News Column

Albany International Posts Fourth-Quarter Results

February 13, 2014

Albany International Corp., a global advanced textiles and materials processing company, reported Q4 2013 income attributable to the Company of $8.7 million.

In a release on February 10, the Company noted that these results were increased by a net reduction in restructuring costs of $2.1 million and income tax adjustments of $0.6 million, and were decreased by foreign currency revaluation losses of $1.6 million.

Q4 2012 income attributable to the Company was $8.2 million. These results included restructuring charges of $0.9 million, foreign currency revaluation losses of $4.0 million, and net unfavorable income tax adjustments of $0.1 million.

Q4 2013 gross profit was $72.4 million, or 38.2 percent of net sales, compared to $79.0 million, or 40.6 percent of net sales, in the same period of 2012. MC gross profit margin decreased from 45.0 percent in 2012 to 41.7 percent in 2013. The decrease in MC gross profit percentage was principally attributable to lower sales in North America.

Selling, technical, general, and research (STG&R) expenses were $54.6 million, or 28.8 percent of net sales, in the fourth quarter of 2013, including losses of $0.2 million related to the revaluation of nonfunctional-currency assets and liabilities. In Q4 2012, STG&R expenses were $58.4 million, or 30.0 percent of net sales, including losses of $1.2 million related to the revaluation of nonfunctional- currency assets and liabilities.

The Company reported a net reduction in restructuring costs for Q4 2013, principally due to a pension curtailment gain associated with the Company's Machine Clothing production facilities in France.

Q4 2013 Other expense, net, was $1.6 million, including losses related to the revaluation of nonfunctional-currency balances of $1.3 million. Q4 2012 Other expense, net, was $2.6 million, including losses of $2.8 million related to the revaluation of nonfunctional-currency balances.

The Company's income tax rate, excluding tax adjustments, was 48.8 percent for Q4 2013, compared to 38.5 percent for the same period of 2012. The increase in the tax rate was primarily attributable to changes in the amount and distribution of income and loss among the countries in which the Company operates, including losses in Europe driven by significant restructuring charges during 2013. Q4 2013 income tax expense included a charge of $1.2 million for a change in the income tax rate, and a net benefit of $1.8 million for discrete tax adjustments. Q4 2012 income tax expense included an unfavorable adjustment of $1.2 million related to a change in the tax rate, and net favorable discrete income tax adjustments of $1.1 million.

Capital spending for equipment and software was $16.9 million for Q4 2013, resulting in a full-year total of $64.5 million, including $36.9 million for the Engineered Composites segment and its expansion associated with the LEAP program. Depreciation and amortization was $16.0 million for Q4 2013.

CEO Comments

President and CEO Joe Morone said, "Due primarily to softer-than- expected market conditions in North America, the anticipated Q4 rebound in Machine Clothing failed to materialize. As expected, sales held firm in Europe and Asia, continuing the trend of the past several quarters. But in North America-our largest and most profitable market-they weakened sharply, which in turn, dragged down gross margins. While full-year performance in North America was excellent, in Q4 sales were 7.5 percent lower than in Q3, and more than 10 percent lower than in Q4 2012. November was especially soft, as certain producers in the containerboard market, our largest market segment, took substantial downtime in order to reduce their inventories. We had been expecting some decline due to seasonal end- of-the-year inventory reductions. But we had not anticipated the magnitude of the slowdown in the containerboard market, where in some cases, customers pulled forward downtime that had been scheduled for 2014.

"Nonetheless, we continue to expect a strong first half for MC in 2014. This view is bolstered by strong MC orders in Q4, improvement in North American containerboard production in December, and strong North American MC shipments in January. In particular, we expect first-half sales in North America to be much stronger than Q4 levels, and to be steady or somewhat higher in both Asia and Europe. More generally, we view the macro-economy, rather than structural or competitive factors, as the most important driver of our MC performance in 2014.

