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. Weakness in investment returns and low interest rates could result in the
need to make greater pension plan contributions in future years.
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. A small part of the Applied Technologies
business segment relates to 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. While 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.
Item 1B. UNRESOLVED STAFF
COMMENTS
None.
Item 2. PROPERTIES
The Company’s principal
manufacturing facilities are located in Australia, Brazil, Canada, China, Finland, France, Germany, Italy, Mexico, South Korea, Sweden, 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 2,529,000 square feet, of which 2,352,000 square feet are owned and 177,000 square feet are leased. The Company’s facilities located
outside the United States and Canada comprise approximately 2,550,000 square feet, of which 2,386,000 square feet are owned and 164,000 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 2008.
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
18,789 claims as of February 1, 2008. This compares with 18,791 such 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, 19,283 claims as of October 27, 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.
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 less than 10% 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.
As of February 1, 2008,
approximately 12,611 of the claims pending against Albany are pending in Mississippi. Of these, approximately 12,031 are in federal court, at the
multidistrict litigation panel (“MDL”), either through
31
removal or original
jurisdiction. (In addition to the 12,031 Mississippi claims pending against the Company at the MDL, there are approximately 850 claims pending against
the Company at the MDL removed from various United States District Courts in other states.)
Previously, the MDL’s
practice had been to place all nonmalignant claims on an inactive docket until such time as the plaintiff developed a malignant disease. The MDL would
also administratively dismiss, without prejudice, the claims of plaintiffs resulting from mass-screenings who had not otherwise demonstrated that they
suffered from an asbestos-related disease. Because the court continued to exercise jurisdiction over these claims, it would allow the claims to be
reinstated following the diagnosis of an asbestos-related disease. Any such administratively dismissed claims are included in the total number of
pending claims reported.
On May 31, 2007, the MDL issued a
new administrative order that required each plaintiff to provide detailed information regarding, among other things, alleged asbestos-related medical
diagnoses. The order does not require exposure information with this initial filing. The first set of plaintiffs were required to submit their filings
with the Court by August 1, 2007, with deadlines for additional sets of plaintiffs monthly thereafter until December 1, 2007, by which time all
plaintiffs were initially required to be compliant. The process remains incomplete, however, as a number of extensions have been requested and granted.
The order states that the Court may dismiss the claims of any plaintiff who fails to comply.
Because the order of the MDL does
not require the submission of alleged exposure information, the Company cannot predict if any dismissals will result from these initial filings. The
MDL will at some point begin conducting settlement conferences, at which time the plaintiffs will be required to submit short position statements
setting forth exposure information. The Company does not expect the MDL to begin the process of scheduling the settlement conference for several
months. Consequently, the Company believes that the effects of the new order will not be fully known or realized for some time.
Based on past experience,
communications from certain plaintiffs’ counsel, and the advice of the Company’s Mississippi counsel, the Company expects the percentage of
Mississippi 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. However, due to the large
number of inactive claims pending in the MDL and the lack of alleged exposure information, 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 1, 2008,
the Company had resolved, by means of settlement or dismissal, 21,635 claims. The total cost of resolving all claims was $6,706,000. Of this amount,
$6,671,000, 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 8,741 claims as of February 1, 2008. This is the same amount as last report of
October 19, 2007, and compares with 9,023 such 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, 8,992 claims as of October 27, 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 Company acquired Geschmay Corp., formerly
32
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 1, 2008, Brandon has resolved, by means of settlement or dismissal,
8,825 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.
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 recent 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 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. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
There were no matters submitted
during the fourth quarter of 2007 to a vote of security holders.
33
PART II
Item
5. |
|
MARKET FOR 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, 2007, there were approximately 12,500 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:
Quarter Ended
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share |
|
|
|
$ |
0.10 |
|
|
$ |
0.11 |
|
|
$ |
0.11 |
|
|
$ |
0.11 |
|
Class A
Common Stock prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
|
$ |
35.98 |
|
|
$ |
42.42 |
|
|
$ |
42.10 |
|
|
$ |
39.48 |
|
Low |
|
|
|
$ |
32.10 |
|
|
$ |
36.13 |
|
|
$ |
37.23 |
|
|
$ |
34.54 |
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share |
|
|
|
$ |
0.09 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
Class A
Common Stock prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
|
$ |
38.54 |
|
|
$ |
42.39 |
|
|
$ |
42.41 |
|
|
$ |
34.10 |
|
Low |
|
|
|
$ |
33.69 |
|
|
$ |
36.15 |
|
|
$ |
31.82 |
|
|
$ |
31.20 |
|
Restrictions on dividends and
other distributions are described in Note 6 of the 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.
34
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).
(in thousands, except per share amounts)
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
Summary of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
|
|
$ |
1,092,977 |
|
|
$ |
1,011,458 |
|
|
$ |
978,710 |
|
|
$ |
919,802 |
|
|
$ |
887,943 |
|
Cost of goods
sold |
|
|
|
|
711,448 |
|
|
|
620,149 |
|
|
|
586,700 |
|
|
|
557,742 |
|
|
|
526,757 |
|
Restructuring
and other (1) |
|
|
|
|
27,625 |
|
|
|
5,936 |
|
|
|
— |
|
|
|
54,058 |
|
|
|
21,751 |
|
Operating
income |
|
|
|
|
37,449 |
|
|
|
90,287 |
|
|
|
115,999 |
|
|
|
40,504 |
|
|
|
85,614 |
|
Interest
expense, net |
|
|
|
|
15,280 |
|
|
|
9,183 |
|
|
|
10,583 |
|
|
|
14,636 |
|
|
|
15,074 |
|
Income before
income taxes |
|
|
|
|
20,043 |
|
|
|
78,325 |
|
|
|
100,763 |
|
|
|
12,329 |
|
|
|
69,878 |
|
Income
taxes |
|
|
|
|
2,155 |
|
|
|
20,530 |
|
|
|
29,420 |
|
|
|
2,450 |
|
|
|
15,720 |
|
Net
income |
|
|
|
|
17,782 |
|
|
|
58,039 |
|
|
|
71,852 |
|
|
|
10,385 |
|
|
|
54,055 |
|
Basic
earnings per share |
|
|
|
|
0.60 |
|
|
|
1.95 |
|
|
|
2.25 |
|
|
|
0.32 |
|
|
|
1.64 |
|
Diluted
earnings per share |
|
|
|
|
0.60 |
|
|
|
1.92 |
|
|
|
2.22 |
|
|
|
0.31 |
|
|
|
1.61 |
|
Dividends
declared per share |
|
|
|
|
0.43 |
|
|
|
0.39 |
|
|
|
0.34 |
|
|
|
0.30 |
|
|
|
0.250 |
|
Weighted
average number of shares outstanding — basic |
|
|
|
|
29,421 |
|
|
|
29,803 |
|
|
|
31,921 |
|
|
|
32,575 |
|
|
|
32,889 |
|
| |
Capital
expenditures
|
|
|
|
|
149,215 |
|
|
|
84,452 |
|
|
|
43,293 |
|
|
|
57,129 |
|
|
|
51,849 |
|
| |
Financial
position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
$ |
73,305 |
|
|
$ |
68,237 |
|
|
$ |
72,771 |
|
|
$ |
58,982 |
|
|
$ |
78,822 |
|
Cash
surrender value of life insurance |
|
|
|
|
43,701 |
|
|
|
41,197 |
|
|
|
37,778 |
|
|
|
34,583 |
|
|
|
32,399 |
|
Property,
plant and equipment, net |
|
|
|
|
499,540 |
|
|
|
397,521 |
|
|
|
335,446 |
|
|
|
378,170 |
|
|
|
370,280 |
|
Total
assets |
|
|
|
|
1,526,977 |
|
|
|
1,306,547 |
|
|
|
1,087,047 |
|
|
|
1,155,760 |
|
|
|
1,138,923 |
|
Current
liabilities |
|
|
|
|
238,570 |
|
|
|
195,985 |
|
|
|
175,123 |
|
|
|
209,218 |
|
|
|
178,511 |
|
Long-term
debt |
|
|
|
|
446,433 |
|
|
|
354,587 |
|
|
|
162,597 |
|
|
|
213,615 |
|
|
|
214,894 |
|
Total
noncurrent liabilities |
|
|
|
|
688,736 |
|
|
|
611,437 |
|
|
|
337,006 |
|
|
|
395,765 |
|
|
|
405,757 |
|
Total
liabilities |
|
|
|
|
927,306 |
|
|
|
807,422 |
|
|
|
512,129 |
|
|
|
604,983 |
|
|
|
584,268 |
|
Shareholders’ equity (2) |
|
|
|
|
599,671 |
|
|
|
499,125 |
|
|
|
574,918 |
|
|
|
550,777 |
|
|
|
554,655 |
|
(1) |
|
In 2003, 2004, 2006, and 2007 the Company recorded Restructuring
and other charges related to cost reduction initiatives. |
(2) |
|
In 2006, the Company adopted the provisions of FAS No. 158,
Employers’ Accounting for 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. |
35
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, our Consolidated Financial Statements and the
accompanying Notes.
Overview
Albany International Corp. (the
Registrant, the Company, or we) and its subsidiaries are engaged in three 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 dilute
sheet through the section. Press fabrics are designed to carry the sheet through the presses, where water pressed from the sheet is carried through the
press nip in the fabric. 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’s customers in the PMC segment are paper industry companies, some of which operate in
multiple regions of the world. The Company’s manufacturing processes and distribution channels for PMC are substantially the same in each region
of the world in which it operates.
The Applied Technologies segment
includes the emerging businesses that apply the Company’s core competencies in advanced textiles and materials to other industries, including
specialty materials and composite structures for aircraft and other applications (Albany Engineered Composites); fabrics, wires, and belting products
for the nonwovens and pulp industries, and industrial process belts for tannery, textile, and corrugator applications (Albany Engineered Fabrics);
specialty filtration products for wet and dry applications (Albany Filtration Technologies); and insulation for personal outerwear and home furnishings
(PrimaLoft®). No class of similar products or services within this segment accounted for 10% or more of the Company’s consolidated net sales
in any of the past three years.
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 further expanded its market position in North America with the
second-quarter 2007 acquisition of the assets and business of R-Bac Industries, the fastest-growing high-performance door company in North America,
whose product lines are complementary to Albany’s. The business segment also derives revenue from aftermarket sales and service.
Trends
The Company’s primary
segment, Paper Machine Clothing, accounted for approximately 70% of consolidated revenues during 2007. 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 have grown at an annual
rate of approximately 2.6% over the last ten years. Based on data from RISI, demand for paper is expected to grow approximately 2.9% over the next five
years. 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
36
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 tends to be cyclical, with periods of healthy paper prices followed by increases in new capacity, which then leads to increased production and
higher inventories of paper and paperboard, followed by a period of price competition and reduced profitability among the Company’s customers.
Although sales of paper machine clothing do not tend to be as cyclical, the Company may experience somewhat greater demand during periods of increased
production and somewhat reduced demand during periods of lesser production.
The world paper and paperboard
industry experienced a significant period of consolidation and rationalization from approximately 2000 through 2004. While significant consolidation
among paper and paperboard suppliers slowed after 2004, machine closures, or announcements of additional machine closures, continued during 2005, 2006
and 2007 in North America as well as Europe. During this period, a number of older, less efficient machines in areas where significant established
capacity existed were closed or were the subject of planned closure announcements, while at the same time a number of newer, faster and more efficient
machines began production or plans for the installation of such newer machines were announced in areas of growing demand for paper and paperboard (such
as Asia and South America). Management anticipates that this trend is likely to continue in the near term.
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. The net effect of these
trends is that the specific volume of paper machine clothing consumption (measured in kilograms or square meters) has been increasing at a rate of
approximately 1% per year over the past several years.
During 2006, the Company reported
that price competition in Western Europe had an adverse impact on the Company’s operating results in this segment. In the third and fourth
quarters of 2006, and in the first two quarters of 2007, sales of paper machine clothing to customers in Western Europe were significantly lower than
the same quarter of the previous year. This also contributed to reduced operating income within this segment, as well as overall operating income,
during those quarters.
The Company’s response to
that pricing disruption has been to initiate a deliberate, intensive three-year process of restructuring and performance improvement initiatives. In
the mature paper machine clothing markets of North America and Europe, the Company is driving for growth in market share, while the Company is
positioning itself to expand in the rapidly growing markets of Asia and South America. At the same time that the Company is adjusting its manufacturing
footprint to align with these regional markets, management is taking actions to reduce costs significantly. Additionally, the Company has reorganized
its PMC research and product development function resulting in better ability to bring value-added products to market faster.
The Applied Technologies segment
has experienced significant growth in net sales during the last few years, due both to the introduction of new products as well as growth in demand and
application for previously existing products. Sales in this segment increased 12.7% during 2007 and 14.8% during 2006, excluding the effect of changes
in currency translation rates, while operating income declined as the Company ramped-up manufacturing and engineering in the Engineered Composites
business, to meet higher order backlog. The principal challenges and opportunities in the Engineered Composites business involve managing this growth
opportunity.
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,
37
customers may reduce levels
of capital expenditures, which could have a negative effect on sales and earnings in the Albany Door Systems segment. The large amount of revenue
derived from sales and manufacturing outside the United States could cause the reported financial results for the Albany Door Systems segment to be
more sensitive than the other segments of the Company to changes in currency rates.
Foreign Currency
Albany International operates in
many geographic regions of the world and has more than half of its business in countries outside the United States. A substantial portion of the
Company’s sales are denominated in euros or other currencies. 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. As a
result, changes in the relative values of U.S. dollars, euros and other currencies affect revenues and profits as the results are translated into U.S.
dollars in the consolidated financial statements.
From time to time, the Company
enters into foreign currency or other derivative contracts in order to enhance cash flows or to mitigate volatility in the financial statements that
can be caused by changes in currency exchange rates.
Review of Operations
2007 vs. 2006
Net sales increased to $1,093.0
million in 2007, as compared to $1,011.5 million for 2006. Changes in currency translation rates had the effect of increasing net sales by $45.5
million. Net sales for 2006 were reduced by $7.6 million related to a change in contract terms with a major customer. Excluding the effect of that
change and the additional effect of changes in currency translation rates, 2007 net sales increased 2.8% as compared to 2006.
Following is a table of net sales
for each business segment and the effect of changes in currency translation rates:
|
|
|
|
Net sales as reported
December 31,
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
Percent
change
|
|
Impact of
changes in
currency
translation
rates
|
|
Impact of
change in
contract
terms
|
|
Percent change
excluding contract
terms
change
and currency
rate effects
|
Paper Machine
Clothing |
|
|
|
$ |
763,522 |
|
|
$ |
737,070 |
|
|
|
3.6 |
% |
|
$ |
26,867 |
|
|
$ |
7,586 |
|
|
|
–1.1 |
% |
Applied
Technologies |
|
|
|
|
176,503 |
|
|
|
149,742 |
|
|
|
17.9 |
% |
|
|
7,790 |
|
|
|
|
|
|
|
12.7 |
% |
Albany Door
Systems |
|
|
|
|
152,952 |
|
|
|
124,646 |
|
|
|
22.7 |
% |
|
|
10,794 |
|
|
|
|
|
|
|
14.0 |
% |
Total |
|
|
|
$ |
1,092,977 |
|
|
$ |
1,011,458 |
|
|
|
8.1 |
% |
|
$ |
45,451 |
|
|
$ |
7,586 |
|
|
|
2.8 |
% |
Gross profit was 34.9% in 2007,
compared to 38.7% in 2006. The decrease is principally due to costs incurred in 2007 related to performance improvement initiatives, idle capacity
costs at plants being closed, and the effect of the European pricing disruption.
