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AIN > SEC Filings for AIN > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for ALBANY INTERNATIONAL CORP /DE/

Form 10-K for ALBANY INTERNATIONAL CORP /DE/


26-Feb-2014

Annual Report


ITEM 7. 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.

Overview

Our reportable segments: Machine Clothing (MC) and Engineered Composites (AEC) draw on many of the same advanced textiles and materials processing capabilities, and compete on the basis of proprietary, product-based advantage that is grounded in those core capabilities. As a result, technology and manufacturing advances in one tend to benefit the other.

Machine Clothing is the Company's long-established core business and primary generator of cash. While the paper and paperboard industry in our traditional geographic markets has suffered from well-documented overcapacity in publication grades, especially newsprint, the industry is still expected to grow on a global basis, driven by demand for packaging and tissue grades, as well as the expansion of paper consumption and production in Asia and South America. We feel we are now well-positioned in these markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, field services, and manufacturing technology. Although we consider the market for Machine Clothing as having flat growth potential, the business has been a significant generator of cash, and we seek to maintain the cash-generating potential of this business by maintaining the low costs that we achieved through restructuring, and competing vigorously by using our differentiated products and services to reduce our customers' total cost of operation and improve their paper quality.

We believe that AEC provides the greatest growth potential, both near and long term, for our Company. Our strategy is to grow organically by focusing our proprietary technology on high-value aerospace and defense applications that cannot be served effectively by conventional composites. AEC (including Albany Safran Composites, LLC ("ASC"), in which our customer SAFRAN Group owns a 10% noncontrolling interest) supplies a number of customers in the aerospace industry. AEC's largest aerospace customer is the SAFRAN Group. Through ASC, AEC develops and sells composite aerospace components to SAFRAN, with the most significant program at present being the production of fan blades and other components for the LEAP engine. AEC (through ASC and otherwise) is also developing other new and potentially significant composite products for aerospace (engine and airframe) applications.

Consolidated Results of Operations

Net sales

The following table summarizes our net sales by business segment:

(in thousands, except percentages)

          Years ended December 31,        2013             2012          2011
          Machine Clothing           $    674,747       $ 693,176     $ 739,211
          Engineered Composites            82,667          67,765        48,076
          Total                      $    757,414       $ 760,941     $ 787,287
          % change                           -0.5 %          -3.3 %

2013 vs. 2012

Changes in currency translation rates had the effect of increasing net sales by $1.6 million during 2013 as compared to 2012.

Excluding the effect of changes in currency translation rates:

Net sales were down 0.7% compared to 2012.

Net sales in MC decreased 2.9%.

Net sales in Engineered Composites increased 22.0%.

2012 included a change in contract terms with a North American MC customer that increased sales by $8.0 million.

2012 vs. 2011

Changes in currency translation rates had the effect of decreasing net sales by $15.4 million during 2012 as compared to 2011.

Excluding the effect of changes in currency translation rates:

Net sales decreased 1.4% as compared to 2011.

Net sales in MC decreased 4.1%.

Net sales in Engineered Composites increased 41.0%.

Compared to 2011, 2012 MC sales in Western Europe declined approximately 15% due to economic weakness and customer overcapacity.

Backlog

Backlog in the Machine Clothing segment was $225.6 million at December 31, 2013, compared to $266.8 million at December 31, 2012. The decrease reflects a trend toward shorter order-to-delivery times. Backlog in the Engineered Composites segment was $21.7 million at December 31, 2013 compared to $33.2 million at December 31, 2012. The backlog is generally expected to be invoiced during the next 12 months.

Gross Profit

The following table summarizes gross profit by business segment:

                           (in thousands, except percentages)

Years ended December 31,        2013           2012       2011
Machine Clothing            $289,100       $303,801   $317,984
Engineered Composites          4,799          5,627        507
Unallocated expenses          (3,345 )       (4,032 )   (4,325 )
Total                       $290,554       $305,396   $314,166
% of Net Sales                  38.4 %         40.1 %     39.9 %

The decrease in gross profit during 2013 was principally due to the net effect of the following:

$8.1 million decrease due to lower sales in North America for MC, principally due to the 2012 change in contract terms with a key customer.

$6.8 million decrease due to lower gross profit margin in MC resulting from lower sales volume.