"AEC had another strong quarter in Q4. Sales grew by more than 10 percent compared to a year ago, Adjusted EBITDA more than doubled, performance on the LEAP program was once again strong, and the development pipeline continued to expand. While there were no major milestones scheduled in Q4, we continued to make steady progress toward the LEAP ramp. The biggest change in AEC over the past several months has been the growth in the array of potential airframe applications. A year ago, we were working on one airframe opportunity: a ceramic matrix composite (CMC) exhaust nozzle for Boeing. We continue to work on this CMC application, but at the same time we are now actively engaged with our customers in exploring a broad portfolio of additional potential airframe applications, including components for commercial aircraft wing, empennage, fuselage, and nacelle substructures, as well as components for Department of Defense rotorcraft and unmanned aerial vehicles. The revenue potential of these airframe applications ranges from small (less than $5 million per year) to large (tens of millions of dollars per year), with potential for initial production revenue ranging from two years from now to a decade or more from now. We expect several of these explorations to lead to jointly funded R&D projects this year. To be clear, most of these potential applications are still in the early stages of development. But given the rapid expansion of this airframe pipeline, along with the work we are doing with Safran on potential enhancements to LEAP, we continue to hold to our objective of $300 to $500 million of revenue by 2020.

"As for the 2014 outlook for AEC, we expect full-year sales to grow by roughly 10 percent, while full-year Adjusted EBITDA has the potential to nearly double. The most important performance milestone for the business will be on-time delivery of parts for LEAP engine tests.

"In sum, MC Q4 performance was held back by what we view as a temporary softening of the North American containerboard market, while in AEC, performance was strong on all fronts. Our outlook for the first half of 2014 remains unchanged. Assuming a gradually improving macroeconomic environment, we expect a strong rebound in MC and continued strong performance in AEC."

CFO Comments

CFO and Treasurer John Cozzolino commented, "Net debt declined another $13 million in the quarter, and was $82 million at year-end (see Table 9). The Company's leverage ratio, as defined in our primary debt agreements, finished the year at 1.78. In October 2013, the Company utilized funds borrowed from its bank credit facility to repay $50 million of its 6.84 percent senior notes with Prudential, effectively reducing our annual interest costs on that portion of our debt by over five percentage points at current market rates. At the end of the year, $100 million of notes were still outstanding, with $50 million due to be repaid in October 2015 and the remaining $50 million due in October 2017.

"At the end of Q4, $130 million was available on our $330 million bank credit facility. Cash balances, predominately held outside of the U.S., totaled about $223 million at the end of Q4. During Q4, the Company repatriated to the U.S. approximately $12 million of cash held outside the country, bringing the full-year total repatriations amount to about $35 million.

"Cash flow during the quarter was bolstered by the completion of two transactions. First, as previously disclosed, the Company received $28 million from a subsidiary of Safran S.A. in exchange for a 10 percent equity interest in ASC. The funds were received directly by ASC and are currently being held as cash, to be used for future cash flow requirements. Second, the Company received $3.8 million, representing the remaining proceeds from the 2012 sale of our PrimaLoft business.

"Offsetting the cash received from those transactions were significant cash outlays for capital expenditures and restructuring expenses. During Q4, capital spending was almost $17 million, bringing the full-year total to about $64 million. Approximately $37 million of that total spending for the year was related to AEC. Primarily due to a year-end carryover of about $52 million due on previously approved projects, capital spending in 2014 is expected to be about $65 million to $75 million.

"Cash outlays for restructuring were about $16 million in Q4, mostly related to restructuring activities in France. At the end of the year, the Company had a restructuring accrual of about $10 million, with over $8 million of that accrual related to France. Cash payments related to the accrual, as well as any other restructuring costs related to France, are expected to occur during 2014.

"The Company's income tax rate, exclusive of tax adjustments, was 49 percent for the full-year 2013, compared to 38.5 percent for the same period in 2012. The increase in the 2013 rate is primarily due to the adverse impact of restructuring activities. The tax rate for the year is higher than our previous estimate of 41 percent due to a larger-than-expected Q4 change in the mix of pre-tax income among the jurisdictions in which we operate. Including payments related to tax audit activities, cash paid for income taxes in 2013 was about $29 million."

More Information:

www.albint.com

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