Selling, general, technical and
research (STG&R) expenses increased to $316.5 million or 29.0% of net sales in 2007, as compared to $295.1 million or 29.2% of net sales in 2006.
The increase includes $15.6 million related to performance improvement initiatives and $14.1 million related to the effect of changes in currency
translation rates.
38
Following is a table of operating
income by segment:
|
|
|
|
Years ended
December 31,
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
Operating
Income
|
|
|
|
|
|
|
|
|
|
|
Paper Machine
Clothing |
|
|
|
$ |
90,549 |
|
|
$ |
130,330 |
|
Applied
Technologies |
|
|
|
|
14,307 |
|
|
|
15,299 |
|
Albany Door
Systems |
|
|
|
|
4,933 |
|
|
|
5,931 |
|
Research
expense |
|
|
|
|
(23,337 |
) |
|
|
(21,628 |
) |
Unallocated
expenses |
|
|
|
|
(49,003 |
) |
|
|
(39,645 |
) |
Operating
income |
|
|
|
$ |
37,449 |
|
|
$ |
90,287 |
|
Beginning in the first quarter of
2007, segment operating income includes expenses associated with product engineering activities, which is consistent with a change in the
Company’s internal reporting structure. These expenses were previously included in Research expense. Additionally, certain other 2006 expenses
previously included in Unallocated have been allocated to Paper Machine Clothing and Applied Technologies to conform to the current year presentation.
The following table illustrates the impact on the 2006 and 2005 segment operating income that resulted from these changes:
|
|
|
|
Years ended
December 31,
|
|
|
|
|
|
2006
|
|
2005
|
|
(in thousands)
|
|
|
|
As originally
Reported
|
|
Reclassification
|
|
As
Adjusted
|
|
As originally
Reported
|
|
Reclassification
|
|
As
Adjusted
|
Operating
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper Machine
Clothing |
|
|
|
$ |
138,895 |
|
|
$ |
(8,565 |
) |
|
$ |
130,330 |
|
|
$ |
164,986 |
|
|
$ |
(5,256 |
) |
|
$ |
159,730 |
|
Applied
Technologies |
|
|
|
|
17,398 |
|
|
|
(2,099 |
) |
|
|
15,299 |
|
|
|
20,545 |
|
|
|
(904 |
) |
|
|
19,641 |
|
Albany Door
Systems |
|
|
|
|
8,089 |
|
|
|
(2,158 |
) |
|
|
5,931 |
|
|
|
7,579 |
|
|
|
(1,882 |
) |
|
|
5,697 |
|
Research
expense |
|
|
|
|
(31,665 |
) |
|
|
10,037 |
|
|
|
(21,628 |
) |
|
|
(28,059 |
) |
|
|
8,042 |
|
|
|
(20,017 |
) |
Unallocated
expenses |
|
|
|
|
(42,430 |
) |
|
|
2,785 |
|
|
|
(39,645 |
) |
|
|
(49,052 |
) |
|
|
— |
|
|
|
(49,052 |
) |
Consolidated
total |
|
|
|
$ |
90,287 |
|
|
$ |
— |
|
|
$ |
90,287 |
|
|
$ |
115,999 |
|
|
$ |
— |
|
|
$ |
115,999 |
|
In the third and fourth quarters
of 2006, the Company announced the initial steps in its restructuring and performance improvement plan, which resulted in costs of $53.9 million in
2007 and $6.4 million in 2006. The restructuring activities are related to an intensive effort to restore profitability in the short term, and for the
long term, lay a sustainable foundation for the Company’s cash and grow strategy. The table below presents the costs by category and operating
segment. In order to conform to the current year presentation, $5.9 million of 2006 expense is included in Restructuring and other, whereas those
amounts had been reported in Selling and general expenses in previous financial reports.
|
|
|
|
Years ended
December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
(in thousands)
|
|
|
|
Restructuring
and other
|
|
Idle capacity
costs at
plants closing
|
|
Performance
improvement
initiatives
|
|
Total
|
|
Restructuring
and other
|
|
Performance
improvement
initiatives
|
|
Total
|
Operating income effect of:
|
Paper Machine
Clothing |
|
|
|
$ |
(24,434 |
) |
|
$ |
(4,177 |
) |
|
$ |
(10,749 |
) |
|
$ |
(39,360 |
) |
|
$ |
(4,862 |
) |
|
$ |
(164 |
) |
|
$ |
(5,026 |
) |
Applied
Technologies |
|
|
|
|
— |
|
|
|
— |
|
|
|
(742 |
) |
|
|
(742 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Albany Door
Systems |
|
|
|
|
(2,164 |
) |
|
|
— |
|
|
|
(1,168 |
) |
|
|
(3,332 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Research |
|
|
|
|
(308 |
) |
|
|
— |
|
|
|
— |
|
|
|
(308 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Unallocated |
|
|
|
|
(719 |
) |
|
|
— |
|
|
|
(9,404 |
) |
|
|
(10,123 |
) |
|
|
(1,074 |
) |
|
|
(323 |
) |
|
|
(1,397 |
) |
Consolidated
total |
|
|
|
$ |
(27,625 |
) |
|
$ |
(4,177 |
) |
|
$ |
(22,063 |
) |
|
$ |
(53,865 |
) |
|
$ |
(5,936 |
) |
|
$ |
(487 |
) |
|
$ |
(6,423 |
) |
39
Operating income decreased to
$37.5 million for 2007, compared to $90.3 million for 2006. The decrease was principally due to costs associated with restructuring and performance
improvement initiatives. Idle capacity costs are included in Cost of goods sold. Costs in 2007 related to performance improvement initiatives include
charges to Cost of goods sold in the amount of $1.9 million for PMC, and $0.6 million for Applied Technologies. The remainder of the performance
improvement costs are included in selling and general expenses.
The Company expects to record a
curtailment gain of $1.1 million in the first quarter of 2008 related to restructuring activities. The Company expects additional restructuring
expenses related to actions announced prior to 2008 will not be significant.
Research expense increased $1.7
million or 7.9% in 2007, principally due to higher project expenses and wages. Unallocated expenses increased $9.4 million to $49.0 million in 2007
principally due to $7.6 million of costs associated with performance improvement initiatives, including the Company’s implementation of the SAP
enterprise resource planning system.
Interest expense increased to
$16.9 million for 2007 compared to $13.1 million for 2006. The increase in 2007 reflects higher average levels of debt outstanding in 2007. Interest
income decreased from $4.0 million to $1.6 million principally due to lower levels of invested cash and cash equivalents in 2007.
Other expense, net, was $2.1
million for 2007 compared to $2.8 million for 2006. The decrease in expense is primarily due to 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. The
Company’s currency hedging strategy is aimed at mitigating volatility in the income statement that can be caused by sharp changes in currency
exchange rates. The Company uses various derivative instruments, primarily currency forward contracts, in its currency hedging activities. Changes in
fair value of derivative instruments that are designated and qualify for hedge accounting in accordance with FAS No. 133 are reported in Other
comprehensive income, and not Other expense, net.
Income tax expense was $2.2
million in 2007 compared to $20.5 million in 2006, and the effective tax rate for the full year 2007 was 10.8% as compared to 26.2% in 2006. Income tax
expense in 2007 includes net discrete adjustments that reduced income tax by $2.7 million principally due to the effects of net operating losses in
non-U.S. subsidiaries. Income tax expense in 2006 includes net discrete adjustments that reduced income tax by $3.5 million related to changes in
estimated tax liabilities and changes in contingent tax reserves and valuation allowances.
Net income was $17.8 million for
2007, compared to $58.0 million for 2006. Basic earnings per share were $0.60 for 2007, compared to $1.95 for 2006. The decrease in 2007 was
principally due to higher costs in 2007 for restructuring and performance improvement initiatives.
Paper Machine Clothing Segment
Net sales in the Paper Machine
Clothing segment increased to $763.5 million for 2007 as compared to $737.1 million for 2006. Changes in currency translation rates had the effect of
increasing 2007 net sales by $26.9 million, while the change in contract terms with a major customer reduced 2006 net sales by $7.6 million. Excluding
the effect of changes in currency translation rates and the change in contract terms, 2007 net sales decreased 0.1% as compared to
2006.
Gross profit as a percentage of
net sales was 38.4% for 2007 compared to 41.6% for 2006. The decrease in 2007 was principally due to costs associated with performance improvement
initiatives, idle capacity costs at plants being closed, and the pricing disruption in the Western European market.
Operating income was $90.5
million for 2007, compared to $130.3 million for 2006. Segment expenses for restructuring and performance improvement initiatives increased from $5.0
million in 2006 to $39.4 million in 2007. Additionally, the change in contract terms with a major customer had the effect of reducing 2006 operating
income by $2.8 million.
Applied Technologies Segment
Net sales in the Applied
Technologies segment increased to $176.5 million in 2007 as compared to $149.7 million in 2006. Changes in currency translation rates had the effect of
increasing net sales by $7.8 million.
40
Excluding the effect of
changes in currency translation rates, 2007 net sales increased 12.7% as compared to 2006. The increase in net sales was led by strong sales
performance in Albany Engineered Composites and Albany Filtration Technologies.
Gross profit as a percentage of
net sales was 26.3% for 2007 compared to 30.8% for 2006. Operating income decreased to $14.3 million for 2007 compared to $15.3 million for 2006. The
decreases were principally due to the ramp-up of manufacturing and engineering in Albany Engineered Composites.
Albany Door Systems Segment
Net sales in the Albany Door
Systems segment increased to $153.0 million in 2007 as compared to $124.6 million in 2006. Changes in currency translation rates had the effect of
increasing net sales by $10.8 million. Excluding the effect of changes in currency translation rates, 2007 net sales increased 14.0% as compared to
2006. Sales of new products continued to accelerate and the aftermarket business in Europe also posted gains. Net sales were also increased as a result
of the R-Bac acquisition. Globally, the aftermarket service and parts for high-performance doors grew to $48.0 million in 2007, compared to $40.7
million in 2006.
Gross profit as a percentage of
net sales was 32.1% for 2007 compared to 34.3% for 2006. The decrease was principally due to higher material costs. Operating income decreased from
$5.9 million in 2006 to $4.9 million in 2007, which included restructuring costs of $2.2 million, and performance improvement costs of $1.2
million.
2006 vs. 2005
Total Company
Net sales increased to $1,011.5
million in 2006, as compared to $978.7 million for 2005. Changes in currency translation rates had the effect of increasing net sales by $9.3 million.
Net sales for 2006 were reduced by $7.6 million related to a change in contract terms with a major customer. Excluding the effect of that change and
the additional effect of changes in currency translation rates, 2006 net sales increased 3.2% as compared to 2005.
Following is a table of net sales
for each business segment and the effect of changes in currency translation rates:
|
|
|
|
Net sales as reported
December 31,
|
|
(in thousands)
|
|
|
|
2006
|
|
2005
|
|
Percent
change
|
|
Impact of changes
in currency
translation
rates
|
|
Impact of
change in
contract terms
|
|
Percent change
excluding contract
terms
change
and currency
rate effects
|
Paper Machine
Clothing |
|
|
|
$ |
737,070 |
|
|
$ |
732,918 |
|
|
|
0.6 |
% |
|
$ |
6,903 |
|
|
$ |
(7,586 |
) |
|
|
0.7 |
% |
Applied
Technologies |
|
|
|
|
149,742 |
|
|
|
129,303 |
|
|
|
15.8 |
% |
|
|
1,318 |
|
|
|
|
|
|
|
14.8 |
% |
Albany Door
Systems |
|
|
|
|
124,646 |
|
|
|
116,489 |
|
|
|
7.0 |
% |
|
|
1,106 |
|
|
|
|
|
|
|
6.1 |
% |
Total
|
|
|
|
$ |
1,011,458 |
|
|
$ |
978,710 |
|
|
|
3.3 |
% |
|
$ |
9,327 |
|
|
$ |
(7,586 |
) |
|
|
3.2 |
% |
Gross profit as a percentage of
net sales was 38.7% in 2006, compared to 40.1% for 2005. Gross profit was negatively affected by lower European PMC sales volume, higher materials
costs, and the continued ramp-up of manufacturing and engineering in Albany Engineered Composites.
Selling, general, technical and
research (STG&R) expenses increased to $295.1 million or 29.2% of net sales in 2006, as compared to $276.0 million or 28.2% of net sales in 2005.
The increase includes $5.4 million related to the effect of changes in currency translation rates on accounts receivable and other balances held in
currencies other than local currencies, and $2.1 million resulting from a cumulative correction related to postretirement obligations, as a result of
adopting Securities and Exchange Commission Staff Accounting Bulletin No. 108 (SAB 108). Additionally, changes in currency translation rates had the
effect of increasing 2006 STG&R expenses by $3.2 million as compared to 2005.
41
Following is a table of operating
income by segment:
|
|
|
|
Years ended
December 31,
|
|
(in thousands)
|
|
|
|
2006
|
|
2005
|
Operating
Income
|
|
|
|
|
|
|
|
|
|
|
Paper Machine
Clothing |
|
|
|
$ |
130,330 |
|
|
$ |
159,730 |
|
Applied
Technologies |
|
|
|
|
15,299 |
|
|
|
19,641 |
|
Albany Door
Systems |
|
|
|
|
5,931 |
|
|
|
5,697 |
|
Research
expense |
|
|
|
|
(21,628 |
) |
|
|
(20,017 |
) |
Unallocated
expenses |
|
|
|
|
(39,645 |
) |
|
|
(49,052 |
) |
Operating
income |
|
|
|
$ |
90,287 |
|
|
$ |
115,999 |
|
Operating income decreased to
$90.3 million for 2006, compared to $116.0 million for 2005. The decrease was principally due to lower gross profit as a percentage of net sales, $5.9
million of restructuring expenses in 2006, and higher STG&R expenses.
Research expense increased $1.6
million or 8.0% in 2006, principally due to higher project expenses and wages. Unallocated expenses decreased $9.4 million to $39.6 million in 2006
principally due to $3.9 million of lower costs for incentive compensation programs, and $1.1 million of lower unallocated expenses related to cost
efficiency programs. Unallocated expenses in 2006 included the $2.1 million adjustment recorded as a result of adopting SAB 108. That incremental cost,
however, was offset by a reduction in the net periodic benefit cost of the postretirement benefit program. The net periodic benefit cost of the program
was lower in 2006 as compared to 2005 principally due to modifications made to the plan in 2005.
Interest expense increased to
$13.1 million for 2006 compared to $12.8 million for 2005. The increase in 2006 reflects higher levels of debt outstanding as a result of issuing $180
million of principal amount of 2.25% convertible notes in March 2006 as described in the Liquidity and Capital Resources section. During 2005, the
Company’s interest rate swap agreements expired that had effectively fixed the interest rate on $200 million of debt to 7.17%. In October 2005,
the Company entered into a $150 million borrowing facility with an average term of 10 years that carries a fixed interest rate of 5.34%. Proceeds from
this borrowing were used to pay off the remaining balance under the Company’s principal revolving credit facility, and cash was increased.
