Company Quick10K Filing
Quick10K
Albany International
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$68.66 32 $2,210
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-11 Earnings, Exhibits
8-K 2018-10-30 Earnings, Exhibits
8-K 2018-09-04 Officers
8-K 2018-08-06
8-K 2018-05-11 Shareholder Vote
8-K 2018-05-07 Earnings, Exhibits
8-K 2018-03-06 Officers
8-K 2018-02-23 Officers, Other Events, Exhibits
8-K 2018-02-05 Officers, Exhibits
MLM Martin Marietta Materials
TSE Trinseo
KRO Kronos Worldwide
GLT Glatfelter
UFI Unifi
CSWC Capital Southwest
GLAD Gladstone Capital
CULP Culp
CRWS Crown Crafts
RAND Rand Capital
AIN 2018-09-30
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 e2643ex31-1.htm
EX-31.2 e2643ex31-2.htm
EX-32.1 e2643ex32-1.htm
EX-99.1 e2643ex99-1.htm

Albany International Earnings 2018-09-30

AIN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 e2643-10q.htm QUARTERLY REPORT

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: September 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 every Interactive Data File required to be submitted 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 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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 October 22, 2018.

 

 

ALBANY INTERNATIONAL CORP.
TABLE OF CONTENTS

 

    Page No.
     
Part I Financial information  
     
  Item 1. Financial Statements 3
  Consolidated statements of income – three and nine months ended September 30, 2018 and 2017 3
  Consolidated statements of comprehensive income/(loss) – three and nine months ended September 30, 2018 and 2017 4
  Consolidated balance sheets as of September 30, 2018 and December 31, 2017 5
  Consolidated statements of cash flows – three and nine months ended September 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
61
  Item 4. Controls and Procedures 61
     
Part II Other Information  
     
  Item 1. Legal Proceedings 62
  Item 1A. Risk Factors 62
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 62
  Item 3. Defaults upon Senior Securities 62
  Item 4. Mine Safety Disclosures 62
  Item 5. Other Information 62
  Item 6. Exhibits 62

 2

 

ITEM 1. FINANCIAL STATEMENTS

 

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

 

Three Months Ended
September 30,
    Nine Months Ended
September 30,
2018  2017     2018  2017
        
$253,253   $222,141   Net sales  $739,459   $636,989 
160,227   142,582   Cost of goods sold  472,604   418,224 
                 
93,026   79,559   Gross profit  266,855   218,765 
39,071   40,575   Selling, general, and administrative expenses  117,708   122,296 
9,958   10,553   Technical and research expenses  30,473   30,788 
2,552   5,503   Restructuring expenses, net  13,714   10,220 
                 
41,445   22,928   Operating income  104,960   55,461 
4,621   4,429   Interest expense, net  13,530   13,042 
(3,151)  (530)  Other (income)/expense, net  (973)  2,854 
                 
39,975   19,029   Income before income taxes  92,403   39,565 
11,491   3,809   Income tax expense  23,131   12,138 
                 
28,484   15,220   Net income  69,272   27,427 
269   (49)  Net income/(loss) attributable to the noncontrolling interest  447   202 
$28,215   $15,269   Net income attributable to the Company  $68,825   $27,225 
                 
$0.87   $0.47   Earnings per share attributable to Company shareholders - Basic  $2.13   $0.85 
                 
$0.87   $0.47   Earnings per share attributable to Company shareholders - Diluted  $2.13   $0.85 
                 
        Shares of the Company used in computing earnings per share:        
32,264   32,187   Basic  32,247   32,160 
                 
32,280   32,214   Diluted  32,263   32,193 
                 
$0.17   $0.17   Dividends declared per share, Class A and Class B  $0.51   $0.51 

 

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
September 30,
     Nine Months Ended
September 30,
        
2018  2017     2018  2017
        
$28,484   $15,220   Net income  $69,272   $27,427 
                 
        Other comprehensive income/(loss), before tax:        
(7,847)  11,974   Foreign currency translation adjustments  (21,193)  39,348 
(232)  -   Pension/postretirement curtailment gain  (750)  - 
        Amortization of pension liability adjustments:        
(1,114)  (1,113)  Prior service credit  (3,341)  (3,339)
1,294   1,350   Net actuarial loss  3,882   4,050 
(96)  295   Payments and amortization related to interest rate swaps included in earnings  138   1,238 
1,777   (96)  Derivative valuation adjustment  9,703   (1,094)
                 
        Income taxes related to items of other comprehensive income/(loss):        
70   -   Pension/postretirement curtailment gain  225   - 
(54)  (71)  Amortization of pension liability adjustment  (162)  (213)
23   (112)  Payments and amortization related to interest rate swaps included in earnings  (33)  (470)
(427)  36   Derivative valuation adjustment  (2,329)  415 
21,878   27,483   Comprehensive income  55,412   67,362 
264   (43)  Comprehensive income/(loss) attributable to the noncontrolling interest  446   221 
$21,614   $27,526   Comprehensive income attributable to the Company  $54,966   $67,141 

 

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

 4

 

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

 

   September 30,
2018
  December 31,
2017
ASSETS        
Cash and cash equivalents  $160,593   $183,727 
Accounts receivable, net  252,464   202,675 
Contract assets  56,100   - 
Inventories  99,765   136,519 
Income taxes prepaid and receivable  6,643   6,266 
Prepaid expenses and other current assets  20,541   14,520 
Total current assets  596,106   543,707 
         
Property, plant and equipment, net  462,438   454,302 
Intangibles, net  50,765   55,441 
Goodwill  165,103   166,796 
Deferred income taxes  79,865   68,648 
Noncurrent receivables  41,657   32,811 
Other assets  52,392   39,493 
 Total assets  $1,448,326   $1,361,198 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Notes and loans payable  $-   $262 
Accounts payable  51,373   44,899 
Accrued liabilities  132,219   105,914 
Current maturities of long-term debt  1,231   1,799 
Income taxes payable  20,725   8,643 
Total current liabilities  205,548   161,517 
         
Long-term debt  529,003   514,120 
Other noncurrent liabilities  92,218   101,555 
Deferred taxes and other liabilities  12,915   10,991 
Total liabilities  839,684   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 37,450,329 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  430,231   428,423 
Retained earnings  581,369   534,082 
Accumulated items of other comprehensive income:        
Translation adjustments  (110,900)  (87,318)
Pension and postretirement liability adjustments  (48,293)  (50,536)
Derivative valuation adjustment  9,432   1,953 
Treasury stock (Class A), at cost 8,418,620 shares in 2018 and 8,431,335 shares in 2017  (256,603)  (256,876)
Total Company shareholders’ equity  605,276   569,768 
Noncontrolling interest  3,366   3,247 
Total equity  608,642   573,015 
Total liabilities and shareholders’ equity  $1,448,326   $1,361,198 

 

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

 5

 

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

 

Three Months Ended
September 30,
     Nine Months ended
September 30,
        
2018  2017     2018  2017
        OPERATING ACTIVITIES        
$28,484   $15,220   Net income  $69,272   $27,427 
        Adjustments to reconcile net income to net cash provided by operating activities:        
17,436   15,522   Depreciation  52,852   45,367 
2,366   2,608   Amortization  7,571   7,889 
(5,102)  (168)  Change in other noncurrent liabilities  (6,333)  (2,522)
1,331   (3,263)  Change in deferred taxes and other liabilities  (5,571)  (10,620)
2,131   1,086   Provision for write-off of property, plant and equipment  3,255   1,916 
150   211   Non-cash interest expense  304   634 
543   195   Compensation and benefits paid or payable in Class A Common Stock  1,879   1,865 
(10)  2   Fair value adjustment on foreign currency option  61   131 
-   4,149   Write-off of intangible assets in a discontinued product line  -   4,149 
        Changes in operating assets and liabilities that provided/(used) cash:        
(4,177)  (4,645)  Accounts receivable  (48,547)  (19,781)
3,040   -   Contract assets  (8,721)  - 
(2,228)  (3,944)  Inventories  (12,843)  (17,210)
103   (601)  Prepaid expenses and other current assets  (5,117)  (3,298)
(551)  -   Income taxes prepaid and receivable  (454)  (2,817)
(2,728)  (4,769)  Accounts payable  6,154   (2,704)
7,565   5,425   Accrued liabilities  12,233   4,525 
6,766   3,472   Income taxes payable  13,355   2,964 
(4,676)  (8,107)  Noncurrent receivables  (8,846)  (15,643)
(5,728)  (4,495)  Other, net  (9,049)  (557)
44,715   17,898   Net cash provided by operating activities  61,455   21,715 
                 
        INVESTING ACTIVITIES        
(21,441)  (15,319)  Purchases of property, plant and equipment  (60,564)  (61,724)
(78)  (147)  Purchased software  (130)  (538)
(21,519)  (15,466)  Net cash used in investing activities  (60,694)  (62,262)
                 
        FINANCING ACTIVITIES        
3,000   13,076   Proceeds from borrowings  26,031   45,335 
(10,471)  (3,569)  Principal payments on debt  (24,614)  (24,711)
-   -   Taxes paid in lieu of share issuance  (1,652)  (1,364)
52   356   Proceeds from options exercised  202   531 
(5,485)  (5,470)  Dividends paid  (16,441)  (16,396)
(12,904)  4,393   Net cash (used in)/provided by financing activities  (16,474)  3,395 
                 
(4,443)  7,848   Effect of exchange rate changes on cash and cash equivalents  (7,421)  8,875 
                 
5,849   14,673   (Decrease)/increase in cash and cash equivalents  (23,134)  (28,277)
154,744   138,792   Cash and cash equivalents at beginning of period  183,727   181,742 
$160,593   $153,465   Cash and cash equivalents at end of period  $160,593   $153,465 

 

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 include 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 MC 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 MC 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 MC revenue that is recognized over time.

