UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2009
OR
| o | 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)
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| Delaware | 14-0462060 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
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| 1373 Broadway, Albany, New York | 12204 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code 518-445-2200
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Name of each exchange on which registered | |
| Class A Common Stock ($0.001 par value) | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No x
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.
Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No x
The aggregate market value of the Common Stock held by non-affiliates of the registrant on June 30, 2009, the last business day of the registrant’s most recently completed second quarter, computed by reference to the price at which Common Stock was last sold on such a date, was $311,110,469.
The registrant had 27,763,988 shares of Class A Common Stock and 3,236,098 shares of Class B Common Stock outstanding as of February 28, 2010.
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| DOCUMENTS INCORPORATED BY REFERENCE | PART | |
| Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 27, 2010 | III |
TABLE OF CONTENTS
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Forward-Looking Statements
This annual report and the documents incorporated or deemed to be incorporated by reference in this annual report contain statements concerning 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,” “plan,” “project,” “may,” “will,” 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, 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 industry in which the Company’s Paper Machine Clothing segment competes or in the papermaking industry in general, along with general risks associated with economic downturns; |
| • | failure to remain competitive in the industry in which the Company’s Paper Machine Clothing segment competes; |
| • | failure to receive the benefits from the Company’s capital expenditures and investments; |
| • | failure to have profitable growth in the Company’s emerging businesses; 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 the “Risk Factors” and “Trends” sections of this annual report. Statements expressing management’s assessments of the growth potential of various businesses are not intended as forecasts of actual future growth, and should not be relied on as such. While management believes such assessments to have a reasonable basis, such assessments are, by their nature, inherently uncertain. This release sets forth a number of assumptions regarding these assessments, including historical results and independent forecasts regarding the markets in which these businesses operate. Historical growth rates are no guarantee of future growth, and such independent forecasts could prove incorrect. Although the Company believes the expectations reflected in the Company’s 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 the Company’s future performance. The forward-looking statements included or incorporated by reference in this annual report are made on the basis of management’s assumptions and analyses, as of the time the statements are made, in light of their 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, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained or incorporated by reference in this annual report to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based.
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PART I
| Item 1. | BUSINESS |
Albany International Corp. (the Registrant, the Company, we, us, or our) and its subsidiaries are engaged in five business segments.
The Paper Machine Clothing segment includes fabrics and belts used in the manufacture of paper and paperboard (PMC or paper machine clothing). The Company designs, manufactures, and markets paper machine clothing for each section of the paper machine. It manufactures and sells more paper machine clothing worldwide than any other company. PMC consists of large permeable and non-permeable continuous belts of custom-designed and custom-manufactured engineered fabrics that are installed on paper machines and carry the paper stock through each stage of the paper production process. PMC products are consumable products of technologically sophisticated design that utilize polymeric materials in a complex structure. The design and material composition of PMC can have a considerable effect on the quality of paper products produced and the efficiency of the paper machines on which it is used. Principal products in the PMC segment include forming, pressing and dryer fabrics, and process belts. A forming fabric assists in sheet formation and conveys the very wet sheet (over 75% water) through the forming section. Press fabrics are designed to carry the sheet through the press section, where water is pressed from the sheet as it passes through the press nip. In the dryer section, dryer fabrics manage air movement and hold the sheet against heated cylinders to enhance drying. Process belts are used in the press section to increase dryness and enhance sheet properties, as well as in other sections of the machine to improve runnability and enhance sheet qualities. The Company sells its PMC products directly to its customer end-users, which are paper industry companies, some of which operate in multiple regions of the world. The Company’s products, manufacturing processes and distribution channels for PMC are substantially the same in each region of the world in which it operates. The sales of forming, pressing, and dryer fabrics, individually and in aggregate, accounted for more than 10% of the Company’s consolidated net sales during one year or more of the last three years.
The Company’s other reportable segments apply the Company’s core competencies in advanced textiles and materials to other industries:
Albany Door Systems (ADS) designs, manufactures, sells, and services high-speed, high-performance industrial doors worldwide, for a wide range of interior, exterior, and machine protection industrial applications. Already a high-performance door leader, ADS added to its product offerings through its acquisitions of Aktor GmbH in 2008 and R-Bac Industries in 2007. The business segment also derives revenue from aftermarket sales and service. ADS sells directly to customer end-users in certain markets, such as Sweden and Germany, while in other markets, such as the United States, it sells primarily through distributors and dealers.
The Engineered Fabrics (EF) segment derives its revenue from various industries that use fabrics and belts for industrial applications other than the manufacture of paper and paperboard. Revenue in this segment is derived from sales to the nonwovens industry, which include the manufacture of diapers, personal care and household wipes; and to building products markets, which includes the manufacture of fiberglass-reinforced roofing shingles. Other segment revenue includes sales to markets adjacent to the paper industry, and to the tannery and textile industries. Segment sales in the European and Pacific regions combined are almost at the same level as sales within the Americas. The Company generally markets EF products directly to its customers.
The Engineered Composites segment (AEC) provides custom-designed advanced composite structures and textile preforms to customers in aerospace and other high-tech industries.
The PrimaLoft® Products segment includes sales of insulation for outdoor clothing, gloves, footwear, sleeping bags, and home furnishings. This segment has sales operations in the United States, Europe, and Asia, through which it sells products produced by third-parties according to the Company’s proprietary specifications. This segment also generates a significant portion of its income as royalties from the licensing of its intellectual property.
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See “Trends” under Item 7, Managements’ Discussion and Analysis of Financial Condition and Results of Operations for a discussion of general segment developments in recent years.
Following is a table of net sales by segment for 2009, 2008, and 2007.
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| (in thousands) | 2009 | 2008 | 2007 | |||||||||
| Paper Machine Clothing | $ | 598,590 | $ | 727,967 | $ | 747,278 | ||||||
| Albany Door Systems | 133,423 | 189,348 | 152,952 | |||||||||
| Engineered Fabrics | 86,216 | 101,118 | 101,506 | |||||||||
| Engineered Composites | 33,824 | 46,666 | 32,955 | |||||||||
| PrimaLoft® Products | 18,992 | 21,418 | 17,212 | |||||||||
| Consolidated total | $ | 871,045 | $ | 1,086,517 | $ | 1,051,903 | ||||||
The table setting forth certain sales, operating income, and balance sheet data that appears in Note 2, “Reportable Segments and Geographic Data,” of the Financial Statements, included under Item 8 of this Form 10-K, is incorporated herein.
International Operations
The Company maintains manufacturing facilities in Brazil, Canada, China, France, Germany, the United Kingdom, Italy, Mexico, South Korea, Sweden, Turkey, and the United States. The Company also has a 50% interest in certain companies (see Note 1 of Notes to Consolidated Financial Statements).
The Company’s geographically diversified operations allow it to serve its markets efficiently and to provide extensive technical services to its customers. The Company benefits from the transfer of research and development and product innovations between geographic regions. The worldwide scope of the Company’s manufacturing and marketing efforts could also mitigate the impact on the Company of economic downturns that are limited to a geographic region.
The Company’s global presence subjects it to certain risks, including controls on foreign exchange and the repatriation of funds. However, the Company has been able to repatriate earnings in excess of working capital requirements from the countries in which it operates without substantial governmental restrictions and does not foresee any material changes in its ability to continue to do so in the future. In addition, the Company believes that the risks associated with its operations outside the United States are no greater than those normally associated with doing business in those locations.
Technology, Seasonality, Working Capital, Customers, and Backlog
Paper machine clothing is custom-designed for each user, depending on the type, size, and speed of the paper machine, the machine section, the grade of paper being produced, and the quality of the pulp stock used. Technical expertise, judgment, and experience are critical in designing the appropriate clothing for each position on the machine. As a result, the Company employs highly skilled sales and technical service personnel who work directly with paper mill operating management. The Company’s technical service program gives its service engineers field access to the measurement and analysis equipment needed for troubleshooting and application engineering. Sales, service, and technical expenses are major cost components of the Company. Many employees in sales and technical functions have engineering degrees or paper mill experience. The Company’s market leadership position reflects the Company’s commitment to technological innovation.
Payment terms granted to paper industry customers reflect general competitive practices. Terms vary with product, competitive conditions, and the country of operation. In some markets, customer agreements require the Company to maintain significant amounts of finished goods inventories to assure continuous availability of paper machine clothing.
Albany Door Systems provides high-performance door solutions to industrial and commercial customers. The doors are designed for applications in which frequent use requires fast opening and closing. Rapid Roll® Doors open and close very fast, can be designed to operate automatically with traffic, and have automatic breakaway and reset ability to limit impact damage. The Company has manufacturing locations in Germany,
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the United States, and China. Albany Door Systems also provides aftermarket service and support for high-performance and other dock and door products from 16 sales and service centers located in Europe and Australia.
The Engineered Fabrics business is a leading supplier to the nonwovens industry (which includes the manufacture of products such as diapers, personal care and household wipes and fiberglass-reinforced roofing shingles), the wood and cement-based building products industry and the pulp industry. This segment has a wide range of customers, with markets that vary from industrial applications to consumer use.
Albany Engineered Composites serves primarily the aerospace industry, with custom-designed composite and advanced composite parts for static and dynamic applications.
PrimaLoft® Products synthetic down is marketed to customers in high-end retail home furnishings and performance outerwear applications.
While there is not a clear seasonal trend in sales of PMC, paper mill downtime in July, August and year-end could contribute to lower quarterly sales in the first and third quarters of each calendar year. The Albany Door Systems segment typically experiences its highest sales in the fourth quarter of the year. PrimaLoft® Products has its strongest quarters in the first half of the year. Seasonality is not a significant factor in the Company’s Engineered Fabrics or Engineered Composites segments.
The Company’s order backlog at December 31, 2009, was $365.1 million, a decrease of 13.0% from the prior year-end. The December 31, 2009 backlog by segment was $313.2 million in PMC, $10.7 million in Albany Doors, $17.3 million in Engineered Fabrics, $22.3 million in Engineered Composites, and $1.5 million in PrimaLoft. The backlog as of December 31, 2009 is generally expected to be invoiced during the next 12 months.
Research and Development
The Company invests in research, new product development, and technical analysis with the objective of maintaining its technological leadership in each business segment. While much research activity supports existing products, the Company also engages in research for new products and product enhancements. New product research has focused primarily on more sophisticated paper machine clothing and engineered fabrics and has resulted in a stream of new products and enhancements such as ULTRAPLANE, HYDROCROSS, AEROPOINT, SEAM HYDROCROSS, AEROPULSE and EVM BELTS. Additionally, the Company has increased, and expects to further increase research and development in the AEC segment.
Product engineering and research and development expenses totaled $29.6 million in 2009, $36.6 million in 2008, and $35.9 million in 2007. In addition, the Company spent $25.3 million in 2009, $29.9 million in 2008, and $32.4 million in 2007 on technical expenditures that are focused on design, quality assurance, and customer support.
The Company conducts its major research and development in Halmstad, Sweden; Menasha, Wisconsin; Sélestat, France; and Rochester, New Hampshire. Additionally, the Company conducts process and product design development activities at locations in Albany, New York, and Menasha, Wisconsin.
The Company holds a number of patents, trademarks, trade names, and licenses. There are no individual patents that are critical to the continuation of the Company’s business. All brand names and product names are trade names of Albany International Corp. or its subsidiaries. The Company has from time to time licensed some of its patents to one or more competitors, and has been licensed under some competitors’ patents, in each case mainly to enhance customer acceptance of new products. The revenue from such licenses is less than 1% of consolidated net sales.
Raw Materials and Inventory
Primary raw materials for the Company’s PMC, EF, and PrimaLoft® Products are synthetic fibers and polymer monofilaments, which have generally been available from a number of suppliers. The Company, therefore, has not needed to maintain raw material inventories in excess of its current needs to assure availability. In addition, the Company manufactures polymer monofilaments, a basic raw material for all types of paper machine clothing, at its facility in Homer, New York, which supplies approximately 65% of its
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worldwide monofilament requirements. This manufacturing enhances the ability of the Company to develop proprietary products and helps balance the total supply requirements for monofilaments. Polymer monofilaments are petroleum-based products and are therefore sensitive to changes in the price of petroleum and petroleum intermediates. ADS doors are assembled from parts that are available from a large number of suppliers globally. Carbon fiber and other raw materials used by AEC are similarly widely available.
Competition
The PMC industry includes several companies that compete in all global markets, along with a number of companies that compete primarily on a regional basis. In the paper machine clothing market, the Company believes that it had a worldwide market share of approximately 29% in 2009, while the largest competitors each had a market share of approximately half of the Company’s. Market shares vary depending on the country and the type of paper machine clothing produced.
While some competitors in the paper machine clothing industry tend to compete more on the basis of price, and others attempt to compete more on the basis of technology, both are significant competitive factors in this industry. The Company, like its competitors, provides technical support to customers through its sales and technical service personnel, including (1) consulting on performance of the paper machine, (2) consulting on paper machine configurations, both new and rebuilt, (3) selection and custom manufacture of the appropriate paper machine clothing, and (4) storing fabrics for delivery to the user. Revenues earned from these services are not significant.
The Albany Door Systems segment derives approximately two-thirds of its net sales from the sale of high-performance doors, and the remainder from aftermarket service and support. Competition for sales of high-performance doors is based on product performance and price, while competitive factors in the aftermarket business include technical service ability and proximity to the customer.
For some of the businesses within the Engineered Fabrics segment, the competitive dynamics are very similar to the paper machine clothing industry. In other product lines, such as Albany Engineered Composites and PrimaLoft®, competitive success is more dependent upon contractual relationships with customers.
Employees
The Company employs approximately 4,700 persons, of whom approximately 70% are engaged in manufacturing the Company’s products. Wages and benefits are competitive with those of other manufacturers in the geographic areas in which the Company’s facilities are located. In general, the Company considers its relations with its employees to be excellent.
Approximately 70 U.S. employees are union members working at two different facilities and subject to two separate collective bargaining agreements. Both agreements will remain in effect until mid-2011. A number of hourly employees outside of the United States are also members of various unions.
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Executive Officers of the Registrant
The following table sets forth certain information with respect to the executive officers of the Company as of March 11, 2010:
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| Name | Age | Position | ||
| Joseph G. Morone | 56 | President and Chief Executive Officer | ||
| Michael K. Burke | 52 | Senior Vice President and Chief Financial Officer | ||
| Ralph M. Polumbo | 58 | Senior Vice President — Human Resources, and Chief Administrative Officer | ||
| Daniel A. Halftermeyer | 48 | President — PMC | ||
| Michael J. Joyce | 46 | President — Applied Technologies | ||
| Robert A. Hansen | 52 | Senior Vice President and Chief Technology Officer | ||
| John B. Cozzolino | 43 | Vice President — Corporate Treasurer and Strategic Planning | ||
| David M. Pawlick | 49 | Vice President — Controller | ||
| Charles J. Silva, Jr. | 50 | Vice President — General Counsel and Secretary | ||
| Dawne H. Wimbrow | 52 | Vice President — Global Information Services and Chief Information Officer | ||
| Joseph M. Gaug | 46 | Associate General Counsel and Assistant Secretary |
Joseph G. Morone joined the Company in 2005. He has served the Company as President and Chief Executive Officer since January 1, 2006, and President since August 1, 2005. He has been a director of the Company since 1996. From 1997 to July 2005, he served as President of Bentley University in Waltham, Massachusetts. Prior to joining Bentley, he served as the Dean of the Lally School of Management and Technology at Rensselaer Polytechnic Institute, where he also held the Andersen Consulting Professorship of Management. He currently serves as the lead director of Transworld Entertainment Corporation.
Michael K. Burke joined the Company in 2009. He has served the Company as Senior Vice President since July 2009 and Chief Financial Officer since August 2009. From November 2001 to December 2006 he served as Executive Vice President and Chief Financial Officer of Intermagnetics General Corp., and prior to that served as Executive Vice President and Chief Financial Officer of HbT, Inc. Before HbT he worked for almost 20 years in corporate finance, and investment banking at both Barclays Capital and later at CIBC World Markets. He has served as a Director of Casella Waste Systems since March 2008, and is a member of their Audit Committee. He has served on the Board of Directors of Albany Medical Center since November 2007, and currently serves as Vice Chair. He also serves on the Board of Trustees of Union Graduate College and the Make-a-Wish Foundation of Northeast New York.
Ralph M. Polumbo joined the Company in 2006 as Senior Vice President — Human Resources, and has served as the Chief Administrative Officer (CAO) since September 2008. From 2004 to April 2006 he served as Head of Human Capital for Deephaven Capital Management. From 1999 to 2004 he served as Vice President — Human Resources and Business Integration for MedSource Technologies. Prior to MedSource, he held the positions of Vice President — Integration and Vice President — Human Resources for Rubbermaid. From 1974 to 1994, he held various management and executive positions for The Stanley Works.
Daniel A. Halftermeyer joined the Company in 1987. He has served the Company as President — PMC since January 2010. He previously served the Company as Group Vice President — PMC Eurasia Business Corridor from August 2008 to December 2009, Group Vice President — PMC Europe from 2005 to August 2008, Vice President and General Manager — North American Dryer Fabrics from 1997 to March 2005, and Technical Director — Dryer Fabrics from 1993 to 1997. He held various technical and management positions in St. Stephen, South Carolina, and Sélestat, France, from 1987 to 1993.
Michael J. Joyce joined the Company in 1987. He has served as President — Applied Technologies since January 2010, Group Vice President — PMC Americas & Global Engineered Fabrics from January 2009 to January 2010, Group Vice President — PMC Americas from March 2007 to January 2009, and Vice President Sales and Marketing — North American Press Fabrics from 2002 to 2003. He held various sales, marketing, technical, and management positions throughout his career. Mr. Joyce also attended the Harvard Business School’s Advanced Management Program.
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Robert A. Hansen joined the Company in 1981. He has served the Company as Senior Vice President and Chief Technology Officer since January 2010, Vice President — Corporate Research and Development from April 2006 to January 2010, and Director of Technical and Marketing — Europe Press Fabrics from 2004 to April 2006. From 2000 to 2004, he served as the Technical Director — Press Fabrics, Göppingen, Germany. Previously he had the position of Technical Director in Dieren, The Netherlands, and had also held technical management and research and development positions in the Company’s Järvenpää, Finland, and Albany, New York facilities.
John B. Cozzolino joined the Company in 1994. He has served the Company as Vice President — Corporate Treasurer and Strategic Planning since February 2009. From 2007 to February 2009, he served the Company as Vice President — Strategic Planning. From 2000 until 2007 he served as Director — Strategic Planning, and from 1994 to 2000 he served as Manager — Corporate Accounting.
David M. Pawlick joined the Company in 2000. He has served the Company as Vice President — Controller since March 2008, and as Director of Corporate Accounting from 2000 to 2008. From 1994 to 2000 he served as Director of Finance and Controller for Ahlstrom Machinery, Inc. in Glens Falls, New York. Prior to 1994, he was employed as an Audit Manager for Coopers & Lybrand.