Interest income increased from $2.3 million to $4.0 million principally due to higher levels of invested cash and cash equivalents in
2006.
Other expense, net, was $2.8
million for 2006 compared to $4.7 million for 2005. The decrease in expense was primarily due to $0.6 million of lower license fee expense and an
increase in of $0.4 million in 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 expense was $20.5
million in 2006 compared to $29.4 million in 2005, and the effective tax rate for the full year 2006 was 26.2% as compared to 29.2% in 2005. Income tax
expense in 2006 includes net discrete adjustments that reduced income tax by $3.5 million related to changes in estimated tax liabilities and changes
in contingent tax reserves and valuation allowances. Income tax expense in 2005 includes $3.9 million of expense related to the repatriation of
earnings outside the United States under the American Jobs Creation Act.
Net income was $58.0 million for
2006, compared to $71.9 million for 2005. Basic earnings per share were $1.95 for 2006, compared to $2.25 for 2005. The decrease in 2006 was
principally due to lower gross profit as a percentage of net sales and higher STG&R expenses.
Paper Machine Clothing Segment
Net sales in the Paper Machine
Clothing segment increased to $737.1 million for 2006 as compared to $732.9 million for 2005. Changes in currency translation rates had the effect of
increasing net sales by $6.9 million, while the change in contract terms with a major customer reduced net sales by $7.6 million. Excluding the effect
of changes in currency translation rates and the change in contract terms, 2006 net sales increased 0.7% as compared to 2005.
Net sales in the first six months
of 2006 were 3.9% higher than the same period of 2005 excluding the effect of changes in currency translation rates. In comparison to the first six
months of 2005, net sales for the first half
42
of 2006 benefited from volume
increases, product upgrades and price improvements in some regions. Excluding the effect of changes in currency translation rates, net sales in the
third quarter of 2006 were 5.6% lower than the same period of 2005 principally due to a sharp decline in PMC sales volume in Europe. The decline in
European volume resulted from shut-downs of paper machines, an industry-wide slowdown in PMC shipments, and a wider gap in PMC pricing between the
Company and its competitors. Net sales for the fourth quarter of 2006 were 1.2% lower than the same period of 2005, excluding the effect of changes in
currency translation rates and the change in contract terms with a major customer. In comparison to the third quarter of 2006, net sales in the fourth
quarter of 2006 were 5.5% higher, and European sales volume improved. For the full year, the increase in net sales that resulted from price
improvements offset the effect of the reduction in sales volume.
Gross profit as a percentage of
net sales was 41.6% for 2006 compared to 43.6% for 2005. The decrease in 2006 was principally due to the factors affecting the European market and
higher materials costs, which were impacted by increases in petroleum prices.
Operating income was $130.3
million for 2006, compared to $159.7 million for 2005. In addition to decreases resulting from the lower gross profit percentage, this segment had
increased expense in 2006 of $5.1 million resulting from the effect of changes in currency translation rates on accounts receivable and other balances
held in currencies other than local currencies. Additionally, the change in contract terms with a major customer had the effect of reducing 2006
operating income by $2.8 million.
Applied Technologies Segment
Net sales in the Applied
Technologies segment increased to $149.7 million in 2006 as compared to $129.3 million for 2005. Changes in currency translation rates had the effect
of increasing net sales by $1.3 million. Excluding the effect of changes in currency translation rates, 2006 net sales increased 14.8% as compared to
2005. The increase in net sales was led by strong sales performance in Albany Engineered Fabrics, Albany Engineered Composites and Industrial Process
Belts. In 2006, the Company acquired Texas Composite Inc. and acquired certain assets of Aztex, Inc. Both of these companies were integrated into
Albany Engineered Composites.
Gross profit as a percentage of
net sales was 30.8% for 2006 compared to 35.4% for 2005. Operating income decreased to $15.3 million for 2006 compared to $19.6 million for 2005. The
decreases were principally due to the ramp-up of manufacturing and engineering in Albany Engineered Composites.
Albany Door Systems Segment
Net sales in the Albany Door
Systems segment increased to $124.6 million in 2006 as compared to $116.5 million for 2005. Changes in currency translation rates had the effect of
increasing net sales by $1.1 million. Excluding the effect of changes in currency translation rates, 2006 net sales increased 6.1% as compared to 2005.
Sales of new products continued to accelerate and the aftermarket business in Europe also posted gains. Globally, the aftermarket service and parts for
high-performance doors grew to $40.7 million in 2006, compared to $37.5 million in 2005.
Gross profit as a percentage of
net sales was 34.3% for 2006 compared to 33.8% for 2005. Operating income increased from $5.7 million in 2005 to $5.9 million in 2006. The improvement
was principally due to higher sales.
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 6, 10 and 14 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.
Liquidity and Capital Resources
The Company finances its business
activities primarily with cash generated from operations and borrowings, primarily under $180 million of 2.25% convertible notes issued in March 2006,
$150 million of 5.34% long-term indebtedness to Prudential Capital Group issued in October 2005, and its revolving credit agreement as
described
43
in Notes to Consolidated
Financial Statements. 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.
Net cash provided by operating
activities was $81.3 million in 2007, compared with $52.0 million in 2006, and $122.4 million for 2005. In September 2006, the Company terminated its
accounts receivable securitization program, resulting in an increase in accounts receivable of $58.1 million, and a decrease in the related note
receivable of $17.3 million, for a net reduction in cash flow of $40.8 million in 2006. The Company terminated the program because it was able to
obtain more favorable financing terms under its revolving credit agreement.
Excluding the effect of changes
in currency translation rates and business acquisitions, inventories increased $8.6 million in 2007, $19.0 million in 2006, and $17.2 million in 2005.
The increase in inventories is partially due to building product coverage for certain customers. Contributions to the United States pension plan
amounted to $10 million in 2007, $20 million in 2006, and $10 million in 2005. Accounts payable increased significantly from 2006 to 2007 principally
due to capital expenditures incurred close to year-end 2007. Depreciation and amortization expense totaled $62.5 million in 2007, $59.5 million in
2006, and $55.4 million in 2005.
Cash payments for restructuring
expenses amounted to $16.6 million in 2007 and $2.7 million in 2006. As of December 31, 2007, the Company has accrued restructuring liabilities of
$10.7 million, which is expected to be substantially paid in 2008.
Including discrete income tax
items, the effective tax rate for the full year 2007 was 10.8%, compared to 26.2% in 2006 and 29.2% in 2005. The Company currently anticipates its
consolidated tax rate in 2008 will not exceed 25% before any discrete items, although there can be no assurance that this will not
change.
The Company’s order backlog
at December 31, 2007, was $547.8 million, an increase of 4.4% from the prior year-end. Excluding the effect of changes in currency translation rates,
backlog decreased approximately 1.5% in comparison to December 31, 2006. The December 31, 2007 backlog by segment was $442.8 million in PMC, $84.9
million in Applied Technologies, and $20.1 million in Albany Doors. The backlog as of December 31, 2007 is generally expected to be invoiced during the
next 12 months.
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.
In October 2005, the Company
closed on a $150 million borrowing from Prudential Capital Group. The principal is due in three installments of $50 million each in 2013, 2015, and
2017 (an average life of 10 years), and the interest rate is fixed at 5.34 percent. Proceeds from the borrowing were used to pay down all $127 million
of floating-rate indebtedness at the time outstanding under the Company’s existing credit facility. The covenants under this agreement are
effectively the same as under the Company’s revolving credit agreement.
In March 2006, the Company issued
$180 million principal amount of 2.25% convertible notes. The notes are convertible upon the occurrence of specified events and at any time on or after
February 15, 2013, into cash up to the principal amount of notes converted and shares of the Company’s Class A common stock with respect to the
remainder, if any, of the Company’s conversion obligation at an initial conversion rate of 22.462 shares per $1,000 principal amount of notes
(equivalent to an initial conversion price of $44.52 per share of Class A common stock).
In connection with the offering,
the Company entered into convertible note hedge and warrant transactions with respect to its Class A common stock at a net cost of $14.7 million. These
transactions are intended to reduce the potential dilution upon conversion of the notes by providing the Company with the option, subject to certain
exceptions, to acquire shares that offset the delivery of newly issued shares upon conversion of the notes.
On April 14, 2006, the Company
entered into a new $460 million five-year revolving credit agreement, under which $116 million was outstanding as of December 31, 2007. The agreement
replaced a similar $460 million
44
revolving credit facility.
Under the terms of the new agreement, commitment fees on the unused portion of the facility were reduced from 0.25% to 0.09% and the term was extended
from 2009 to 2011. The applicable interest rate for borrowings under the new agreement, as well as under the old agreement, is LIBOR plus a spread,
based on the Company’s leverage ratio at the time of borrowing. As of December 31, 2007, the interest rate under this agreement was 5.88%. Spreads
under the new agreement are 15 to 50 basis points lower than under the old agreement. The new agreement includes covenants similar to the old
agreement, which could limit the Company’s ability to purchase Common Stock, pay dividends, or acquire other companies or dispose of its assets.
The Company is also required to maintain a leverage ratio of not greater than 3.50 to 1.00 and a minimum interest coverage of at least 3.00 to 1.00. As
of December 31, 2007, the Company’s leverage ratio under the agreement was 2.45 to 1.00 and the interest coverage ratio was 8.74 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
provided its leverage ratio would not exceed 3.50 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), as of December 31, 2007, the Company
would have been able to borrow an additional $147.1 million under the loan agreement.
On December 10, 2007, the Company
and Bank of America entered into a US dollar-to-euro cross-currency and interest rate swap agreement with a notional value of $150,000,000. The Company
has designed the swap to be an effective hedge of its euro net asset exposure relating to European operations. Under the swap agreement, the Company
has notionally exchanged $150,000,000 at a fixed interest rate of 5.34% for euro 101,950,700 at a fixed interest rate of 5.28%. The exchange was
executed at an exchange rate of 1.4713 US dollars per euro. The majority of the cash flows in the swap agreement are aligned with the Company’s
principal and interest payment obligations on its $150,000,000 Prudential Agreement. The final maturity of the swap matches the final maturity of the
Prudential Agreement.
The Company’s swap agreement
qualifies as a hedge of net investments in foreign operations under the provisions of FAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities”. Under FAS No. 133, changes in fair value of derivatives that qualify as hedges are recorded in shareholders’ equity, net
of tax, in the caption “Derivative valuation adjustment”. As of December 31, 2007, the change in fair value of the swap agreement was
$2,566,000, which was recorded in other assets. Of the $2,566,000 amount, $1,001,000 was included in noncurrent liabilities for applicable taxes and
the remaining $1,565,000 was included in shareholders’ equity.
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 $43.7 million in 2007, $41.2
million in 2006, and $37.8 million in 2005. The rate of return on the policies varies with market conditions and was approximately 6.3% in 2007, 2006
and 2005. 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.
Capital expenditures were $149.2
million in 2007, $84.5 million in 2006, and $43.3 million in 2005. The increases in capital expenditures in 2006 and 2007 are principally due to the
PMC strategic investment program announced in January 2006. Capital expenditures in the PMC segment amounted to $117.5 million in 2007 and $73.5
million in 2006. The Company expects 2008 capital spending to be approximately $140 million, including approximately $110 to $120 million in the PMC
segment and $25 to $30 million for the Engineered Composites business. Capital spending in 2009 is expected to be $100 million, and will substantially
complete the previously announced PMC expansion. Beyond 2008, the Company expects annual capital spending to be approximately $65 million, including
approximately $35 to $40 million in the PMC segment. Full-year depreciation was $57.4 million and amortization was $5.1 million in 2007, and they are
expected to be approximately $68 million and $7 million, respectively, in 2008. Without additional acquisitions or significant capital expenditures,
management expects that free cash flow (net cash flow from operations, less capital expenditures and dividends declared) will become positive late in
2008 and could increase substantially in 2009 and 2010.
Cash dividends per share
increased from $0.34 in 2005, to $0.39 in 2006, to $0.43 in 2007. Accrued dividends as of December 31, 2007 and 2006 were $3.3 million and $2.9
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
45
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 be dependent on debt covenants and on the Board’s assessment of the
Company’s ability to generate sufficient cash flows.
In December 2005, the Board of
Directors increased the number of shares of the Company’s Class A Common Stock that could be purchased to 3.5 million. During the first 6 months
of 2006, the Company purchased 3.5 million shares under this authorization for a total cost of $131.5 million. In August 2006, the Company announced
that the Board of Directors authorized management to purchase up to 2 million additional shares of its Class A Common Stock. The Board’s action
authorizes 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. As of December 31, 2007, no share purchases had been made under the
2006 authorization.
As of December 31, 2007, the
Company had the following cash flow obligations:
|
|
|
|
Payments Due by Period
|
|
(in millions)
|
|
|
|
Total
|
|
Less than
one year
|
|
One to
three years
|
|
Three to
five years
|
|
After
five years
|
Total debt
|
|
|
|
$ |
479.6 |
|
|
$ |
33.2 |
|
|
$ |
0.3 |
|
|
$ |
116.0 |
|
|
$ |
330.1 |
|
Interest
payments (a) |
|
|
|
|
110.1 |
|
|
|
20.7 |
|
|
|
38.2 |
|
|
|
26.2 |
|
|
|
25.0 |
|
Pension plan
contributions (b) |
|
|
|
|
19.6 |
|
|
|
19.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other
postretirement benefits (c) |
|
|
|
|
34.0 |
|
|
|
5.8 |
|
|
|
13.0 |
|
|
|
15.2 |
|
|
|
— |
|
Restructuring
accruals |
|
|
|
|
10.7 |
|
|
|
10.7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other
noncurrent liabilities (d) |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Operating
leases |
|
|
|
|
17.2 |
|
|
|
9.4 |
|
|
|
6.8 |
|
|
|
0.7 |
|
|
|
0.3 |
|
|
|
|
|
$ |
671.2 |
|
|
$ |
99.4 |
|
|
$ |
58.3 |
|
|
$ |
158.1 |
|
|
$ |
355.4 |
|
(a) |
|
The terms of variable-rate debt arrangements, including interest
rates and maturities, are included in Note 6 of Notes to Consolidated Financial Statements. The interest payments are based on the assumption that the
Company maintains $116,000,000 of variable rate debt until the April 2006 credit agreement matures on April 14, 2011 and no changes in variable
interest rates occur. |
(b) |
|
The Company’s largest pension plan is in the United States.
Although no contributions are currently required, the Company’s planned contribution of $10,000,000 in 2008 is included in this schedule and,
additionally, $9,600,000 is included for plans outside of the United States. The amount of contributions after 2008 is subject to many variables,
including return of pension plan assets, interest rates, and tax and employee benefit laws. Therefore, contributions beyond 2008 are not included in
this schedule. |
(c) |
|
Estimated payments for Other postretirement benefits for the
next five years are based on the assumption that employer cash payments will increase by 8% after 2008. No estimate of the payments after five years
has been provided due to many uncertainties. |
(d) |
|
Estimated payments for deferred compensation, taxes payable, 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 7 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.