 

In our 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

 10

 

to conclude that such modifications are not distinct from the existing contract, due to the significant integration of the obligations, and the interrelated nature of tasks, provided for in the modification and the existing contract. Therefore, such modifications are accounted for as if they were part of the existing contract, and 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 are required, any changes from prior estimates are included in revenues or earnings in the period in which the change occurs.

 

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

 

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

 

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

 

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

 

Segment 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 Nine Months Ended  
  September 30, 2018  
(in thousands) Point in Time Revenue
Recognition
Over Time Revenue
Recognition
Total
       
Machine Clothing $467,358 $2,400 $469,758
       
Albany Engineered Composites      
ASC - 134,972 134,972
Other AEC 15,909 118,820 134,729
Total Albany Engineered Composites 15,909 253,792 269,701
       
       
Total revenue $483,267 $256,192 $739,459

 

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 Nine Months Ended
(in thousands) September 30, 2018
   
Americas PMC $232,358
Eurasia PMC 176,300
Engineered Fabrics 61,100
Total Machine Clothing Net sales $469,758

 

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 September 30, 2018 that had an original duration of greater than one year totaled $95 million and related primarily to firm contracts in

 12

 

the AEC segment. Of that amount, we expect to recognize as revenue approximately $20 million during 2018, with the remainder to be recognized between 2019 and 2021.

 

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

 

As a result of applying the cumulative effect method for transition to ASC 606, we are required to disclose the effect of the new standard on each line of the consolidated financial statements. The following tables show the balances as reported for the period ended September 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
September
30, 2018
  Adjustments
to reverse
effects of
ASC 606
  As adjusted
for the
Three
Months
Ended September
30, 2018 to
exclude
adoption of
ASC 606
  As reported
for the
Nine
Months
Ended
September 30,
2018
  Adjustments
to reverse
effects of
ASC 606
  As adjusted
for the
Nine
Months
Ended
September 30,
2018 to
exclude
adoption
of ASC
606
                     
$253,253   $1,692   $254,945 Net sales $739,459   ($6,342)   $733,117
160,227   2,902   163,129 Cost of goods sold 472,604   (1,320)   471,284
                     
93,026   (1,210)   91,816 Gross profit 266,855   (5,022)   261,833
39,071   (12)    39,059 Selling, general, and administrative expenses 117,708   (67)   117,641
9,958   -   9,958 Technical and research expenses 30,473   -   30,473
2,552   -   2,552 Restructuring expenses, net 13,714   -   13,714
                     
41,445   (1,198)   40,247 Operating income 104,960   (4,955)   100,005
4,621   -   4,621 Interest expense, net 13,530   -   13,530
(3,151)   -   (3,151) Other (income)/expense, net (973)   -   (973)
                     
39,975   (1,198)   38,777 Income before income taxes 92,403   (4,955)   87,448
11,491   (431)   11,060 Income tax expense 23,131   (1,539)   21,592
                     
28,484   (767)   27,717 Net income 69,272   (3,416)   65,856
269   (27)   242 Net income/(loss) attributable to the noncontrolling interest 447   (111)   336
$28,215   ($740)   $27,475 Net income attributable to the Company $68,825   ($3,305)   $65,520
                     
$0.87   ($0.02)   $0.85 Earnings per share attributable to Company shareholders - Basic $2.13   ($0.10)   $2.03
                     
$0.87   ($0.02)   $0.85 Earnings per share attributable to Company shareholders - Diluted $2.13   ($0.10)   $2.03

 13

 

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

 

As reported
for the
Three
Months
Ended
September 30,
2018
  Adjustments
to reverse
effects of
ASC 606
  As adjusted
for the
Three
Months
Ended
September 30,
2018 to
exclude
adoption
of ASC
606
    As reported
for the
Nine
Months
Ended
September 30,
2018
  Adjustments
to reverse
effects of
ASC 606
  As adjusted
for the
Nine
Months
Ended
September 30,
2018 to
exclude
adoption
of ASC
606
                       
$28,484   ($767)   $27,717   Net income $69,272   ($3,416)   $65,856
                       
            Other comprehensive income/(loss), before tax:  
(7,847)   157   (7,690)   Foreign currency translation adjustments (21,193)   688   (20,505)
(232)   -   (232)   Pension/postretirement curtailment gain (750)   -   (750)
            Amortization of pension liability adjustments:          
(1,114)   -   (1,114)   Prior service credit (3,341)   -   (3,341)
1,294   -   1,294   Net actuarial loss 3,882   -   3,882
(96)   -   (96)   Payments and amortization related to interest rate swaps included in earnings 138   -   138
1,777   -   1,777   Derivative valuation adjustment 9,703   -   9,703
                       
            Income taxes related to items of other
comprehensive income/(loss):
70   -   70   Pension/postretirement curtailment gain 225   -   225
(54)   -   (54)   Amortization of pension liability adjustment (162)   -   (162)
23   -   23   Payments and amortization related to interest rate swaps included in earnings (33)   -   (33)
(427)   -   (427)   Derivative valuation adjustment (2,329)   -   (2,329)
21,878   (610)   21,268   Comprehensive income 55,412   (2,728)   52,684
264   (27)   237   Comprehensive income/(loss) attributable to the noncontrolling interest 446   (111)   335
$21,614   ($583)   $21,031   Comprehensive income attributable to the Company $54,966   ($2,617)   $52,349

 14

 

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

 

   As reported
September 30, 2018
  Adjustments to
reverse effects
of ASC 606
  As adjusted for
September 30, 2018 to
exclude
adoption of ASC
606
ASSETS            
Cash and cash equivalents  $160,593   $-   $160,593 
Accounts receivable, net  252,464   (8,784)  243,680 
Contract assets  56,100   (56,100)  - 
Inventories  99,765   50,458   150,223 
Income taxes prepaid and receivable  6,643   -   6,643 
Prepaid expenses and other current assets  20,541   -   20,541 
Total current assets  596,106   (14,426)  581,680 
             
Property, plant and equipment, net  462,438   -   462,438 
Intangibles, net  50,765   -   50,765 
Goodwill  165,103   -   165,103 
Deferred income taxes  79,865   (217)  79,648 
Noncurrent receivables  41,657   -   41,657 
Other assets  52,392   (1,256)  51,136 
Total assets  $1,448,326   ($15,899)  $1,432,427 
             
LIABILITIES AND SHAREHOLDERS’ EQUITY            
Notes and loans payable  $-   $-   $- 
Accounts payable  51,373   -   51,373 
Accrued liabilities  132,219   (19,076)  113,143 
Current maturities of long-term debt  1,231   -   1,231 
Income taxes payable  20,725   -   20,725 
Total current liabilities  205,548   (19,076)  186,472 
             
Long-term debt  529,003   -   529,003 
Other noncurrent liabilities  92,218   -   92,218 
Deferred taxes and other liabilities  12,915   (52)  12,863 
Total liabilities  839,684   (19,128)  820,556 
             
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 37,450,329 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  430,231   -   430,231 
Retained earnings  581,369   $2,325   583,694 
Accumulated items of other comprehensive income:            
  Translation adjustments  (110,900)  688   (110,212)
 Pension and postretirement liability adjustments  (48,293)  -   (48,293)
  Derivative valuation adjustment  9,432   -   9,432 
   Treasury stock (Class A), at cost 8,418,620 shares in 2018 and 8,431,335 shares in 2017  (256,603)  -   (256,603)
Total Company shareholders’ equity  605,276   3,013   608,289 
Noncontrolling interest  3,366   216   3,582 
Total equity  608,642   3,229   611,871 
Total liabilities and shareholders’ equity  $1,448,326   ($15,899)  $1,432,427 