Charles J. Silva, Jr. joined the Company in 1994. He has served the Company as Vice President — General Counsel and Secretary since 2002 and as Assistant Secretary since 1996. He served as Assistant General Counsel from 1994 until 2002. Prior to 1994, he was an associate with Cleary, Gottlieb, Steen and Hamilton, an international law firm with headquarters in New York City.
Dawne H. Wimbrow joined the Company in 1993. She has served the Company as Vice President — Global Information Services and Chief Information Officer since September 2005. She previously served the Company in various management positions in the Global Information Systems organization. From 1980 to 1993, she worked as a consultant supporting the design, development, and implementation of computer systems for various textile, real estate, insurance, and law firms.
Joseph M. Gaug joined the Company in 2004. He has served the Company as Associate General Counsel since 2004 and as Assistant Secretary since 2006. Prior to 2004, he was a principal with McNamee, Lochner, Titus & Williams, P.C., a law firm located in Albany, New York.
The Company is incorporated under the laws of the State of Delaware and is the successor to a New York corporation originally incorporated in 1895, which was merged into the Company in August 1987 solely for the purpose of changing the domicile of the corporation. Upon such merger, each outstanding share of Class B Common Stock of the predecessor New York corporation was changed into one share of Class B Common Stock of the Company. References to the Company that relate to any time prior to the August 1987 merger should be understood to refer to the predecessor New York corporation.
The Company’s Corporate Governance Guidelines, Business Ethics Policy, and Code of Ethics for the Chief Executive Officer, Chief Financial Officer, and Controller, and the charters of the Audit, Compensation, and Governance Committees of the Board of Directors are available at the Corporate Governance section of the Registrant’s website (www.albint.com).
The Company’s current reports on Form 8-K, quarterly reports on Form 10-Q, and annual reports on Form 10-K are electronically filed with the Securities and Exchange Commission (SEC), and all such reports and amendments to such reports filed subsequent to November 15, 2002, have been and will be made available, free of charge, through the Company’s website (www.albint.com) as soon as reasonably practicable after such filing. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC0330. The SEC maintains a website (www.sec.gov) that contains reports, proxy, information statements, and other information regarding issuers that file electronically with the SEC.
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| Item 1A. | RISK FACTORS |
The Company’s business, operations, and financial condition are subject to various risks. Some of these risks are described below and in the documents incorporated by reference, and investors should take these risks into account in evaluating any investment decision involving the Company. This section does not describe all risks applicable to the Company, its industry or business, and it is intended only as a summary of certain material factors.
The recent recession and lingering uncertainties about global recovery have negatively affected our customers and our business, and could continue to negatively affect our customers and adversely affect our results of operations
The global recession had a significant negative effect on the Company and the markets in which it competes. Continued economic weakness, or a slower than expected recovery, could have an adverse impact on the Company’s business and results of operations.
The Company identifies below a number of risks, the effects of which may be exacerbated by an unfavorable economic climate. For example, continued unfavorable global economic and paper industry conditions may increase consolidation and rationalization within the paper industry, further reducing global consumption of paper machine clothing. Reduced consumption of PMC could in turn increase the risk of greater price competition within the PMC industry and greater effort by competitors to gain market share at the expense of the Company. Sales in the Company’s other business segments may also be adversely affected by unfavorable economic conditions.
Weak or unstable economic and paper industry conditions also increase the risk that one or more of our customers could be unable to pay outstanding accounts receivable, whether as the result of bankruptcy or an inability to obtain working capital financing from banks or other lenders. In such a case, we could be forced to write-off such accounts, which could have a material adverse effect on our operating results, financial condition and/or liquidity. Furthermore, many of our businesses design and manufacture products that are custom designed for a specific customer application, at a specific location. In the event of a customer liquidity issue, the Company could also be required to write off amounts that are included in inventories.
Developments in digital media will continue to adversely affect the demand for certain paper products, which could have an adverse effect on demand for our products
The demand for certain grades of paper has weakened in recent years. Trends in advertising, digital information transmission and storage, and the Internet could have further adverse effects on demand for newsprint as well as coated paper, uncoated specialty papers, or other products made by our customers.
If these trends were to accelerate, our customers would likely respond with additional reductions of papermaking capacity, which would adversely affect demand for PMC.
There are a number of factors inhibiting growth in the industry in which the Company’s Paper Machine Clothing segment competes
Significant consolidation and rationalization in the paper industry in recent years reduced global consumption of paper machine clothing. Consolidation and rationalization, and the resulting downward pressure on PMC revenues, could continue in the near term. At the same time, technological advances in paper machine clothing, while contributing to the papermaking efficiency of customers, have in some cases lengthened the useful life of the Company’s products and reduced the number of pieces required to produce the same volume of paper. These factors are resulting in a steady decline in the number of pieces of paper machine clothing, while the average PMC fabric size is increasing. The net effect of these trends is that the rate of any future growth in the specific volume of PMC is likely to be lower than the rate of future growth in paper production.
Competitive pricing in the PMC industry has had and could continue to have, an adverse effect on the Company’s net sales and operating income
The market for paper machine clothing in recent years has been characterized by increased price competition, especially in Europe, which has negatively affected the Company’s net sales and operating results
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in recent periods. The Company expects price competition to remain intense in all PMC markets during periods of customer consolidation, plant closures, or when major contracts are being renegotiated.
Failure to remain competitive in the industry in which the Company’s Paper Machine Clothing segment does business could adversely affect the Company’s business, financial condition, and results of operations
The industry in which the Company’s Paper Machine Clothing segment does business is very competitive. The Company’s Paper Machine Clothing segment accounted for 68.7%, 67.0%, and 71.0% of the Company’s consolidated net sales in 2009, 2008, and 2007, respectively. While some competitors in this industry tend to compete more on the basis of price, and others attempt to compete more on the basis of technology, both are significant competitive factors in this industry. Failure to maintain or increase the technical performance of the Company’s products in future periods, or to maintain or increase the overall product and service value delivered to customers, could have a material adverse effect on the Company’s business, financial condition, and results of operations.
Some of the Company’s competitors in the Paper Machine Clothing segment have the capability to make and sell paper machines and papermaking equipment as well as other engineered fabrics
Although customers historically have viewed the purchase of paper machine clothing and the purchase of paper machines as separate purchasing decisions, the ability to coordinate research and development efforts, and to market machines and fabrics together could be perceived as providing a competitive advantage. This underscores the importance of the Company’s ability to maintain the technical competitiveness and value of the Company’s products, and a real or perceived failure to do so could have a material adverse effect on the Company’s business, financial condition, and results of operations.
Moreover, the Company cannot predict how the nature of competition in this segment may continue to evolve as a result of further consolidation among the Company’s competitors, or consolidation involving the Company’s competitors and other suppliers to the Company’s customers.
The loss of a few major customers could have a material adverse effect on the Company’s business, financial condition, and results of operations
Although supply agreements with terms of more than a year are not uncommon in the industry in which the Company’s Paper Machine Clothing segment does business, they do not typically obligate the customer to purchase any products. Therefore, it is common for competitors in this industry to approach customers, offering new products, lower prices, or both, in an attempt to displace the current supplier or suppliers. In addition, a production disruption at one of the Company’s customers in a particular country or region, due to work stoppages, lack of raw materials, or other factors, could have a negative impact on net sales in the Company’s Paper Machine Clothing segment. Although no individual customer accounted for more than 10% of consolidated net sales during 2009, the loss of a few major customers, or a substantial decrease in such customers’ purchases from the Company, could have a material adverse effect on the Company’s business, financial condition, and results of operations.
The Company’s recent capital expenditures may not provide the benefit of return on investment
The Company had capital expenditures of $38.3 million, $129.5 million, and $149.2 million in 2009, 2008, and 2007, respectively. Additionally, the Company had capitalized software investments of $4.2 million in 2009, $11.5 million in 2008, and $16.0 million in 2007. The investments were part of the Company’s three-year restructuring and performance improvement plan.
The Company may not be successful in achieving any of the benefits it hopes to gain from these investments. If the Company is not successful, it could have a negative impact on the Company’s growth strategy, financial condition, and results of operations.
In addition to the general risks that the Company already faces outside the U.S., the Company now conducts more of its manufacturing operations in emerging markets than it did in the past, which could involve many uncertainties for the Company
The Company currently has manufacturing facilities outside the U.S. In 2009, 62.3% of consolidated net sales were generated by the Company’s non-U.S. subsidiaries. Operations outside of the U.S. are subject to a
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number of risks and uncertainties, including risks that governments may impose limitations on the Company’s ability to repatriate funds; governments may impose withholding or other taxes on remittances and other payments to the Company, or the amount of any such taxes may increase; an outbreak or escalation of any insurrection or armed conflict may occur; governments may seek to nationalize the Company’s assets; or governments may impose or increase investment barriers or other restrictions affecting the Company’s business. In addition, emerging markets pose other uncertainties, including the protection of the Company’s intellectual property, pressure on the pricing of the Company’s products, and risks of political instability. The occurrence of any of these conditions could disrupt the Company’s business or prevent it from conducting business in particular countries or regions of the world.
A fundamental change in the papermaking process could reduce demand for paper machine clothing
The basic papermaking process, while it has undergone dramatic increases in efficiency and speed, has always relied on paper machine clothing. In the event that a paper machine builder or other person were able to develop a commercially viable manner of paper manufacture that did not require paper machine clothing, sales of the Company’s products in this segment could be expected to decline significantly.
Conditions in the paper industry have required, and could further require, the Company to reorganize its operations, which could result in significant expense and could pose risks to the Company’s operations
The Company has been engaged in significant restructuring of the global operations of the Company’s Paper Machine Clothing segment, including the closing of a number of manufacturing operations in North America, Europe, and Australia. Restructuring activities have included a continuing effort to match the Company’s manufacturing capacity to shifting global demand, and also changes in the Company’s administrative processes to improve efficiency. Future shifting of customer demand, the need to reduce costs, or other factors could cause the Company to determine in the future that additional restructuring steps were required. Restructuring involves risks such as employee work stoppages, slowdowns, or strikes, which can threaten uninterrupted production, maintenance of high product quality, meeting of customers’ delivery deadlines, and maintenance of administrative processes. Increases in output in remaining manufacturing operations can likewise impose stress on these remaining facilities as they undertake the manufacture of greater volume and, in some cases, a greater variety of products. Competitors can be quick to attempt to exploit these situations. Although the Company considers these risks, plans each step of the process carefully, and works to reassure customers who could be affected by any such matters that their requirements will continue to be met, the Company could lose customers and associated revenues if the Company fails to plan properly or if the foregoing tactics are ineffective.
The Company may experience supply constraints due to the Company’s reliance on a limited number of suppliers
The Company has relied on a number of suppliers of polymer fiber and monofilaments, key raw materials that the Company uses in the manufacture of paper machine clothing. For the Company’s European and Asian production facilities, the Company purchases most of its monofilament from third parties. For the Company’s North American production facilities, the Company currently produces a significant portion of the Company’s own monofilament needs. While the Company has always been able to meet its raw material needs in the past, the limited number of producers of polymer monofilaments creates the potential for disruption in supply. In addition, if the Company’s own monofilament production facility were to shut down or cease production for any reason, including due to natural disaster, labor problems, or otherwise, there is no guarantee that the Company would be able to replace any shortfall. Lack of supply, delivery delays, or quality problems relating to supplied raw materials could harm the Company’s production capacity and make it difficult to supply the Company’s customers with products on time, which could have a negative impact on the Company’s business, financial condition, and results of operations.
The Company is exposed to the risk of increased expense resulting from factors such as higher petroleum and energy prices, or increases in health care related costs
Polymer monofilaments are ultimately petroleum-based. In recent years, prices for petroleum, petroleum intermediates, and energy have been volatile. Other market forces that influence the cost and availability of intermediates (such as demand and capacity for applications that have the same basic components, such as
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benzyne or caprolactam; capacity problems in refineries; natural disasters; etc.) are not controlled by the Company. Future increases for petroleum and/or petroleum intermediates could lead to additional increases in or sustained high levels of material costs. Additionally, costs for employee benefits such as healthcare can sharply increase over short periods of time, which could have a material adverse effect on the Company’s results of operations.
Material disruption to one of our significant manufacturing plants could adversely affect our ability to generate revenue
As a result of our restructuring, the Company has placed greater reliance on its remaining manufacturing plants. If operations at a significant facility were to be disrupted as a result of equipment failures, natural disasters, work stoppages, power outages, or other reasons, our business, financial conditions, and results of operations could be adversely affected. Interruptions in production could increase costs and delay delivery of units in production. Production capacity limits could cause us to reduce or delay sales efforts until production capacity is available.
At December 31, 2009, the Company had outstanding debt totaling $499.2 million. The Company may not be able to repay its outstanding debt in the event that default provisions are triggered due to a breach of loan covenants
Existing borrowing agreements contain a number of covenants and financial ratios that the Company is required to satisfy. The most restrictive of these covenants pertain to asset dispositions and prescribed leverage and interest coverage ratios. Any breach of any such covenants or restrictions would result in a default under such agreements that would permit the lenders to declare all borrowings under such agreements to be immediately due and payable and, through cross default provisions, could entitle other lenders to accelerate their loans. In such an event, the Company would need to modify or restructure all or a portion of such indebtedness. In the current economic and financing market, the Company might find it difficult to modify or restructure on attractive terms, or at all, and any modification, restructuring, or refinancing would, in the current environment, likely result in additional fees and higher interest expenses.
The Company may incur a substantial amount of additional indebtedness in the future. As of December 31, 2009, the Company had borrowed $308 million under its $460 million revolving credit facility. The Company is currently required to maintain a leverage ratio of not greater than 3.50 to 1.00 under the Credit Agreement and under the Prudential Agreement. Under the Prudential Agreement, the maximum leverage ratio will be reduced to 3.00 to 1.00 on January 1, 2011. The Company is also required to maintain minimum interest coverage of 3.00 to 1.00 under each agreement. As of December 31, 2009, the Company’s leverage ratio under the agreement was 2.07 to 1.00 and the interest coverage ratio was 7.95 to 1.00. The Company may purchase its Common Stock or pay dividends to the extent its leverage ratio remains at or below 3.50 to 1.00, and may make acquisitions for cash provided its leverage ratio would not exceed 3.00 to 1.00 after giving pro forma effect to the acquisition.
Any additional indebtedness incurred could increase the risks associated with substantial leverage. These risks include limiting the Company’s ability to make acquisitions or capital expenditures to grow the Company’s business, limiting the Company’s ability to withstand business and economic downturns, limiting the Company’s ability to invest the Company’s operating cash flow in the Company’s business, and limiting the Company’s ability to pay dividends. In addition, any such indebtedness could contain terms that are more restrictive than the Company’s current facilities.
Our access to borrowing capacity has been and could continue to be affected by the uncertainty impacting credit markets generally
Our ability to access the capital markets to raise funds through the sale of equity or debt securities is subject to various factors, including general economic and/or financial market conditions. As a result of current economic conditions, including turmoil and uncertainty in the capital markets, credit markets remain somewhat constrained, which makes obtaining new capital more challenging and more expensive than before the recession.
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There can be no assurance that the expected sales growth in the Engineered Composites segment will be Realized
Management expects that the Engineered Composites segment will experience significant growth in net sales during the next several years. In order to support this growth, management expects increases in fixed costs and investments, which will likely result in this segment being cash-flow negative through the first half of this decade.
Future growth and long-term success in the Engineered Composites segment will depend, in part, on the success of new commercial and military aircraft programs. We are currently working with our customers on projects to supply components for a number of commercial, general aviation, and military aircraft programs. The Company may not be successful in obtaining contracts, or the Company may not be successful in the execution of contracts it obtains. Cancellation, reductions or delays of orders or contracts by our customers on any of these programs could also have a material adverse effect on revenues and earnings in this segment in any period.
Sales in the Company’s Albany Door Systems segment depend on capital expenditures by its customers, which may cause the segment to be more vulnerable to economic downturns
The Albany Door Systems segment derives most of its revenue from the sale of high-performance doors, particularly to customers in Europe. The purchase of these doors is normally a capital expenditure item for customers; as a result, market opportunities tend to fluctuate with industrial capital spending. The global recession negatively affected 2009 segment sales, especially in Europe. If economic recovery is weak or delayed, sales and earnings in the Albany Door Systems segment would be negatively affected.
The Company must successfully maintain and/or upgrade its information technology systems
The Company relies on various information technology systems to manage its operations. The Company is currently implementing modifications and upgrades to its systems, including replacing legacy systems with successor systems, making changes to legacy systems, and acquiring new systems with new functionality. For example, the Company began its implementation of the SAP enterprise resource planning system in the fourth quarter of 2006. This implementation subjects the Company to inherent costs and risks associated with replacing and changing these systems, including impairment of the Company’s ability to fulfill customer orders, potential disruption of the internal control structure, substantial capital expenditures, demands on management time, and other risks of delays or difficulties in transitioning to new systems. These systems implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. Any information technology system disruptions, if not anticipated and appropriately mitigated, could have an adverse effect on the Company’s business and operations.
Fluctuations in currency exchange rates could adversely affect the Company’s business, financial condition, and results of operations
The Company operates in many geographic regions of the world, and more than half of the Company’s business is in countries outside the United States. A substantial portion of the Company’s sales is denominated in euros or other foreign currencies. As a result, changes in the relative values of U.S. dollars, euros and such other currencies impact reported net sales and operating income. In some locations, the profitability of transactions is affected by the fact that sales are denominated in a currency different from the currency in which the costs to manufacture and distribute the products are denominated. These sales are typically denominated in U.S. dollars while the manufacturing costs are based mainly on currencies that have in the past strengthened, and may in the future strengthen, against the U.S. dollar. Although the Company may enter into foreign currency or other derivative contracts from time to time in order to mitigate volatility in the Company’s earnings that can be caused by changes in currency exchange rates, these mitigation measures may not be effective.
The Company is subject to legal proceedings and legal compliance risks, and has been named as defendant in a large number of suits relating to the actual or alleged exposure to asbestos-containing products
We are subject to a variety of legal proceedings. Pending proceedings that the Company determines are material are disclosed in Item 3 — Legal Proceedings of this annual report. Litigation is an inherently
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unpredictable process and unanticipated negative outcomes are always possible. An adverse outcome in any period could have an adverse impact on the Company’s operating results for that period.
We are also subject to a variety of legal compliance risks. While we believe that we have adopted appropriate risk management and compliance programs, the global and diverse nature of our operations means that legal compliance risks will continue to exist and related legal proceedings and other contingencies, the outcome of which cannot be predicted with certainty, are likely to arise from time to time. Failure to resolve successfully any legal proceedings related to compliance matters could have an adverse impact on our results in any period.
A substantial portion of the Company’s assets includes goodwill, and impairment in the value of the Company’s goodwill could adversely affect the Company’s assets and net income
Goodwill represented 8.9% and 8.3% of the Company’s total assets as of December 31, 2009 and 2008, respectively. In 2008, non-cash charges of $72.3 million were recorded for impairment of goodwill, which was primarily due to adverse financial market conditions that caused a significant decrease in the market multiples and increase in the discount rates used in the impairment analysis.