46
Recent Accounting Pronouncements
In February 2006, the FASB issued
FAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB statements No. 133 and 140” (FAS No. 155). This
Standard resolves and clarifies the accounting and reporting for certain financial instruments, including hybrid financial instruments with embedded
derivatives, interest-only strips, and securitized financial instruments. FAS No. 155 is effective for all financial instruments acquired or issued
after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company’s adoption of this Standard on January
1, 2007 did not have a material effect on its financial statements.
In March 2006, the FASB issued
FAS No. 156. “Accounting for Servicing of Financial Assets, an amendment of FAS No. 140”. This Standard amends the accounting treatment with
respect to separately recognized servicing assets and servicing liabilities, and is effective for fiscal years beginning after September 15, 2006. The
Company’s adoption of this Standard on January 1, 2007 did not have a material effect on its financial statements.
In June 2006, the FASB issued
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FAS No. 109” (FIN 48). This interpretation clarifies
the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on derecognizing, measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company’s adoption of this interpretation on January 1, 2007 resulted in an increase in liabilities and a
decrease in retained earnings of $2,491,000.
In September 2006, the FASB
issued FAS No.157, “Fair Value Measurements”. FAS No. 157 clarifies the principle that fair value should be based on the assumptions market
participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those
assumptions. Under the Standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. FAS No. 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early
adoption permitted. The Company does not expect the adoption of FAS No. 157 to have a material effect on its financial statements.
In February 2007, the FASB issued
FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115”.
FAS No. 159 provides companies with a choice to measure certain financial assets and liabilities at fair value that are not currently required to be
measured at fair value (the “Fair Value Option”). Election of the Fair Value Option is made on an instrument-by-instrument basis and is
irrevocable. At the adoption date, unrealized gains and losses on financial assets and liabilities for which the Fair Value Option has been elected
would be reported as a cumulative adjustment to beginning retained earnings. The Fair Value Option for certain financial assets and liabilities
requires that unrealized gains and losses, due to changes in their fair value, be reported in earnings at each subsequent reporting date. FAS No. 159
is effective as of January 1, 2008. The Company does not expect the adoption of FAS No. 159 to have a material effect on its financial
statements.
In December 2007, the FASB issued
FAS No. 141 (revised 2007), “Business combinations” (FAS 141R), which replaces FAS 141. FAS 141R establishes principles and requirements for
how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business
combination. FAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after a company’s fiscal
year that begins after December 15, 2008. The Company does not expect the adoption of FAS No. 141R to have a material effect on its financial
statements.
Also in December 2007, the FASB
issued FAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements — an amendment to ARB No. 51”. FAS 160 establishes
accounting and reporting standards that require the ownership interest in subsidiaries held by parties other than the parent be clearly identified and
presented in the consolidated balance sheets within equity, but separate from the parent’s equity; the amount of consolidated net income
attributable to the parent and the noncontrolling interest be clearly identified and presented on the face
47
of the consolidated statement
of earnings; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be
accounted for consistently. This statement is effective for fiscal years beginning on or after December 15, 2008. The Company does not expect the
adoption of FAS No. 160 to have a material effect on its 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.
The Company records sales when
persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed, and collectibility 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. Sales contracts in the Albany Door Systems segment may
include product and installation services. For these sales, the Company applies the provisions of EITF 00-21, “Revenue Arrangements with Multiple
Deliverables”. The Company’s contracts that include product and installation services generally do not qualify as separate units of
accounting and, accordingly, revenue for the entire contract value is recognized upon completion of installation services. 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.
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.
Goodwill and other long-lived
assets are reviewed for impairment whenever events such as significant changes in the business climate, plant closures, changes in product offerings,
or other circumstances indicate that the carrying amount may not be recoverable. The Company performs a test for goodwill impairment at least annually.
The determination of whether these assets are impaired involves significant judgments based on short and long-term projections of future performance.
Changes in strategy and/or market conditions may result in adjustments to recorded asset balances.
The Company has investments in
other companies that are accounted for under either the cost method or equity method of accounting. Investments accounted for under the equity method
are included in Investments in associated companies. The Company performs regular reviews of the financial condition of the investees to determine if
its investment is impaired. If the financial condition of the investees were to no longer support their valuations, the Company would record an
impairment provision.
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 41% and
21% of the total company benefit obligations. 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
pension plan assets (35% for the U.S. plan and 74% for non-U.S. plans) was invested in equities. The assumption for
48
expected return on plan
assets is based on historical and expected returns on various categories of plan assets. The U.S. plan accounts for 64% of the total consolidated
pension plan assets. The actual return on assets in the U.S. pension plan for 2007 was 188% of the total assumed return. For the U.S. pension plan,
2007 pension expense was determined using the 1983 Group Annuity Mortality table. The benefit obligation as of September 30, 2007 was calculated using
the RP-2000 Combined Healthy Mortality Table projected to 2015 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 2007. Including anticipated contributions for all pension plans, the Company estimates that contributions
will amount to approximately $19.6 million. Actual contributions for 2007 totaled $20.8 million. The Company adopted the provisions of FAS No. 158 in
the fourth quarter of 2006. resulting in an increase of $23.7 million in noncurrent deferred tax assets, a decrease of $5.6 million in intangible
assets, an increase of $59.6 million in pension liabilities, and an increase of $41.5 million in accumulated other comprehensive
losses.
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.
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 Notes to
the Consolidated Financial Statements.
Outlook
The Company began 2007 with two
tightly connected objectives: for the short term, restore profits to the levels experienced before the 2006 pricing disruption in the Western European
PMC market, and for the long term, lay a sustainable foundation for the Company’s cash and grow strategy. By the end of 2007, both objectives had
been substantially achieved.
Management responded to the 2006
pricing disruption by initiating, in the third quarter of 2006, a deliberate, intensive three-year process of restructuring and performance-improvement
initiatives. By late 2009, the Company will have streamlined its manufacturing footprint in Europe and North America, and expanded it dramatically in
South America and Asia; reshaped and strengthened virtually every function in every business unit in every region of the world; and fully implemented a
shared services center in Europe, a unified, comprehensive ERP system, and a global procurement organization. This transformation process is on
schedule, contributed to improved profitability in the fourth quarter of 2007, and is a major reason that management remains optimistic about the
prospects for strong cash flow generation in 2009. The Company expects that total recurring, annual savings from all of the initiatives taken or
announced since the third quarter of 2006 will be at least $1.20 per share, of which $0.50 per share was realized by the end of 2007; the remaining
savings will be fully realized beginning in the first quarter of 2008. Additionally, the Company announced the intention to shut down its forming plant
in Montgomery, Alabama. The amount and timing of restructuring, idle-capacity, and other expenses associated with that shutdown have not yet been
determined.
The top-line performance in 2007
was influenced by all of the now familiar trends: sales growth in Asia and South America, fueled by rapidly growing markets; lower sales in North
America, with the continuing shrinkage of the number of paper machines partially offset by market share gains resulting from superior performance in
the field; and higher sales in Europe, with the lower prices resulting from the 2006 disruption more than offset by growth in volume.
During 2007, management did not
see any significant change in the underlying forces at work in the PMC market. The emerging markets in Asia and South America continue to grow, while
the mature markets in North America and Western Europe continue to face top-line pressure from the shrinking number of paper machines and continuing
threat of competitive price pressure. This means that sustained growth in profit and cash generation in the Company’s core business will be driven
not as it has been in the past by market growth in the traditional markets, but by performance-based market share gains in those markets, growth in
Asia and South America, and fundamentally lower costs. This is precisely what drove PMC performance in the fourth quarter of 2007, and management
expects more of the same in 2008.
49
On the surface, Albany Engineered
Composites (AEC) business (included in the Applied Technologies segment), performed poorly in 2007, with an operating loss including R&D of $7.1
million ($0.18 per share). But underneath the surface, management sees encouraging signs of progress, both in the steps being taken to turn the corner
on profitability, and in increasing visibility about the long-term growth potential of the business. The poor bottom-line performance stems from the
combination of the inefficiencies that accompany steep ramp-ups in production in a still-small business, coupled with rapidly escalating expenditures
in R&D and engineering. In the fourth quarter of 2007, and again at the start of 2008, management began to see sustained improvement in the
performance parameters that drive production efficiency. As a result, management expects that AEC should turn profitable in the second half of
2008.
With each passing quarter,
management develops a firmer appreciation of the growth potential of this business. In 2006, management estimated that AEC had the potential for at
least 25 percent per annum growth for the next five years. Given the 2007 AEC sales of $30.5 million, this would make AEC a potential $150 million
business by the middle of the next decade. With an additional year of experience, management now views that estimate as overly conservative. In 2007,
net sales grew 31.1 percent compared to 2006. For the next five years, management believes AEC has the potential to grow at least 35 percent per annum.
But more importantly, management now believes AEC has the potential, and it is important to underscore the word “potential,” to be
significantly larger than the $150 million enterprise that was envisioned a year ago, and to become a second core business of the
Company.
According to independent
estimates, the total aerospace composites market will grow from about $5 billion in 2008 to about $25 billion in 2016. Of that $25 billion market,
about $3 billion is addressable by AEC’s unique technology, and a total of $13 billion is addressable by a combination of AEC’s unique
capabilities and its more conventional composites capability.
The aerospace composites market
is being shaped by two major waves of growth: the current wave, just beginning, is being driven by the new generation of long-haul aircraft, the Boeing
787 and the Airbus A380. Except for the landing gear braces that the Company is developing with Messier-Dowty and one other relatively small project,
AEC is not participating in the 787 wave, as AEC started up far too late to participate in the critical development projects. Much of the short-term
AEC growth results from participation on smaller platforms that have already been certified and are in production, like the Eclipse
VLJ.
The second wave of growth, which
is expected to hit early to mid-next decade, is driven by the next-generation single-aisle aircraft, the successor aircraft to the Boeing 737 and
Airbus A320. For these platforms, the Company’s timing is excellent. The Company has made good progress on positioning AEC to be a supplier of
parts for the next-generation engines for these new short-haul aircraft, and management is increasingly hopeful of participating in airframe
applications as well. It is this second wave of growth opportunities that is driving the Company’s rapidly increasing expenditures in R&D and
engineering; and it will be AEC’s performance in pursuit of the development opportunities created by this second wave that will dictate whether,
by the end of this decade, management is viewing AEC as a healthy and important part of the Albany portfolio of businesses, or as something altogether
more significant than that. It is too early to tell, but management is encouraged by the progress we made in 2007 in the pursuit of second-wave
development contracts and partnerships.
As for the rest of the Applied
Technologies segment, sales grew by 15.4 percent in 2007. The strong top-line performance was driven by growth in the power generation filtration
business in China. Another highlight of the quarter was the successful start-up of the Company’s new Engineered Fabrics plant in Kaukauna,
Wisconsin. As management looks to the prospects of this segment in 2008 and beyond, the key is the potential for sustained profitability and cash
generation. For example, the Engineered Fabrics business, which has the mission of applying permeable belts technology to process industries outside of
the paper industry, has growth potential of about 5 percent per year, and profit and cash generation potential comparable to PMC in its steady
state.
Sales in the Albany Door Systems
segment grew by 22.7 percent compared to 2006, and reflecting the efforts to improve profits, operating income before restructuring and costs
associated with performance improvement initiatives improved by 39.4%. The results were driven by across-the-board top-line strength, in both product
and aftermarket, and in each region of the world. In 2008, management expects continued progress in the European aftermarket; growing momentum in North
America, as the consolidation of operations and product lines with R-Bac
50
is completed; and progress in
laying the foundation for growth in China, where the Company is now establishing a stand-alone manufacturing facility that will produce the
Company’s full range of products. It is important to note that this is not a capital intensive business for the Company; growth is driven
primarily by breadth and performance of product line, and strength of distribution channels. On both fronts, management expects good progress in 2008.
The only caution flag for this business in 2008 is the prospect of recession, which, in the past, has had a marked effect on demand for high
performance doors.
In sum, by the fourth quarter of
2007, and more generally in 2007 overall, the Company accomplished its twin objectives of restoring near-term profitability, while continuing to lay
the long-term foundation for the cash and grow strategy. As for 2008, we expect more of the same: continued improvement in profitability, and continued
internal transformation. The risks associated with pursuing the first while undergoing the second are magnified in a recessionary environment, but
management remains confident nonetheless that by the second half of 2009, the transformation will be complete, the cash and grow strategy will be fully
implemented, and the results increasingly reflected in the Company’s financial performance.
Non-GAAP Measures
This Form 10-K contains certain
items, such as sales excluding currency effects, and consolidated net income and consolidated and segment operating income excluding costs associated
with restructuring and performance-improvement initiatives, that may be considered to be non-GAAP financial measures. Such items are provided because
management believes that, when presented together with the GAAP items to which they relate, they can provide additional useful information to investors
regarding the registrant’s financial condition, results of operations, and cash flows. Presenting increases or decreases in sales, after currency
effects are excluded, can give managements and investors insight into underlying sales trends. As explained in the text of the release, an
understanding of the impact in a particular quarter of specific restructuring and performance-improvement measures, and in particular of the costs
associated with the implementation of such measures, on the Company’s net income or operating income, or the operating income of a business
segment, can give management and investors additional insight into quarterly performance, especially when compared to quarters in which such measures
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.
Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET 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 non-functional currencies subject to
potential loss amount to approximately $710.0 million. The potential loss in fair value resulting from a hypothetical 10% adverse change in quoted
foreign currency exchange rates amounts to $71.0 million. On December 10, 2007, the Company and Bank of America entered into a US dollar-to-euro
cross-currency and interest rate swap agreement with a notional value of $150,000,000. The Company has designed the swap to be an effective hedge of
its euro net asset exposure relating to European operations. Under the swap agreement, the Company has notionally exchanged $150,000,000 at a fixed
interest rate of 5.34% for euro 101,950,700 at a fixed interest rate of 5.28%. The exchange was executed at an exchange rate of 1.4713 US dollars per
euro. The Company’s swap agreement qualifies as a hedge of net investments in foreign operations under the provisions of FAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities”. Under FAS No. 133, changes in fair value of derivatives that qualify as
hedges are recorded in shareholders’ equity, net of tax, in the caption “Derivative valuation adjustment”. As of December 31, 2007, the
change in fair value of the swap agreement was $2,566,000, which was recorded in other assets. Of the $2,566,000 amount, $1,001,000 was included in
noncurrent liabilities for applicable taxes and the remaining $1,565,000 was included in shareholders’ equity.
51
Furthermore, related to foreign
currency transactions, the Company has exposure to non-functional currency balances totaling $160.4 million. This amount includes, on an absolute
basis, exposures to foreign currency assets and liabilities. On a net basis, the Company had approximately $39.3 million of foreign currency
liabilities as of December 31, 2007. As currency rates change, these non-functional 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
$3.9 million. Actual results may differ.