 15

 

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

 

As
reported
for the
Three
Months
Ended
September 30,
2018
  Adjustments
to reverse
effects of
ASC 606
  As
adjusted
for the
Three
Months
Ended
September 30,
2018 to
exclude
adoption
of ASC
606
  As
reported
for the
Nine
Months
Ended
September 30,
2018
  Adjustments
to reverse
effects of
ASC 606
  As
adjusted
for the
Nine
Months
Ended
September 30,
2018 to
exclude
adoption
of ASC
606
          OPERATING ACTIVITIES          
$28,484   ($767)   $27,717 Net income $69,272   ($3,416)   $65,856
          Adjustments to reconcile net income to net cash provided by operating activities:
17,436   -   17,436 Depreciation 52,852   -   52,852
2,366   -   2,366 Amortization 7,571   -   7,571
(5,102)   -   (5,102) Change in other noncurrent liabilities (6,333)   -   (6,333)
1,331   (431)   900 Change in deferred taxes and other liabilities (5,571)   (1,539)   (7,110)
2,131   -   2,131 Provision for write-off of property, plant and equipment 3,255   -   3,255
150   -   150 Non-cash interest expense 304   -   304
543   -   543 Compensation and benefits paid or payable in Class A Common Stock 1,879   -   1,879
(10)   -   (10) Fair value adjustment on foreign currency option 61   -   61
-   -   - Write-off of intangible assets in a discontinued product line -        
          Changes in operating assets and liabilities that provided/(used) cash:
(4,177)   1,348   (2,829) Accounts receivable (48,547)   (2,379)   (50,926)
3,040   (3,040)   - Contract assets (8,721)   8,721   -
(2,228)   2,902   674 Inventories (12,843)   (1,320)   (14,163)
103   -   103 Prepaid expenses and other current assets (5,117)   -   (5,117)
(551)   -   (551) Income taxes prepaid and receivable (454)   -   (454)
(2,728)   -   (2,728) Accounts payable 6,154   -   6,154
7,565   (12)   7,553 Accrued liabilities 12,233   (67)   12,166
6,766   -   6,766 Income taxes payable 13,355   -   13,355
(4,676)   -   (4,676) Noncurrent receivables (8,846)   -   (8,846)
(5,728)   -   (5,728) Other, net (9,049)   -   (9,049)
44,715   -   44,715 Net cash provided by operating activities 61,455   -   61,455
(21,519)   -   (21,519) Net cash used in investing activities (60,694)   -   (60,694)
(12,904)   -   (12,904) Net cash used in financing activities (16,474)   -   (16,474)
                     
(4,443)   -   (4,443) Effect of exchange rate changes on cash and cash equivalents (7,421)   -   (7,421)
                     
5,849 - 5,849 (Decrease)/increase in cash and cash equivalents (23,134) - (23,134)
154,744   -   154,744 Cash and cash equivalents at beginning of period 183,727   -   183,727
$160,593   $ -   $160,593 Cash and cash equivalents at end of period $160,593   $ -   $160,593

 

 

 

 

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 nine-month periods ended September 30, 2018:

 16

 

  Three months ended September 30,   Three months ended
September 30, 2018
(in thousands) 2018 2017   Increase/(decrease)
attributable to
application of ASC 606
Net sales        
Machine Clothing $158,971 $150,694   $3,336
Albany Engineered Composites 94,282 71,447   (5,028)
Consolidated total $253,253 $222,141   ($1,692)
Operating income/(loss)        
Machine Clothing $50,310 $42,679   $2,158
Albany Engineered Composites 3,612 (9,301)   (960)
Corporate expenses (12,477) (10,450)   -
Operating income $41,445 $22,928   $1,198
Reconciling items:        
Interest income (579) (355)   -
Interest expense 5,200 4,784   -
Other (income)/expense, net (3,151) (530)   -
Income before income taxes $39,975 $19,029   $1,198

 

 

  Nine months ended September 30,   Nine months ended
September 30, 2018
(in thousands) 2018 2017   Increase/(decrease)
attributable to
application of ASC 606
Net sales        
Machine Clothing $469,758 $440,093   $8,404
Albany Engineered Composites 269,701 196,896   (2,062)
Consolidated total $739,459 $636,989   $6,342
Operating income/(loss)        
Machine Clothing $131,921 $119,366   $4,923
Albany Engineered Composites 9,979 (32,242)   32
Corporate expenses (36,940) (31,663)   -
Operating income $104,960 $55,461   $4,955
Reconciling items:        
Interest income (1,399) (801)   -
Interest expense 14,929 13,843   -
Other (income)/expense, net (973) 2,854   -
Income before income taxes $92,403 $39,565   $4,955

 17

 

At the January 1, 2018 date of adoption of ASC 606, Machine Clothing (MC) assets increased by $22 million, and Albany Engineered Composites (AEC) assets decreased by $13 million.

 

In the third quarter of 2018, AEC finalized a modification to the lease of its primary manufacturing facility in Salt Lake City, Utah. The modification, which includes additional manufacturing space, extends the minimum lease period until December 31, 2029. The lease modification resulted in a non-cash increase of $12.7 million to Property, plant and equipment, net and to Long-term debt in the Consolidated Balance Sheets. Due to the non-cash nature of the transaction, those increases are excluded from amounts reported in the Consolidated Statements of Cash Flows.

 

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 (income)/expense, net. Periods prior to 2018 have been restated to conform to the current year presentation (see Note 4).

 

The 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, 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 ASC at either market rent or a minimal cost. All lease expense is reimbursable by Safran to ASC due to the cost-plus nature of the supply agreement. ASC net sales to Safran were $136.9 million in the first nine months of 2018 and $84.1 million in the first nine months of 2017. The total of Accounts receivable, Contract assets and Noncurrent receivables due from Safran amounted to $99.0 million and $58.6 million as of September 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 September 30, Nine months ended
September 30,
(in thousands) 2018 2017 2018 2017
Machine Clothing $371 $96 $10,523 $1,012
Albany Engineered Composites 2,189 5,407 2,968 9,208
Corporate expenses (8) - 223 -
Total $2,552 $5,503 $13,714 $10,220

 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 benefits accrued under this plan have been frozen since February 2009. 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. In the third quarter of 2018, the Company made a $5 million voluntary contribution to its U.S. pension plan and, with that contribution, the plan is close to being fully funded. 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 nine months ended September 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 $2,085 $1,960 $174 $183
Interest cost 5,430 5,507 1,520 1,660
Expected return on assets (6,702) (6,004) - -
Curtailment gain (750) - - -
Amortization of prior service cost/(credit) 25 27 (3,366) (3,366)
Amortization of net actuarial loss 1,665 1,943 2,217 2,107
Net periodic benefit cost $1,753 $3,433 $545 $584

 

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:

 

 

 

 19

 

 

Effect by segment operating expenses:

(in thousands) Increase/(decrease) in expense for the nine months ended
September 30, 2017
Machine Clothing ($14)
Albany Engineered Composites -
Corporate expenses (1,860)
Total operating expenses ($1,874)
   
Other expense, net $1,874
   

Effect by Statement of Income line item:

 

 

(in thousands) Increase/(decrease) in expense for the nine months ended
September 30, 2017
Cost of goods sold ($371)
Selling, general and administrative expenses (1,503)
Total operating expenses ($1,874)
   
Other expense, net $1,874

 

 

 

5. Restructuring

 

On October 5, 2017, the Company filed a Current Report on Form 8-K to announce the initiation of discussions regarding a proposal to discontinue operations at its Machine Clothing production facility in Sélestat, France. The restructuring program was driven by the Company’s need o balance manufacturing capacity with demand. 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. In the first nine months of 2018, we recorded restructuring expense of $9.0 million, which includes severance and outplacement costs for the approximately 50 positions to be terminated under this plan. Since 2017, we have recorded $10.1 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 included expenses for the first nine months of 2018 and 2017 related to work force reductions in Salt Lake City, Utah and Rochester, New Hampshire. To date, we have recorded $6.1 million of restructuring charges related to these actions.

 

AEC restructuring charges in the third quarter of 2018 were principally related to the discontinuation of certain manufacturing processes in Salt Lake City, resulting in a non-cash restructuring charge of $1.7 million, and an additional $0.2 million for severance. The non-cash restructuring charge results from an impairment of related manufacturing equipment. The Company

 20

 

has decided to dispose of that equipment by sale and the impairment charge reflects management’s estimate of proceeds that may be recovered in the sale. As of September 30, 2018, the asset value, net of the impairment charge, is included in Prepaid expenses and other current assets in the accompanying Consolidated Balance Sheets.