The Company reviews goodwill and other long-lived assets 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 value may not be recoverable. The Company performs a test for goodwill impairment at least annually, in the second quarter of each year. If the Company were required to record additional impairment charges in future periods, it would have the effect of decreasing the Company’s earnings (or increasing the Company’s losses), and the Company’s stock price could decline as a result.
Changes in performance of pension plan assets and assumptions used to estimate the Company’s pension and postretirement benefit costs and liabilities could adversely affect the Company’s liabilities and net income
The Company has pension and postretirement benefit costs and liabilities that are developed from actuarial valuations. As of December 31, 2009, the Company’s liabilities under its defined benefit pension and postretirement retirement welfare plans exceeded plan assets by $184.1 million. The Company currently expects 2010 employer contributions under those plans to be approximately $12.3 million. Inherent in these valuations are key assumptions, including discount rates and return on plan assets, which are updated on an annual basis. The Company is required to consider current market conditions, including changes in interest rates, in making these assumptions. Changes in the related pension and postretirement benefit costs or credits may occur in the future due to changes in actual performance of pension plan investments and the assumptions used in the valuations. The amount of annual pension plan funding and annual expense is subject to many variables, including the investment return on pension plan assets and interest rates. Weakness in investment returns and low interest rates could result in higher benefit plan expense and the need to make greater pension plan contributions in future years.
Failure to retain and recruit qualified technical personnel may hinder the Company’s growth
The Company competes for qualified personnel in all of its business segments, and in each region of the world. The Company’s continued success in developing technological improvements and new applications of its products depends on the Company’s ability to recruit and retain highly skilled employees. If the Company is unable to attract and retain qualified technical personnel with adequate skills and expertise, the Company’s growth may be hindered and the Company’s development programs may be delayed or aborted.
The Company’s success is dependent upon its management and employees
The Company’s success is dependent upon its management and employees. The loss of key employees or any failure to recruit and train needed managerial, sales and technical personnel, could have a material adverse effect on the Company.
The Company may not be able to successfully integrate acquisitions into the Company’s operations and/or the expected benefits of such acquisitions may not be realized
The Company’s growth strategy may involve the acquisition of one or more businesses. Any such acquisition could involve numerous risks, which may include difficulty in assimilating the operations,
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technologies, products, and key employees of the acquired businesses; the Company’s inability to maintain the existing customers of the acquired businesses or succeed in selling the products or services of the acquired businesses to the Company’s existing customers; a diversion of management’s attention from other business concerns; the Company’s entry into markets in which competitors have a better-established market position than the businesses the Company acquires; the incurrence of significant expenses in completing the acquisitions; and the assumption of significant liabilities, some of which may be unknown at the time of the acquisitions. The Company’s inability to execute any acquisitions or integrate acquired businesses successfully could have an adverse effect on the Company’s business, financial condition, and results of operations.
Changes in or interpretations of accounting principles could result in unfavorable accounting changes
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles, such as the future potential change to International Financial Reporting Standards (IFRS), can have a significant effect on our reported results and could also retroactively affect previously reported activity.
Changes in or interpretations of tax rules, structures, country profitability mix and regulations may adversely affect our effective tax rates
We are a United States-based multinational company subject to tax in the United States and foreign tax jurisdictions. Unanticipated changes in our tax rates, or tax policies of the countries in which we operate, could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in or interpretation of tax rules and regulations in the jurisdictions in which we do business, structural changes in the Company’s businesses, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, by lapses of the availability of the U.S. research and development tax credit, or by changes in the valuation of our deferred tax assets and liabilities.
The Company has substantial deferred tax assets that could become impaired and result in a charge to earnings
The Company has a net deferred tax asset in several tax jurisdictions, including a U.S. asset of approximately $85,000,000 at December 31, 2009. The Company has incurred a cumulative loss in the U.S. over the three-year period ending December 31, 2009. The cumulative loss resulted from restructuring expenses from the three-year restructuring plan and a large write-off in 2008 related to the bankruptcy of Eclipse, a customer of the Engineered Composites segment, as well as an impairment of U.S. goodwill.
Realization of this and other deferred tax assets is dependent upon many factors, including generation of future income in specific countries. Lower than expected operating results, organizational changes, or changes in tax laws could result in those deferred tax assets becoming impaired, thus resulting in a charge to earnings.
The Company’s insurance coverage may be inadequate to cover other significant risk exposures
In addition to asbestos-related claims, the Company may be exposed to other liabilities related to the products and services we provide. The Engineered Composites segment is engaged in designing, developing, and manufacturing components for commercial jet aircraft and defense and technology systems and products. The Company expects this portion of the business to grow in future periods. Although the Company maintains insurance for the risks associated with this business, there can be no assurance that the amount of our insurance coverage will be adequate to cover all claims or liabilities. In addition, there can be no assurance that insurance coverage will continue to be available to the Company in the future at a cost that is acceptable. Any material liability not covered by insurance could have a material adverse effect on the Company’s business, financial condition and results of operations.
Climate Change
Although the Company has not determined that existing or pending laws and regulations related to the environment are reasonably likely to have a material effect on its financial condition or results of operation, it is possible that various proposed legislative or regulatory initiatives related to climate change — such as cap-and-trade systems, increased limits on emissions of greenhouse gases, or other measures — could in the future
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have a material impact on customers in each of our segments. For example, customers in the paper industry could be required to incur greater costs in order to comply with such initiatives, which could have an adverse impact on their profitability or viability. This could in turn lead to further changes in the structure of the paper industry that could reduce demand for our products. The Company also relies on electric power provided by public utilities to operate its facilities. Any increased costs experienced by such providers could be passed along to the Company and other power consumers in the form of higher rates, which could have a negative impact on our profitability.
The price of our Class A common stock historically has been volatile.
The market price for our Class A common stock has varied between a high of $22.87 and a low of $5.05 during 2009. This volatility may make it difficult for holders to resell our common stock, and the sale of substantial amounts of our Class A common stock could adversely affect the price of our Class A common stock. Our stock price is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors, including the other risk factors disclosed in this report.
The Standish family has a significant influence on our company and could prevent transactions that might be in the best interests of our other stockholders
As of June 30, 2009, J. Spencer Standish and related persons (including Christine L. Standish and John C. Standish, both directors of the Company) and Thomas R. Beecher, Jr., as sole trustee of trusts for the benefit of descendants of J. Spencer Standish, held in the aggregate shares entitling them to cast approximately 54% of the combined votes entitled to be cast by all stockholders of the Company. The Standish family has significant influence over the management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. The Standish family currently has, in the aggregate, sufficient voting power to elect all of our directors and determine the outcome of any shareholder action requiring a majority vote. This could have the effect of delaying or preventing a change in control or a merger, consolidation or other business combination at a premium price, even though it might be in the best interest of our other stockholders.
We are a “controlled company” within the meaning of the Corporate Governance Rules of the New York Stock Exchange (the “NYSE”) and qualify for, and rely on, certain exemptions from corporate governance requirements applicable to other listed companies
As a result of the greater than 50% voting power of the Standish family described above, we are a “controlled company” within the meaning of the rules of the NYSE. Therefore, we are not required to comply with certain corporate governance rules that would otherwise apply to us as a listed company on the NYSE. Specifically, we have elected to avail ourselves of the provision exempting a controlled company from the requirement that the Board of Directors include a majority of “independent” directors (as defined by the rules of the NYSE) and the requirement that the Compensation and Governance Committees each be composed entirely of “independent” directors. Should the interests of the Standish family differ from those of other stockholders, the other stockholders would not be afforded such protections as might otherwise exist if our Board of Directors, or these Committees, were controlled by directors who were independent of the Standish family or our management.
| Item 1B. | UNRESOLVED STAFF COMMENTS |
None.
| Item 2. | PROPERTIES |
The Company’s principal manufacturing facilities are located in Australia, Brazil, Canada, China, France, Germany, Italy, Mexico, South Korea, Sweden, Turkey, the United Kingdom, and the United States. The aggregate square footage of the Company’s operating facilities in the United States and Canada is approximately 2,620,000 square feet, of which 2,395,000 square feet are owned and 225,000 square feet are leased. The Company’s facilities located outside the United States and Canada comprise approximately 3,278,000 square feet, of which 3,079,000 square feet are owned and 199,000 square feet are leased. The Company considers these facilities to be in good condition and suitable for their purpose. The capacity associated with these facilities is adequate to meet production levels required and anticipated through 2010.
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| Item 3. | LEGAL PROCEEDINGS |
Albany International Corp. (“Albany”) 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 products previously manufactured by Albany. Albany produced asbestos-containing paper machine clothing synthetic dryer fabrics marketed during the period from 1967 to 1976 and used in certain paper mills. Such fabrics generally had a useful life of three to twelve months.
Albany was defending against 7,809 claims as of February 16, 2010. This compares with 8,945 such claims as of October 30, 2009,16,060 claims as of July 23, 2009, 16,818 claims as of May 1, 2009, 17,854 claims as of February 6, 2009, 18,385 claims as of October 27, 2008, 18,462 claims as of July 25, 2008, 18,529 claims as of May 2, 2008, 18,789 claims as of February 1, 2008, 18,791 claims as of October 19, 2007, 18,813 claims as of July 27, 2007, 19,120 claims as of April 27, 2007, 19,388 claims as of February 16, 2007, 19,416 claims as of December 31, 2006, 24,451 claims as of December 31, 2005, 29,411 claims as of December 31, 2004, 28,838 claims as of December 31, 2003, 22,593 claims as of December 31, 2002, 7,347 claims as of December 31, 2001, 1,997 claims as of December 31, 2000, and 2,276 claims as of December 31, 1999. These suits allege a variety of lung and other diseases based on alleged exposure to products previously manufactured by Albany. 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:
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| 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 ($) |
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| 2005 | 29,411 | 6,257 | 1,297 | 24,451 | 504 | |||||||||||||||
| 2006 | 24,451 | 6,841 | 1,806 | 19,416 | 3,879 | |||||||||||||||
| 2007 | 19,416 | 808 | 190 | 18,798 | 15 | |||||||||||||||
| 2008 | 18,798 | 523 | 110 | 18,385 | 52 | |||||||||||||||
| 2009 | 18,385 | 9,482 | 42 | 8,945 | 88 | |||||||||||||||
| 2010 to date | 8,945 | 1,295 | 159 | 7,809 | 0 | |||||||||||||||
Albany anticipates that additional claims will be filed against it and related companies in the future, but is unable to predict the number and timing of such future claims. These suits typically involve claims against from twenty to more than two hundred defendants, and the complaints usually fail to identify the plaintiffs’ work history or the nature of the plaintiffs’ alleged exposure to Albany’s products. Pleadings and discovery responses in those cases in which work histories have been provided indicate claimants with paper mill exposure in approximately 10% of the total claims filed against Albany to date, and only a portion of those claimants have alleged time spent in a paper mill to which Albany is believed to have supplied asbestos-containing products.
The significant increase in the number of dismissed claims during 2009 and early 2010 is in large part the result of changes in the administration of claims assigned to the multidistrict litigation panel of the federal district courts (the “MDL”).
Since May 31, 2007 the MDL has issued a series of administrative orders to expedite the resolution of pending cases. While it is unclear how many may attempt to re-file their claims, this process has resulted in numerous claims being dismissed, either voluntarily or involuntarily. As of February 16, 2010, 3,375 claims were pending against the Company in the MDL. Of these MDL claims, 2,993 were originally filed in state courts in Mississippi.
With respect to the remaining MDL claims where plaintiffs have complied with the administrative orders, the MDL expects to begin conducting settlement conferences, at which time the plaintiffs will be required to submit short position statements setting forth exposure information. The MDL has not yet begun the process of scheduling the settlement conferences, but it has instituted a procedure by which plaintiffs may request remand of their claims back to the court of original jurisdiction for trial. Since a settlement conference is a prerequisite to remand, it is expected that institution of this procedure will expedite the requests for settlement conferences. At the time of these settlement conferences, the Company expects to be given more relevant information regarding work histories and the basis, if any, for the plaintiff’s claim against the Company. The
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Company believes that the effects of these administrative orders may not be fully known or realized for some time. The Company does not believe a meaningful estimate can be made regarding the range of possible loss with respect to the claims remaining at the MDL at this time.
As of February 16, 2010, the remaining 4,434 claims pending against Albany were pending in a number of jurisdictions other than the MDL. Pleadings and discovery responses in those cases in which work histories have been provided indicate claimants with paper mill exposure in approximately 25% of total claims reported, and only a portion of those claimants have alleged time spent in a paper mill to which Albany is believed to have supplied asbestos-containing products. For these reasons, the Company expects the percentage of these remaining claimants able to demonstrate time spent in a paper mill to which Albany supplied asbestos-containing products during a period in which Albany’s asbestos-containing products were in use to be considerably lower than the total number of pending claims. In addition, over half of these remaining claims have not provided any disease information. Detailed exposure and disease information sufficient meaningfully to estimate a range of possible loss of a particular claim is typically not available until late in the discovery process, and often not until a trial date is imminent and a settlement demand has been received. For these reasons, the Company does not believe a meaningful estimate can be made regarding the range of possible loss with respect to these remaining claims.
It is the position of Albany and the other paper machine clothing defendants that there was insufficient exposure to asbestos from any paper machine clothing products to cause asbestos-related injury to any plaintiff. Furthermore, asbestos contained in Albany’s synthetic products was encapsulated in a resin-coated yarn woven into the interior of the fabric, further reducing the likelihood of fiber release. While the Company believes it has meritorious defenses to these claims, it has settled certain of these cases for amounts it considers reasonable given the facts and circumstances of each case. The Company’s insurer, Liberty Mutual, has defended each case and funded settlements under a standard reservation of rights. As of February 16, 2010, the Company had resolved, by means of settlement or dismissal, 32,823 claims. The total cost of resolving all claims was $6,846,000. Of this amount, $6,801,000, or 99%, was paid by the Company’s insurance carrier. The Company has approximately $130 million in confirmed insurance coverage that should be available with respect to current and future asbestos claims, as well as additional insurance coverage that it should be able to access.
Brandon Drying Fabrics, Inc.
Brandon Drying Fabrics, Inc. (“Brandon”), a subsidiary of Geschmay Corp., which is a subsidiary of the Company, is also a separate defendant in many of the asbestos cases in which Albany is named as a defendant. Brandon was defending against 7,905 claims as of February 16, 2010. This compares with 7,907 such claims as of October 30, 2009, 8,139 claims as of July 23, 2009, 8,604 claims as of May 1, 2009, 8,607 claims as of February 6, 2009, 8,664 such claims as of October 27, 2008, 8,672 claims as of July 25, 2008, 8,689 claims as of May 2, 2008, 8,741 claims as of February 1, 2008 and October 19, 2007, 9,023 claims as of July 27, 2007, 9,089 claims as of April 27, 2007, 9,189 claims as of February 16, 2007, 9,114 claims as of December 31, 2006, 9,566 claims as of December 31, 2005, 9,985 claims as of December 31, 2004, 10,242 claims as of December 31, 2003, 11,802 claims as of December 31, 2002, 8,759 claims as of December 31, 2001, 3,598 claims as of December 31, 2000, and 1,887 claims as of December 31, 1999.
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:
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| 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 ($$) |
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| 2005 | 9,985 | 642 | 223 | 9,566 | 0 | |||||||||||||||
| 2006 | 9,566 | 1182 | 730 | 9,114 | 0 | |||||||||||||||
| 2007 | 9,114 | 462 | 88 | 8,740 | 0 | |||||||||||||||
| 2008 | 8,740 | 86 | 10 | 8,664 | 0 | |||||||||||||||
| 2009 | 8,664 | 760 | 3 | 7,907 | 0 | |||||||||||||||
| 2010 to date | 7,907 | 5 | 3 | 7,905 | 0 | |||||||||||||||
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The Company acquired Geschmay Corp., formerly known as Wangner Systems Corporation, in 1999. Brandon is a wholly-owned subsidiary of Geschmay Corp. In 1978, Brandon acquired certain assets from Abney Mills (“Abney”), a South Carolina textile manufacturer. Among the assets acquired by Brandon from Abney were assets of Abney’s wholly-owned subsidiary, Brandon Sales, Inc. which had sold, among other things, dryer fabrics containing asbestos made by its parent, Abney. It is believed that Abney ceased production of asbestos-containing fabrics prior to the 1978 transaction. Although Brandon manufactured and sold dryer fabrics under its own name subsequent to the asset purchase, none of such fabrics contained asbestos. Under the terms of the Assets Purchase Agreement between Brandon and Abney, Abney agreed to indemnify, defend, and hold Brandon harmless from any actions or claims on account of products manufactured by Abney and its related corporations prior to the date of the sale, whether or not the product was sold subsequent to the date of the sale. It appears that Abney has since been dissolved. Nevertheless, a representative of Abney has been notified of the pendency of these actions and demand has been made that it assume the defense of these actions. Because Brandon did not manufacture asbestos-containing products, and because it does not believe that it was the legal successor to, or otherwise responsible for obligations of Abney with respect to products manufactured by Abney, it believes it has strong defenses to the claims that have been asserted against it. In some instances, plaintiffs have voluntarily dismissed claims against it, while in others it has entered into what it considers to be reasonable settlements. As of February 16, 2010, Brandon has resolved, by means of settlement or dismissal, 9,676 claims for a total of $152,499. Brandon’s insurance carriers initially agreed to pay 88.2% of the total indemnification and defense costs related to these proceedings, subject to the standard reservation of rights. The remaining 11.8% of the costs had been borne directly by Brandon. During 2004, Brandon’s insurance carriers agreed to cover 100% of indemnification and defense costs, subject to policy limits and the standard reservation of rights, and to reimburse Brandon for all indemnity and defense costs paid directly by Brandon related to these proceedings.
As of February 16, 2010, 6,821 (or approximately 86%) of the claims pending against Brandon were pending in Mississippi. For the same reasons set forth above with respect to Albany’s claims, as well as the fact that no amounts have been paid to resolve any Brandon claims since 2001, the Company does not believe a meaningful estimate can be made regarding the range of possible loss with respect to these remaining claims.
Mount Vernon
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”). The Company 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. The Company denies 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, the Company has successfully moved for dismissal in a number of actions.