52
Item 8 of Form 10-K FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
Report of
Independent Registered Public Accounting Firm |
|
|
|
|
54 |
|
Consolidated
Statements of Income and Retained Earnings for the years ended December 31, 2007, 2006, and 2005 |
|
|
|
|
55 |
|
Consolidated
Statements of Comprehensive Income for the years ended December 31, 2007, 2006, and 2005 |
|
|
|
|
56 |
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006 |
|
|
|
|
57 |
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005 |
|
|
|
|
58 |
|
Notes to
Consolidated Financial Statements |
|
|
|
|
59 |
|
Quarterly
Financial Data |
|
|
|
|
94 |
|
53
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and Shareholders of Albany International Corp.:
In our opinion, the accompanying
consolidated balance sheets and the related consolidated statements of income and retained earnings, of comprehensive income and of cash flows present
fairly, in all material respects, the financial position of Albany International Corp. and its subsidiaries at December 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting
principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index
appearing under item 15(a)(2) present 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, 2007, 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 schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Item 9A under Management’s Report on Internal Control over Financial Reporting. Our responsibility
is to express opinions on these financial statements, on the financial statement schedules, 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, effective January 1, 2007, the Company changed the manner in which it accounts for uncertain tax positions.
Additionally, as discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for defined benefit
pension and other postretirement benefit plans effective December 31, 2006.
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
February
29, 2008
54
Albany International Corp.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For the years ended December 31,
(in
thousands, except per share amounts)
|
|
|
|
2007
|
|
2006
|
|
2005
|
Statements
of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
$ |
1,092,977 |
|
|
$ |
1,011,458 |
|
|
$ |
978,710 |
|
Cost of goods
sold |
|
|
|
|
711,448 |
|
|
|
620,149 |
|
|
|
586,700 |
|
Gross profit
|
|
|
|
|
381,529 |
|
|
|
391,309 |
|
|
|
392,010 |
|
Selling and
general expenses |
|
|
|
|
248,195 |
|
|
|
230,499 |
|
|
|
217,242 |
|
Technical,
product engineering, and research expenses |
|
|
|
|
68,260 |
|
|
|
64,587 |
|
|
|
58,769 |
|
Restructuring
and other |
|
|
|
|
27,625 |
|
|
|
5,936 |
|
|
|
— |
|
Operating
income |
|
|
|
|
37,449 |
|
|
|
90,287 |
|
|
|
115,999 |
|
Interest
income |
|
|
|
|
(1,635 |
) |
|
|
(3,959 |
) |
|
|
(2,256 |
) |
Interest
expense |
|
|
|
|
16,915 |
|
|
|
13,142 |
|
|
|
12,839 |
|
Other
expense, net |
|
|
|
|
2,126 |
|
|
|
2,779 |
|
|
|
4,653 |
|
Income before
income taxes |
|
|
|
|
20,043 |
|
|
|
78,325 |
|
|
|
100,763 |
|
Income tax
expense |
|
|
|
|
2,155 |
|
|
|
20,530 |
|
|
|
29,420 |
|
Income before
equity in earnings of associated companies |
|
|
|
|
17,888 |
|
|
|
57,795 |
|
|
|
71,343 |
|
Equity in
(losses)/earnings of associated companies |
|
|
|
|
(106 |
) |
|
|
244 |
|
|
|
509 |
|
Net income
|
|
|
|
|
17,782 |
|
|
|
58,039 |
|
|
|
71,852 |
|
| |
Retained
earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings, beginning of year |
|
|
|
|
541,602 |
|
|
|
495,018 |
|
|
|
434,057 |
|
Cumulative
effect of adopting FIN 48 (see Note 1) |
|
|
|
|
(2,491 |
) |
|
|
— |
|
|
|
— |
|
Less
dividends |
|
|
|
|
(12,665 |
) |
|
|
(11,455 |
) |
|
|
(10,891 |
) |
Retained
earnings, end of year |
|
|
|
|
544,228 |
|
|
|
541,602 |
|
|
|
495,018 |
|
Earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
$ |
0.60 |
|
|
$ |
1.95 |
|
|
$ |
2.25 |
|
Diluted
|
|
|
|
$ |
0.60 |
|
|
$ |
1.92 |
|
|
$ |
2.22 |
|
Dividends per
share |
|
|
|
$ |
0.43 |
|
|
$ |
0.39 |
|
|
$ |
0.34 |
|
The accompanying notes are an integral part of the
consolidated financial statements.
55
Albany International Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31,
(in
thousands)
|
|
|
|
2007
|
|
2006
|
|
2005
|
Net income
|
|
|
|
$ |
17,782 |
|
|
$ |
58,039 |
|
|
$ |
71,852 |
|
| |
Other
comprehensive income/(loss), before tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments |
|
|
|
|
60,556 |
|
|
|
52,857 |
|
|
|
(61,151 |
) |
Hedges of net
investments in non-U.S. subsidiaries |
|
|
|
|
— |
|
|
|
— |
|
|
|
2,717 |
|
Pension and
postretirement liability adjustments |
|
|
|
|
41,009 |
|
|
|
793 |
|
|
|
(1,448 |
) |
Derivative
valuation adjustment |
|
|
|
|
2,566 |
|
|
|
— |
|
|
|
4,566 |
|
| |
Income taxes
related to items of other comprehensive
income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedges of net
investments in non-U.S. subsidiaries |
|
|
|
|
— |
|
|
|
— |
|
|
|
(1,060 |
) |
Pension and
postretirement liability adjustments |
|
|
|
|
(15,891 |
) |
|
|
(293 |
) |
|
|
(523 |
) |
Derivative
valuation adjustment |
|
|
|
|
(1,001 |
) |
|
|
— |
|
|
|
(1,781 |
) |
Other
comprehensive income/(loss), after tax |
|
|
|
|
87,239 |
|
|
|
53,357 |
|
|
|
(58,680 |
) |
Comprehensive
income |
|
|
|
$ |
105,021 |
|
|
$ |
111,396 |
|
|
$ |
13,172 |
|
The accompanying notes are an integral part of the
consolidated financial statements.
56
Albany International Corp.
CONSOLIDATED BALANCE SHEETS
At December 31,
(in thousands, except share
data)
|
|
|
|
2007
|
|
2006
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
|
|
$ |
73,305 |
|
|
$ |
68,237 |
|
Accounts
receivable, less allowance for doubtful accounts ($7,322 in 2007;
$5,747 in 2006) |
|
|
|
|
232,440 |
|
|
|
202,611 |
|
Inventories
|
|
|
|
|
247,043 |
|
|
|
224,210 |
|
Income taxes
receivable and deferred |
|
|
|
|
26,734 |
|
|
|
23,586 |
|
Prepaid
expenses and other current assets |
|
|
|
|
22,832 |
|
|
|
10,552 |
|
Total current
assets |
|
|
|
|
602,354 |
|
|
|
529,196 |
|
| |
Property, plant
and equipment, at cost, net |
|
|
|
|
499,540 |
|
|
|
397,521 |
|
Investments in
associated companies |
|
|
|
|
5,373 |
|
|
|
6,634 |
|
Intangibles
|
|
|
|
|
11,217 |
|
|
|
9,343 |
|
Goodwill
|
|
|
|
|
194,660 |
|
|
|
172,890 |
|
Deferred taxes
|
|
|
|
|
100,604 |
|
|
|
112,280 |
|
Cash surrender
value of life insurance |
|
|
|
|
43,701 |
|
|
|
41,197 |
|
Other assets
|
|
|
|
|
69,528 |
|
|
|
37,486 |
|
Total assets
|
|
|
|
$ |
1,526,977 |
|
|
$ |
1,306,547 |
|
| |
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Notes and
loans payable |
|
|
|
$ |
32,030 |
|
|
$ |
12,510 |
|
Accounts
payable |
|
|
|
|
82,157 |
|
|
|
50,214 |
|
Accrued
liabilities |
|
|
|
|
120,267 |
|
|
|
101,995 |
|
Current
maturities of long-term debt |
|
|
|
|
1,146 |
|
|
|
11,167 |
|
Income taxes
payable and deferred |
|
|
|
|
2,970 |
|
|
|
20,099 |
|
Total current
liabilities |
|
|
|
|
238,570 |
|
|
|
195,985 |
|
| |
Long-term debt
|
|
|
|
|
446,433 |
|
|
|
354,587 |
|
Other
noncurrent liabilities |
|
|
|
|
188,621 |
|
|
|
219,774 |
|
Deferred taxes
and other credits |
|
|
|
|
53,682 |
|
|
|
37,076 |
|
Total
liabilities |
|
|
|
|
927,306 |
|
|
|
807,422 |
|
| |
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 34,865,744 in 2007 and 34,518,870 in 2006 |
|
|
|
|
35 |
|
|
|
35 |
|
Class B Common
Stock, par value $.001 per share; authorized 25,000,000 shares; issued and outstanding 3,236,098 in 2007 and 2006 |
|
|
|
|
3 |
|
|
|
3 |
|
Additional
paid-in capital |
|
|
|
|
326,608 |
|
|
|
316,164 |
|
Retained
earnings |
|
|
|
|
544,228 |
|
|
|
541,602 |
|
Accumulated
items of other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustments |
|
|
|
|
42,208 |
|
|
|
(18,348 |
) |
Pension and
postretirement liability adjustments |
|
|
|
|
(55,953 |
) |
|
|
(81,071 |
) |
Derivative
valuation adjustment |
|
|
|
|
1,565 |
|
|
|
— |
|
|
|
|
|
|
858,694 |
|
|
|
758,385 |
|
Less treasury
stock (Class A), at cost; 8,530,066 shares in 2007 and
8,540,882 in 2006 |
|
|
|
|
259,023 |
|
|
|
259,260 |
|
Total
shareholders’ equity |
|
|
|
|
599,671 |
|
|
|
499,125 |
|
Total
liabilities and shareholders’ equity |
|
|
|
$ |
1,526,977 |
|
|
$ |
1,306,547 |
|
The accompanying notes are an integral part of the
consolidated financial statements.
57
Albany International Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(in
thousands)
|
|
|
|
2007
|
|
2006
|
|
2005
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
$ |
17,782 |
|
|
$ |
58,039 |
|
|
$ |
71,852 |
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in
earnings of associated companies |
|
|
|
|
106 |
|
|
|
(244 |
) |
|
|
(509 |
) |
Depreciation
|
|
|
|
|
57,397 |
|
|
|
55,100 |
|
|
|
51,339 |
|
Amortization
|
|
|
|
|
5,120 |
|
|
|
4,350 |
|
|
|
4,106 |
|
Provision for
deferred income taxes, other credits and
long-term liabilities |
|
|
|
|
(10,897 |
) |
|
|
(8,104 |
) |
|
|
10,787 |
|
Provision for
write-off of equipment |
|
|
|
|
3,126 |
|
|
|
1,010 |
|
|
|
2,827 |
|
Increase in
cash surrender value of life insurance |
|
|
|
|
(3,028 |
) |
|
|
(2,397 |
) |
|
|
(2,171 |
) |
Unrealized
currency transaction gains and losses |
|
|
|
|
(363 |
) |
|
|
1,368 |
|
|
|
(4,520 |
) |
Loss on
disposition of assets |
|
|
|
|
688 |
|
|
|
— |
|
|
|
— |
|
Shares
contributed to ESOP |
|
|
|
|
5,088 |
|
|
|
6,215 |
|
|
|
5,357 |
|
Stock option
expense |
|
|
|
|
804 |
|
|
|
1,543 |
|
|
|
|
|
Excess tax
benefit of options exercised |
|
|
|
|
— |
|
|
|
(362 |
) |
|
|
3,469 |
|
Issuance of
shares under long-term incentive plan |
|
|
|
|
937 |
|
|
|
— |
|
|
|
— |
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
|
|
(10,030 |
) |
|
|
(53,601 |
) |
|
|
4,550 |
|
Note
receivable |
|
|
|
|
— |
|
|
|
17,827 |
|
|
|
1,128 |
|
Inventories
|
|
|
|
|
(8,610 |
) |
|
|
(19,034 |
) |
|
|
(17,155 |
) |
Income taxes
prepaid and receivable |
|
|
|
|
(1,722 |
) |
|
|
(7,296 |
) |
|
|
— |
|
Prepaid
expenses and other current assets |
|
|
|
|
(11,487 |
) |
|
|
(2,036 |
) |
|
|
2,285 |
|
Accounts
payable |
|
|
|
|
26,679 |
|
|
|
7,677 |
|
|
|
(421 |
) |
Accrued
liabilities |
|
|
|
|
10,759 |
|
|
|
(4,399 |
) |
|
|
(445 |
) |
Income taxes
payable |
|
|
|
|
(2,119 |
) |
|
|
2,213 |
|
|
|
(5,617 |
) |
Other, net
|
|
|
|
|
1,069 |
|
|
|
(5,846 |
) |
|
|
(4,490 |
) |
Net cash
provided by operating activities |
|
|
|
|
81,299 |
|
|
|
52,023 |
|
|
|
122,372 |
|
| |
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of
property, plant and equipment |
|
|
|
|
(149,215 |
) |
|
|
(84,452 |
) |
|
|
(43,293 |
) |
Purchased
software |
|
|
|
|
(16,023 |
) |
|
|
(8,822 |
) |
|
|
(2,533 |
) |
Proceeds from
sale of assets |
|
|
|
|
10,117 |
|
|
|
— |
|
|
|
5,067 |
|
Cash received
from life insurance policy terminations |
|
|
|
|
1,470 |
|
|
|
— |
|
|
|
— |
|
Acquisitions,
net of cash acquired |
|
|
|
|
(9,592 |
) |
|
|
(15,918 |
) |
|
|
— |
|
Premiums paid
for life insurance policies |
|
|
|
|
(988 |
) |
|
|
(1,022 |
) |
|
|
(1,022 |
) |
Net cash used
in investing activities |
|
|
|
|
(164,231 |
) |
|
|
(110,214 |
) |
|
|
(41,781 |
) |
| |
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
borrowings |
|
|
|
|
137,801 |
|
|
|
222,735 |
|
|
|
176,430 |
|
Principal
payments on debt |
|
|
|
|
(37,728 |
) |
|
|
(16,933 |
) |
|
|
(235,455 |
) |
Purchase of
treasury shares |
|
|
|
|
— |
|
|
|
(131,499 |
) |
|
|
(1,576 |
) |
Purchase of
call options on common stock |
|
|
|
|
— |
|
|
|
(47,688 |
) |
|
|
— |
|
Sale of
common stock warrants |
|
|
|
|
— |
|
|
|
32,961 |
|
|
|
— |
|
Proceeds from
options exercised |
|
|
|
|
3,303 |
|
|
|
3,227 |
|
|
|
14,455 |
|
Excess tax
benefit of options exercised |
|
|
|
|
— |
|
|
|
362 |
|
|
|
|
|
Debt issuance
costs |
|
|
|
|
— |
|
|
|
(5,434 |
) |
|
|
— |
|
Dividends
paid |
|
|
|
|
(12,335 |
) |
|
|
(11,446 |
) |
|
|
(10,489 |
) |
Net cash
provided by/(used in) financing activities |
|
|
|
|
91,041 |
|
|
|
46,285 |
|
|
|
(56,635 |
) |
Effect of
exchange rate changes on cash flows |
|
|
|
|
(3,041 |
) |
|
|
7,372 |
|
|
|
(10,167 |
) |
Increase/(decrease) in cash and cash equivalents |
|
|
|
|
5,068 |
|
|
|
(4,534 |
) |
|
|
13,789 |
|
Cash and cash
equivalents at beginning of year |
|
|
|
|
68,237 |
|
|
|
72,771 |
|
|
|
58,982 |
|
Cash and cash
equivalents at end of year |
|
|
|
$ |
73,305 |
|
|
$ |
68,237 |
|
|
$ |
72,771 |
|
The accompanying notes are an integral part of the
consolidated financial statements.