 

In 2017, the Company decided to discontinue the Bear Claw® line of hydraulic fracturing components used in the oil and gas industry, which was part of the Harris aerostructures business acquired by AEC in 2016. This decision resulted in a non-cash restructuring charge of $4.5 million for the write-off of intangible assets and equipment, and a $3.2 million charge to Cost of goods sold for the write-off of inventory in the third quarter of 2017.

 

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

 

  Three months ended September 30, Nine months ended
September 30,
(in thousands) 2018 2017 2018 2017
Machine Clothing $371 $96 $10,523 $1,012
Albany Engineered Composites 2,189 5,407 2,968 9,208
Corporate expenses (8) - 223 -
 Total $2,552 $5,503 $13,714 $10,220

 

Nine months ended September 30, 2018 

(in thousands)

 

Total
restructuring
costs incurred
Termination
and other
costs
Impairment
of assets
Benefit plan
curtailment/settlement
Machine Clothing $10,523 $11,129 $144 ($750)
Albany Engineered Composites 2,968 1,206 1,762 -
Corporate expenses 223 223 - -
Total $13,714 $12,558 $1,906 ($750)

 

Nine months ended September 30, 2017

 

 

(in thousands)

Total
restructuring
costs incurred
Termination
and other
costs
Impairment
of plant and
equipment
Impairment
of intangible
asset
Machine Clothing $1,012 $1,012 $- $-
Albany Engineered Composites 9,208 4,173 886 4,149
Corporate expenses - - -  
Total $10,220 $5,185 $886 $4,149

 

We expect that approximately $6.1 million of Accrued liabilities for restructuring at September 30, 2018 will be paid within one year and approximately $0.3 million will be paid in the following year.

 21

 

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 September 30,
(in thousands) 2017 charges accrued Payments translation /other 2018
           
Total termination and other costs $3,326 $12,558 ($9,153) ($379)  $6,352

 

  December 31, Restructuring   Currency September 30,
(in thousands) 2016 charges accrued Payments translation /other 2017
           
Total termination and other costs $5,559 $5,185 ($6,370) $24  $4,398
         

 

 

6. Other expense, net

 

The components of Other expense, net are:

 

  Three months ended September 30, Nine months ended September 30,
(in thousands) 2018 2017 2018 2017
Currency transaction (gains)/losses ($3,611) $261 ($2,930) $2,310
Bank fees 100 116 303 375
Gain on insurance recovery - (2,000) - (2,000)
Components of net periodic pension and postretirement cost other than service 282 625 807 1,874
Other 78 468 847 295
Total ($3,151) ($530) ($973) $2,854

 

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.

 

In the third quarter of 2017, the Company recorded an insurance recovery gain of $2.0 million related to a 2016 loss due a theft of cash in Japan.

 

 

 22

 

7. Income Taxes

 

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

  Three months ended Nine months ended
  September 30, September 30,
(in thousands) 2018 2017 2018 2017
Income tax based on income from continuing operations, at estimated tax rates of 29.7% and 36.4%, respectively $ 11,857 $ 6,935 $ 27,409 $ 14,420
Provision for change in estimated tax rate (227) 741 - -
Income tax before discrete items 11,630 7,676 27,409 14,420
         
Discrete tax expense:        
Exercise of U.S. Stock Options (29) - (155) -
Impact of Mandatory Repatriation - - (1,099) -
Adjustments to prior period tax liabilities (7) (73) (259) 606
Provision for/resolution of tax audits and contingencies, net (166) - 2,282 961
Changes in Opening Valuation Allowance 63 (3,787) (4,923) (3,787)
Other - (7) (124) (62)
Total income tax expense $ 11,491 $ 3,809 $ 23,131 $ 12,138

 

The third quarter estimated effective tax rate on continuing operations was 29.7 percent in 2018, compared to 36.4 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 will be 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 could potentially affect the measurement of these balances or potentially give rise to new deferred tax

 23

 

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 September 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 recorded a net $1.1 million reduction to the provisional transition tax in second quarter of 2018. The $1.1 million adjustment was 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 $22 million and increased the AETR by 2.2%. The Company also calculated an estimated foreign-derived intangible income (FDII) deduction of $4.5 million which decreased the AETR by 0.8%. 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 $100.7 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 $2.3 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. In the second quarter of 2018, the Company recorded 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 $1.2 million, from the reevaluation of uncertain tax positions arising in examinations, in appeals, or in the courts, or from the closure of tax statutes of limitations.

 24

 

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. In the second quarter of 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 allowances 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
September 30,
Nine months ended
September 30,
(in thousands, except market price and earnings per share) 2018 2017 2018 2017
         
Net income attributable to the Company $28,215 $15,269 $68,825 $27,225
         
Weighted average number of shares:        
Weighted average number of shares used in        
calculating basic net income per share       32,264       32,187       32,247       32,160
Effect of dilutive stock-based compensation plans:        
Stock options              16              27              16              33
         
Weighted average number of shares used in        
calculating diluted net income per share       32,280       32,214       32,263       32,193
         
Average market price of common stock used        
for calculation of dilutive shares $72.30 $53.49 $66.01 $49.49
         
Net income attributable to the Company per share:        
Basic $0.87 $0.47 $2.13 $0.85
Diluted $0.87 $0.47 $2.13 $0.85

 

 

 

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

 25

 

impact that the ASC 606 revenue standard had on Company results for the first nine months of 2018, included in the consolidated financial statements:

 

  Nine months ended
September 30,
(in thousands) 2018 2017
Net income of Albany Safran Composites (ASC) $5,433 $2,805
Less: Return attributable to the Company’s preferred holding 965 782
Net income of ASC available for common ownership $4,468 $2,023
Ownership percentage of noncontrolling shareholder 10% 10%
Net income attributable to noncontrolling interest $447 $202
     
Noncontrolling interest, beginning of year $3,247 $3,767
Decrease attributable to application of ASC 606 (327) -
Net income attributable to noncontrolling interest 447 202
Changes in other comprehensive income attributable to noncontrolling interest (1) 19
Noncontrolling interest $3,366 $3,988

 

 

 

10. Accumulated Other Comprehensive Income (AOCI)

 

The table below presents changes in the components of AOCI for the period December 31, 2017 to September 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 (23,582) 2,389 7,374 (13,819)
Pension/postretirement curtailment gain, net of tax - (525) - (525)
Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax - - 105 105
Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax - 379 - 379
Net current period other comprehensive income (23,582) 2,243 7,479 (13,860)
September 30, 2018 ($110,900) ($48,293) $9,432 ($149,761)

 

 26

 

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

(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 40,775 (1,427) (679) 38,669
Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax - - 768 768
Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax - 498 - 498
Net current period other comprehensive income 40,775 (929) 89 39,935
September 30, 2017 ($92,523) ($52,648) $917 ($144,254)

 

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 September 30, 2018 and 2017.

 

  Three months ended
September 30,
Nine months ended
September 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)
($96) $295 $138 $1,238
Income tax effect 23 (112) (33) (470)
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income ($73) $183 $105 $768
         
Pretax pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income:        
Pension/postretirement curtailment gain (c) ($232)  $-    ($750)  $-   
Amortization of prior service credit (b)        (1,114)     (1,113)         (3,341)      (3,339)
Amortization of net actuarial loss (b)         1,294      1,350          3,882       4,050
Total pretax amount reclassified (52) 237 (209) 711
Income tax effect 16 (71) 63 (213)
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income ($36) $166 ($146) $498

(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 (income)/expense, net (see Note 4).
(c)The curtailment adjustment was included in restructuring expenses, net (see Note 5).

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11. Accounts Receivable

 

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

(in thousands)   September 30,
2018
December 31,
2017
Trade and other accounts receivable $241,748 $152,375
Bank promissory notes 18,390 20,255
Revenue in excess of progress billings - 37,964
Allowance for doubtful accounts (7,674) (7,919)
Total accounts receivable $252,464 $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 September 30, 2018 and December 31, 2017, Noncurrent receivables consisted of the following:

(in thousands)   September 30,
2018
December 31,
2017
Noncurrent receivables $41,657 $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.

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

 28

 

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)   September 30,
2018
December 31,
2017
Contract assets $56,100 $ -
Contract liabilities 6,310 -

Contract assets increased $8.7 million during the nine month period ended September 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 nine month period ended September 30, 2018.