While the Company does not believe, based on currently available information and for the reasons stated above, that a meaningful estimate of a range of possible loss can be made with respect to such claims, based on its understanding of the insurance policies available, how settlement amounts have been allocated to various policies, its settlement experience, the absence of any judgments against the Company or Brandon, the ratio of paper mill claims to total claims filed, and the defenses available, the Company currently does not anticipate any material liability relating to the resolution of the aforementioned pending proceedings in excess of existing insurance limits. Consequently, the Company currently does 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 the Company cannot predict the number and timing of future claims, based on the foregoing factors and the trends in claims against it to date, the Company does not anticipate that additional claims likely to be filed against it in the future will have a material adverse effect on its financial position, results of operations, or cash flows. The Company is aware that litigation is inherently uncertain, especially when the outcome is dependent primarily on determinations of factual matters to be made by juries. The Company is also aware
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that numerous other defendants in asbestos cases, as well as others who claim to have knowledge and expertise on the subject, have found it difficult to anticipate the outcome of asbestos litigation, the volume of future asbestos claims, and the anticipated settlement values of those claims. For these reasons, there can be no assurance that the foregoing conclusions will not change.
| Item 4. | Reserved |
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PART II
| Item 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Company’s common stock is principally traded on the New York Stock Exchange under the symbol AIN. As of December 31, 2009, there were approximately 7,100 beneficial owners of the Company’s common stock, including employees owning shares through the Company’s 401(k) defined contribution plan. The Company’s cash dividends and the high and low common stock prices per share were as follows:
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| Quarter Ended | March 31 | June 30 | September 30 | December 31 | ||||||||||||
| 2009 |
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| Cash dividends per share | $ | 0.12 | $ | 0.12 | $ | 0.12 | $ | 0.12 | ||||||||
| Class A Common Stock prices: |
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| High | $ | 13.72 | $ | 14.69 | $ | 20.53 | $ | 22.87 | ||||||||
| Low | $ | 5.05 | $ | 7.95 | $ | 10.05 | $ | 16.39 | ||||||||
| 2008 |
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| Cash dividends per share | $ | 0.11 | $ | 0.12 | $ | 0.12 | $ | 0.12 | ||||||||
| Class A Common Stock prices: |
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| High | $ | 37.35 | $ | 37.51 | $ | 34.83 | $ | 26.87 | ||||||||
| Low | $ | 32.34 | $ | 29.00 | $ | 26.18 | $ | 11.40 | ||||||||
Restrictions on dividends and other distributions are described in Note 12 of the Notes to Consolidated Financial Statements (see Item 8).
Disclosures of securities authorized for issuance under equity compensation plans and the performance graph are included under Item 12 of this Form 10-K.
In August 2006, the Company announced that the Board of Directors authorized management to purchase up to 2,000,000 additional shares of its Class A Common Stock. The Board’s action authorized management to purchase shares from time to time, in the open market or otherwise, whenever it believes such purchase to be advantageous to the Company’s shareholders, and it is otherwise legally permitted to do so. Management has made no share purchases under that authorization.
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| Item 6. | SELECTED FINANCIAL DATA |
The following selected historical financial data have been derived from the Consolidated Financial Statements of the Company (see Item 8). The data should be read in conjunction with those financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (see Item 7).
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| (in thousands, except per share amounts) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
| Summary of Operations |
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| Net sales (1) | $ | 871,045 | $ | 1,086,517 | $ | 1,051,903 | $ | 986,827 | $ | 958,998 | ||||||||||
| Cost of goods sold (1) (2) | 577,135 | 724,484 | 679,612 | 599,857 | 570,655 | |||||||||||||||
| Restructuring and other (2) | 69,168 | 38,653 | 27,625 | 5,936 | — | |||||||||||||||
| Goodwill and intangible impairment charge (3) | 1,011 | 72,305 | — | — | — | |||||||||||||||
| Operating (loss)/income (1) | (36,322 | ) | (66,917 | ) | 33,196 | 90,583 | 115,170 | |||||||||||||
| Interest expense, net (4) | 20,627 | 23,477 | 19,232 | 12,441 | 10,583 | |||||||||||||||
| (Loss)/income from continuing operations (1) (4) | (22,380 | ) | (84,858 | ) | 13,377 | 57,139 | 71,023 | |||||||||||||
| (Loss)/income from discontinued operations (5) | (10,000 | ) | 6,479 | 1,851 | (1,030 | ) | 829 | |||||||||||||
| Net (loss)/income (4) | (32,380 | ) | (78,379 | ) | 15,228 | 56,109 | 71,852 | |||||||||||||
| Basic (losses)/income from continuing operations per share (4) |
(0.73 | ) | (2.85 | ) | 0.45 | 1.92 | 2.22 | |||||||||||||
| Basic net (losses)/ income per share (4) |
(1.06 | ) | (2.63 | ) | 0.52 | 1.88 | 2.25 | |||||||||||||
| Diluted net (losses)/ income per share (4) | (1.06 | ) | (2.63 | ) | 0.51 | 1.85 | 2.22 | |||||||||||||
| Dividends declared per share | 0.48 | 0.47 | 0.43 | 0.39 | 0.34 | |||||||||||||||
| Weighted average number of shares outstanding — basic | 30,612 | 29,786 | 29,421 | 29,803 | 31,921 | |||||||||||||||
| Capital expenditures | 38,262 | 129,499 | 149,215 | 84,452 | 43,293 | |||||||||||||||
| Financial position |
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| Cash | $ | 97,466 | $ | 106,571 | $ | 73,305 | $ | 68,237 | $ | 72,771 | ||||||||||
| Cash surrender value of life insurance | 49,135 | 47,425 | 43,701 | 41,197 | 37,778 | |||||||||||||||
| Property, plant and equipment, net | 514,475 | 536,576 | 525,853 | 409,056 | 338,865 | |||||||||||||||
| Total assets (4) | 1,344,257 | 1,405,057 | 1,526,479 | 1,305,892 | 1,087,047 | |||||||||||||||
| Current liabilities | 184,887 | 210,177 | 242,840 | 200,255 | 179,393 | |||||||||||||||
| Long-term debt | 483,922 | 508,386 | 419,926 | 323,794 | 162,597 | |||||||||||||||
| Total noncurrent liabilities (4) (6) | 734,372 | 761,944 | 684,633 | 604,720 | 349,072 | |||||||||||||||
| Total liabilities (4) (6) | 919,259 | 972,121 | 927,473 | 804,975 | 528,465 | |||||||||||||||
| Shareholders’ equity (3) (4) (6) | 424,998 | 432,936 | 599,006 | 500,917 | 558,582 | |||||||||||||||
| (1) | In 2008, the Company sold its Filtration Technologies business. Previously reported data for net sales, cost of sales, and operating income for years prior to 2008 have been adjusted to reflect only the activity from continuing operations. |
| (2) | In 2006, 2007, 2008, and 2009, the Company recorded Restructuring and other charges related to cost reduction initiatives. |
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| (3) | In 2008, a Goodwill impairment charge of $72.3 million was recorded, and in 2009 an Intangible impairment charge of $1.0 million was recorded for customer contracts. The latter charge was an error that should have been recorded in 2008. |
| (4) | In 2009, the Company adopted new accounting guidance for convertible debt instruments that may be settled in cash upon conversion, which required certain retrospective adjustments to the years 2008, 2007, and 2006. During 2009, the Company entered into agreements to exchange a portion of these convertible debt instruments for cash plus an equivalent amount of the Company’s Senior Notes (“New Notes”). In each case, the Company simultaneously entered into additional agreements to purchase the New Notes, which resulted in $52.0 million of pretax gains on early retirement of debt. |
| (5) | In 2009, there was a $10.0 million purchase price adjustment related to the sale of the Filtration business, which was also paid during the year. |
| (6) | In 2006, the Company adopted the new accounting guidance related to defined benefit pension and other postretirement plans, which resulted in a $59.6 million increase in pension liabilities and a $41.5 million decrease in shareholders’ equity. |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. The MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s Consolidated Financial Statements and the accompanying Notes.
Overview
Albany International Corp. (the Registrant, the Company, Management, or we) and its subsidiaries are engaged in five business segments.
The Paper Machine Clothing segment includes fabrics and belts used in the manufacture of paper and paperboard (PMC or paper machine clothing). The Company designs, manufactures, and markets paper machine clothing for each section of the paper machine. It manufactures and sells more paper machine clothing worldwide than any other company. PMC consists of large permeable and non-permeable continuous belts of custom-designed and custom-manufactured engineered fabrics that are installed on paper machines and carry the paper stock through each stage of the paper production process. PMC products are consumable products of technologically sophisticated design that utilize polymeric materials in a complex structure. The design and material composition of PMC can have a considerable effect on the quality of paper products produced and the efficiency of the paper machines on which it is used. Principal products in the PMC segment include forming, pressing and dryer fabrics, and process belts. A forming fabric assists in sheet formation and conveys the very wet sheet (over 75% water) through the forming section. Press fabrics are designed to carry the sheet through the press section, where water is pressed from the sheet as it passes through the press nip. In the dryer section, dryer fabrics manage air movement and hold the sheet against heated cylinders to enhance drying. Process belts are used in the press section to increase dryness and enhance sheet properties, as well as in other sections of the machine to improve runnability and enhance sheet qualities. The Company sells its PMC products directly to its customer end-users, which are paper industry companies, some of which operate in multiple regions of the world. The Company’s products, manufacturing processes and distribution channels for PMC are substantially the same in each region of the world in which it operates. The sales of forming, pressing, and dryer fabrics, individually and in aggregate, accounted for more than 10% of the Company’s consolidated net sales during one year or more of the last three years.
The Company’s other reportable segments apply the Company’s core competencies in advanced textiles and materials to other industries:
Albany Door Systems (ADS) designs, manufactures, sells, and services high-speed, high-performance industrial doors worldwide, for a wide range of interior, exterior, and machine protection industrial applications. Already a high-performance door leader, ADS added to its product offerings through its acquisitions of Aktor GmbH in 2008 and R-Bac Industries in 2007. The business segment also derives revenue from aftermarket sales and service. ADS sells directly to customer end-users in certain markets, such as Sweden and Germany, while in other markets, such as the United States, it sells primarily through distributors and dealers.
The Engineered Fabrics (EF) segment derives its revenue from various industries that use fabrics and belts for industrial applications other than the manufacture of paper and paperboard. Revenue in this segment is derived from sales to the nonwovens industry, which include the manufacture of diapers, personal care and household wipes; and to building products markets, which includes the manufacture of fiberglass-reinforced roofing shingles. Other segment revenue includes sales to markets adjacent to the paper industry, and to the tannery and textile industries. Segment sales in the European and Pacific regions combined are almost at the same level as sales within the Americas. The Company generally markets EF products directly to its customers.
The Engineered Composites segment (AEC) provides custom-designed advanced composite structures and textile preforms to customers in aerospace and other high-tech industries.
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The PrimaLoft® Products segment includes sales of insulation for outdoor clothing, gloves, footwear, sleeping bags, and home furnishings. This segment has sales operations in the United States, Europe, and Asia, through which it sells products produced by third-parties according to the Company’s proprietary specifications. This segment also generates a significant portion of its income as royalties from the licensing of its intellectual property.
Trends
The Company’s primary segment, Paper Machine Clothing, accounted for approximately 69% of consolidated revenues during 2009. Paper machine clothing is purchased primarily by manufacturers of paper and paperboard. According to data published by RISI, Inc., world paper and paperboard production volumes grew at an annual rate of approximately 2.6% between 1998 and 2009. Paper and paperboard production decreased 6.6% during 2009 due to the global recession, but is expected to grow slightly in future years as demand increases in the emerging markets of Asia and South America while demand stabilizes in the mature markets of Europe and North America.
The paper and paperboard industry has been characterized by an evolving but essentially stable manufacturing technology based on the wet-forming papermaking process. This process, of which paper machine clothing is an integral element, requires a very large capital investment. Consequently, management does not believe that a commercially feasible substitute technology to paper machine clothing is likely to be developed and incorporated into the paper production process by paper manufacturers in the foreseeable future. For this reason, management expects that demand for paper machine clothing will continue into the foreseeable future.
The world paper and paperboard industry has experienced a significant period of consolidation and rationalization since 2000. During this period a number of older and less efficient machines in areas where significant established capacity existed were closed, primarily in Europe and North America. At the same time a number of newer, faster, and more efficient machines began production or plans for the installation of such newer machines in areas of growing demand for paper and paperboard. The Company anticipates that new machines will be added in Asia and South America as demand for paper and paperboard products increase in those regions.
At the same time, technological advances in paper machine clothing, while contributing to the papermaking efficiency of customers, have lengthened the useful life of many of the Company’s products and reduced the number of pieces required to produce the same volume of paper. As the Company introduces new value-creating products and services, it is often able to charge higher prices or increase market share in certain areas as a result of these improvements. However, increased prices and share have not always been sufficient to offset completely a decrease in the number of fabrics sold.
The factors described above result in a steady decline in the number of pieces of paper machine clothing, while the average fabric size is increasing. Due to the global recession, global PMC volume decreased significantly in 2009, resulting in a decline in segment revenue. Going forward, management expects significant volume growth in Asia and South America, while flat or slightly lower volume is expected in Europe and North America.
During 2006, the Company initiated a deliberate, intensive three-year process of restructuring and performance improvement initiatives. In PMC, the Company’s strategy has been to offset the impacts of the maturation of the North American and Western European markets by (a) growing volume in these mature markets, (b) growing with the emerging markets in Asia and South America, and (c) reducing costs significantly through a company-wide, three-year restructuring and performance improvement program.
During this process of adjusting its manufacturing footprint to align with these regional markets, the Company incurred significant restructuring charges. Specific charges reported have been incurred in connection with the reduction of PMC manufacturing capacity in the United States, Canada, Germany, Finland, France, and Australia, and Doors segment manufacturing in Sweden and Germany. The Company has also incurred costs for idle capacity and equipment relocation that are related to the shutdown of these plants, and underutilized costs related to the new PMC plant in China. Expenses related to these items are included in “Cost of Goods Sold.” In addition, the Company also incurred restructuring charges related to the
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centralization of PMC administrative functions in Europe, and reorganization of the Company’s research and development function that has improved the Company’s ability to bring value-added products to market faster.
In addition to these restructuring and restructuring-related activities, management launched significant cost reduction and performance improvement initiatives. In 2006, the Company announced a plan to migrate its global enterprise resource planning system to SAP, and began a strategic procurement initiative designed to establish a world-class supply chain organization and processes that would lead to significant cost savings. Expenses incurred in connection with these actions are included in Selling, Technical, General and Research (STG&R) expenses. These expenses were not allocated to the reportable segments because they are corporate-wide initiatives.
While the major activities associated with the Company’s three-year plan of restructuring and performance improvement initiatives came to a conclusion in 2009, the Company expects some residual expenses during 2010 related to restructuring plans announced during 2009. Those expenses are expected to include items that will be reported as restructuring, and costs of goods sold for equipment relocation. The only remaining planned process improvement initiative that will run through 2010 will be the conversion of the Company’s Eurasia and Brazilian operations to SAP.
Recent economic conditions have affected, and could further impact competition in the PMC segment. Some of the Company’s competitors in the PMC segment also have the ability to make and sell paper machines, which could be perceived as providing a competitive advantage. While the Company is unable to predict how competition will be affected by further transactions, we will continue to drive for technical competitiveness and value of our products.
The Albany Door Systems segment derives most of its revenue from the sale of high-performance doors, particularly to customers in Europe. The purchase of these doors is normally a capital expenditure item for customers and, as such, market opportunities tend to fluctuate with industrial capital spending. If economic conditions weaken, customers may reduce levels of capital expenditures, which could have a negative effect on sales and earnings in the ADS segment. New product and aftermarket sales were significantly lower in 2009 due to the effects of the recession. Accordingly, the Company took steps across the business to reduce operating costs as well as to focus expansion of its aftermarket business, which tends to carry a higher margin of profit than sales of new products. The Company expects recovery in this segment to track recovery in the overall economy.
The Engineered Fabrics segment derives its revenue from various industries that use fabrics and belts for industrial applications other than the manufacture of paper and paperboard. Approximately 60% of revenue in this segment is derived from sales to the nonwovens industry and building products markets, which include the manufacture of diapers, personal care and household wipes, and fiberglass-reinforced roofing shingles. Approximately 40% of segment revenue is derived from sales to markets that are adjacent to the paper industry. Segment sales in the European and Pacific regions combined are almost at the same level as sales within the Americas. Sales in 2009 were 11% lower than in 2008, reflecting the effects of the global recession. Management expects any economic recovery will contribute to stronger sales in this segment.
The Engineered Composites segment serves primarily the aerospace industry, with custom-designed composite and advanced composite parts for static and dynamic applications. While sales declined in 2009, the Company views AEC as a future core business with significant growth potential. The Company expects this growth to be fueled by a combination of increased sales from existing growth programs and the commercial introduction of new products that are currently under development.
The PrimaLoft® Products segment includes sales of insulation for outdoor clothing, gloves, footwear, sleeping bags, and home furnishings. The segment has manufacturing and sales operations in the United States, Europe, and Asia. Reflecting global economic pressures, segment sales for 2009 were 10% lower than the same period of 2008. Top line growth in this segment is affected by the health of consumer apparel markets in North America and Europe, and the severity and harshness of the winter weather in those markets.
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Foreign Currency
The Company operates in many regions of the world, and currency rate movements can have a significant effect on operating results. Changes in exchange rates can result in revaluation gains and losses that are recorded in Selling, Technical, General and Research expenses or Other income/expense, net. Operating margins 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. A strengthening of the local functional currency against the U.S. dollar has a negative effect on operating margins in situations where the local manufacturing costs, which are based in the local functional currency, exceed the amount of local-currency-based sales in that same currency. This situation arises most often when a non-U.S. subsidiary has a significant amount of its sales denominated, or pegged to, the U.S. dollar. A strengthening of the local functional currency against the U.S. dollar has a positive effect on operating margins when local functional currency based sales exceed the functional currency based costs in any given country. In order to mitigate foreign exchange volatility in the financial statements, the Company enters into foreign currency financial instruments from time to time. There were no foreign currency financial instruments designated as hedging instruments at December 31, 2009.
Review of Operations
2009 vs. 2008
Net sales decreased to $871.0 million in 2009, as compared to $1,086.5 million for 2008. Changes in currency translation rates had the effect of decreasing net sales by $29.4 million. Excluding the effect of changes in currency translation rates, 2009 net sales decreased 17.1% as compared to 2008.
Following is a table of net sales for each business segment and the effect of changes in currency translation rates:
Table 1
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| Net sales as reported December 31, |
Percent change |
Impact of changes in currency translation rates |
Percent change excluding currency translation rate effects |
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| (in thousands) | 2009 | 2008 | ||||||||||||||||||
| Paper Machine Clothing | $ | 598,590 | $ | 727,967 | -17.8 | % | ($17,189 | ) | -15.4 | % | ||||||||||
| Albany Door Systems | 133,423 | 189,348 | -29.5 | % | (8,223 | ) | -25.2 | % | ||||||||||||
| Engineered Fabrics | 86,216 | 101,118 | -14.7 | % | (3,730 | ) | -11.0 | % | ||||||||||||
| Engineered Composites | 33,824 | 46,666 | -27.5 | % | — | -27.5 | % | |||||||||||||
| PrimaLoft® Products | 18,992 | 21,418 | -11.3 | % | (279 | ) | -10.0 | % | ||||||||||||
| Total | $ | 871,045 | $ | 1,086,517 | -19.8 | % | ($29,421 | ) | -17.1 | % | ||||||||||
Gross profit was 33.7% in 2009, compared to 33.3% in 2008. The higher percentage in 2009 reflects a $1.1 million decrease in performance improvements costs and lower cost of goods sold due to charges of $3.2 million related to the Eclipse Aviation bankruptcy filing in Q4 2008. The performance improvement costs principally relate to equipment relocation, idle capacity at plants that are being closed, and underutilized capacity at the Company’s new plant in Hangzhou, China.