58
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1. Accounting
Policies
The consolidated financial
statements include the accounts of Albany International Corp. and its subsidiaries (the “Company”) after elimination of intercompany
transactions. The Company has 50% interests in an entity in South Africa, an entity in the United Kingdom, and an entity in Russia. The consolidated
financial statements include the Company’s original investment in these entities, plus its share of undistributed earnings or losses, in the
account “Investments in associated companies.”
Estimates
The preparation of the
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue Recognition
The Company records sales when
persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed, and collectibility is reasonably assured. The Company
includes in revenue any amounts invoiced for shipping and handling. 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. Certain contracts in the Applied Technologies segment are accounted for using the percentage of completion method. Sales
contracts in the Albany Door Systems segment may include product and installation services. For these sales, the Company applies the provisions of EITF
00-21, “Revenue Arrangements with Multiple Deliverables”. The Company’s contracts that include product and installation services
generally do not qualify as separate units of accounting and, accordingly, revenue for the entire contract value is recognized upon completion of
installation services. 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. Any value added taxes that are imposed on sales transactions are excluded from net
sales.
Cost of Goods Sold
Cost of goods sold includes the
cost of materials, provisions for obsolete inventories, labor and supplies, shipping and handling costs, depreciation of manufacturing facilities and
equipment, purchasing, receiving, warehousing and other expenses.
Selling, General, Technical and Product Engineering
Expenses
Selling, general, technical and
product engineering expenses are primarily comprised of wages, benefits, travel, professional fees, remeasurement of foreign currency balances and
other costs, and are expensed as incurred. Provisions for bad debts are included in selling expense.
Translation of Financial Statements
Assets and liabilities of
non-U.S. operations are translated at year-end rates of exchange, and the income statements are translated at the average rates of exchange for the
year. Gains or losses resulting from translating non-U.S. currency financial statements are recorded in Other comprehensive income and accumulated in
shareholders’ equity in the caption Translation adjustments.
59
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
1. Accounting Policies —
(Continued)
Gains or losses resulting from
short-term intercompany loans and balances denominated in a currency other than the entity’s local currency, forward exchange contracts that are
not designated as hedges for accounting purposes and futures contracts, are generally included in income in Other expense/(income), net. Gains and
losses on long-term intercompany loans not intended to be repaid in the foreseeable future are recorded in Other comprehensive income. Gains and losses
resulting from other balances denominated in a currency other than the entity’s local currency are recorded in Selling and general
expenses.
The following table summarizes
total transaction losses and gains recognized in the income statement:
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
2005
|
Losses/(gains) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and
general expenses |
|
|
|
$ |
1,999 |
|
|
$ |
3,754 |
|
|
$ |
(1,690 |
) |
Other
(income)/expense, net |
|
|
|
|
(1,549 |
) |
|
|
(2,915 |
) |
|
|
(2,472 |
) |
Total
transaction losses/(gains) |
|
|
|
$ |
450 |
|
|
$ |
839 |
|
|
$ |
(4,162 |
) |
Research Expense
Research expense consists
primarily of wages, benefits, supplies, and professional fees incurred in connection with intellectual property, and is charged to operations as
incurred. During the first quarter of 2007 product engineering costs were reclassified out of research expense, and prior year amounts have been
changed to conform to the reclassification. Research expense was $23,030,000 in 2007, $21,628,000 in 2006, and $20,017,000 in 2005.
Cash and Cash Equivalents
Cash and cash equivalents consist
of cash and highly liquid short-term investments with original maturities of three months or less.
Inventories
Inventories are stated at the
lower of cost or market and are valued at average cost, net of reserves. The Company records a provision for obsolete inventory based on the age and
category of the inventories. As of December 31, 2007 and 2006, inventories consisted of the following:
(in thousands)
|
|
|
|
2007
|
|
2006
|
Raw materials
|
|
|
|
$ |
60,528 |
|
|
$ |
44,314 |
|
Work in process
|
|
|
|
|
67,374 |
|
|
|
59,738 |
|
Finished goods
|
|
|
|
|
119,141 |
|
|
|
120,158 |
|
Total
inventories |
|
|
|
$ |
247,043 |
|
|
$ |
224,210 |
|
Property, Plant and Equipment
Property, plant and equipment are
recorded at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets for financial reporting
purposes; accelerated methods are used for income tax purposes. Significant additions or improvements extending assets’ useful lives are
capitalized; normal maintenance and repair costs are expensed as incurred. The cost of fully depreciated assets remaining in use are included in the
respective asset and accumulated depreciation accounts. When items are sold or retired, related gains or losses are included in net
income.
The Company reviews the carrying
value of property, plant and equipment and other long-lived assets for impairment whenever events and circumstances indicate that the carrying value of
an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.
60
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
1. Accounting Policies —
(Continued)
Goodwill, Intangibles and Other Assets
The Company accounts for goodwill
and other intangible assets under the provisions of Statement of Financial Accounting Standards No. 142 (FAS No. 142), “Goodwill and Other
Intangible Assets”. FAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead
tested for impairment at least annually. The Company performs the test for goodwill impairment during the second quarter of each year. Goodwill and
other long-lived assets are reviewed for impairment whenever events such as significant changes in the business climate, plant closures, changes in
product offerings, or other circumstances indicate that the carrying amount may not be recoverable. The Company is continuing to amortize certain
patents and trade names that have finite lives. Patents, trade names and technology, at cost, are amortized on a straight-line basis over 8 to 12
years.
Computer software purchased for
internal use, at cost, is amortized on a straight-line basis over five years after being placed into service, and is included in Other assets. In 2006,
the Company initiated a project to migrate its global enterprise resource planning (ERP) system to SAP. The Company is capitalizing internal and
external costs incurred during the software development stage. Capitalized salaries, social costs and travel costs related to the software development
amounted to $15,027,000 in 2007 and $2,238,000 in 2006. Including costs related to the new ERP system, unamortized software costs were $26,311,000 at
December 31, 2007 and $11,535,000 December 31, 2006. Software amortization is recorded in Selling and general expense and was $1,244,000, $1,296,000,
and $1,460,000 for 2007, 2006 and 2005, respectively.
The Company has investments in
other companies that are accounted for under either the cost method or equity method of accounting. Investments accounted for under the equity method
are included in Investments in associated companies. The Company performs regular reviews of the financial condition of the investees to determine if
its investment is other than temporarily impaired. If the financial condition of the investees were to no longer support their valuations, the Company
would record an impairment provision.
Cash Surrender Value of Life Insurance
The Company is the owner and
beneficiary of life insurance policies on certain present and former employees. The cash surrender value of the policies generates income that is
reported as a reduction to Selling and general expenses. The rate of return on the policies varies with market conditions and was approximately 6.3%
during 2007, 2006, and 2005. 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. The Company reports the cash surrender value of life insurance, net of any outstanding loans, as a
separate noncurrent asset. As of December 31, 2007 and 2006, there were no outstanding loans.
Stock-Based Compensation
As described in Note 15, the
Company has stock-based compensation plans for key employees. Prior to 2003, the Company issued stock options to certain key employees. Stock options
are accounted for in accordance with the modified prospective transition method of Financial Accounting Standard No. 123 (Revised) “Share-Based
Payment,” as interpreted by SEC Staff Accounting Bulletin No. 107.
In 2005, shareholders approved
the Albany International 2005 Incentive Plan. The plan provides key members of management with incentive compensation based on achieving certain
performance targets. The incentive compensation award is paid out over three years, partly in cash and partly in shares of Class A Common Stock. If a
person terminates employment prior to the award becoming fully vested, the person will forfeit a portion of the incentive compensation award. Expense
associated with this plan is recognized over the vesting period, which includes the year for which performance targets are measured and the two
subsequent years.
61
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
1. Accounting Policies —
(Continued)
Derivatives
The Company uses derivatives
from time to time to reduce potentially large adverse effects from changes in currency exchange rates and interest rates. The Company monitors its
exposure to these risks and evaluates, on an ongoing basis, the risk of potentially large adverse effects versus the costs associated with hedging such
risks.
The Company uses interest rate
swaps in the management of interest rate exposures and foreign currency derivatives in the management of foreign currency exposure related to assets
and liabilities (including net investments in subsidiaries located outside the U.S.) denominated in foreign currencies. When the Company enters into a
derivative contract, the Company makes a determination whether the transaction is deemed to be a hedge for accounting purposes. For those contracts
deemed to be a hedge, the Company formally documents the relationship between the derivative instrument and the risk being hedged. In this
documentation, the Company specifically identifies the asset, liability, forecasted transaction, cash flow, or net investment that has been designated
as the hedged item, and evaluates whether the derivative instrument is expected to reduce the risks associated with the hedged item. To the extent
these criteria are not met, the Company does not use hedge accounting for the derivative.
All derivative contracts are
recorded in the balance sheet at fair value. For transactions that are designated as hedges, the Company performs an evaluation of the effectiveness of
the hedge. To the extent that the hedge is effective, changes in the fair value of the hedge is recorded, net of tax, in Other comprehensive income.
The Company measures effectiveness of its hedging relationships both at inception and on an ongoing basis. The ineffective portion of a hedge, if any,
and changes in the fair value of a derivative not deemed to be a hedge, are recorded in Other expense, net.
For derivatives that are
designated and qualify as hedges of net investments in subsidiaries located outside the United States, changes in the fair value of derivatives are
reported in Other comprehensive income as part of the cumulative translation adjustment.
Income Taxes
The Company accounts for income
taxes in accordance with the asset and liability method. Deferred income taxes are recognized for the tax consequences of temporary differences by
applying enacted statutory tax rates applicable for future years to differences between financial statement and tax bases of existing assets and
liabilities. The effect of tax rate changes on deferred taxes is recognized in the income tax provision in the period that includes the enactment date.
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. The Company
adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48),
on January 1, 2007. The cumulative effect of adopting FIN 48 was an increase in tax reserves and a decrease in beginning of the year retained earnings
of $2,491,000.
It is the Company’s policy
to accrue U.S. and non-U.S. income taxes on earnings of subsidiary companies that are intended to be remitted to the parent company in the near
future.
The provision for taxes is
reduced by tax credits in the years such credits become available.
Pension and Postretirement Benefit Plans
As described in Note 13, the
Company has pension and postretirement benefit plans covering substantially all employees. As described below, the Company adopted the provisions of
FAS No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans” in 2006. The Company’s defined benefit
pension plan in the United States was closed to new participants as of October 1998. The plans are generally trusteed or insured,
62
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
1. Accounting Policies —
(Continued)
and accrued amounts are
funded as required in accordance with governing laws and regulations. The Company has provided certain postretirement medical, dental and life
insurance benefits to certain retired United States retirees. Effective January 1, 2005, any new employees who wish to be covered under this plan will
be responsible for the full cost of such benefits. The annual expense and liabilities recognized for defined benefit pension plans and postretirement
benefit plans 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 at the beginning of each fiscal year. The Company considers current market conditions, including
changes in interest rates, in making these assumptions. 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
assumption for expected return on plan assets is based on historical and expected returns on various categories of plan assets.
Reclassifications
The Company reclassified
$5,936,000 of 2006 expense from Selling and general expenses to Restructuring and other to conform to the 2007 presentation. Additionally, in the 2006
Balance Sheet, the Company reclassified $7,296,000 from Accounts receivable to Income taxes receivable and deferred.
Earnings Per Share
Net income per share is
computed using the weighted average number of shares of Class A Common Stock and Class B Common Stock outstanding during each year. Diluted net income
per share includes the effect of all potentially dilutive securities.
Reportable Segments
In accordance with FAS No.
131, “Disclosures About Segments of an Enterprise and Related Information”, the internal organization that is used by management for making
operating decisions and assessing performance is used as the source of the Company’s reportable segments. The reportable segments, which are
described in more detail in Note 12, are Paper Machine Clothing, Applied Technologies and Albany Door Systems.
Recent Accounting Pronouncements
In February 2006, the FASB issued
FAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB statements No. 133 and 140” (FAS No. 155). This
Standard resolves and clarifies the accounting and reporting for certain financial instruments, including hybrid financial instruments with embedded
derivatives, interest-only strips, and securitized financial instruments. FAS No. 155 is effective for all financial instruments acquired or issued
after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company’s adoption of this Standard on January
1, 2007 did not have a material effect on its financial statements.
In March 2006, the FASB issued
FAS No. 156. “Accounting for Servicing of Financial Assets, an amendment of FAS No. 140”. This Standard amends the accounting treatment with
respect to separately recognized servicing assets and servicing liabilities, and is effective for fiscal years beginning after September 15, 2006. The
Company’s adoption of this Standard on January 1, 2007 did not have a material effect on its financial statements.
In June 2006, the FASB issued
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FAS No. 109” (FIN 48). This interpretation clarifies
the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on derecognizing, measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company’s adoption of this interpretation on January 1, 2007 resulted in an increase in liabilities and a
decrease in retained earnings of $2,491,000.
63
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
1. Accounting Policies —
(Continued)
In September 2006, the FASB
issued FAS No.157, “Fair Value Measurements”. FAS No. 157 clarifies the principle that fair value should be based on the assumptions market
participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those
assumptions. Under the Standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. FAS No. 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early
adoption permitted. The Company does not expect the adoption of FAS No. 157 to have a material effect on its financial statements.
In February 2007, the FASB issued
FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No.
115”. FAS No. 159 provides companies with a choice to measure certain financial assets and liabilities at fair value that are not currently
required to be measured at fair value (the “Fair Value Option”). Election of the Fair Value Option is made on an instrument-by-instrument
basis and is irrevocable. At the adoption date, unrealized gains and losses on financial assets and liabilities for which the Fair Value Option has
been elected would be reported as a cumulative adjustment to beginning retained earnings. The Fair Value Option for certain financial assets and
liabilities requires that unrealized gains and losses, due to changes in their fair value, be reported in earnings at each subsequent reporting date.
FAS No. 159 is effective as of January 1, 2008. The Company does not expect the adoption of FAS No. 159 to have a material effect on its financial
statements.
In December 2007, the FASB issued
FAS No. 141 (revised 2007), “Business combinations” (FAS 141R), which replaces FAS 141. FAS 141R establishes principles and requirements for
how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business
combination. FAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after a company’s fiscal
year that begins after December 15, 2008. The Company does not expect the adoption of FAS No. 141R to have a material effect on its financial
statements.
Also in December 2007, the FASB
issued FAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements — an amendment to ARB No. 51”. FAS 160 establishes
accounting and reporting standards that require the ownership interest in subsidiaries held by parties other than the parent be clearly identified and
presented in the consolidated balance sheets within equity, but separate from the parent’s equity; the amount of consolidated net income
attributable to the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of earnings;
and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for
consistently. This statement is effective for fiscal years beginning on or after December 15, 2008. The Company does not expect the adoption of FAS No.
160 to have a material effect on its financial statements.