Contract liabilities increased $5.6 million during the nine month period ended September 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 nine month period ended September 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 September 30, 2018 and December 31, 2017, inventories consisted of the following:

(in thousands)   September 30,
2018
December 31,
2017
Raw materials $42,011 $42,215
Work in process  45,621  65,448
Finished goods  12,133  28,856
Total inventories $99,765 $136,519

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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 September 30, 2018 and December 31, 2017, were as follows:

 30

 

As of September 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 ($128) $12
AEC technology 15 370 (308) 62
Customer relationships 15 48,421 (8,076) 40,345
Customer contracts 6 17,471 (7,287) 10,184
Other intangibles 5 322 (160) 162
Net amortized intangible assets   $66,724 ($15,959) $50,765
         
Unamortized intangible assets:        
MC Goodwill   $69,373 $- $69,373
AEC Goodwill   95,730 - 95,730
Total unamortized intangible assets:   $165,103 $- $165,103

 

 

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 September 30, 2018, were as follows:

 31

 

(in thousands) December
31, 2017
Amortization Currency
Translation
September 30, 2018
         
Amortized intangible assets:        
AEC trade names $15 ($3) $- $12
AEC technology 80 (18) - 62
Customer relationships 42,767 (2,422) - 40,345
Customer contracts 12,369 (2,185) - 10,184
Other intangibles 210 (48) - 162
Net amortized intangible assets $55,441 ($4,676) $- $50,765
         
Unamortized intangible assets:        
MC Goodwill $71,066 $- ($1,693) $69,373
AEC Goodwill 95,730 - - 95,730
Total unamortized intangible assets: $166,796 $- ($1,693) $165,103

 

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

 

 

 

 

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15. Financial Instruments

 

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

(in thousands, except interest rates) September 30,
2018
December 31, 2017
     
Revolving credit agreement with borrowings outstanding at an end of period interest rate of 3.61% in 2018 and 3.40% in 2017 (including the effect of interest rate hedging transactions, as described below), due in 2022 $504,000 $501,000
     
Finance lease obligation 26,234 14,919
     
Long-term debt 530,234 515,919
     
Less: current portion (1,231) (1,799)
     
Long-term debt, net of current portion $529,003 $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, $504 million of borrowings were outstanding as of September 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 September 17, 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 September 30, 2018, we would have been able to borrow an additional $181 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).

In September 2018, we finalized a modification to the lease of our primary manufacturing facility in Salt Lake City, Utah. The original lease agreement had an initial expiration date of December 31, 2022 and an implied interest rate of 5.0%. The modification, which includes additional manufacturing space, retains the same implied interest rate and extends the minimum lease period until December 31, 2029. The following schedule presents future minimum annual lease payments under the finance lease obligation and the present value of the minimum lease payments, as of September 30, 2018.

 33

 

Years ending December 31, (in thousands)
2018 $623
2019 2,472
2020 2,995
2021 2,997
2022 3,054
Thereafter 22,207
Total minimum lease payments 34,348
Less: Amount representing interest (8,114)
   
Present value of minimum lease payments $26,234

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 September 17, 2018 was 2.16%, during the swap period. On September 17, 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 September 30, 2018, our leverage ratio was 2.05 to 1.00 and our interest coverage ratio was 11.50 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 September 30, 2018.

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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 September 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:

 

    September 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   $25,056   $-   $13,601   $-  
Other Assets:                  
Common stock of unaffiliated foreign public company (a)   918   -    999    -  
Interest rate swaps   -   10,819 (b) -    313 (c)
                   

 

 

 

 

 

 

 

(a)Original cost basis $0.5 million
(b)Net of $39.8 million receivable floating leg and $29.0 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. 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.

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

 35

 

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 is 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 September 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 $0.6 million for the nine month period ended September 30, 2018 and $0.6 million for the nine month period ended September 30, 2017. Additionally, non-cash interest expense/(income) related to the amortization of swap buyouts totaled ($0.5) million for the nine-month period ended September 30, 2018 and $0.6 million for the nine-month period ended September 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:

 

  Three months
ended September 30,
Nine months
ended September 30,
(in thousands) 2018 2017 2018 2017
         
Derivatives not designated as hedging instruments        
Foreign currency options gains/(losses) $10 ($2) ($61) ($131)

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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 3,673 claims as of September 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 September 30)  3,730 132  75  3,673 $100

 

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 September 30, 2018 we had resolved, by means of settlement or dismissal, 37,726 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 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 September 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

 37

 

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.

 

 

 

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) - -  (5,086) - - (327)  (5,413)
Net income - - 68,825 - - 447  69,272
Compensation and benefits paid or payable in shares -  1,606 - - 273 - 1,879
Options exercised -  202       - 202
Dividends declared - - (16,452) - - - (16,452)
Cumulative translation adjustments - - -  (23,582) - (1) (23,583)
Pension and postretirement liability adjustments - - - 2,243 - - 2,243
Derivative valuation adjustment - - - 7,479 - - 7,479
September 30, 2018 $40 $430,231 $581,369 ($149,761) ($256,603) $3,366 $608,642

 

(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 million increase to Retained earnings.

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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, for all leases with terms longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. 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 new standard is effective January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to apply the standard either (1) on the January 1, 2019 effective date, or (2) the beginning of the earliest comparative period presented in its financial statements. The Company will adopt the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new standard provides a number of optional practical expedients for transition, some of which, if elected, must be adopted as a package. The Company expects to elect the package of practical expedients which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the practical expedients pertaining to use-of-hindsight or land easements. The new standard also provides practical expedients for an entity’s ongoing accounting including not recording a lease-related asset and liability when the original lease term is 12 months or less, a provision which the Company will adopt. The Company also currently expects to elect the practical expedient to not separate lease and non-lease components for all of our leases. The Company does not expect a significant change in our leasing activities between now and adoption. Additionally, the Company is 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.

In August 2018, an accounting update was issued which clarifies that implementation costs incurred by customers in cloud computing arrangements are deferred if they would be capitalized by customers in software licensing arrangements under the internal-use software guidance. This update is effective for annual and interim periods in fiscal years beginning after December 15, 2019. We are currently evaluating the impact of this update. 

In August 2018, an accounting update was issued which aims to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing defined benefit plan disclosures. This update is effective for annual and interim periods in fiscal years beginning after December 15, 2020. We are currently evaluating the impact of this update. 

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In August 2018, an accounting update was issued which aims to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing fair value measurement disclosures. This update is effective for annual and interim periods in fiscal years beginning after December 15, 2019. 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.

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

 40

 

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 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 (both commercial 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 industry. AEC’s largest aerospace customer is the SAFRAN Group and sales to SAFRAN, through ASC, (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. 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.

 41

 

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:

 

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


(in thousands)
Machine
Clothing
Albany
Engineered
Composites
Income tax and
noncontrolling
interest effects
Total
Company
Net sales $3,336 ($5,028) $ - ($1,692)
Gross profit  2,170  (960) -  1,210
Selling, technical, general and research expenses  12 - -  12
Operating income and Income before income taxes  2,158  (960) -  1,198
Income taxes - -  431  431
Net income  2,158  (960)  (431)  767
Net income attributable to the noncontrolling interest in ASC - -  27  27
Net income attributable to the Company $2,158 ($960) ($458) $740

 

Increase/(decrease) attributable to adoption of ASC 606 for the nine Months ended September 30, 2018

(in thousands)
Machine
Clothing
Albany
Engineered
Composites
Income tax and
noncontrolling
interest effects
Total
Company
Net sales $8,404 ($2,062) $ - $6,342
Gross profit  4,990  32 -  5,022
Selling, technical, general and research expenses  67 - -  67
Operating income and Income before income taxes  4,923  32 -  4,955
Income taxes - -  1,539  1,539
Net income  4,923  32  (1,539)  3,416
Net income attributable to the noncontrolling interest in ASC - -  111  111
Net income attributable to the Company $4,923 $32 ($1,650) $3,305

Net sales

 

The following table summarizes our Net sales by business segment:

 42

 

  Three months ended
September 30,
Nine months ended
September 30,
(in thousands, except percentages) 2018 2017 %
Change
2018 2017 %
Change
Machine Clothing $158,971 $150,694 5.5% $469,758 $440,093 6.7%
Albany Engineered Composites 94,282 71,447 32.0% 269,701  196,896 37.0%
Total $253,253 $222,141 14.0% $739,459 $636,989 16.1%

 

 