AEC 2013 gross margin was negatively affected by inventory write-offs and profitability adjustments associated with legacy programs at the Company's Boerne, Texas, facility that resulted in gross profit losses of $2.3 million in 2013.

The decrease in gross profit during 2012 was principally due to the net effect of the following:

$5.9 million increase due to higher gross profit margin in MC resulting from high plant utilization in the Americas, favorable geographic sales mix, and the cumulative effect of restructuring initiatives.

$19.8 million decrease due to lower sales in MC, principally in Western Europe.

An increase of $5.1 million in Engineered Composites, principally due to higher sales related to the LEAP program.

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

The following table summarizes STG&R by business segment:

                           (in thousands, except percentages)

Years ended December 31,        2013           2012       2011
Machine Clothing            $127,835       $132,542   $135,545
Engineered Composites          7,233          6,467      4,654
Research                      30,220         27,616     29,007
Unallocated expenses          48,067         56,111     61,035
Total                       $213,355       $222,736   $230,241
% of Net Sales                  28.2 %         29.3 %     29.2 %

STG&R expenses for 2013 decreased $9.4 million in comparison with 2012, principally due to the net effect of the following:

A gain on the sale of a former manufacturing facility in Australia reduced 2013 expenses by $3.8 million.

Revaluation of nonfunctional currency assets and liabilities resulted in losses of $0.3 million during 2013 and losses of $1.6 million in 2012.

U.S. pension expense decreased by $1.7 million principally due to the settlement in 2012 of certain pension plan liabilities.

STG&R expenses for 2012 decreased $7.5 million in comparison with 2011, principally due to the net effect of the following:

Currency translation decreased STG&R by $7.1 million as compared to 2011.

Revaluation of nonfunctional currency assets and liabilities resulted in losses of $1.6 million in 2012 and gains of $2.7 million in 2011.

Pension expense decreased by $3.4 million as a result of settlement of certain pension plan liabilities.

We completed our global SAP implementation in 2011. Implementation charges in 2011 were $2.9 million. No similar expense was incurred in 2012.

Pension Plan

In 2012, we took actions to settle certain pension plan liabilities in the U.S., Canada, and Sweden leading to charges totaling $119.7 million, which were included in Unallocated Expenses. In the first quarter of 2012, we recorded a settlement charge of $9.2 million related to the extinguishment of our pension plan liability in Sweden. In the second quarter of 2012, we recorded settlement charges totaling $110.6 million related to settling a majority of the defined benefit pension plan liabilities in the United States and Canada. No similar charges were incurred in 2013 or 2011.

Restructuring

In addition to the items discussed above affecting gross profit, STG&R, and pension settlement charges, operating income/(loss) was affected by restructuring costs of $25.1 million in 2013, $7.1 million in 2012, and $1.3 million in 2011.

The following table summarizes restructuring expense by business segment:

(in thousands)

Years ended December 31,    2013        2012       2011
Machine Clothing           $24,568     $7,386     $5,680
Engineered Composites          540          -         57
Unallocated expenses             -       (325 )    3,580
Total                      $25,108     $7,061     $9,317

During the second quarter of 2013, the Company commenced a program to restructure operations at the Company's Machine Clothing production facilities in France. The restructuring, when completed, will have reduced employment by approximately 200 positions at these locations. As of December 31, 2013, approximately 150 positions had been eliminated.

Under the terms of the restructuring plan, the Company provides training, outplacement and other benefits, the costs of which are recorded as restructuring when they are incurred. In 2013, the Company recorded a curtailment gain of $1.1 million related to the elimination of pension accruals, which reduced net restructuring expense as reflected in the above table. Such curtailment gains are recorded as employees terminate employment and, accordingly, we expect to record additional curtailment gains in 2014. The total amount of such gains has not yet been determined, but will be less than the 2013 gain. Remaining costs for this program, net of curtailment gains, are expected to be between $3 to $5 million, most of which we expect to be incurred in 2014. We expect the annual cost savings associated with this restructuring to be approximately $10 million. Whereas most of the affected employees were involved in the production process, the full effect of the cost savings associated with this restructuring program will not be full realized until mid-2014.

During 2013, the Company incurred some restructuring costs in the Engineered Composites segment that were related to organizational changes and exiting certain aerospace programs.

Restructuring expenses in 2012 were principally due to a reduction in workforce in Sweden and curtailment of manufacturing in New York and Wisconsin, driven by lower demand for paper machine clothing. Those costs were partially offset by a reduction in accruals related to the Company's headquarters.