Selling, general, technical and research expenses decreased to $260.1 million or 29.9% of net sales in 2009, as compared to $318.0 million or 29.3% of net sales in 2008. Costs in STG&R related to performance improvement initiatives were $6.1 million in 2009 and $20.7 million in 2008. The performance improvement costs are principally costs related to the implementation of the SAP enterprise resource planning software and employee terminations. In 2008, STG&R included a provision for bad debts in the amount of $7.4 million for the Eclipse Aviation bankruptcy filing. Changes in currency translation rates had the effect of decreasing 2009 STG&R expenses by $11.8 million compared to 2008.
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Following is a table of operating income by segment (includes non-GAAP data; see Non-GAAP Measures below):
Table 2
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| (in thousands) | Total Operating income/(loss) |
Total Operating income/(loss) |
Goodwill impairment charge |
Operating income/(loss) excluding goodwill charge |
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| Operating Income/(loss) |
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| Paper Machine Clothing | $ | 40,417 | $ | 35,692 | $ | 48,590 | $ | 84,282 | ||||||||
| Albany Door Systems | (259 | ) | 16,635 | — | 16,635 | |||||||||||
| Engineered Fabrics | 8,141 | (3,517 | ) | 17,753 | 14,236 | |||||||||||
| Engineered Composites | (7,664 | ) | (25,920 | ) | 5,962 | (19,958 | ) | |||||||||
| PrimaLoft® Products | 3,689 | 3,104 | — | 3,104 | ||||||||||||
| Research expense | (23,849 | ) | (22,783 | ) | — | (22,783 | ) | |||||||||
| Unallocated expenses | (56,797 | ) | (70,128 | ) | — | (70,128 | ) | |||||||||
| Operating (loss)/income | ($36,322 | ) | ($66,917 | ) | $ | 72,305 | $ | 5,388 | ||||||||
As a result of a broad decline in equity markets and the Company’s market capitalization, the Company performed an interim goodwill impairment test in the fourth quarter of 2008. As a result of that test, the Company recorded a goodwill impairment charge of $72.3 million. Fair values of the reporting units and the related implied fair values of their respective goodwill were established using public company analysis and discounted cash flows. The impairment charge was driven by adverse financial market conditions that caused a significant decrease in market multiples and the Company’s share price, and increases to discount rates.
In the third quarter of 2006, the Company announced the initial steps in its restructuring and performance improvement plan. The actions were part of a three-year restructuring and performance improvement plan and affected each of the Company’s reportable segments. The actions resulted in restructuring and other charges in each period since the original steps were announced. The actions taken to reduce manufacturing capacity were driven by the need to balance the Company’s manufacturing capacity with anticipated demand. Actions undertaken to reduce STG&R expenses were related to efficiency initiatives.
Paper Machine Clothing restructuring activities include closure or significant reductions of manufacturing in Canada, France, Finland, Germany, Sweden, Australia, and in the United States. Additionally, the Company has incurred restructuring charges related to the centralization of European administrative functions. These activities contributed to restructuring expense in the PMC segment of $63.7 million in 2009, $34.2 million in 2008, and $24.4 million in 2007. Restructuring expense included provisions for property, plant, and equipment impairments of $8.6 million in 2009, $9.9 million in 2008, and $1.7 million in 2007. In 2009, restructuring expense included $5.1 million in impairment provisions related to a joint venture investment located in South Africa. The process of closing manufacturing facilities in Europe and North America resulted in idle capacity costs of $12.1 million, $4.2 million, and $4.2 million in 2009, 2008, and 2007, respectively.
Restructuring expense in the Company’s Albany Door Systems segment was $4.3 million during 2009, which was principally the result of employee reductions throughout manufacturing facilities in Europe, primarily in Lippstadt, Germany. The 2009 terminations were part of a Company-wide initiative to reduce operating costs. In May 2007, the Company announced its plan to discontinue operations at its door manufacturing facility in Halmstad, Sweden, as part of a plan to match installed capacity with business demands. That action contributed to restructuring expense in the ADS segment of $0.9 million in 2008, and $2.2 million in 2007.
The Company’s Engineered Fabrics business was affected by the announcement of a plan in June 2009 to discontinue manufacturing at its plant in Gosford, Australia, and to transfer production to its St. Stephen, South Carolina, manufacturing facility. The actions as part of that plan resulted in net restructuring charges in the Company’s EF segment of $3.7 million in 2009. Employee reductions in the Company’s EF manufacturing
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facility in Europe, incurred an additional $0.6 million in termination costs, bringing the total restructuring expense for that business segment to $4.3 million in 2009. The European terminations were part of a Company-wide initiative to reduce operating costs.
Research expense was affected by the Company’s announcement in April 2008 of a plan to shut down its Mansfield, Massachusetts, facility and consolidate its technical and manufacturing operations located there into other facilities in Europe and North America. The actions resulted in net restructuring charges of $1.8 million in 2008.
The Company has also taken actions to reduce its Corporate overhead expenses, which resulted in net restructuring charges of income of $3.4 million during 2009, expense of $0.4 million in 2008 and $0.7 million in 2007. Those restructuring charges are net of curtailment gains of $6.4 million in 2009, $2.5 million in 2008, and $1.9 million in 2007, which are related to the Company’s pension and postretirement benefit plans.
The table below presents restructuring and performance improvement costs by reportable segment:
Table 3
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||||||||||||
| Year ended December 31, 2009 | ||||||||||||||||
| (in thousands) | Restructuring | Idle capacity costs |
Other performance improvement costs |
Total | ||||||||||||
| Paper Machine Clothing | $ | 63,664 | $ | 12,069 | $ | 10,146 | $ | 85,879 | ||||||||
| Albany Door Systems | 4,271 | — | 435 | 4,706 | ||||||||||||
| Engineered Fabrics | 4,311 | — | — | 4,311 | ||||||||||||
| Engineered Composites | 291 | — | 825 | 1,116 | ||||||||||||
| PrimaLoft® Products | 61 | — | — | 61 | ||||||||||||
| Unallocated expenses | (3,430 | ) | — | 6,820 | 3,390 | |||||||||||
| Consolidated total | $ | 69,168 | $ | 12,069 | $ | 18,226 | $ | 99,463 | ||||||||
|
|
|
|
|
||||||||||||
| Year ended December 31, 2008 | ||||||||||||||||
| (in thousands) | Restructuring | Idle capacity costs |
Other performance improvement costs |
Total | ||||||||||||
| Paper Machine Clothing | $ | 34,173 | $ | 4,202 | $ | 24,080 | $ | 62,455 | ||||||||
| Albany Door Systems | 945 | — | 215 | 1,160 | ||||||||||||
| Engineered Fabrics | 156 | — | — | 156 | ||||||||||||
| Engineered Composites | 972 | — | — | 972 | ||||||||||||
| PrimaLoft® Products | 182 | — | — | 182 | ||||||||||||
| Research expense | 1,779 | — | — | 1,779 | ||||||||||||
| Unallocated expenses | 446 | — | 17,509 | 17,955 | ||||||||||||
| Consolidated total | $ | 38,653 | $ | 4,202 | $ | 41,804 | $ | 84,659 | ||||||||
27
|
|
|
|
|
||||||||||||
| Year ended December 31, 2007 | ||||||||||||||||
| (in thousands) | Restructuring | Idle capacity costs |
Other performance improvement costs |
Total | ||||||||||||
| Paper Machine Clothing | $ | 24,434 | $ | 4,177 | $ | 10,232 | $ | 38,843 | ||||||||
| Albany Door Systems | 2,164 | — | 1,168 | 3,332 | ||||||||||||
| Engineered Fabrics | — | 606 | 136 | 742 | ||||||||||||
| Research expense | 308 | — | — | 308 | ||||||||||||
| Unallocated expenses | 719 | — | 9,921 | 10,640 | ||||||||||||
| Consolidated total | $ | 27,625 | $ | 4,783 | $ | 21,457 | $ | 53,865 | ||||||||
Operating income was a loss of $36.3 million for 2009 compared with income of $5.4 million for 2008 before the goodwill impairment charges. The decrease in operating income was principally due to an increase of $14.8 million for costs associated with restructuring and performance improvement initiatives and a decrease in sales during 2009 as compared to 2008.
Research expense increased $1.1 million or 4.7% as compared to 2008, principally due to higher labor and material costs during 2009. Research expense in 2008 included restructuring charges of $1.8 million.
Unallocated expenses decreased $13.3 million to $56.8 million in 2009 principally due to a decrease of $14.6 million related to restructuring, and performance improvement initiatives, reflecting lower implementation costs with respect to the Company’s SAP enterprise resource planning system.
Interest expense, net of interest income, decreased to $20.6 million for 2009, compared to $23.5 million for 2008. The decrease reflects lower average levels of debt outstanding during 2009 at lower average interest rates.
Other income/expense, net, was income of $49.9 million for 2009 compared to expense of $0.3 million for 2008. Included in 2009 was income of $52.0 million for gains on extinguishment of debt, offset by expense of $1.9 million related to amortization debt issuance costs and loan origination fees. Other income/expense includes income of $2.2 million and $1.0 million in 2009 and 2008, respectively, related to the remeasurements (remeasurements gains) of short-term intercompany balances at operations that held amounts denominated in currencies other than their local currencies. Other income/expense in 2009 includes $1.5 million of expense related to line of credit fees in Canada.
Income tax expense/benefit from continuing operations was expense of $15.6 million in 2009 compared to a benefit of $5.7 million in 2008. Discrete tax adjustments in 2009 were a net expense of $6.4 million and resulted principally from provisions for resolution of tax audits and contingencies. Discrete tax adjustments in 2008 were a net benefit of $13.0 million and resulted principally from changes in benefit programs, offset by the recording of valuation allowances on net operating loss carryforwards.
In July 2008, the Company closed on the sale of its Filtration Technologies business, the principal operations of which were in Gosford, Australia, and Zhangjiagang, China. At closing, the Company received approximately $45.0 million, which resulted in a 2008 pretax gain of $5.4 million. In 2009 the Company recorded a charge of $10.0 million representing a purchase price adjustment related to the Company’s sale of the Filtration Technologies business, which was paid during the third-quarter of 2009. The charge results from an agreement between the Company and the purchaser of the business to return a portion of the original $45.0 million purchase price in exchange for a release of certain future claims under the related sale agreement. In accordance with the applicable accounting guidance for the impairment or disposal of long-lived assets, the results of operations, including the proceeds from the purchase price adjustment of this business have been reported as income/loss from discontinued operations for all periods presented. Cash flows of the discontinued operation were combined with cash flows from continuing operations in the consolidated statements of cash flows. The activities of this business are reported as a discontinued operation in 2009, 2008, and 2007 financial statements and, accordingly, are excluded from Tables 1, 2, 3, 4 and 5.
28
Net income/loss was a loss of $32.4 million for 2009, compared to a loss of $78.4 million for 2008. Basic earnings/loss per share was a loss of $1.06 for 2009, compared to a loss of $2.63 for 2008. The 2009 and 2008 earnings/loss per share were reduced by net charges for certain items by $2.15 per share and $4.71 per share, respectively (see Non-GAAP Measures section below).
Paper Machine Clothing Segment
Net sales in the Paper Machine Clothing segment decreased to $598.6 million for 2009 as compared to $728.0 million for 2008. Changes in currency translation rates had the effect of decreasing 2009 net sales by $17.2 million. Excluding the effect of changes in currency translation rates, 2009 net sales decreased 15.4% as compared to 2008 principally due to lower sales volume. The decrease principally relates to the broad economic weakness that began during second half of 2008. Quarterly sales in 2009 in comparison to the same quarter of 2008 showed decreases, excluding the effect of changes in currency translation rates, of 16.9% in Q1, 22.4% in Q2, 12.4% in Q3, and 8.6% in Q4.
For the full year, 2009 sales were lower in every region, with the exception of South America which grew 8.2% over 2008. Q1 2009 sales in Asia Pacific were significantly lower than in Q4 2008, but grew sequentially in 2009, and Q4 2009 sales levels were higher than Q4 2008. While 2009 sales were lower in Europe and North America than 2008, sales levels remained relatively consistent in those regions from quarter to quarter throughout 2009, which suggests that these markets may have bottomed, but economic recovery is not expected to lead to significant sales growth.
Gross profit as a percentage of net sales was 37.2% for 2009 compared to 36.9% for 2008. The increase in 2009 was principally due to $3.0 million of lower costs associated with performance improvement initiatives, idle capacity costs at plants being closed, and underutilized capacity at the Company’s new plant in Hangzhou, China.
Operating income was $40.4 million during 2009 and $84.3 million in 2008, excluding the goodwill impairment charge, as illustrated in Table 2. Segment expenses for restructuring and performance improvement initiatives, as illustrated in Table 3, increased by $23.4 million compared to 2008. The remaining decrease in operating income is principally due to lower sales during 2009.
Albany Door Systems Segment
Net sales in the Albany Door Systems segment decreased to $133.4 million in 2009, compared to $189.3 million in 2008. Changes in currency translation rates had the effect of decreasing net sales by $8.2 million. Excluding the effect of changes in currency translation rates, 2009 net sales decreased 25.2% as compared to 2008.
Sales of new products were 34.8% lower during 2009 as customers spent less on capital expenditure due to the weakness of the overall economy. New product sales were lower in every quarter during 2009 as compared with Q4 2008, with some improvement during Q4 2009 as compared to the first three quarters of the year, which is consistent with normal seasonal patterns. In comparison to 2008, aftermarket sales were 17.3% lower in 2009 and remained lower in the first three quarters of 2009, increasing to a level during Q4 2009, consistent with the sales level in Q4 2008. The sales trend in North America and Europe were similar, with sales in the first three quarters of 2009 showing continuing weakness followed by increases in Q4 2009.
Gross profit as a percentage of net sales was 30.7% in 2009 and 32.1% in 2008. The decrease is principally related to lower sales.
Operating income decreased to an operating loss of $0.3 million in 2009 compared with operating income of $16.6 million in 2008 principally due to the effect of weaker sales. Additionally, costs for restructuring and performance improvement increased by $3.5 million in 2009, as compared to 2008.
Engineered Fabrics Segment
Net sales in the Engineered Fabrics segment decreased to $86.2 million in 2009, compared to $101.1 million in 2008. Changes in currency translation rates had the effect of decreasing net sales by $3.7 million. Excluding the effect of changes in currency translation rates, 2009 net sales decreased 11.0% as compared to 2008.
29
The sales trends in EF were similar to PMC, as the recession significantly weakened sales in this segment starting with Q3 2008. Quarterly sales in 2009 in comparison to the same quarter in 2008 showed decreases, excluding the effect of changes in currency translation rates, of 13.0% in the first quarter, 12.1% in the second quarter, 9.9% in the third quarter, and 8.5% in the fourth quarter.
Gross profit as a percentage of net sales was 33.0% in 2009 compared to 34.0% in 2008. The decrease was principally due to lower sales in products that carry higher profit margins.
Operating income was $8.1 million in 2009 compared with $14.2 million in 2008, excluding the goodwill impairment charge, as illustrated in Table 2. The decrease reflects lower sales and an increase of $4.2 million in performance improvement and restructuring costs during 2009.
Engineered Composites Segment
Net sales in the Engineered Composites segment decreased to $33.8 million in 2009, compared to $46.7 million in 2008. Eclipse Aviation contributed $7.4 million to sales during 2008, accounting for a significant portion of the decrease.
Gross profit was a loss of $2.5 million in 2009 compared with a loss of $6.1 million in 2008, which included a $3.2 million write-off of inventory and tooling for Eclipse Aviation.
The segment operating loss was $7.7 million in 2009 compared with $20.0 million in 2008, excluding the goodwill impairment charge, as illustrated in Table 2. Results for 2008 include a write-off totaling $10.6 million for Eclipse Aviation.
PrimaLoft® Products Segment
Net sales in the PrimaLoft® Products segment decreased to $19.0 million in 2009, compared to $21.4 million in 2008. Changes in currency translation rates had the effect of decreasing net sales by $0.3 million. Excluding the effect of changes in currency translation rates, 2009 net sales decreased 10.0% as compared to 2008. Sales were strong during the first two quarters of 2009, and were followed by weaker third and fourth quarters, reflecting a consistent seasonality trend in this business.
Gross profit as a percentage of net sales was 46.6% in 2009 compared to 44.6% in 2008. The increase reflects lower production costs associated with performance improvement initiatives.
Operating income increased to $3.7 million in 2009 from $3.1 million in 2008, which reflects higher gross profit in 2009.
2008 vs. 2007
Net sales increased to $1,086.5 million in 2008, as compared to $1,051.9 million for 2007. Changes in currency translation rates had the effect of increasing net sales by $30.3 million. Excluding the effect of that change and the additional effect of changes in currency translation rates, 2008 net sales increased 0.4% as compared to 2007.
30
Following is a table of net sales for each business segment and the effect of changes in currency translation rates (includes non-GAAP data; see Non-GAAP Measures below):
Table 4
|
|
|
|
|
|
|||||||||||||||
Net sales as reported December 31, |
Percent change |
Impact of changes in currency translation rates |
Percent change excluding currency translation rate effects |
|||||||||||||||||
| (in thousands) | 2008 | 2007 | ||||||||||||||||||
| Paper Machine Clothing | $ | 727,967 | $ | 747,279 | -2.6 | % | $ | 16,657 | -4.8 | % | ||||||||||
| Albany Door Systems | 189,348 | 152,951 | 23.8 | % | 9,824 | 17.4 | % | |||||||||||||
| Engineered Fabrics | 101,118 | 101,506 | -0.4 | % | 3,533 | -3.9 | % | |||||||||||||
| Engineered Composites | 46,666 | 32,955 | 41.6 | % | — | 41.6 | % | |||||||||||||
| PrimaLoft® Products | 21,418 | 17,212 | 24.4 | % | 308 | 22.6 | % | |||||||||||||
| Total | $ | 1,086,517 | $ | 1,051,903 | 3.3 | % | $ | 30,322 | 0.4 | % | ||||||||||
Gross profit was 33.3% in 2008, compared to 35.4% in 2007. The lower percentage in 2008 was principally due to an increase of $14.9 million for performance improvement initiatives. The performance improvement costs principally related to equipment relocation, idle capacity at plants being closed, and underutilized capacity at the Company’s plant in Hangzhou, China.