The following table summarizes third-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, Q3
2018
Increase /
(decrease) due
to ASC 606
Decrease due to
changes in
currency
translation
rates
Q3 2018 sales
on same basis
as Q3 2017
% Change
excluding
currency
rate and
ASC 606
effects
compared to
Q3 2017
Machine Clothing $158,971 $3,336 ($1,225) $156,860 4.1%
Albany Engineered Composites         94,282        (5,028)             (441)        99,751 39.6%
Total $253,253 ($1,692) ($1,666) $256,611 15.5%

 

(in thousands, except percentages) Net sales as
reported, first
nine months of
2018
Increase /
(decrease) due
to ASC 606
Increase due to
changes in
currency
translation
rates
Year to date
September 30, 2018
sales on same
basis as 2017
% Change
excluding
currency
rate and
ASC 606
effects
compared to 2017
Machine Clothing $469,758 $8,404 $8,675 $452,679 2.9%
Albany Engineered Composites 269,701  (2,062) 3,085  268,678 36.5%
Total $739,459 $6,342 $11,760 $721,357 13.2%

 

Three month comparison

 

·   Changes in currency translation rates had the effect of decreasing net sales by $1.7 million during the third quarter of 2018, as compared to 2017, principally due to the weakening of the euro and Chinese renminbi in the third quarter of 2018, compared to the third quarter of 2017.
·   Excluding the effect of changes in currency translation rates:

 

  Net sales increased 14.8% compared to the same period in 2017. Excluding the additional effect of ASC 606, Net sales increased 15.5%.
  Net sales in MC increased 6.3%. Excluding the additional effect of adopting ASC 606, Net sales increased 4.1%, principally due to global growth in sales for packaging, tissue, publication and pulp grades, with particular strength in South America and Asia.
  Net sales in AEC increased 32.6%. Excluding the additional effect of adopting ASC 606, Net sales increased 39.6%, primarily driven by growth in the LEAP, Boeing 787, F-35, and CH-53K programs.

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Nine month comparison

 

·Changes in currency translation rates had the effect of increasing net sales by $11.8 million during the first nine months of 2018, as compared to 2017. That currency translation effect was principally due to the euro and Chinese renminbi being stronger in 2018 than in 2017.
·Excluding the effect of changes in currency translation rates:
  Net sales increased 14.2% compared to the same period in 2017. Excluding the impact of the adoption of ASC 606, Net sales increased 13.2%.
  Net sales in MC increased 4.8%. Excluding the impact of ASC 606, Net sales increased 2.9%, principally due to global growth in sales for packaging and tissue grades.
  Net sales increased 14.2% compared to the same period in 2017. Excluding the impact of the adoption of ASC 606, Net sales increased 13.2%.
  Net sales in AEC increased 35.4%. Excluding the impact of ASC 606, Net sales increased 36.5%, 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
September 30,
Nine months ended
September 30,
(in thousands, except percentages) 2018 2017 2018 2017
Machine Clothing $79,352 $73,027 $229,140 $213,077
Albany Engineered Composites 13,727 6,638 37,877 5,872
Corporate expenses (53) (106) (162) (184)
Total $93,026 $79,559 $266,855 $218,765
% of Net sales 36.7% 35.8% 36.1% 34.3%

 

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:

· An increase in MC gross profit, principally due to higher sales.
· The increase in AEC gross profit of $7.1 million, which was principally due to the net effect of the following individually significant items:
  ·The increase in net sales, as described above, and improved labor productivity.
  ·The write-off of inventory in a discontinued product line reduced gross profit in the third quarter of 2017 by $3.2 million.
· Changes in currency translation rates did not have a significant effect on gross profit in 2018.

 44

 

Nine 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:

·An increase in MC Gross profit, principally due to higher sales.
·The increase in AEC Gross profit of $32.0 million, which 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 write-off of inventory in a discontinued product line reduced 2017 gross profit by $3.2 million.
 · The Net sales increase in 2018, as described above, and improved labor productivity.
·Changes in currency translation rates did not have a significant effect on 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
September 30,
Nine months ended
September 30,
(in thousands, except percentages) 2018 2017 2018 2017
Machine Clothing $28,673 $30,252 $86,696 $92,698
Albany Engineered Composites  7,926 10,532 24,930  28,907
Corporate expenses 12,430 10,344 36,555  31,479
Total $49,029 $51,128 $148,181 $153,084
% of Net sales 19.4% 23.0% 20.0% 24.0%

 

 

Three month comparison

 

The decrease in STG&R expenses in the third 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 third-quarter losses of $0.4 million in 2018, and $1.3 million in 2017.
·In AEC, lower spending in Research and Development, restructuring and other organization changes contributed to a $2.6 million decrease in third-quarter STG&R expense.
·Corporate STG&R expenses increased by approximately $2.1 million principally due to higher costs to support continued growth in AEC.

 

 

Nine month comparison

 

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

 45

 

·In MC, revaluation of nonfunctional currency assets and liabilities resulted in gains of $0.9 million in 2018, and losses of $4.4 million in 2017.
·In AEC, restructuring and other organization changes contributed to a $4.0 million decrease in third-quarter STG&R expense.
·Corporate STG&R expenses increased by approximately $5.1 million principally due to higher costs 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
September 30,
Nine months ended
September 30,
(in thousands) 2018 2017 2018 2017
Machine Clothing $4,208 $4,229 $12,837 $13,273
Albany Engineered Composites  3,117 3,828  9,447  9,683
Total $7,325 $8,057 $22,284 $22,956

 

Restructuring Expense

 

In addition to the items discussed above affecting gross profit, and STG&R expenses, operating income was affected by restructuring costs of $13.7 million in the first nine months of 2018 and $10.2 million for the same period in 2017.

 

The following table summarizes restructuring expenses by business segment:

 

  Three months ended
September 30,
Nine months ended
September 30,
(in thousands) 2018 2017 2018 2017
Machine Clothing $371 $96 $10,523 $1,012
Albany Engineered Composites  2,189 5,407 2,968  9,208
Corporate expenses (8) - 223 -
Total $2,552 $5,503 $13,714 $10,220

 

 

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 nine months of 2018, we recorded restructuring expense of $9.0 million, which includes severance and outplacement costs for the approximately 50 positions that will be terminated under this plan. Since 2017, we have recorded $10.1 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

 46

 

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 principally resulted in lower cost of goods sold in 2018.

AEC restructuring charges included expenses for the first nine months of 2018 and 2017 related to work force reductions in Salt Lake City, Utah and Rochester, New Hampshire. To date, we have recorded $6.1 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.

AEC restructuring charges in the third quarter of 2018 were principally related to the discontinuation of certain manufacturing processes in Salt Lake City, resulting in a non-cash restructuring charge of $1.7 million, and an additional $0.2 million for severance.

In 2017, the Company decided to discontinue the Bear Claw® line of hydraulic fracturing components used in the oil and gas industry, which was part of the Harris aerostructures business acquired by AEC in 2016. This decision resulted in a non-cash restructuring charge of $4.5 million for the write-off of intangible assets and equipment, and a $3.2 million charge to Cost of goods sold for the write-off of inventory in the third quarter of 2017. 

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
September 30,
Nine months ended
September 30,
(in thousands) 2018 2017 2018 2017
Machine Clothing $50,310 $42,679 $131,921 $119,366
Albany Engineered Composites  3,612  (9,301)  9,979 (32,242)
Corporate expenses  (12,477)  (10,450) (36,940) (31,663)
Total $41,445 $22,928 $104,960 $55,461

 

Other Earnings Items

 

  Three months ended
September 30,
Nine months
ended September 30,
(in thousands) 2018 2017 2018 2017
Interest expense, net $4,621 $4,429 $13,530 $13,042
Other (income)/expense, net (3,151)  (530) (973)  2,854
Income tax expense 11,491 3,809 23,131 12,138
Net income/(loss) attributable to the noncontrolling interest 269 (49)  447 202

 47

 

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:

 

Three month comparison

 

·For the third quarter of each year, revaluation of nonfunctional currency cash and intercompany balances resulted in a gain of $3.6 million in 2018 and a loss of $0.3 million in 2017.
·We recorded a $2.0 million insurance recovery gain in the third quarter of 2017.

 

 

Nine month comparison

 

·For the first nine months of each year, revaluation nonfunctional currency cash and intercompany balances resulted in a gain of $2.9 million in 2018, and a loss of $2.3 million in 2017.
·We recorded a $2.0 million insurance recovery gain in the third quarter of 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 third quarter of 2018 and 2017 were 28.7% and 20.0%, 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 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 third 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 29.7%.
·A $0.2 million [-0.4%] tax benefit due to changes of uncertain tax positions.
·A $0.1 million [0.2%] tax expense due to changes in the opening valuation allowance.
·A $0.3 million [-0.8%] tax benefit for other tax adjustments.