64
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
2. Earnings Per
Share
The amounts used in computing
earnings per share and the weighted average number of shares of potentially dilutive securities are as follows:
(in thousands, except market price data)
|
|
|
|
2007
|
|
2006
|
|
2005
|
Net income
available to common shareholders |
|
|
|
$ |
17,782 |
|
|
$ |
58,039 |
|
|
$ |
71,852 |
|
Weighted
average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares used in
calculating basic net income per share |
|
|
|
|
29,421 |
|
|
|
29,803 |
|
|
|
31,921 |
|
Effect of
dilutive stock-based compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
386 |
|
|
|
419 |
|
|
|
433 |
|
Long-term
incentive plan |
|
|
|
|
47 |
|
|
|
67 |
|
|
|
49 |
|
Weighted
average number of shares used in
calculating diluted net income per share |
|
|
|
|
29,854 |
|
|
|
30,289 |
|
|
|
32,403 |
|
Average
market price of common stock used
for calculation of dilutive shares |
|
|
|
$ |
37.15 |
|
|
$ |
36.25 |
|
|
$ |
34.33 |
|
Net income
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
$ |
0.60 |
|
|
$ |
1.95 |
|
|
$ |
2.25 |
|
Diluted
|
|
|
|
$ |
0.60 |
|
|
$ |
1.92 |
|
|
$ |
2.22 |
|
There were no option shares that
were excluded from the computation of diluted earnings per share in any of the periods presented. As of December 31, 2007, and 2006, there was no
dilution resulting from the convertible debt instrument, purchased call option, and warrant that are described in Note 6.
Total shares outstanding were
29,571,776 as of December 31, 2007, 29,214,086 as of December 31, 2006, and 32,362,327 as of December 31, 2005.
3. Property, Plant and
Equipment
The components of property, plant
and equipment are summarized below:
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
Estimated useful life
|
Land and land
improvements |
|
|
|
$ |
37,294 |
|
|
$ |
39,919 |
|
|
|
|
25 years for improvements |
Buildings
|
|
|
|
|
240,691 |
|
|
|
209,293 |
|
|
|
|
25 to 40 years |
Machinery and
equipment |
|
|
|
|
880,333 |
|
|
|
749,789 |
|
|
|
|
10 years |
Furniture and
fixtures |
|
|
|
|
29,075 |
|
|
|
25,154 |
|
|
|
|
5 years |
Computer and
other equipment |
|
|
|
|
8,103 |
|
|
|
7,098 |
|
|
|
|
3 to 10 years |
Property,
plant and equipment, gross |
|
|
|
|
1,195,496 |
|
|
|
1,031,253 |
|
|
|
|
|
Accumulated
depreciation |
|
|
|
|
(695,956 |
) |
|
|
(633,732 |
) |
|
|
|
|
Property,
plant and equipment, net |
|
|
|
$ |
499,540 |
|
|
$ |
397,521 |
|
|
|
|
|
Expenditures for maintenance and
repairs are charged to income as incurred and amounted to $23,497,000 in 2007, $21,314,000 in 2006, and $21,256,000 in 2005.
Depreciation expense was
$57,397,000 in 2007, $55,100,000 in 2006, and $51,339,000 in 2005. Capital expenditures were $149,215,000 in 2007, $84,452,000 in 2006, and $43,293,000
in 2005.
4. Goodwill and
Intangibles
Effective January 1, 2002, the
Company adopted Statement of FAS No. 142, “Goodwill and Other Intangible Assets”. FAS No. 142 changed the accounting for goodwill from an
amortization method to an impairment-only approach. As required by FAS No. 142, the Company performed its annual test for impairment during the
second
65
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
4. Goodwill and Intangibles —
(Continued)
quarters of 2007, 2006, and
2005, and determined that there was no impairment of goodwill. The Company is continuing to amortize certain patents and trade names that have finite
lives.
For the purposes of applying FAS
No. 142, the Company has determined that the reporting units are the Americas, Europe and Asia Pacific businesses within the Paper Machine Clothing
segment, the Albany Doors segment, and the Albany Engineered Composites and Albany Engineered Fabrics businesses that are within the Applied
Technologies segment. 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 changes in intangible assets
and goodwill from January 1, 2006 to December 31, 2007, were as follows:
(in thousands)
|
|
|
|
Balance at
December 31, 2006
|
|
Amortization
|
|
Currency
Translation
|
|
Other
Changes
|
|
Balance at
December 31, 2007
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents |
|
|
|
$ |
2,450 |
|
|
$ |
(481 |
) |
|
$ |
122 |
|
|
$ |
— |
|
|
$ |
2,091 |
|
Trade
names |
|
|
|
|
2,339 |
|
|
|
(641 |
) |
|
|
116 |
|
|
|
230 |
|
|
|
2,044 |
|
Customer
contracts |
|
|
|
|
4,202 |
|
|
|
(819 |
) |
|
|
— |
|
|
|
3,310 |
|
|
|
6,693 |
|
Technology |
|
|
|
|
352 |
|
|
|
(33 |
) |
|
|
— |
|
|
|
70 |
|
|
|
389 |
|
Total
amortized intangible assets |
|
|
|
$ |
9,343 |
|
|
$ |
(1,974 |
) |
|
$ |
238 |
|
|
$ |
3,610 |
|
|
$ |
11,217 |
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
$ |
172,890 |
|
|
|
— |
|
|
$ |
17,047 |
|
|
$ |
4,723 |
|
|
$ |
194,660 |
|
(in thousands)
|
|
|
|
Balance at
January 1, 2006
|
|
Amortization
|
|
Currency
Translation
|
|
Other
Changes
|
|
Balance at
December 31, 2006
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents |
|
|
|
$ |
2,756 |
|
|
$ |
(540 |
) |
|
$ |
234 |
|
|
$ |
— |
|
|
$ |
2,450 |
|
Trade
names |
|
|
|
|
2,658 |
|
|
|
(708 |
) |
|
|
249 |
|
|
|
140 |
|
|
|
2,339 |
|
Customer
contracts |
|
|
|
|
— |
|
|
|
(528 |
) |
|
|
— |
|
|
|
4,730 |
|
|
|
4,202 |
|
Technology |
|
|
|
|
— |
|
|
|
(18 |
) |
|
|
— |
|
|
|
370 |
|
|
|
352 |
|
Deferred
pension costs |
|
|
|
|
6,662 |
|
|
|
— |
|
|
|
— |
|
|
|
(6,662 |
) |
|
|
— |
|
Total
amortized intangible assets |
|
|
|
$ |
12,076 |
|
|
$ |
(1,794 |
) |
|
$ |
483 |
|
|
$ |
(1,422 |
) |
|
$ |
9,343 |
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
$ |
153,001 |
|
|
|
— |
|
|
$ |
13,614 |
|
|
$ |
6,275 |
|
|
$ |
172,890 |
|
In June 2007, the Company
acquired the assets and business of R-Bac Industries, LLC for $9,592,000 in cash plus the assumption of certain liabilities. The purchase price was
allocated, as follows: $1,653,000 to accounts receivable, $158,000 to inventories, $131,000 to property, plant, and equipment, $4,819,000 to goodwill,
$3,610,000 to amortized intangibles, $457,000 to other assets, and $1,236,000 to current liabilities.
The other change in goodwill
during 2007 is due to a $4,819,000 goodwill addition related to the R-Bac acquisition and a decrease of $96,000 for deferred taxes related to 2006
acquisitions. The R-Bac acquisition has been integrated into the Albany Doors Systems segment and reporting unit of the Company.
The increase in goodwill and
amortized intangible assets, excluding deferred pension costs, during 2006 relates to the acquisition of Texas Composite Inc. (TCI) and the purchase of
certain assets of Aztex, Inc. These acquisitions have been integrated into Albany Engineered Composites, a business of the Applied Technologies
segment. The decrease in deferred pension costs in 2006 includes the offset of adopting FAS No. 158, as described in Notes 1 and 13.
66
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
4. Goodwill and Intangibles —
(Continued)
The Company paid $6,700,000 in
January 2006, and paid $8,000,000 in October 2006 for the purchase of TCI. The purchase price was allocated as follows: $7,000,000 to property, plant
and equipment, $5,100,000 to goodwill, $3,700,000 to intangibles, $4,000,000 to other assets, and $5,100,000 to liabilities.
The Company paid $2,300,000 in
April 2006, and assumed liabilities of $1,100,000 for certain tangible and intangible assets of Aztex, Inc. The purchase price was allocated as
follows: $600,000 to current assets, $200,000 to property, plant and equipment, $1,000,000 to goodwill, $1,500,000 to other intangibles, and $100,000
to other assets.
As of December 31, 2007, goodwill
included $132,593,000 in the Paper Machine Clothing segment, $24,518,000 in the Applied Technologies segment, and $37,549,000 in the Albany Door
Systems segment.
Estimated amortization expense
for intangibles for the years ending December 31, 2008 through 2012, is as follows:
Year
|
|
|
|
|
|
Annual amortization
(in thousands)
|
2008
|
|
|
|
|
|
|
|
$ |
2,496 |
|
2009
|
|
|
|
|
|
|
|
|
2,336 |
|
2010
|
|
|
|
|
|
|
|
|
1,927 |
|
2011
|
|
|
|
|
|
|
|
|
929 |
|
2012
|
|
|
|
|
|
|
|
|
865 |
|
5. Accrued
Liabilities
Accrued liabilities consists
of:
(in thousands)
|
|
|
|
2007
|
|
2006
|
Salaries and
wages |
|
|
|
$ |
16,943 |
|
|
$ |
14,474 |
|
Accrual for
compensated absences |
|
|
|
|
20,035 |
|
|
|
18,390 |
|
Employee
benefits |
|
|
|
|
17,884 |
|
|
|
16,847 |
|
Pension
liability — current portion |
|
|
|
|
3,498 |
|
|
|
3,153 |
|
Postretirement
medical benefits — current portion |
|
|
|
|
5,750 |
|
|
|
6,115 |
|
Returns and
allowances |
|
|
|
|
15,617 |
|
|
|
12,539 |
|
Interest
|
|
|
|
|
2,818 |
|
|
|
2,904 |
|
Restructuring
costs — current portion |
|
|
|
|
10,709 |
|
|
|
1,283 |
|
Dividends
|
|
|
|
|
3,252 |
|
|
|
2,919 |
|
Performance
improvement costs |
|
|
|
|
2,595 |
|
|
|
4,148 |
|
Other
|
|
|
|
|
21,166 |
|
|
|
19,223 |
|
Total
|
|
|
|
$ |
120,267 |
|
|
$ |
101,995 |
|
67
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
6. Financial
Instruments
Notes and loans payable at
December 31, 2007 and 2006 were short-term debt instruments with banks, denominated in local currencies with a weighted average interest rate of 4.99%
in 2007 and 2.91% in 2006.
Long-term debt at December 31,
2007 and 2006, principally to banks and bondholders, consists of:
(in thousands)
|
|
|
|
December 31,
2007
|
|
December 31,
2006
|
Convertible
notes issued in March 2006 with fixed interest rates of 2.25%, due in 2026 |
|
|
|
$ |
180,000 |
|
|
$ |
180,000 |
|
| |
Private
placement with a fixed interest rate of 5.34%, due in 2013 through 2017 |
|
|
|
|
150,000 |
|
|
|
150,000 |
|
| |
April 2006
credit agreement with borrowings outstanding at an average interest rate of 5.88% |
|
|
|
|
116,000 |
|
|
|
23,000 |
|
| |
Various notes
and mortgages relative to operations principally outside the United States, at an average rate of 5.80% in 2007 and 5.81% in 2006 due in varying
amounts through 2021 |
|
|
|
|
1,015 |
|
|
|
1,822 |
|
| |
Industrial
revenue financings at an average interest rate of 1.75% in 2007 and 7.06% in 2006, due in varying amounts through 2009 |
|
|
|
|
564 |
|
|
|
10,932 |
|
| |
Long-term debt
|
|
|
|
|
447,579 |
|
|
|
365,754 |
|
| |
Less: current
portion |
|
|
|
|
(1,146 |
) |
|
|
(11,167 |
) |
| |
Long-term debt,
net of current portion |
|
|
|
$ |
446,433 |
|
|
$ |
354,587 |
|
The weighted average interest
rate for all debt was 4.06% in 2007 and 3.91% in 2006. Interest paid was $17,078,000 in 2007, $11,922,000 in 2006, and $12,318,000 in
2005.
Principal payments due on
long-term debt are: 2008, $1,147,000; 2009, $258,000; 2010, $11,000; 2011, $116,012,000; 2012, $13,000, and thereafter, $330,139,000.
In October 2005, the Company
entered into a Note Agreement and Guaranty (“the Prudential Agreement”) with the Prudential Insurance Company of America, and certain other
purchasers, in an aggregate principal amount of $150,000,000. The notes bear interest at a rate of 5.34% and have a maturity date of October 25, 2017,
with mandatory prepayments of $50,000,000 on October 25, 2013 and October 25, 2015. At the noteholders’ election, certain prepayments may also be
required in connection with certain asset dispositions or financings. The notes may not otherwise be prepaid without a premium. The Note Agreement
contains customary terms, as well as affirmative covenants, negative covenants and events of default comparable to those in the Company’s current
principal revolving credit facility. The fair value of the note agreement was approximately $151,114,000 as of December 31, 2007.
In March 2006, the Company issued
$180,000,000 principal amount of 2.25% convertible notes. The notes are convertible upon the occurrence of specified events and at any time on or after
February 15, 2013, into cash up to the principal amount of notes converted and shares of the Company’s Class A common stock with respect to the
remainder, if any, of the Company’s conversion obligation at a conversion rate of 22.487 shares per $1,000 principal amount of notes (equivalent
to a conversion price of $44.47 per share of Class A common stock). The fair value of the convertible notes was approximately $170,100,000 as of
December 31, 2007.
In connection with the offering,
the Company has entered into convertible note hedge and warrant transactions with respect to its Class A common stock at a net cost of $14,700,000.
These transactions are intended to reduce the potential dilution upon conversion of the notes by providing the Company with the option, subject to
certain exceptions, to acquire shares which offset the delivery of newly issued shares upon conversion of the notes.
68
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
6. Financial Instruments —
(Continued)
Emerging Issues Task Force (EITF)
Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, (EITF
00-19) provides guidance for distinguishing between permanent equity, temporary equity and assets and liabilities. The convertible feature of the
notes, the convertible note hedge, and the warrant transactions each meet the requirements of EITF 00-19 to be accounted for as equity instruments. As
such, the convertible feature of the notes has not been accounted for as a derivative (which would be marked to market each reporting period) and in
the event the debt is converted, no gain or loss is recognized, as the cash payment of principal reduces the recorded liability and the issuance of
common shares would be recorded in stockholders’ equity.
In addition, the amount paid for
the call option and the premium received for the warrant were recorded as additional paid-in capital in the accompanying consolidated balance sheet and
are not accounted for as derivatives (which would be marked to market each reporting period). Incremental net shares for the convertible note feature
and the warrant agreement will be included in future diluted earnings per share calculations for those periods in which the Company’s average
common stock price exceeds $44.47 per share in the case of the Senior Notes and $52.16 per share in the case of the warrants. The purchased call option
is anti-dilutive and is excluded from the diluted earnings per share calculation.