Restructuring expenses for 2011 were the result of restructuring and performance improvement plans affecting each of our reportable segments, and included actions to reduce costs and to create process efficiencies within administrative functions.

Restructuring actions taken in 2011, 2012 and 2013 have resulted in cost reductions in line with Company expectations, and have helped to maintain or improve gross profit margins, or reduce STG&R expenses. For more information on our restructuring charges, see Note 6 to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.

Operating Income/(loss)

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

                                                     (in thousands)

Years ended December 31,                      2013       2012         2011
Machine Clothing                          $136,698     $163,873     $176,759
Engineered Composites                       (2,974 )       (840 )     (4,204 )
Research expenses                          (30,220 )    (27,616 )    (23,000 )
Unallocated expenses-pension settlement          -     (119,735 )          -
Unallocated expenses-other                 (51,413 )    (60,818 )    (74,947 )
Total                                      $52,091     ($45,136 )    $74,608


Other Earnings Items

                                                                  (in thousands)

Years ended December 31,                                  2013        2012        2011
Interest expense, net                                    $13,759     $16,601     $18,121
Other expense/(income), net                                7,256       7,629       2,639
Income tax expense/(benefit)                              13,372     (27,523 )    32,582
(Loss)/income from discontinued operations, net of tax       (46 )    71,820      13,672
Net income attributable to the noncontrolling interest       141           -           -

Interest Expense, net

Interest expense, net, decreased $2.8 million in 2013, of which $2.0 million was due to lower interest rates, and the remainder due to lower average debt. Interest expense, net declined $1.5 million in 2012 principally due to a decline in net debt. See the Capital Resources section below for further discussion of borrowings and interest rates.

Other Expense/(income), net

Other expense/(income), net included the following:

Foreign currency revaluations of cash and intercompany balances resulted in losses of $5.2 million in 2013, $5.7 million in 2012, and gains of $0.1 million in 2011. The revaluation effects were principally due to the euro's relative strength against the U.S. dollar, Canadian dollar, Australian dollar, and Japanese yen.

Bank fees and amortization of debt issuance costs were $1.5 million, $2.4 million, and $1.8 million in 2013, 2012, and 2011, respectively.

Fees for a letter-of-credit (LOC) were $0.0 million, $1.0 million, and $1.5 million in 2013, 2012, and 2011, respectively. The fees were associated with an LOC required by the Canadian government for tax contingencies that were resolved in 2012.

In July 2013, the Company's manufacturing facility in Germany was damaged by severe weather. The Company expensed the remaining book value of the damaged property, but that value was minimal. We have filed an insurance claim, but the final amount that the Company will recover has not been determined. We expect to record a gain for this involuntary conversion when the insurance claim is settled, but the amount of the gain cannot presently be determined.

Income Taxes

The Company has operations which constitute a taxable presence in 19 countries outside of the United States. All of these countries except one had income tax rates that were lower than the United States federal tax rate of 35% during the periods reported. The jurisdictional location of earnings is a significant component of our effective tax rate each year, and therefore on our overall income tax expense.

The Company's effective tax rate for fiscal years 2013, 2012, and 2011 was 43.0%, 40.3%, and 60.5%, 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 rate is also affected by U.S. tax costs on foreign earnings that have been or will be repatriated to the U.S., and discrete items that may occur in any given year but are not consistent from year to year.

Significant items that impacted the 2013 tax rate included the following (percentages reflect the effect of each item as a percentage of income before income taxes):

A discrete charge of $1.8 million (5.7%) related to the settlement of a competent authority claim with U.S. and France.

A discrete tax benefit of $3.7 million (12.0%) related to the release of a valuation allowance on deferred tax assets.

A $0.1 million (0.6%) net tax benefit related to other discrete items.

A net tax rate increase of 0.2% was recognized in 2013 from rate differences between non-U.S. and U.S. jurisdictions. Lesser earnings in jurisdictions where tax rates differ substantially from the U.S. tax rate coupled with lower tax benefits on non-U.S. restructuring charges contributed to the net tax rate increase.

The income tax rate on continuing operations, excluding discrete items, was 49%.

Significant items that impacted the 2012 tax rate included the following:

A $39.5 million (57.7%) discrete income tax benefit related to pension settlements in the U.S., Canada and Sweden.