 48

 

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

·The income tax rate on continuing operations, excluding discrete items, was 36.4%.
·A $0.1 million [-0.4%] tax benefit due to changes of uncertain tax positions.
·A $3.8 million [-19.9%] tax benefit related to the release of valuation allowances.
·A $0.8 million [3.9%] net tax expense related to a change in the estimated tax rate for the year.

 

Nine month comparison

 

The Company’s effective tax rates for the first nine-month periods of 2018 and 2017 were 25.0% and 30.7%, 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 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 nine 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 29.7%.
·A $0.3 million [-0.3%] tax benefit related to the true-up of prior years’ estimated taxes.
·A $1.1 million [-1.2%] tax benefit from the impact of the mandatory repatriations.
·A $2.3 million [2.5%] tax expense due to changes of uncertain tax positions.
·A $5.0 million [-5.3%] tax benefit due to changes in the opening valuation allowance.
·A $0.3 million [-0.4%] net tax benefit for other tax adjustments.

 

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

·The income tax rate on continuing operations, excluding discrete items, was 36.4%.
·A $0.4 million [1.1%] tax expense due to changes of uncertain tax positions.
·A $0.2 million [0.5%] tax expense related to the true-up of prior years’ estimated taxes.
·A $1.0 million [2.4%] tax expense related to provisions for and settlements of income tax audits.
·A $3.8 million [-9.5%] tax benefit related to the release of valuation allowances.
·A $0.1 million [-0.2%] tax benefit related to the exercise of stock options.

 

Segment Results of Operations

 

Machine Clothing Segment

 

Machine Clothing is our primary business segment and accounted for 64% of our consolidated revenues during the first nine 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-

 49

 

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.

 

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
September 30,
Nine months ended
September 30,
(in thousands, except percentages) 2018 2017 2018 2017
Net sales $158,971 $150,694 $469,758  $440,093
Gross profit 79,352 73,027  229,140  213,077
% of net sales 49.9% 48.5% 48.8% 48.4%
STG&R expenses 28,673 30,252 86,696 92,696
Operating income 50,310 42,679  131,921  119,366

 

Net Sales

 

Three month comparison

 

·Net sales increased by 5.5%.
·Changes in currency translation rates had the effect of decreasing third-quarter 2018 sales by $1.2 million compared to the same period in 2017. That currency translation effect was principally due to the weakening of the euro and Chinese renminbi in the third quarter of 2018, compared to the third quarter of 2017.
·Excluding the effect of changes in currency translation rates, Net sales in MC increased 6.3%. Excluding the additional effect of adopting ASC 606, Net sales increased 4.1%, principally due to global growth in sales for the packaging, tissue, publication and pulp grades, with particular strength in South America and Asia.

 

Nine month comparison

 

·Net sales increased by 6.7%.
·Changes in currency translation rates had the effect of increasing the first nine months of 2018 sales by $8.7 million compared to the same period in 2017. That currency translation effect was principally due to the euro and Chinese renminbi being stronger in 2018 than in 2017.

 50

 

·Excluding the effect of changes in currency translation rates, Net sales in MC increased 4.8%. Excluding the additional effect of adopting ASC 606, Net sales increased 2.9%, principally due to global growth in sales for the packaging and tissue grades.

 

 

Gross Profit

 

Three month comparison

 

·The increase in MC Gross profit and gross profit as a percentage of sales was principally due to higher sales.
·ASC 606 had the effect of increasing MC Gross profit by $2.2 million.
·Changes in currency translation rates did not have a significant effect on Gross profit for the third quarter of 2018.

 

Nine month comparison

 

·The increase in MC gross profit and gross profit as a percentage of sales was principally due to higher sales.
·ASC 606 had the effect of increasing MC Gross profit by $5.0 million.
·Changes in currency translation rates did not have a significant effect on gross profit for the first nine 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 $6.3 million due to increased sales, as described above.
  · STG&R expenses decreased $1.6 million principally due to:

 

  o In MC, revaluation of nonfunctional currency assets and liabilities resulted in third-quarter losses of $0.4 million in 2018 and $1.3 million in 2017.

 

  · Restructuring charges were $0.4 million in the third-quarter of 2018, compared to $0.1 million in the same period in 2017.

 

 

Nine month comparison

 

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

 

  · Gross profit increased $16.1 million due to increased sales, as described above.
  · STG&R expenses decreased $6.0 million principally due to:

 

  o In MC, revaluation of nonfunctional currency assets and liabilities resulted in gains of $0.9 million in 2018, and losses of $4.4 million in 2017.

 

  · Restructuring charges were $10.5 million in the first nine months of 2018, compared to $1.0 million in the same period in 2017.

 51

 

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 (both commercial and defense) industry. 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, components for the CH53-K helicopter, and the fan case for the GE9X engine.

 

Review of Operations

 

Three months ended

September 30,

Nine months ended

September 30,

(in thousands, except percentages) 2018 2017 2018 2017
Net sales $94,282 $71,447 $269,701 $196,896
Gross profit 13,727 6,638 37,877  5,872
% of net sales 14.6% 9.3% 14.0% 3.0%
STG&R expenses  7,926 10,532 24,930  28,907
Operating income/(loss) 3,612 (9,301) 9,979 (32,242)

 

 

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 32.6%. Excluding the impact of adopting ASC 606, Net sales increased 39.6%, primarily driven by growth in the LEAP, Boeing 787, F-35, and CH-53K programs.

 

Nine 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 35.4%. Excluding the impact of adopting ASC 606, Net sales increased 36.5%, 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 $7.1 million was principally due to the net effect of the following individually significant items:

 

·The increase in net sales, as described above, and improved labor productivity.

 52

 

·In the third quarter of 2017, the Company recorded a $3.2 million charge for the write-off of inventory in a discontinued product line.

 

Nine month comparison

 

The increase in gross profit of $32.0 million was principally due to the net effect of the following individually significant items:

 

·The increase in net sales, as described above, and improved labor productivity.
·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.
·In the third quarter of 2017, the Company recorded a $3.2 million charge for the write-off of inventory in a discontinued product line.

 

 

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 43 percent of segment revenue for the first nine 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 increase to gross profit of $0.5 million for the first nine months of 2018. In the first nine 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 nine months of 2017 resulted in an increase to gross profit of $0.3 million.

 

Operating Income/(Loss)

 

Three and Nine month comparison

 

The increase in operating income of $12.9 million in the third quarter of 2018 and $42.2 million for the first nine months of 2018 was principally due to the net effect of the following individually significant items:

 

·A significant increase in Net sales and strong productivity, as described above.
·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.
·In the third quarter of 2017, we recorded a $3.2 million charge to Cost of goods sold for the write-off of inventory in a discontinued product line.
·A 2018 decrease in Restructuring expenses, compared to 2017, of $3.2 million for the third quarter and $6.2 million for the nine months ended September 30.

 53

 

Liquidity and Capital Resources

 

Cash Flow Summary

  Nine months ended
September 30,
(in thousands) 2018 2017
Net income $69,272 $27,427
Depreciation and amortization 60,423 53,256
Changes in working capital (a)  (63,957)  (39,695)
Changes in other noncurrent liabilities and deferred taxes  (11,904)  (13,142)
Other operating items  7,621  (6,131)
Net cash provided in operating activities 61,455 21,715
Net cash used in investing activities  (60,694)  (62,262)
Net cash used in financing activities  (16,474) 3,395
Effect of exchange rate changes on cash and cash equivalents (7,421) 8,875
Decrease in cash and cash equivalents  (23,134)  (28,277)
Cash and cash equivalents at beginning of year 183,727 181,742
Cash and cash equivalents at end of period $160,593 $153,465

 

(a)Includes Accounts receivable, Contract assets, Inventories, and Accounts payable

 

 

Operating activities

 

Cash flow provided by operating activities was $61.5 million and $21.7 million for the first nine 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. In the third quarter of 2018, the Company made a $5 million voluntary contribution to its U.S. pension plan and, with that contribution, the plan is close to being fully funded. 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 $19.9 million and $21.7 million for the first nine 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 U.S., Mexico and China.

At September 30, 2018, we had $160.6 million of cash and cash equivalents, of which $139.2 million was held by subsidiaries outside of the United States.

 

Investing and Financing Activities

 

 

Capital expenditures for the first nine months were $60.7 million in 2018 and $62.3 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.

 54

 

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 September 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 September 30, 2018.

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, $504 million of borrowings were outstanding as of September 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 September 17, 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 September 30, 2018, we would have been able to borrow an additional $181 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 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 September 17, 2018 was 2.16%, during the swap period. On September 17, 2018, the all-in-rate on the $350 million of debt was 3.61%.