STG&R expenses increased to $318.0 million or 29.3% of net sales in 2008, as compared to $311.5 million or 29.6% of net sales in 2007. Costs related to performance improvement initiatives were $20.5 million in 2008 and $15.6 million in 2007. The performance improvement costs were principally costs related to the implementation of the SAP enterprise resource planning software and employee terminations. Compared to 2007, provisions for bad debts increased $14.5 million, including a provision of $7.4 million for the Eclipse Aviation bankruptcy filing in Q4 2008. Changes in currency translation rates had the effect of increasing 2008 STG&R expenses by $8.6 million compared to 2007.
Following is a table of operating income by segment (includes non-GAAP data; see Non-GAAP Measures):
Table 5
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|
|
||||||||||||
| Year ended December 31, 2008 |
Operating Income/(loss) Excluding Goodwill Charge |
Year ended December 31, 2007 | ||||||||||||||
| (in thousands) | Total Operating Income/(loss) |
Goodwill Impairment Charge |
Total Operating Income/(loss) |
|||||||||||||
| Operating Income/(loss) |
||||||||||||||||
| Paper Machine Clothing | $ | 35,692 | $ | 48,590 | $ | 84,282 | $ | 104,375 | ||||||||
| Albany Door Systems | 16,635 | — | 16,635 | 6,734 | ||||||||||||
| Engineered Fabrics | (3,517 | ) | 17,753 | 14,236 | 17,598 | |||||||||||
| Engineered Composites | (25,920 | ) | 5,962 | (19,958 | ) | (6,259 | ) | |||||||||
| PrimaLoft® Products | 3,104 | — | 3,104 | 2,820 | ||||||||||||
| Research expense | (22,783 | ) | — | (22,783 | ) | (23,337 | ) | |||||||||
| Unallocated expenses | (70,128 | ) | — | (70,128 | ) | (68,735 | ) | |||||||||
| Operating income/(loss) | ($66,917 | ) | $ | 72,305 | $ | 5,388 | $ | 33,196 | ||||||||
Operating income before the goodwill impairment charges decreased to $5.4 million in 2008, compared to $33.2 million in 2007. The lower income in 2008 was principally due to an increase of $30.8 million for costs associated with restructuring and performance improvement initiatives.
Research expense decreased $0.6 million or 2.4% in 2008, principally due to a gain of $2.2 million from the sale of a building, which offset additional costs related to restructuring initiatives.
31
Unallocated expenses increased $1.4 million to $70.1 million in 2008, principally due to an increase of $8.1 million related to performance improvement initiatives, including the Company’s implementation of the SAP enterprise resource planning system and costs related to the Company’s global procurement initiative. Those cost increases were partially offset by a $2.8 million reduction in incentive compensation expense related to the decrease in the Company’s stock price and a $1.3 million reduction in global information system costs during 2008.
Interest expense increased to $20.8 million for 2008, compared to $16.6 million for 2007. The increase reflects higher average levels of debt outstanding in 2008.
Other expense, net, was $0.5 million for 2008 compared to $0.4 million for 2007. The decrease in expense is primarily due to lower income resulting from currency hedging activities and the remeasurement of short-term intercompany balances at operations that held amounts denominated in currencies other than their local currencies.
Income tax benefit/expense from continuing operations was a benefit of $5.7 million in 2008 compared to expense of $0.2 million in 2007. Discrete tax adjustments in 2008 were a net expense of $13.0 million and resulted principally from changes in benefit programs and the recording of valuation allowances on net operating loss carryforwards. Discrete tax adjustments in 2007 were a net benefit of $2.7 million and resulted principally from impairment provisions recorded for statutory purposes.
Net loss/income was a loss of $78.4 million for 2008, compared to income of $15.2 million for 2007. Basic earnings per share was a loss of $2.63 for 2008, compared to income of $0.52 for 2007. The 2008 and 2007 earnings/loss per share were reduced by net charges for certain items by $4.71 per share and $1.27 per share, respectively (see Non-GAAP Measures section below).
Paper Machine Clothing Segment
Net sales in the Paper Machine Clothing segment decreased to $728.0 million for 2008 as compared to $747.3 million for 2007. Changes in currency translation rates had the effect of increasing 2008 net sales by $16.7 million. Excluding the effect of changes in currency translation rates, 2008 net sales decreased 4.8% as compared to 2007. The decrease principally relates to the broad economic weakness in the second half of 2008, as PMC 2008 vs. 2007 quarterly sales comparisons showed a decrease of 7.5% in Q3, and 8.7% in Q4, excluding the effect of changes in currency translation rates.
For the full year, 2008 sales were lower in North America and Asia Pacific, but increased in Europe and South America. However, in Q4 2008 all regions were lower than in Q4 2007.
Gross profit as a percentage of net sales was 36.9% for 2008 compared to 38.5% for 2007. The decrease in 2008 was principally due to costs associated with performance improvement initiatives, idle capacity costs at plants being closed, and underutilized capacity at the Company’s new plant in Hangzhou, China.
Operating income excluding the goodwill impairment charge was $84.3 million for 2008, compared to $104.4 million for 2007, as illustrated in Table 5. Segment expenses for restructuring and performance improvement initiatives, as illustrated in Table 3, increased by $23.6 million compared to 2007.
Albany Door Systems Segment
Net sales in the Albany Door Systems segment increased to $189.3 million in 2008, compared to $153.0 million in 2007. Changes in currency translation rates had the effect of increasing net sales by $9.8 million. Excluding the effect of changes in currency translation rates, 2008 net sales increased 17.4% as compared to 2007. Sales of new products continued to accelerate, and the aftermarket business strengthened. Globally, the aftermarket service and parts for high-performance doors grew to $57.2 million in 2008, compared to $48.0 million in 2007.
Net sales in Europe in euros were up 18.0% compared to 2007. This increase was due to continued strength in product sales and growth in the aftermarket. North American net sales increased 8.5 percent compared to 2007, partially due to the acquisition of R-Bac in mid-2007.
32
Gross profit as a percentage of net sales was 32.1% in 2008 and 2007. Product sales, which carry a lower gross profit percentage than aftermarket sales, represented a larger portion of total sales in 2008. Operating income increased $9.9 million to $16.6 million, due to the effect of stronger sales and $2.2 million lower costs for restructuring and performance improvement.
Engineered Fabrics Segment
Net sales in the Engineered Fabrics segment decreased to $101.1 million in 2008, compared to $101.5 million in 2007. Changes in currency translation rates had the effect of increasing net sales by $3.5 million. Excluding the effect of changes in currency translation rates, 2008 net sales decreased 3.9% as compared to 2007.
The recession significantly impacted this segment, with Q3 2008 sales down 8.9% and fourth quarter sales down 4.6%, excluding the effect of changes in currency translation rates.
Gross profit as a percentage of net sales was 34.0% in 2008 compared to 36.3% in 2007. Operating income excluding the goodwill impairment charge decreased from $17.6 million in 2007 to $14.2 million in 2008, as illustrated in Table 5. The decrease reflects lower sales and higher defective work costs in 2008.
Engineered Composites Segment
Net sales in the Engineered Composites segment increased to $46.7 million in 2008, compared to $33.0 million in 2007, an increase of 41.6%. New business opportunities continue to emerge, and include projects that provide both short-term revenue, and potential for long-term growth. Q4 2008 sales were 10.4% higher than the same quarter of 2007, reflecting weakness that was expected to carry into 2009.
Gross profit was a loss of $6.1 million in 2008, including a $3.2 million write-off of inventory and tooling for Eclipse Aviation, which declared bankruptcy in Q4 2008. Segment gross profit was a loss of $1.7 million in 2007. The segment operating loss grew to $20.0 million compared to $6.3 million in 2007. Results for 2008 include a write-off totaling $10.6 million for Eclipse Aviation and $1.0 million for restructuring costs.
PrimaLoft® Products Segment
Net sales in the PrimaLoft® Products segment increased to $21.4 million in 2008, compared to $17.2 million in 2007. Changes in currency translation rates had the effect of increasing net sales by $0.3 million. Excluding the effect of changes in currency translation rates, 2008 net sales increased 22.6% as compared to 2007. The sales growth came during the first three quarters of 2008 and reflected strong sales in outerwear markets.
Gross profit as a percentage of net sales was 44.6% in 2008 compared to 45.9% in 2007. Operating income increased to $3.1 million in 2008 from $2.8 million in 2007. The increase reflects higher sales in 2008.
Backlog
The Company’s order backlog at December 31, 2009, was $365.1 million, a decrease of 13.0% from the prior year-end. The December 31, 2009, backlog by segment was $313.2 million in PMC, $10.7 million in Albany Doors, $17.3 million in Engineered Fabrics, $22.3 million in Engineered Composites, and $1.5 million in PrimaLoft. The backlog as of December 31, 2009, is generally expected to be invoiced during the next 12 months.
International Activities
The Company conducts more than half of its business in countries outside of the United States. As a result, the Company experiences transaction and translation gains and losses because of currency fluctuations. The Company periodically enters into foreign currency contracts to hedge this exposure (see Notes 5, 13, and 16 of Notes to Consolidated Financial Statements). The Company believes that the risks associated with its operations and locations outside the United States are not other than those normally associated with operations in such locations.
33
Liquidity and Capital Resources
Cash Flow Summary — Table 6
|
|
|
|
|||||||||
| For the years ended December 31, | ||||||||||||
| (in thousands) | 2009 | 2008 | 2007 | |||||||||
| Net (loss)/income | ($32,380 | ) | ($78,379 | ) | $ | 15,228 | ||||||
| Changes in working capital | 27,571 | 28,917 | 4,176 | |||||||||
| Other operating items | 18,784 | 133,500 | 61,895 | |||||||||
| Net cash provided by operating activities | 13,975 | 84,038 | 81,299 | |||||||||
| Net cash used in investing activities | (43,647 | ) | (87,590 | ) | (164,231 | ) | ||||||
| Net cash provided by financing activities | 22,092 | 51,808 | 91,041 | |||||||||
| Effect of exchange rate changes on cash flows | (1,525 | ) | (14,990 | ) | (3,041 | ) | ||||||
| (Decrease)/increase in cash and cash equivalents | (9,105 | ) | 33,266 | 5,068 | ||||||||
| Cash and cash equivalents at beginning of year | 106,571 | 73,305 | 68,237 | |||||||||
| Cash and cash equivalents at end of year | $ | 97,466 | $ | 106,571 | $ | 73,305 | ||||||
Operating Activities
Net cash provided by operating activities was $14.0 million in 2009, compared to $84.0 million in 2008, and $81.3 million in 2007.
Depreciation and amortization expense totaled $68.8 million in 2009, $66.0 million in 2008, and $62.4 million in 2007. The Company expects depreciation and amortization to be a total of $68.0 million in 2010.
Changes in working capital in Table 6 above include changes in inventories and accounts receivable. Inventories decreased $42.1 million in 2009, and decreased $6.8 million in 2008 and increased $8.6 million in 2007. Accounts receivable decreased $43.5 million in 2009, decreased $6.8 million in 2008, and increased $10.4 million in 2007. The decreases in inventory and accounts receivable during 2009 and 2008 were due in the part to Company-wide initiatives to reduce working capital. Lower sales during 2009 also contributed to the reductions in accounts receivable. The increase in inventory during 2007 was partially due to building product coverage for certain customers.
Cash payments made in connection with restructuring activities, primarily employee severance payments, were $61.4 million in 2009, $15.4 million in 2008, and $16.6 million in 2007. The Company expects to pay approximately $20.0 million of its December 31, 2009, restructuring accrual during 2010.
Contributions to the United States pension plan amounted to $20.0 million in 2009 and $10.0 million in 2007. No contribution was made during 2008. Including anticipated contributions for all pension plans, the Company estimates that contributions will amount to approximately $12.3 million for 2010. The Company’s U.S. pension plan was approximately $47.0 million underfunded as of December 31, 2009, as measured on a U.S. GAAP basis.
During 2009 the Company disclosed that German tax authorities were challenging certain tax benefits the Company claimed related to a reorganization in 1999. In Q3 2009, a decision made by the German Tax Court to deny benefits in a case involving similar legal issues was successfully appealed by the taxpayer, and remanded back to the Tax Court. It is expected that there will be a final decision by the courts sometime during 2010 that will resolve the legal issue. Despite management’s continued belief that it is more likely than not that the legal basis for the tax authorities’ challenge to the Company’s position will not be sustained, the Company was required to pay approximately $15.0 million to the German tax authorities during Q4 2009 in order to continue to pursue the position. These monies will be returned to the Company if the position is ultimately upheld.
Investing Activities
Capital expenditures were $38.3 million in 2009, $129.5 million in 2008, and $149.2 million in 2007. Capital expenditures were higher in 2008 and 2007, principally due to the PMC strategic investment program that was part of a three-year restructuring and performance improvement plan. Capital expenditures in the
34
PMC segment amounted to $111.6 million in 2008 and $117.5 million in 2007. The Company estimates capital spending for 2010 to range from $50.0 million to $60.0 million, which includes carryover effects of delayed capital spending from 2009 as well as new capital investments for the planned accelerated growth in the AEC business segment.
The Company continues to actively manage for sale a global portfolio of real estate freed up as a result of prior restructuring activities. In Q4 2009, the Company concluded the disposition of a single property for $7.5 million in cash proceeds. Additional proceeds received from any sale of properties in the future should help to offset a portion of remaining restructuring cash payments, although the exact amount or timing of the proceeds to be realized cannot yet be predicted accurately.
In Q3 2009, the Company made a $10.0 million payment representing a partial purchase price return related to its Filtration Technologies business that was sold in July 2008. During 2009, the purchaser asserted that various working capital items included in the sale were improperly valued at the time of sale. As a result, without admitting liability, the Company made the payment in exchange for a broad release of future claims under the purchase agreement or related to the business, including claims of breach of representations or warranties, related indemnity obligations, and certain other post closing obligations of the Company related to the business.
Financing Activities
During 2009 the Company entered into several agreements to exchange its 2.25% Convertible Senior Notes due 2026 for cash plus an equivalent amount of the Company’s 2.25% Senior Notes due 2026 (the “New Notes”), resulting in gains for the extinguishment of debt. In each case, the Company simultaneously entered into additional agreements to purchase the New Notes. Information pertinent to these transactions is noted below:
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|
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| (in thousands) | ||||||||||||||||||||
| Month of agreement |
Month of settlement |
Par value | Book value | Aggregate cost |
Pretax gain on extinguishment of debt |
|||||||||||||||
| March 2009 |
March 2009 | $ | 7,074 | $ | 6,248 | $ | 3,360 | $ | 2,800 | |||||||||||
| April 2009 |
April 2009 | 93,989 | 83,182 | 53,515 | 36,631 | |||||||||||||||
| May 2009 |
July 2009 | 30,500 | 27,183 | 18,887 | 7,906 | |||||||||||||||
| May 2009 |
October 2009 | 20,000 | 17,958 | 13,100 | 4,622 | |||||||||||||||
| Total | $ | 151,563 | $ | 134,571 | $ | 88,862 | $ | 51,959 | ||||||||||||
The cash used to buy the New Notes was provided by the Company’s revolving credit agreement as discussed below under the Capital Resources section. Long-term debt was reduced by $45.7 million (book value less aggregate cost) as a result of these transactions.
Cash dividends per share increased from $0.43 in 2007 to $0.47 in 2008, and to $0.48 in 2009. Accrued dividends as of December 31, 2009 and 2008, were $3.7 million and $3.6 million, respectively. 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, the Company would expect to pay such dividends out of operating cash flow. Future cash dividends will depend on debt covenants and on the Board’s assessment of the Company’s ability to generate sufficient cash flows.
Under “Trends,” management discussed certain recent trends in its paper machine clothing segment that have had a negative impact on demand for the Company’s products within that segment, as well as its strategy for addressing these trends. Management also discussed pricing competition within this segment and the negative effect of such competition on segment sales and earnings. If these trends continue or intensify, and if management’s strategy for addressing them should prove inadequate, the Company’s operating cash flow could be adversely affected. In any event, although historical cash flows may not, for all of these reasons, necessarily be indicative of future cash flows, the Company expects to continue to be able to generate substantial cash from sales of its products and services in future periods.
35
Capital Resources
The Company finances its business activities primarily with cash generated from operations and borrowings, largely through its revolving credit agreement as discussed below. Company 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.
The Company has a $460 million five-year revolving credit agreement (the “Credit Agreement”) that was executed on April 14, 2006, under which $308.0 million was outstanding as of December 31, 2009. In addition, $14.0 million in letters of credit were outstanding under the credit agreement. The applicable interest rate for borrowings under the agreement is LIBOR plus a spread, based on the Company’s leverage ratio at the time of borrowing. The existing terms of the Company’s credit agreement expire in April 2011.
The Company also has a $150 million borrowing from Prudential Capital Group. The principal is due in three installments of $50 million each in 2013, 2015, and 2017, and the interest rate is fixed at 6.84%.
Reflecting, in each case, the effect of subsequent amendments to each agreement, the Company is currently required to maintain a leverage ratio of not greater than 3.50 to 1.00 under the Credit Agreement and under the Prudential Agreement. Under the Prudential Agreement, the maximum permitted leverage ratio will be reduced to 3.00 to 1.00 on January 1, 2011. The Company is also required to maintain minimum interest coverage of 3.00 to 1.00 under each agreement. As of December 31, 2009, the Company’s leverage ratio under the agreement was 2.07 to 1.00, and the interest coverage ratio was 7.95 to 1.00. The Company may purchase its Common Stock or pay dividends to the extent its leverage ratio remains at or below 3.50 to 1.00, and may make acquisitions for cash provided its leverage ratio would not exceed 3.00 to 1.00 after giving pro forma effect to the acquisition. The Company’s 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. Based on the maximum leverage ratio and the Company’s consolidated EBITDA (as defined in the agreement), and without modification to any other credit agreements as of December 31, 2009, the Company would have been able to borrow an additional $138 million under its credit agreements.
If the Company’s earnings were to decline as a result of continued difficult market conditions or for other reasons, it may impact the Company’s ability to maintain compliance with these covenants. If the Company determined that its compliance with these covenants may be under pressure, the Company may elect to take a number of actions, including reducing expenses in order to increase earnings, using available cash to repay all or a portion of the outstanding debt subject to these covenants, or seeking to negotiate with lenders to modify the terms or to restructure the debt. Using available cash to repay indebtedness would make the cash unavailable for other uses and might affect the liquidity discussions and conclusions above. Entering into any modification or restructuring of the Company’s debt would likely result in additional fees or interest payments.
Prior to 2009, the Company had $180 million principal amount of 2.25% convertible notes that were issued in March 2006. As of December 31, 2009, $28.4 million principal amount of convertible notes were outstanding, which reflects the reduction in principal amount as a result of the purchases made in March, April, July, and October 2009 as described above in the Financing Activities section.
The Company issued letters of credit totaling $47.4 million in respect of preliminary assessments for income tax contingencies, of which $14.0 million was drawn from the Company’s credit agreement. Income tax contingencies are more fully described in Note 7 of Notes to Consolidated Financial Statements.