A discrete tax benefit of $7.1 million (10.3%) related to the settlement of a tax audit in Canada.

A $0.8 million (1.1%) net tax benefit related to other discrete items.

A net tax rate reduction of 1.7% was recognized in 2012 from rate differences between non-U.S. and U.S. jurisdictions. The tax rate benefit from earnings in Switzerland and Brazil that are taxed at lower rates was offset by pension settlement and restructuring charges recognized outside the U.S. that resulted in a lower tax benefit, as compared to the benefit calculated using the U.S. notional tax rate of 35%.

The income tax rate on continuing operations, excluding discrete items, was 39%.

Significant items that impacted the 2011 tax rate included the following:

$22.8 million (42.1%) of expense for valuation allowances, principally in Germany, that resulted from the Company's sale of Albany Door Systems.

A favorable tax adjustment of $3.5 million (6.4%) to correct errors from periods prior to 2006. (The Company does not believe that the corrected item was material to 2011 or any of the previously reported quarterly or annual financial statements. As a result, the Company has not restated its previously issued financial statements.)

A $3.3 million (6.2%) reduction in expense resulting from a change in the applicable tax regime in Mexico.

A $1.2 million (2.2%) net tax benefit related to the settlement of certain audits and other discrete tax matters.

A net tax rate reduction of 14.3% was recognized from rate differences between non-U.S. and U.S. jurisdictions. Earnings in Switzerland and Brazil, where tax rates are lower than the U.S. notional rate of 35%, contributed to the majority of the reduction noted. U.S. tax costs on foreign earnings and foreign withholdings offset the tax rate benefits gained from operating in low tax jurisdictions by 12.8%.

The income tax rate on continuing operations, excluding discrete items, was 33%.

Income from Discontinued Operations

In October, 2011 we entered into a contract to sell the assets and liabilities of our Albany Door Systems (ADS) business to Assa Abloy AB for $130 million. Closing on the transaction occurred on January 11, 2012 Under the terms of the contract, Assa Abloy AB acquired our equity ownership of Albany Doors Systems GmbH in Germany, Albany Door Systems AB in Sweden, and other ADS affiliates in Germany, France, the Netherlands, Turkey, Poland, Belgium, New Zealand, and other countries, as well as the remaining ADS business assets, most of which were located in the United States, Australia, China, and Italy. In January 2012, the Company completed the sale of Albany Door Systems, and in March 2012, we finalized certain post-closing adjustments that increased the sale price by $5 million. As of December 31, 2012, $122 million of the total $135 million sale price had been received, with the remainder received in July 2013.

In May 2012, we announced an agreement to sell our PrimaLoft Products business and that transaction closed on June 29, 2012. Under the terms of the agreement, the purchaser acquired all of the assets of that business, which were located in the United States, Italy and Germany. The purchase price of $38.0 million included $3.8 million held in escrow accounts, and which was received in 2013. The Company recorded a pre-tax gain of $34.9 million as result of that sale.

We provided customary representations and warranties in the sale of both of these businesses, but we do not expect any material negative financial consequence will result from these arrangements. In accordance with the applicable accounting guidance for discontinued businesses, the associated results of operations and financial position are reported separately in the accompanying Consolidated Statements of Income and Balance Sheets. Cash flows of the discontinued operation were combined with cash flows from continuing operations in the Consolidated Statements of Cash Flows.

Segment Results of Operations

Machine Clothing Segment

Business Environment and Trends

Machine Clothing is our primary business segment and accounted for 89% of our consolidated revenues during 2013. Machine clothing is purchased primarily by manufacturers of paper and paperboard.

According to RISI, Inc., global production of paper and paperboard is expected to grow at an annual rate of approximately 2% over the next five years, driven primarily by secular demand increases in Asia and South America, with stabilization in the mature markets of Europe and North America.

Shifting demand for paper, across different paper grades as well as across geographical regions, continues to drive the elimination of papermaking capacity in areas with significant established capacity, primarily in the mature markets of Europe and North America. At the same time, the newest, most efficient machines were being installed in areas of growing demand, including Asia and South America generally, as well as tissue and towel paper grades in all regions. Recent technological advances in Paper Machine Clothing, while contributing to the papermaking efficiency of customers, have lengthened the useful life of many of our products and had an adverse impact on overall paper machine clothing demand.

