains the calculation of AEC Adjusted EBITDA as a percentage of sales:

 
  For the three month periods ended:
(in thousands, except percentages) June 30,
 2018
June 30,
 2017 *
AEC Adjusted EBITDA (non-GAAP) $15,134  ($8,586)
AEC Net sales (GAAP) 93,590  68,999 
AEC Adjusted EBITDA as a percentage of sales (non-GAAP) 16.2% -12.4%

* Includes charge of $15.8 million for revisions in estimated profitability of two AEC contracts.  

 

The following table contains the calculation of net debt:

 

       
(in thousands) June 30, 2018 December 31, 2017 June 30, 2017
Notes and loans payable $26 $262 $249
Current maturities of long-term debt                   1,844            1,799                51,732
Long-term debt               523,186        514,120              444,030
Total debt               525,056        516,181              496,011
Cash and cash equivalents               154,744        183,727              138,792
Net debt $370,312 $332,454 $357,219

 

The following table contains the reconciliation of MC 2018 projected Adjusted EBITDA to MC 2018 projected net income:

 

 

 61

 

 
Machine Clothing Full-Year 2018 Outlook
(in millions)
Actual, Six months ended June 30, 2018 Results for last two quarters of year to meet low end of range Results for last two quarters of year to meet high end of range Estimated range for full-year
Net income/(loss) (GAAP) $81  $56  $71  $137-$152 
Depreciation and amortization 17  17  17  34 
EBITDA (non-GAAP) $98  $73  $88  $171-$186 
Restructuring expenses, net 10   *    *    *  
Foreign currency revaluation gains (1)  *    *    *  
Adjusted EBITDA (non-GAAP) $107  $73  $88  $180-$195 

*Due to the uncertainty of these items, management is currently unable to project restructuring expenses and foreign currency revaluation gains/losses for 2018

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For discussion of our exposure to market risk, refer to “Quantitative and Qualitative Disclosures about Market Risk”, which is included as an exhibit to this Form 10-Q.

Item 4. Controls and Procedures

 

a)

Disclosure controls and procedures.

 

The principal executive officer and principal financial officer, based on their evaluation of disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that the Company’s disclosure controls and procedures 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.

 

During the second quarter of 2018, the Company implemented additional controls and modified other controls related to revenue recognition and the Company’s adoption of ASC 606. There were no other changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 62

 

 

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

 

The information set forth above under Note 17 in Item 1, “Notes to Consolidated Financial Statements” is incorporated herein by reference.

 

Item 1A. Risk Factors

 

There have been no material changes in risks since December 31, 2017. For discussion of risk factors, refer to Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

We made no share purchases during the second quarter of 2018. 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.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit No.   Description 

 

10(u)    Employment Agreement

 

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 June 30, 2018. 

 

101   

The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, formatted in extensible Business Reporting Language (XBRL), filed herewith: 

 

 

 63

 
(i)Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017.

 

(ii)Consolidated Statements of Comprehensive Income/(Loss) for the three and six months ended June 30, 2018 and 2017.

 

(iii)Consolidated Balance Sheets at June 30, 2018 and December 31, 2017.

 

(iv)Consolidated Statements of Cash Flows for the three and six months ended June 30, 2018 and 2017.

 

(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. 

 

 

 64

 

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: August 7, 2018

  By /s/ John B. Cozzolino
    John B. Cozzolino
    Chief Financial Officer and Treasurer
    (Principal Financial Officer)

 

 

 65