The Company is the owner and beneficiary of life insurance policies on certain present and former employees. The Company reports the cash surrender value of life insurance, net of any outstanding loans, as a separate noncurrent asset. The year-end cash surrender value of life insurance policies was $49.1 million in 2009, $47.4 million in 2008, and $43.7 million in 2007. The rate of return on the policies varies with market conditions and was approximately 5.2% in 2009 and 6.5% in 2008 and 2007. The Company may convert the cash surrender value of these policies to cash at any time, by either surrendering the policies or borrowing against the cash value of the policies.
As of December 31, 2009, the Company was in compliance with the covenants of debt and credit agreements. When considering debt covenants, the Company continues to have substantial borrowing capacity. A combination of continued strong underlying operating performance by the Company, and a stabilization or
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improvement in the capital markets, positions the Company well for obtaining favorable terms for a refinancing of the current credit agreement sometime in the second half of 2010, albeit likely at a higher cost of borrowing.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.
Contractual Obligations
As of December 31, 2009, the Company had the following cash flow obligations:
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| Payments Due by Period | ||||||||||||||||||||
| (in millions) | Total | Less than one year |
One to three years |
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| Total debt | $ | 499.2 | $ | 15.3 | $ | 308.0 | $ | 75.9 | $ | 100.0 | ||||||||||
| Interest payments (a) | 67.7 | 15.8 | 23.2 | 16.5 | 12.2 | |||||||||||||||
| Pension plan contributions (b) | 12.3 | 12.3 | — | — | — | |||||||||||||||
| Other postretirement benefits (c) | 65.4 | 6.1 | 11.5 | 10.8 | 37.0 | |||||||||||||||
| Restructuring accruals | 20.5 | 20.0 | 0.5 | — | — | |||||||||||||||
| Other noncurrent liabilities (d) | — | — | — | — | — | |||||||||||||||
| Operating leases | 18.3 | 7.5 | 7.7 | 2.8 | 0.3 | |||||||||||||||
| Totals | $ | 683.4 | $ | 77.0 | $ | 350.9 | $ | 106.0 | $ | 149.5 | ||||||||||
| (a) | The terms of variable-rate debt arrangements, including interest rates and maturities, are included in Note 12 of Notes to Consolidated Financial Statements. The interest payments are based on the assumption that the Company maintains $308.0 million of variable rate debt until the April 2006 credit agreement matures on April 14, 2011, and the rate as of December 31, 2009 (1.35%) continues until maturity. |
| (b) | The Company’s 2010 contribution to defined benefit pension plans is estimated to be $12.3 million. However, that estimate is subject to revision based on many factors. The amount of contributions after 2010 is subject to many variables, including return of pension plan assets, interest rates, and tax and employee benefit laws. Therefore, contributions beyond 2010 are not included in this schedule. |
| (c) | Estimated cash outflow for other postretirement benefits is consistent with the expected benefit payments as presented in Note 3 of Notes to Consolidated Financial Statements. |
| (d) | Estimated payments for deferred compensation, taxes, and other noncurrent liabilities are not included in this table due to the uncertain timing of the ultimate cash settlement. |
The foregoing table should not be deemed to represent all of the Company’s future cash requirements, which will vary based on the Company’s future needs. While the cash required to satisfy the obligations set forth in the table is reasonably determinable in advance, many other cash needs, such as raw materials costs, payroll, and taxes, are dependent on future events and are harder to predict. In addition, while the contingencies described in Note 15 of Notes to Consolidated Financial Statements are not currently anticipated to have a material adverse effect on the Company, there can be no assurance that this will be the case. Subject to the foregoing, the Company currently expects that cash from operations and the other sources of liquidity described above will be sufficient to enable it to meet the foregoing cash obligations, as well as to meet its other cash requirements.
Recent Accounting Pronouncements
In October 2009, the FASB amended authoritative guidance related to accounting and disclosure of revenue recognition for multiple-element arrangements. This guidance provides principles for allocation of consideration among multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. This guidance introduces an estimated selling price method for allocating revenue to the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This is effective on
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a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.
In January 2010, the FASB issued guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements, including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. The guidance is effective for reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures that are effective for periods beginning after December 15, 2010. It is expected that the adoption of this guidance will not have a material effect on the Company’s financial statements.
Critical Accounting Policies and Assumptions
The following should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
The Company’s discussion and analysis of its financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Some of these estimates require judgments about matters that are inherently uncertain.
Revenue Recognition
The Company records sales when persuasive evidence of an arrangement exists, delivery has occurred, title has been transferred, the selling price is fixed, and collectability is reasonably assured. The timing of revenue recognition is dependent upon the contractual arrangement between the Company and its customers. These arrangements, which may include provisions for transfer of title and guarantees of workmanship, are specific to each customer. Some of these contracts provide for title transfer upon delivery, or upon reaching a specific date, while other contracts provide for title transfer to occur upon consumption of the product. Sales contracts in the Albany Door Systems segment may include product and installation services. For years through 2009, revenue for the entire contract value was recognized upon completion of installation services. The Company expects this policy to change when it adopts the recently issued accounting guidance.
The Company limits the concentration of credit risk in receivables by closely monitoring credit and collection policies. The Company records allowances for sales returns as a deduction in the computation of net sales. Such provisions are recorded on the basis of written communication with customers and/or historical experience.
Products and services provided under long-term contracts represent a significant portion of sales in the Engineered Composites segment. The Company uses the percentage of completion method for accounting for these projects. That method requires significant judgment and estimation, which could be considerably different if the underlying circumstances were to change. When adjustments in estimated contract revenues or costs are required, any changes from prior estimates are included in earnings in the current period. Additionally, the fact that these projects are long-term could increase the chance that a party to the contract may be unable to fulfill its obligations.
Restructuring Charges
The Company may incur expenses related to restructuring of its operations, which could include employee termination costs, costs to consolidate or close facilities, or costs to terminate contractual relationships. Employee termination costs include the severance pay and social costs for periods after employee service is completed. Termination costs related to an ongoing benefit arrangement are recognized when the amount becomes probable and estimable. Termination costs related to a one-time benefit arrangement are recognized at the communication date to employees. Costs related to contract termination, relocation of employees, and the consolidation or the closure of facilities are recognized when incurred.
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Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. 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.
Reserves for Inventory Impairment
The Company maintains reserves for possible impairment in the value of inventories. Such reserves can be specific to certain inventory, or general based on judgments about the overall condition of the inventory. General reserves are established based on percentage write-downs applied to aged inventories, or for inventories that are slow-moving. If actual results differ from estimates, additional inventory write-downs may be necessary. These general reserves for aged inventory are relieved through income only when the inventory is sold.
Property, Plant, and Equipment (PP&E)
PP&E is recorded at cost, which is generally objectively quantifiable when assets are purchased singly. However, when assets are purchased in groups, as would be the case for a business acquisition, costs assigned to PP&E are based on an estimate of fair value of each asset at the date of acquisition. These estimates are based on assumptions about asset condition, remaining useful life and market conditions. The Company may employ appraisers to aid in allocating cost to assets purchased as a group. Included in the cost basis of PP&E are those costs that substantially increase the useful lives or capacity of existing PP&E. Significant judgment is needed to determine which costs should be capitalized under these criteria, and which should be expensed as repairs and maintenance costs. Economic useful life is the duration of time an asset is expected to be productively employed by the Company, which may be less than its physical life. Management’s estimate of useful life is monitored to determine its appropriateness, especially in light of changed business circumstances. Changes in these estimates that affect PP&E could have a significant impact on the Company’s financial statements. However, significant adjustments have not been required in recent years. Management also monitors changes in business conditions and events such as a plant closure that could indicate that PP&E asset values are impaired. The determination of asset impairment involves significant judgment about market values and future cash flows.
Goodwill
Goodwill impairment exists when the carrying amount of goodwill exceeds its fair value. Assessments of possible impairment of goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of recorded goodwill and certain intangible asset balances is required annually. The amount and timing of any impairment charges based on these assessments require the estimation of future cash flows and the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes; operating, raw material, energy, and freight costs; and various other projected operating and economic factors. When testing, fair values of the reporting units and the related implied fair values of their respective goodwill are established using public company analysis and discounted cash flows.
Health Care Liabilities
The Company is self-insured for some employee and business risks, including health care and workers compensation programs in the United States. Losses under all of these programs are accrued based upon estimates of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries and service providers. However, these liabilities are difficult to assess and estimate due to unknown factors, including the severity of an illness or injury and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals to be adequate. If actual results significantly differ from estimates used to calculate the liability, the Company’s financial condition, results of operations and cash flows could be materially impacted.
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Pension and Postretirement Liabilities
The Company has pension and postretirement benefit costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and expected return on plan assets, which are updated on an annual basis. The Company is required to consider current market conditions, including changes in interest rates, in making these assumptions. Changes in the related pension and postretirement benefit costs or credits may occur in the future due to changes in the assumptions. The amount of annual pension plan funding and annual expense is subject to many variables, including the investment return on pension plan assets and interest rates. Assumptions used for determining pension plan liabilities and expenses are evaluated and updated at least annually.
The largest benefit plans are the U.S. pension plan and the U.S. postretirement benefits plan, which account for 49.9% and 17.0% of the total Company benefit obligations as of December 31, 2009. Discount rate assumptions are based on the population of plan participants and a mixture of high-quality fixed income investments for which the average maturity approximates the average remaining service period of plan participants. The largest portion of U.S. plan assets (45%) were invested in debt securities and the largest portion of non-U.S. plan assets (64%) were invested in equity securities.
The assumption for expected return on plan assets is based on historical and expected returns on various categories of plan assets. The largest of the funded defined benefit plans is the U.S. plan, which accounts for 66% of the Company’s pension plan assets. The actual return on assets in the U.S. pension plan for 2009 was 17.9% compared to an assumed rate of return of 8.5% for that year.
During 2009, the Company changed its investment strategy for the Unites States pension plan by adopting a liability-driven investment strategy. Under this arrangement, the Company seeks to invest in assets that track closely to the discount rate that is used to measure the plan liabilities. Accordingly, the plan assets will primarily comprise debt securities. As of December 31, 2009, the Company was in the midst of transitioning from its prior strategy of maximizing total return while maintaining adequate balance of liquidity and investment risk. The change in investment strategy is reflective of the Company’s 2008 decision to freeze benefit accruals under the plan. As of result of this change in strategy, the Company has changed its expected return on U.S. plan assets to 6.1% for 2010.
For the U.S. pension plan, 2009 pension expense and the benefit obligation as of December 31, 2009, were calculated using the RP-2000 Combined Healthy Mortality Table projected to 2016 using Scale AA with phase-out and without collar adjustment. Weakness in investment returns and low interest rates, or deviations in results from other assumptions, could result in the Company making equal or greater pension plan contributions in future years, as compared to 2009.
Deferred Taxes
The Company records deferred income tax assets and liabilities for the tax consequences of differences between financial statement and tax bases of existing assets and liabilities. A tax valuation allowance is established, as needed, to reduce net deferred tax assets to the amount expected to be realized. In the event it becomes more likely than not that some or all of the deferred tax asset allowances will not be needed, the valuation allowance will be adjusted. Management judgment is required to determine income tax expense and the related balance sheet amounts. Judgments are required concerning the ultimate outcome of tax contingencies and the realization of deferred tax assets. Actual income taxes paid may differ from estimates, depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by authorities. Additionally, tax assessments may arise several years after the tax returns have been filed. The Company believes its recorded tax liabilities adequately provide for the estimated outcome of these assessments.
Contingencies
The Company has contingent liabilities for litigation, claims, and assessments that result from the ordinary course of business. These matters are more fully described in Note 15 to the Consolidated Financial Statements.
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Financial Assets and Liabilities
The Company has certain financial assets and liabilities that are measured at fair-value on a recurring basis, in accordance with the applicable accounting guidance. Fair-values are based on assumptions that market participants would use in pricing an asset or liability, which include review of observable inputs, market quotes, and assumptions of expected cash flows. In certain cases this determination of value may require some level of valuation analysis, interpretation of information, and judgment. As these key observable inputs and assumptions change in future periods, the Company will update its valuation to reflect market conditions.
The Company may enter into hedging transactions from time to time in order to mitigate volatility in cash flows, which can be caused by changes in currency exchange rates. To qualify for hedge accounting under the applicable accounting guidance, the hedging relationship between the hedging instrument and the hedged item must be effective in achieving the offset of changes that are attributable to the hedged risk, both at the inception of the hedge and on a continuing basis until maturity or settlement of the hedging instrument. Hedge effectiveness, which would be tested by the Company periodically, is dependent upon market factors and changes in currency exchange rates, which are unpredictable. In the event that the hedged item falls below the hedging instrument, any gains and losses related to the ineffective portion of the hedge will be recognized in the current period in earnings.
Outlook
Some of the forgoing paragraphs make reference to Adjusted EBITDA, which is a non-GAAP measure (see Non-GAAP Measures below).
In Q4 2009, sales grew 6 percent compared to Q3 2009, the first significant sequential quarter growth since Q2 2008. The growth was led by Asia and South America PMC, which grew 23 and 25 percent, respectively, and by ADS, which grew 20%. Q4 2009 Adjusted EBITDA grew to $41.0 million, compared to $34.1 million in Q3 2009.
In the Company’s Q3 2009 earnings release, management reported that most of the cost reductions associated with the restructuring of the past three years had already flowed through earnings. The improvement in Q4 2009 Adjusted EBITDA reflects the impact of higher sales flowing through the now fundamentally lower cost structure.
Affecting the sustainability of the Company’s improvement in Adjusted EBITDA in the near term, will be higher 2010 pension costs, and higher STG&R costs in the Company’s AEC business segment. Management expects pension costs to rise by $2.0 million per quarter in 2010. In order to keep up with the accelerating and steep scale-up of the business in AEC, management expects STG&R expenses to increase by $1.5 million per quarter.
While 2009 marks the conclusion of the Company’s three-year restructuring program, management expects some residual restructuring-related expenses to continue into 2010. Those residual expenses primarily consist of roughly $3.0 million in equipment relocation costs, which are expected to be incurred over the course of the first half of 2010. Management also expects $1.0 million per quarter during 2010 in SAP implementation costs, which will extend through the first quarter of 2011.
The short-term outlook for sales is complicated by seasonal fluctuations, which had a significant impact on Q4 2009 results. ADS sales increased 20% during Q4 2009 over Q3 2009 and accounted for nearly half of the consolidated sales growth for Q4 2009. The surge appears to have been driven by normal end-of-year seasonal effects. Management therefore expects ADS sales in the first half of 2010 to fall back to Q3 2009 levels, and to grow above these levels only when European, and especially German, gross national product (GNP) begins to recover.
While it is often difficult to predict seasonality in the PMC segment, management expects the slowdown in shipments at the end of 2009 to lead to a sluggish start to Q1 2010. Moreover, as China accounts for an increasingly large fraction of global PMC sales, the seasonal impact of the slowdown in production associated with the Chinese New Year will also increase.
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Seasonal effects have always had an impact on revenue in PMC. While the Q4 seasonal slowdown was not as pronounced in 2009 as it has been in the past, management expects the slowdown in shipments at the end of 2009 to lead to a sluggish start to Q1 2010. Moreover, as China accounts for an increasingly large fraction of global PMC sales, the seasonal impact of the slowdown in production associated with the Chinese New Year will also increase.
Apart from seasonal fluctuations, sales and order trends in Q4 2009 suggest the PMC and ADS markets are stabilizing and that the residual risk of another step-down in sales, which management had expressed concern about in previous quarters, is diminishing. Management saw similar patterns in Q4 2009 sales and orders in the Company’s other businesses.
Overall, the markets in which the Company’s businesses operate appear to have stabilized, the effects of recession are receding, and most of the remaining uncertainty in the short-term outlook is about the pace and shape of recovery. AEC and PrimaLoft® Products appear on their way to V-shaped recoveries, while the rate of growth in EF and ADS in 2010 will be determined in large measure by the rate of growth of the GNP in North America and Europe.
With the recession seemingly in the past and the three-year restructuring program at an end, the Company’s longer term outlook returns to the focus on the strategy of cash and grow.
Before the recession, management viewed the Company as a portfolio of advanced textiles and materials businesses which, in combination, generate the cash required to invest in growth, reinvest in the core businesses, continue to pay down debt, and continue to deliver dividends, while at the same time, generating the near-, medium-, and long-term growth required to drive shareholder returns.
The cash and grow portfolio comprises three components: PMC, which is the primary cash generator of the Company; ADS, EF, and PrimaLoft®, which in normal economic conditions grow and generate cash; and AEC, which management is striving to build into a core business by the second half of the decade, but at the same time is expected to be cash flow negative at least through the first half of the decade.
The longer term outlook for PMC business is well positioned for sustained long-term cash generation with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development and field services.
Management sees both upside and downside risk in PMC. On the upside, because of the fundamentally lower cost structure, any incremental growth in PMC sales should result in an even greater incremental growth in PMC earnings. This effect was seen in Q4 2009. On the downside is the familiar risk of erosion of PMC pricing. The risk of pricing instability is greatest when major contracts are being renegotiated; one such renegotiation is scheduled for this summer.
The second component of the cash and grow portfolio is the group of businesses that grow and generate cash. While ADS, EF, and PrimaLoft® Products are all sensitive to the economic cycle, if the global economy returns to a period of steady, slow growth, management expects these businesses to become significant contributors to improvement in Company earnings over the next three to five years. All three businesses have reduced fixed costs during the recession, which should have a positive impact on their profitability as they grow.
The third component of cash and grow is AEC, which management views as a future core business of the Company. Management believes that AEC has the potential to double from Q3 2009 sales levels in 8 to 10 quarters.
Looking beyond the next 8 to 10 quarters, management expects a continuation of rapid growth, fueled by a combination of increased sales from existing growth programs, including the main landing gear brace for the Boeing 787 Dreamliner and critical components for the LiftFan® for the F-35B Joint Strike Fighter aircraft, and the commercial introduction of new products that are currently under development. The single largest of these potential contributors to AEC growth for the foreseeable future is the LEAP-X engine on which management is working closely with the Safran Group on fan blades and other engine components. During Q4 2009, the Company reported the selection of the LEAP-X1C to power COMAC’s (Commercial Aircraft Corporation of China, Ltd.) new single-aisle aircraft, the C919, which should translate into
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larger-than-anticipated growth in AEC sales as early as 2014. The potential for even further increases in sales associated with the LEAP-X engine during this time frame and beyond depends on the extent to which the LEAP-X platform is adopted for use on other short- to medium-range narrow-body aircraft entering the market later this decade.
Management currently estimates that the revenue opportunity for the composite components that the Company is developing for the LEAP-X to be substantially in excess of $100,000 per engine.
Because of the expected higher growth curve in AEC, and the required increases in fixed costs and investment, management expects this business to be cash flow negative through the first half of the decade. But even with the investments of capital required to grow this business, management expects the total of capital expenditures for the Company through this period of negative AEC cash flow to be roughly equal to depreciation and amortization, with at least half of this capital directed at AEC growth.