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

We have incurred significant restructuring charges in recent periods as we reduced Machine Clothing manufacturing capacity in the United States, Canada, Germany, Finland, France, the Netherlands, Sweden, and Australia.

Review of Operations

                           (in thousands, except percentages)

Years ended December 31,        2013           2012       2011
Net sales                   $674,747       $693,176   $739,211
% change from prior year        -2.7 %         -6.2 %      5.4 %
Gross profit                 289,100        303,801    317,984
% of net sales                  42.8 %         43.8 %     43.0 %
Operating income             136,698        163,873    176,759


Net Sales

2013 vs. 2012

Changes in currency translation rates had the effect of increasing net sales by $1.6 million during 2013 as compared to 2012.

Excluding the effect of changes in currency translation rates, 2013 sales decreased 2.9% as compared to 2012. The decrease principally resulted from a change in contract terms with a North American MC customer that increased 2012 sales by $8.0 million, and from lower 2013 sales in Asia resulting from very strong sales in the first half of 2012.

2012 vs. 2011

Changes in currency translation rates had the effect of decreasing 2012 sales by $15.4 million.

Excluding the effect of changes in currency translation rates, 2012 sales decreased 4.1% as compared to 2011.

The decrease in 2012 sales was principally due to a decline of approximately 15% in Western Europe due to economic weakness and customer overcapacity.

Sales remained relatively stable in the Americas and China.

Gross Profit

The decrease in 2013 gross profit was principally due to the net effect of the following:

$8.1 million decrease due to lower sales.

$6.8 million decrease due to lower gross profit margin, resulting from lower sales volume.

The decrease in 2012 gross profit was principally due to the net effect of the following:

$5.9 million increase due to higher gross profit margin, resulting from high plant utilization in the Americas, favorable geographic sales mix, and the cumulative effect of restructuring initiatives.

$19.8 million decrease due to lower sales, principally in Western Europe.

Operating Income/(loss)

The decrease in 2013 operating income was principally due to the net effect of the following:

Restructuring charges of $24.6 million in 2013 compared to $7.4 million in 2012.

Lower gross profit, as described above.

Revaluation of nonfunctional currency assets and liabilities resulted in losses of $0.3 million in 2013 compared to $1.6 million in 2012.

The decrease in 2012 operating income was principally due to the net effect of the following:

Lower gross profit, as described above.

Revaluation of nonfunctional currency assets and liabilities resulted in losses of $1.6 million in 2012 compared to gains of $1.7 million in 2011.

Engineered Composites Segment

Business Environment and Trends

The Albany Engineered Composites segment (AEC), including Albany Safran Composites, LLC (ASC), in which our customer SAFRAN Group owns a 10 percent noncontrolling interest, provides custom-designed advanced composite structures based on proprietary technology to customers in the aerospace and defense industries. AEC's largest current development program relates to the LEAP engine being developed by CFM International. Under this program, AEC, through ASC, is developing a family of composite parts, including fan blades, to be incorporated into the LEAP engine. In 2013, approximately 10 percent of this segment's sales were related to U.S. government contracts or programs.

Review of Operations

                            (in thousands, except percentages)

Years ended December 31,       2013          2012          2011
Net sales                   $82,667       $67,765       $48,076
% change from prior year       22.0 %        41.0 %        14.8 %
Gross profit                  4,799         5,627           507
% of net sales                  5.8 %         8.3 %         1.1 %
Operating income/(loss)      (2,974 )        (840 )      (4,204 )

Net Sales

The increase in 2013 sales over 2012 was principally due to LEAP program activities. The majority of revenue recognized for the LEAP program was earned under a cost plus fixed fee arrangement.

The increase in 2012 sales over 2011 was principally due to LEAP program activities.

AEC uses the percentage of completion method for long-term fixed price contracts. Revenue recognized for these contracts amounted to $10.4 million in 2013, $19.6 million in 2012, and $22.2 million in 2011. The decrease in 2013 reflects a lower amount of LEAP program revenue generated by fixed price contracts.

Gross Profit

2013 vs. 2012

AEC gross profit for 2013 was negatively affected by inventory write-offs and lower profitability associated with legacy programs at the Company's Boerne, Texas facility that resulted in gross profit losses of $2.3 million in 2013. Those losses were partially offset by increased revenue associated with the LEAP program.

2012 vs. 2011

The increase in 2012 gross profit included the following:

A $4.2 million increase due to higher sales related to the LEAP program. . . .

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