As of September 30, 2018, our leverage ratio was 2.05 to 1.00 and our interest coverage ratio was 11.50 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.

 55

 

Off-Balance Sheet Arrangements

 

As of September 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

 

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; net debt excluding the impact of certain non-cash items; 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

 56

 

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.

 

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

 

Three months ended September 30, 2018      
(in thousands) Machine
Clothing
  Albany
Engineered
Composites
  Corporate
expenses and
other
  Total
Company
Operating income/(loss) (GAAP) $50,310   $3,612   ($12,477)  $41,445 
Interest, taxes, other income/(expense) -   -   (12,961)  (12,961)
Net income/(loss) (GAAP) 50,310   3,612   (25,438)  28,484 
Interest expense, net -   -   4,621   4,621 
Income tax expense -   -   11,491   11,491 
Depreciation and amortization expense 7,725   10,894   1,183   19,802 
EBITDA (non-GAAP) 58,035   14,506   (8,143)  64,398 
Restructuring expenses, net 371   2,189   (8)  2,552 
Foreign currency revaluation (gains)/losses (38)  242   (3,439)  (3,235)
Pretax income attributable to the noncontrolling interest in ASC -   (397)     (397)
Adjusted EBITDA (non-GAAP) $58,368   $16,540   ($11,590)  $63,318 

 

 

Three months ended September 30, 2017       
(in thousands)  Machine
Clothing
  Albany
Engineered
Composites
  Corporate
expenses and
other
  Total
Company
Operating income/(loss) (GAAP)  $42,679   ($9,301)  ($10,450)  $22,928 
Interest, taxes, other income/(expense)  -   -   (7,708)  (7,708)
Net income/(loss)(GAAP)  42,679   (9,301)  (18,158)  15,220 
Interest expense, net  -   -   4,429   4,429 
Income tax expense  -   -   3,809   3,809 
Depreciation and amortization expense  8,380   8,591   1,159   18,130 
EBITDA (non-GAAP)  51,059   (710)  (8,761)  41,588 
Restructuring expenses, net  96   5,407   -   5,503 
Foreign currency revaluation (gains)/losses  1,114   137   266   1,517 
Write-off of inventory in a discontinued product line  -   3,155   -   3,155 
Pretax loss attributable to the noncontrolling interest in ASC  -   136   -   136 
Adjusted EBITDA (non-GAAP)  $52,269   $8,125   ($8,495)  $51,899 

 57

 

Nine months ended September 30, 2018        
(in thousands) Machine
Clothing
Albany
Engineered
Composites
Corporate
expenses and
other
Total
Company
Operating income/(loss) (GAAP) $131,921 $9,979 ($36,940) $104,960
Interest, taxes, other income/(expense) - -  (35,688)  (35,688)
Net income/(loss) (GAAP)  131,921 9,979  (72,628) 69,272
Interest expense, net - - 13,530 13,530
Income tax expense - - 23,131 23,131
Depreciation and amortization expense 24,269 32,297 3,857 60,423
EBITDA (non-GAAP) 156,190 42,276 (32,110)  166,356
Restructuring expenses, net 10,523 2,968 223 13,714
Foreign currency revaluation (gains)/losses  (852)  544  (2,940)  (3,248)
Pretax income attributable to the noncontrolling interest in ASC - (619) -  (619)
Adjusted EBITDA (non-GAAP) $165,861 $45,169 ($34,827) $176,203

 

Nine months ended September 30, 2017        
(in thousands) Machine
Clothing
Albany
Engineered
Composites
Corporate
expenses and
other
Total
Company
Operating income/(loss) (GAAP) $119,366 ($32,242) ($31,663) $55,461
Interest, taxes, other income/(expense) - -  (28,034)  (28,034)
Net income/(loss) (GAAP)  119,366 (32,242)  (59,697) 27,427
Interest expense, net   - 13,042 13,042
Income tax expense   - 12,138 12,138
Depreciation and amortization expense 25,098 24,613 3,545 53,256
EBITDA (non-GAAP) 144,464 (7,629) (30,972)  105,863
Restructuring expenses, net 1,012 9,208 - 10,220
Foreign currency revaluation (gains)/losses 4,427  171 2,318 6,916
Write-off of inventory in a discontinued product line - 3,155 - 3,155
Pretax income attributable to the noncontrolling interest in ASC - (178) -  (178)
Adjusted EBITDA (non-GAAP) $149,903 $4,727 ($28,654) $125,976

 

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:

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Three months ended September 30, 2018 Pre tax Tax   After tax Per Share
(in thousands, except per share amounts) Amounts Effect   Effect Effect
Restructuring expenses, net $2,552 $758   $1,794 $0.06
Foreign currency revaluation gains  3,235 961   2,274 0.07
Favorable effect of change in income tax rate - 227   227 0.01
Net discrete income tax benefit - 139   139  -
Favorable effect of applying ASC 606  1,198 458 * 740 0.02
* includes tax and noncontrolling interest effects

 

 

Three months ended September 30, 2017 Pre tax Tax After tax Per Share
(in thousands, except per share amounts) Amounts Effect Effect Effect
Restructuring expenses, net $5,503 $2,003 $3,500 $0.11
Foreign currency revaluation losses  1,517 552 965 0.03
Write-off of inventory in a discontinued product line  3,155  1,167 1,988 0.06
Unfavorable effect of change in income tax rate - 741 741 0.02
Net discrete income tax benefit -  3,866 3,866 0.12

 

 

Nine months ended September 30, 2018 Pre tax Tax   After tax Per Share
(in thousands, except per share amounts) Amounts Effect   Effect Effect
Restructuring expenses, net $13,714 $4,323   $9,391 $0.30
Foreign currency revaluation gains  3,248 907   2,341 0.07
Net discrete income tax benefit -  4,278   4,278 0.13
Favorable effect of applying ASC 606  4,955  1,650 * 3,305 0.10
* includes tax and noncontrolling interest effects

 

Nine months ended September 30, 2017 Pre tax Tax After tax Per Share
(in thousands, except per share amounts) Amounts Effect Effect Effect
Restructuring expenses, net $10,220 $3,721 $6,499 $0.20
Foreign currency revaluation losses  6,916  2,516 4,400 0.14
Write-off of inventory in a discontinued product line  3,155  1,167 1,988 0.06
Net discrete income tax benefit -  2,281 2,281 0.07
Charge for revision to estimated profitability of AEC contracts 15,821  5,854 9,967 0.31

 

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

   Three months ended
September 30,
  Nine months ended
September 30,
Per share amounts (Basic)  2018  2017  2018  2017*
Net income attributable to the Company (GAAP)  $0.87  $0.47  $2.13  $0.85
Adjustments:            
Restructuring expenses, net  0.06  0.11  0.30  0.20
Discrete tax adjustments and effect of change in income tax rate  (0.01)  (0.10)  (0.13)  (0.07)
Foreign currency revaluation (gains)/losses  (0.07)  0.03  (0.07)  0.14
Write-off of inventory in a discontinued product line  -  0.06  -  0.06
Net income attributable to the Company, excluding adjustments (non-GAAP)  $0.85  $0.57  $2.23  $1.18

* 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) September 30,
2018
September 30,
2017
AEC Adjusted EBITDA (non-GAAP) $16,540 $8,125
AEC Net sales (GAAP) 94,282  71,447
AEC Adjusted EBITDA as a percentage of sales (non-GAAP) 17.5% 11.4%

 

 

The following table contains the calculation of net debt:

 

 

(in thousands) September 30, 2018   June 30, 2018 December 31, 2017
Notes and loans payable $ -   $26 $262
Current maturities of long-term debt 1,231   1,844 1,799
Long-term debt  529,003   523,186 514,120
Total debt  530,234 * 525,056 516,181
Cash and cash equivalents  160,593   154,744 183,727
Net debt $369,641   $370,312 $332,454

* includes a non-cash increase of $12.7 million related to the modification of a facility lease.

 

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

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Machine Clothing Q4 Projected range of Adjusted EBITDA
(in millions)
Q4 Results to meet low
end of range
Q4 Results to meet high
end of range
Net income/(loss) (GAAP) $39 $43
Depreciation and amortization 8 8
EBITDA (non-GAAP) $47 $51
Restructuring expenses, net * *
Foreign currency revaluation gains * *
Adjusted EBITDA (non-GAAP) $47 $51
*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.

 

There was no change 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 has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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 third 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 
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 September 30, 2018. 
101   

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

 

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

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

 

 

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

 

 

(iv)Consolidated Statements of Cash Flows for the three and nine months ended September 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. 

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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: October 31, 2018

 

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

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