In 2010, the Company’s strategic focus shifts from restructuring and recession to cash and grow. The strong results in Q4 2009, as compared to other quarters in 2009, were the direct consequence of restructuring and suggest that the Company has achieved the goal that was set at the outset of the recession to generate as much operating income in 2010 as in 2008, even if sales remain well below 2008 levels. In this next phase of Company’s strategic evolution, the focus shifts to preserving PMC’s cash-generating capability, while accelerating short-term growth in ADS, EF, and PrimaLoft® and making the necessary investments now to ensure that AEC is a new core business by the second half of the decade.
Non-GAAP Measures
This Form 10-K contains certain items, such as earnings before interest, taxes, depreciation, and amortization (EBITDA) costs associated with restructuring and performance improvement initiatives, Adjusted EBITDA, sales excluding currency effects, and certain income and expense items on a per share basis, that could be considered non-GAAP financial measures. Such items are provided because management believes that, when presented together with the GAAP items to which they relate, they provide additional useful information to investors regarding the registrant’s operational performance. Presenting increases or decreases in sales after currency effects are excluded can give management and investors insight into underlying sales trends. An understanding of the impact in a particular quarter of specific restructuring and performance improvement measures, of the costs associated with the implementation of such measures, changes in tax rates, discrete tax items, and certain other gains, losses, or costs on the Company’s net income (both absolute and on a per share basis), operating income, operating margins, and EBITDA can give management and investors additional insight into quarterly performance, especially when compared to quarters in which such items had a greater or lesser effect, or no effect.
The effect of changes in currency translation rates is calculated by converting amounts reported in local currencies into U.S. dollars at the exchange rate of a prior period. That amount is then compared to the U.S. dollar amount reported in the current period. The Company calculates EBITDA by adding Interest expense net, Income taxes, Depreciation, and Amortization to Net income. Adjusted EBITDA is calculated by adding to EBITDA the costs associated with restructuring and performance improvement initiatives, and then adding or subtracting certain specified losses or gains. The Company believes that EBITDA and Adjusted EBITDA provide useful information to investors because they provide an indication of the strength and performance of the Company’s ongoing business operations. While depreciation and amortization are operating costs under GAAP, they are noncash expenses equal to current period allocation of costs associated with capital and other long-lived investments made in prior periods. While the Company will continue to make capital and other investments in the future, it is currently in the process of concluding a period of significant investment in plant, equipment, and software. Depreciation and amortization associated with these investments have a significant impact on the Company’s net income. While certain other losses or gains have an impact on the Company’s cash position, and may or may not recur in future periods, they are removed when calculating Adjusted EBITDA because doing so provides, in the opinion of the Company, a better measure of operating performance, especially during the intense three-year period of restructuring that was completed in 2009. EBITDA is also a calculation commonly used by investors and analysts to evaluate and compare the periodic and future operating performance and value of companies. EBITDA, as defined by the Company, may not be similar to EBITDA measures of other companies. Neither EBITDA nor Adjusted EBITDA are measurements
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under GAAP and should be considered in addition to, but not as a substitute for, the information contained in the Company’s statements of operations.
The following tables contain the calculation of EBITDA and Adjusted EBITDA:
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| Years ended December 31, | ||||||||||||
| (in thousands) | 2009 | 2008 | 2007 | |||||||||
| Net income/(loss) | ($32,380) | ($78,379 | ) | $ | 15,228 | |||||||
| Interest expense, net | 20,627 | 23,477 | 19,232 | |||||||||
| Income tax expense/(benefit) | 15,579 | (6,823 | ) | 572 | ||||||||
| Depreciation | 60,254 | 59,970 | 57,397 | |||||||||
| Amortization | 8,572 | 6,027 | 4,971 | |||||||||
| EBITDA | $ | 72,652 | $ | 4,272 | $ | 97,400 | ||||||
| Restructuring and other, net | 69,168 | 38,653 | 27,625 | |||||||||
| Goodwill impairment charge | — | 72,305 | — | |||||||||
| Idle-capacity costs | 12,069 | 4,202 | 4,783 | |||||||||
| Assets scrapped at facilities closing | 720 | — | 136 | |||||||||
| Equipment relocation | 7,767 | 14,816 | 3,765 | |||||||||
| SAP implementation costs | 5,926 | 14,919 | 7,604 | |||||||||
| Contract termination costs | 894 | — | — | |||||||||
| Underutilized capacity in new plant | 2,919 | 7,967 | 1,945 | |||||||||
| Employee terminations not included in restructuring | — | 1,596 | 6,437 | |||||||||
| Costs added to global procurement initiative | — | 2,506 | 1,800 | |||||||||
| Depreciation included in idle capacity and performance improvement costs | (2,252) | (1,258 | ) | — | ||||||||
| Gain on extinguishment of debt | (51,959) | — | ||||||||||
| Gain on sale of building | — | (2,200 | ) | (230 | ) | |||||||
| Loss/(gain) on sale of discontinued operations | 10,000 | (5,413 | ) | — | ||||||||
| Adjusted EBITDA | $ | 127,904 | $ | 152,365 | $ | 151,265 | ||||||
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| Three Months ended | ||||||||||||
| December 31, | September 30, |
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| (in thousands) | 2009 | 2008 | 2009 | |||||||||
| Net income/(loss) | $ | 5,527 | ($81,613 | ) | ($6,264 | ) | ||||||
| Interest expense, net | 3,935 | 6,523 | 4,772 | |||||||||
| Income tax expense/(benefit) | 11,763 | (17,368 | ) | 1,080 | ||||||||
| Depreciation | 15,342 | 16,352 | 15,819 | |||||||||
| Amortization | 2,115 | 1,637 | 2,051 | |||||||||
| EBITDA | 38,682 | (74,469 | ) | 17,458 | ||||||||
| Restructuring and other, net | (2,052) | 24,828 | 20,231 | |||||||||
| Goodwill impairment charge | — | 72,305 | — | |||||||||
| Idle-capacity costs | 3,268 | 764 | 2,623 | |||||||||
| Assets scrapped at facilities closing | 720 | — | — | |||||||||
| Equipment relocation | 4,015 | 5,572 | 411 | |||||||||
| SAP implementation costs | 1,066 | 2,635 | 1,286 | |||||||||
| Contract termination costs | — | — | 198 | |||||||||
| Underutilized capacity in new plant | — | 2,332 | — | |||||||||
| Employee terminations not included in restructuring | — | 114 | — | |||||||||
| Depreciation included in idle capacity and performance improvement costs | (196) | (1,258 | ) | (231 | ) | |||||||
| Gain on extinguishment of debt | (4,622) | — | (7,914 | ) | ||||||||
| Gain on sale of building | — | (2,200 | ) | — | ||||||||
| Loss on sale of discontinued operations | — | 721 | — | |||||||||
| Adjusted EBITDA | $ | 40,881 | $ | 31,344 | $ | 34,062 | ||||||
44
The Company discloses certain income and expense items on a per share basis. The Company believes that such disclosures provide important insight of the underlying quarterly earnings and are financial performance metrics commonly used by investors. The Company calculates the per share amount for items included in continuing operations by using the effective tax rate utilized during the applicable reporting period and the weighted average number of shares outstanding for the period.
|
|
|
|
|
|
|||||||||||||||
| Year ended December 31, 2009 (in thousands, except per share data) |
Pretax amounts |
Tax effect | After-tax effect |
Shares outstanding |
Per share effect |
|||||||||||||||
| Restructuring and other, net | $ | 69,168 | $ | 13,156 | $ | 56,012 | 30,612 | $ | 1.83 | |||||||||||
| Expenses for idle-capacity, equipment scrapped, equipment relocation, and SAP implementation | 30,295 | 5,762 | 24,533 | 30,612 | 0.80 | |||||||||||||||
| Gain on extinguishment of debt | (51,959 | ) | (20,264 | ) | (31,695 | ) | 30,612 | (1.04 | ) | |||||||||||
| Charges for intangible impairment error | 1,011 | 394 | 617 | 30,612 | 0.02 | |||||||||||||||
| Filtration settlement accrual | 10,000 | — | 10,000 | 30,612 | 0.33 | |||||||||||||||
| Discrete tax items | — | 6,371 | 6,371 | 30,612 | 0.21 | |||||||||||||||
| Total | $ | 2.15 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
| Year ended December 31, 2008 (in thousands, except per share data) |
Pretax amounts |
Tax effect | After-tax effect |
Shares outstanding |
Per share effect |
|||||||||||||||
| Restructuring and other, net | $ | 38,653 | $ | 7,344 | $ | 31,309 | 29,786 | $ | 1.05 | |||||||||||
| Expenses for idle-capacity, equipment scrapped, equipment relocation, SAP implementation, and employee terminations not included in restructuring | 46,006 | 8,741 | 37,265 | 29,786 | 1.25 | |||||||||||||||
| Gain on sale of Filtration business | (5,413 | ) | — | (5,413 | ) | 29,786 | (0.18 | ) | ||||||||||||
| Gain on sale of building | (2,200 | ) | (1,009 | ) | (1,191 | ) | 29,786 | (0.04 | ) | |||||||||||
| Goodwill impairment charge | 72,305 | 7,156 | 65,149 | 29,786 | 2.19 | |||||||||||||||
| Discrete tax items | — | 13,000 | 13,000 | 29,786 | 0.44 | |||||||||||||||
| Total | $ | 4.71 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
| Year ended December 31, 2007 (in thousands, except per share data) |
Pretax amounts |
Tax effect | After-tax effect |
Shares outstanding |
Per share effect |
|||||||||||||||
| Restructuring and other, net | $ | 27,625 | $ | 6,906 | $ | 20,719 | 29,421 | $ | 0.70 | |||||||||||
| Expenses for idle-capacity, equipment scrapped, equipment relocation, SAP implementation, and employee terminations not included in restructuring | 26,470 | 6,618 | 19,853 | 29,421 | 0.67 | |||||||||||||||
| Gain on sale of building | (230 | ) | (58 | ) | (173 | ) | 29,421 | (0.01 | ) | |||||||||||
| Discrete tax items | (2,723 | ) | (2,723 | ) | 29,421 | (0.09 | ) | |||||||||||||
| Total | $ | 1.27 | ||||||||||||||||||
45
| Item 7a. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Foreign Currency Exchange Rate Risk
The Company has market risk with respect to foreign currency exchange rates and interest rates. The market risk is the potential loss arising from adverse changes in these rates as discussed below.
The Company has manufacturing plants and sales transactions worldwide and therefore is subject to foreign currency risk. This risk is composed of both potential losses from the translation of foreign currency financial statements and the remeasurement of foreign currency transactions. To manage this risk, the Company periodically enters into forward exchange contracts either to hedge the net assets of a foreign investment or to provide an economic hedge against future cash flows. The total net assets of non-U.S. operations and long-term intercompany loans denominated in nonfunctional currencies subject to potential loss amount to approximately $689 million. The potential loss in fair value resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounts to $68.9 million. Furthermore, related to foreign currency transactions, the Company has exposure to nonfunctional currency balances totaling $103.7 million. This amount includes, on an absolute basis, exposures to foreign currency assets and liabilities. On a net basis, the Company had approximately $43.5 million of foreign currency liabilities as of December 31, 2009. As currency rates change, these nonfunctional currency balances are revalued, and the corresponding adjustment is recorded in the income statement. A hypothetical change of 10% in currency rates could result in an adjustment to the income statement of approximately $4.4 million. Actual results may differ.
Interest Rate Risk
The Company is exposed to interest rate fluctuations with respect to its variable rate debt, depending on general economic conditions.
On December 31, 2009, the Company had the following variable rate debt:
|
|
|||
| (in thousands, except interest rates) | ||||
| Short-term debt |
||||
| Notes payable, average interest rate of 3.58% | $ | 15,296 | ||
| Long-term debt |
||||
| April 2006 credit agreement with borrowings outstanding at an average interest rate of 1.35% in 2009, and 1.93% in 2008 |
308,000 | |||
| Various notes and mortgages relative to operations principally outside the United States, at an average rate of 4.85% in 2009, and 4.84% in 2008, due in varying amounts through 2021 |
212 | |||
| Total | $ | 323,508 | ||
Assuming borrowings were outstanding for an entire year, an increase/decrease of one percentage point in weighted average interest rates would increase/decrease interest expense by $3.2 million. To manage interest rate risk, the Company will periodically enter into interest rate swap agreements to effectively fix the interest rates on variable debt to a specific rate for a period of time. As of December 31, 2009, the Company had no such swap agreements in place.
46
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
47
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Albany International Corp.:
In our opinion, the consolidated financial statements listed in the accompanying index, present fairly, in all material respects, the financial position of Albany International Corp. and its subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements the Company changed the manner in which it accounts for uncertain tax positions in 2007 and the manner in which it accounts for convertible debt in 2009.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Albany, NY
March 11, 2010
48
Albany International Corp.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the years ended December 31,
(in thousands, except per share amounts)
|
|
|
|
|||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Statements of Income |
||||||||||||
| Net sales | $ | 871,045 | $ | 1,086,517 | $ | 1,051,903 | ||||||
| Cost of goods sold | 577,135 | 724,484 | 679,612 | |||||||||
| Gross profit | 293,910 | 362,033 | 372,291 | |||||||||
| Selling and general expenses | 205,089 | 251,506 | 244,104 | |||||||||
| Technical, product engineering, and research expenses | 54,964 | 66,486 | 67,366 | |||||||||
| Restructuring and other | 69,168 | 38,653 | 27,625 | |||||||||
| Goodwill and intangible impairment charge | 1,011 | 72,305 | — | |||||||||
| Operating (loss)/income | (36,322) | (66,917 | ) | 33,196 | ||||||||
| Interest income | (741) | (1,876 | ) | (1,635 | ) | |||||||
| Interest expense | 21,368 | 25,353 | 20,867 | |||||||||
| Other (income)/expense, net | (49,871) | 296 | 251 | |||||||||
| (Loss)/income before income taxes | (7,078) | (90,690 | ) | 13,713 | ||||||||
| Income tax expense/(benefit) | 15,579 | (5,666 | ) | 230 | ||||||||
| (Loss)/income before equity in earnings of associated companies | (22,657) |
(85,024 | ) | 13,483 | ||||||||
| Equity in earnings/(losses) of associated companies | 277 | 166 | (106 | ) | ||||||||
| (Loss)/income from continuing operations | (22,380) | (84,858 | ) | 13,377 | ||||||||
| (Loss)/income from discontinued operations | (10,000) | 5,322 | 2,193 | |||||||||
| Income tax (benefit)/expense | — | (1,157 | ) | 342 | ||||||||
| (Loss)/income from discontinued operations | (10,000) | 6,479 | 1,851 | |||||||||
| Net (loss)/income | (32,380) | (78,379 | ) | 15,228 | ||||||||
| Retained earnings |
||||||||||||
| Retained earnings, beginning of year | 429,804 | 523,306 | 523,234 | |||||||||
| Cumulative effect of adopting FIN 48 (see Note 7) | — | — | (2,491 | ) | ||||||||
| Cumulative effect of change in pension plan measurement date (see Note 3) | — | (1,105 | ) | — | ||||||||
| Less dividends declared | (14,704) | (14,018 | ) | (12,665 | ) | |||||||
| Retained earnings, end of year | $ | 382,720 | $ | 429,804 | $ | 523,306 | ||||||
| Earnings per share: |
||||||||||||
| Basic | ($1.06) | ($2.63 | ) | $ | 0.52 | |||||||
| Diluted | ($1.06) | ($2.63 | ) | $ | 0.51 | |||||||
| Dividends declared per share | $ | 0.48 | $ | 0.47 | $ | 0.43 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
49
Albany International Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31,
(in thousands)
|
|
|
|
|||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Net (loss)/income | ($32,380) | ($78,379 | ) | $ | 15,228 | |||||||
| Other comprehensive income/(loss), before tax: |
||||||||||||
| Foreign currency translation adjustments | 38,363 | (76,506 | ) | 60,556 | ||||||||
| Pension and postretirement liability adjustments | (30,758) | (19,771 | ) | 41,009 | ||||||||
| Derivative valuation adjustment | — | (2,566 | ) | 2,566 | ||||||||
| Income taxes related to items of other comprehensive income/(loss): |
||||||||||||
| Pension and postretirement liability adjustments | 12,212 | 7,967 | (15,891 | ) | ||||||||
| Derivative valuation adjustment | — | 1,001 | (1,001 | ) | ||||||||
| Other comprehensive income/(loss), after tax | 19,817 | (89,875 | ) | 87,239 | ||||||||
| Comprehensive (loss)/income | ($12,563) | ($168,254 | ) | $ | 102,467 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
50
Albany International Corp.
CONSOLIDATED BALANCE SHEETS
At December 31,
(in thousands, except share and per share data)
|
|
|
||||||
| 2009 | 2008 | |||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents | $ | 97,466 | $ | 106,571 | ||||
| Accounts receivable, less allowance for doubtful accounts ($12,246 in 2009; $21,090 in 2008) | 168,820 | 204,157 | ||||||
| Inventories | 172,433 | 206,488 | ||||||
| Income taxes receivable and deferred | 42,613 | 26,319 | ||||||
| Prepaid expenses and other current assets | 9,712 | 11,341 | ||||||
| Total current assets | 491,044 | 554,876 | ||||||
| Property, plant and equipment, at cost, net | 514,475 | 536,576 | ||||||
| Investments in associated companies | 3,001 | 3,899 | ||||||
| Intangibles | 5,216 | 8,608 | ||||||
| Goodwill | 120,037 | 116,443 | ||||||
| Deferred taxes | 143,085 | 115,818 | ||||||
| Cash surrender value of life insurance policies | 49,135 | 47,425 | ||||||
| Other assets | 18,264 | 21,412 | ||||||
| Total assets | $ | 1,344,257 | $ | 1,405,057 | ||||
| Liabilities |
||||||||
| Current liabilities: | ||||||||
| Notes and loans payable | $ | 15,296 | $ | 12,597 | ||||
| Accounts payable | 52,618 | 74,001 | ||||||
| Accrued liabilities | 113,323 | 116,361 | ||||||
| Current maturities of long-term debt | 11 | 13 | ||||||
| Income taxes payable and deferred | 3,639 | 7,205 | ||||||
| Total current liabilities | 184,887 | 210,177 | ||||||
| Long-term debt | 483,922 | 508,386 | ||||||
| Other noncurrent liabilities | 185,067 | 187,968 | ||||||
| Deferred taxes and other credits | 65,383 | 65,590 | ||||||
| Total liabilities | 919,259 | 972,121 | ||||||
| Commitments and Contingencies | — | — | ||||||
| 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 36,149,115 in 2009 and 35,245,482 in 2008 | 36 | 35 | ||||||
| Class B Common Stock, par value $.001 per share; authorized 25,000,000 shares; issued and outstanding 3,236,098 in 2009 and 2008 | 3 | |||||||