On April 14, 2006, the Company
entered into a $460,000,000 five-year revolving credit agreement (the “Credit Agreement”), under which $116,000,000 was outstanding as of
December 31, 2007. The agreement replaced a similar $460,000,000 revolving credit facility. 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 agreement includes covenants that could
limit the Company’s ability to purchase Common Stock, pay dividends, or acquire other companies or dispose of its assets.
Reflecting, in each case, the
effect of subsequent amendments to each agreement, the Company is required to maintain a leverage ratio of not greater than 3.50 to 1.00 under the
Credit Agreement, and a leverage ratio of not greater than 3.00 to 1.00 (or 3.50 to 1.00 for a period of six fiscal quarters following a material
acquisition, as defined) under the Prudential Agreement. The Company is also required to maintain minimum interest coverage of 3.00 to 1.00 under each
agreement. As of December 31, 2007, the Company’s leverage ratio under the agreement was 2.49 to 1.00 and the interest coverage ratio was 8.60 to
1.00. Under the Credit Agreement, 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; under the Prudential Agreement, such payments or purchases are permitted to the extent that the leverage ratio remains at or below 3.00 to
1.00.
Based on the maximum leverage
ratio and the Company’s consolidated EBITDA (as defined in the agreement), as of December 31, 2007, the Company would have been able to borrow an
additional $147,081,000 under the loan agreement.
Indebtedness under the Note and
Guaranty agreement, the convertible notes, and the revolving credit agreement is ranked equally in right of payment to all unsecured senior debt of the
Company.
The Company had open forward
exchange contracts with a total unrealized loss of $1,124,000 at December 31, 2007 and total unrealized gain of $1,050,000 at December 31, 2006, which
is included in Accounts receivable. For all positions there is risk from the possible inability of the counterparties (major financial institutions) to
meet the terms of the contracts and the risk of unfavorable changes in interest and currency rates, which may reduce the benefit of the contracts.
However, for most closed forward exchange contracts, both the purchase and sale sides of the Company’s exposures were with the same financial
institution. The Company seeks to control risk by evaluating the creditworthiness of counterparties and by monitoring the currency exchange and
interest rate markets, hedging risks in compliance with internal guidelines and reviewing all principal economic hedging contracts with designated
directors of the Company.
69
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
6. Financial Instruments —
(Continued)
On December 10, 2007, the Company
and Bank of America entered into a US dollar-to-euro cross-currency and interest rate swap agreement with a notional value of $150,000,000. The Company
has designated the swap to be an effective hedge of its euro net asset exposure relating to European operations. Under the swap agreement, the Company
has notionally exchanged $150,000,000 at a fixed interest rate of 5.34% for euro 101,951,000 at a fixed interest rate of 5.28%. The exchange was
executed at an exchange rate of 1.4713 US dollars per euro. The majority of the cash flows in the swap agreement are aligned with the Company’s
principal and interest payment obligations on its $150,000,000 Prudential Agreement. The final maturity of the swap matches the final maturity of the
Prudential Agreement.
The Company’s swap agreement
qualifies as a hedge of net investments in foreign operations under the provisions of FAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities”. Under FAS No. 133, changes in fair value of derivatives that qualify as hedges are recorded in shareholders’ equity, net
of tax, in the caption “Derivative valuation adjustment”. As of December 31, 2007, the change in fair value of the swap agreement was
$2,566,000, which was recorded in other assets. Of the $2,566,000 amount, $1,001,000 was included in noncurrent liabilities for applicable taxes and
the remaining $1,565,000 was included in shareholders’ equity.
Prior to September 30, 2006, the
Company had a program whereby it sold a portion of its North American accounts receivable to a qualified special purpose entity (QSPE). In exchange for
the accounts receivable sold, the Company received cash and a note. In September 2006, the Company terminated its accounts receivable securitization
program, and repurchased accounts receivable of $58,100,000, for cash and a decrease in the related note receivable. The accounts receivable
repurchased were recorded at fair value and there was no gain or loss on the transaction. The Company terminated the program because the financing
terms under the revolving credit agreement are more favorable than those included in the receivable sales agreement with the QSPE.
The following summarizes cash
flows between the Company and the QSPE:
(in thousands, except interest rates)
|
|
|
|
2007
|
|
2006
|
|
2005
|
Amounts
included in the change in Accounts receivable in the Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
new securitizations |
|
|
|
|
— |
|
|
$ |
283,738 |
|
|
$ |
411,127 |
|
Amounts
recognized in the Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
receivable from (payable to) QSPE at year end |
|
|
|
|
— |
|
|
$ |
(826 |
) |
|
$ |
17,827 |
|
Interest rate
on note receivable from QSPE at year end |
|
|
|
|
— |
|
|
|
5.79 |
% |
|
|
4.90 |
% |
Amounts
recognized in the Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
fees received, included in Other expense, net |
|
|
|
|
— |
|
|
$ |
25 |
|
|
$ |
35 |
|
Discount
expense, included in Other expense, net |
|
|
|
|
— |
|
|
$ |
2,245 |
|
|
$ |
2,966 |
|
As of December 31, 2007, the QSPE
was fully liquidated with no remaining assets, liabilities, and equity.
7. Commitments and
Contingencies
Principal leases are for
machinery and equipment, vehicles, and real property. Certain leases contain renewal and purchase option provisions at fair values. There were no
significant capital leases during 2007. Total rental expense amounted to $16,814,000, $14,991,000, and $15,970,000 for 2007, 2006, and 2005,
respectively.
Future rental payments required
under operating leases that have initial or remaining noncancelable lease terms in excess of one year, as of December 31, 2007 are: 2008, $9,393,000;
2009, $4,809,000; 2010, $2,041,000; 2011, $439,000; 2012, $300,000; and thereafter, $263,000.
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
70
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
7. Commitments and Contingencies —
(Continued)
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
18,789 claims as of February 1, 2008. This compares with 18,791 such 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, 19,283 claims as of October 27, 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.
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 less than 10% 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.
As of February 1, 2008,
approximately 12,611 of the claims pending against Albany are pending in Mississippi. Of these, approximately 12,031 are in federal court, at the
multidistrict litigation panel (“MDL”), either through removal or original jurisdiction. (In addition to the 12,031 Mississippi claims
pending against the Company at the MDL, there are approximately 850 claims pending against the Company at the MDL removed from various United States
District Courts in other states.)
Previously, the MDL’s
practice had been to place all nonmalignant claims on an inactive docket until such time as the plaintiff developed a malignant disease. The MDL would
also administratively dismiss, without prejudice, the claims of plaintiffs resulting from mass-screenings who had not otherwise demonstrated that they
suffered from an asbestos-related disease. Because the court continued to exercise jurisdiction over these claims, it would allow the claims to be
reinstated following the diagnosis of an asbestos-related disease. Any such administratively dismissed claims are included in the total number of
pending claims reported.
On May 31, 2007 the MDL issued a
new administrative order that required each plaintiff to provide detailed information regarding, among other things, alleged asbestos-related medical
diagnoses. The order does not require exposure information with this initial filing. The first set of plaintiffs were required to submit their filings
with the Court by August 1, 2007, with deadlines for additional sets of plaintiffs monthly thereafter until December 1, 2007, by which time all
plaintiffs were initially required to be compliant. The process remains incomplete, however, as a number of extensions have been requested and granted.
The order states that the Court may dismiss the claims of any plaintiff who fails to comply.
Because the order of the MDL does
not require the submission of alleged exposure information, the Company cannot predict if any dismissals will result from these initial filings. The
MDL will at some point begin conducting settlement conferences, at which time the plaintiffs will be required to submit short position statements
setting forth exposure information. The Company does not expect the MDL to begin the process of scheduling the settlement conference for several
months. Consequently, the Company believes that the effects of the new order will not be fully known or realized for some time.
Based on past experience,
communications from certain plaintiffs’ counsel, and the advice of the Company’s Mississippi counsel, the Company expects the percentage of
Mississippi 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-
71
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
7. Commitments and Contingencies —
(Continued)
containing products were in
use to be considerably lower than the total number of pending claims. However, due to the large number of inactive claims pending in the MDL and the
lack of alleged exposure information, 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 1, 2008,
the Company had resolved, by means of settlement or dismissal, 21,635 claims. The total cost of resolving all claims was $6,706,000. Of this amount,
$6,671,000, 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 8,741 claims as of February 1, 2008. This is the same amount as last report of
October 19, 2007, and compares with 9,023 such 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, 8,992 claims as of October 27, 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 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 1, 2008, Brandon has resolved, by means of settlement or dismissal, 8,825 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.
72
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
7. Commitments and Contingencies —
(Continued)
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 recent 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 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.
8. Other Noncurrent
Liabilities
Other noncurrent liabilities
consists of:
(in thousands)
|
|
|
|
2007
|
|
2006
|
Pension
liabilities |
|
|
|
$ |
76,148 |
|
|
$ |
102,034 |
|
Postretirement
benefits other than pensions |
|
|
|
|
98,506 |
|
|
|
103,012 |
|
Deferred
compensation |
|
|
|
|
4,143 |
|
|
|
4,749 |
|
Other
|
|
|
|
|
9,824 |
|
|
|
9,979 |
|
Total
|
|
|
|
$ |
188,621 |
|
|
$ |
219,774 |
|
9. Shareholders’
Equity
The Company has two classes of
Common Stock, Class A Common Stock and Class B Common Stock, each with a par value of $.001 and equal liquidation rights. Each share of the
Company’s Class A Common Stock is entitled to one vote on all matters submitted to shareholders, and each share of Class B Common Stock is
entitled to ten votes. Class A and Class B Common Stock will receive equal dividends as the Board of Directors may determine from time to time. The
Class B Common Stock is convertible into an equal number of shares of Class A Common Stock at any time. At December 31, 2007, 4,321,506 shares of Class
A Common Stock were reserved for the conversion of Class B Common Stock and the exercise of stock options.
73
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
9. Shareholders’ Equity —
(Continued)
In December 2005, the Board of
Directors increased the number of shares of the Company’s Class A Common Stock that could be purchased to 3,500,000. The Company purchased a total
of 3,500,000 shares of its Class A Common Stock under these authorizations during the first and second quarters of 2006.
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 authorizes 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. The Company has made no share purchases under the
August 2006 authorization.
Accrued dividends were $3,252,000
and $2,919,000 as of December 31, 2007 and 2006, respectively, and were included in Accrued liabilities.
Changes in shareholders’
equity for 2005, 2006, and 2007, were as follows:
|
|
|
|
Class A
Common Stock
|
|
Class B
Common Stock
|
|
|
|
Treasury Stock
Class A
|
|
(in thousands)
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional
Paid-in
Capital
|
|
Shares
|
|
Amount
|
Balance:
January 1, 2005 |
|
|
|
|
33,177 |
|
|
$ |
33 |
|
|
|
3,237 |
|
|
$ |
3 |
|
|
$ |
296,045 |
|
|
|
5,004 |
|
|
$ |
126,496 |
|
Shares
contributed to ESOP |
|
|
|
|
157 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,357 |
|
|
|
— |
|
|
|
— |
|
Purchase of
treasury shares |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
51 |
|
|
|
1,577 |
|
Options
exercised |
|
|
|
|
842 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
17,923 |
|
|
|
— |
|
|
|
— |
|
Shares issued
to Directors |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
47 |
|
|
|
(5 |
) |
|
|
(109 |
) |
Balance:
December 31, 2005 |
|
|
|
|
34,176 |
|
|
|
34 |
|
|
|
3,237 |
|
|
|
3 |
|
|
|
319,372 |
|
|
|
5,050 |
|
|
|
127,964 |
|
Shares
contributed to ESOP |
|
|
|
|
172 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
6,215 |
|
|
|
— |
|
|
|
— |
|
Purchase of
treasury shares |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,500 |
|
|
|
131,499 |
|
Options
exercised |
|
|
|
|
170 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,589 |
|
|
|
— |
|
|
|
|
|
Shares issued
to Directors |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
172 |
|
|
|
(9 |
) |
|
|
(203 |
) |
Conversion of
Class B shares to Class A shares |
|
|
|
|
1 |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock option
expense |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,543 |
|
|
|
— |
|
|
|
— |
|
Purchase of
call options on common stock |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(47,688 |
) |
|
|
— |
|
|
|
— |
|
Sale of
common stock warrants |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
32,961 |
|
|
|
— |
|
|
|
— |
|
Balance:
December 31, 2006 |
|
|
|
|
34,519 |
|
|
|
35 |
|
|
|
3,236 |
|
|
|
3 |
|
|
|
316,164 |
|
|
|
8,541 |
|
|
|
259,260 |
|
Shares
contributed to ESOP |
|
|
|
|
138 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,087 |
|
|
|
— |
|
|
|
— |
|
Options
exercised |
|
|
|
|
183 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,301 |
|
|
|
— |
|
|
|
|
|
Shares issued
to Directors |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
163 |
|
|
|
(11 |
) |
|
|
(237 |
) |
Long-term
incentive plan |
|
|
|
|
26 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
937 |
|
|
|
— |
|
|
|
— |
|
Stock option
expense |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
804 |
|
|
|
— |
|
|
|
— |
|
Convertible
bond current tax benefit |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
152 |
|
|
|
— |
|
|
|
— |
|
Balance:
December 31, 2007 |
|
|
|
|
34,866 |
|
|
$ |
35 |
|
|
|
3,236 |
|
|
$ |
3 |
|
|
$ |
326,608 |
|
|
|
8,530 |
|
|
$ |
259,023 |
|
74
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
10. Other Expense,
Net
The components of other expense,
net, are:
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
2005
|
Currency
transactions (Note 1) |
|
|
|
$ |
(1,549 |
) |
|
$ |
(2,915 |
) |
|
$ |
(2,472 |
) |
Costs
associated with sale of accounts receivable (Note 6) |
|
|
|
|
— |
|
|
|
2,245 |
|
|
|
2,966 |
|
License fee
expense, net |
|
|
|
|
351 |
|
|
|
442 |
|
|
|
992 |
|
Amortization
of debt issuance costs and loan origination fees |
|
|
|
|
2,002 |
|
|
|
2,016 |
|
|
|
1,553 |
|
Other
|
|
|
|
|
1,322 |
|
|
|
991 |
|
|
|
1,614 |
|
Total
|
|
|
|
$ |
2,126 |
|
|
$ |
2,779 |
|
|
$ |
4,653 |
|
11. Income Taxes
The components of income before income taxes and the provision for income taxes are as follows:
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
2005
|
Income/(loss)
before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
$ |
(11,276 |
) |
|
$ |
22,763 |
|
|
$ |
19,777 |
|
Non-U.S.
|
|
|
|
|
31,319 |
|
|
|
55,562 |
|
|
|
80,986 |
|
|
|
|
|
$ |
20,043 |
|
|
$ |
78,325 |
|
|
$ |
100,763 |
|
Income tax
provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
$ |
199 |
|
|
$ |
3,220 |
|
|
$ |
5,205 |
|
State
|
|
|
|
|
149 |
|
|
|
2,070 |
|
|
|
1,130 |
|
Non-U.S.
|
|
|
|
|
11,510 |
|
|
|
15,384 |
|
|
|
23,435 |
|
|
|
|
|
|
11,858 |
|
|
|
20,674 |
|
|
|
29,770 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
(7,543 |
) |
|
|
(3,423 |
) |
|
|
4,263 |
|
State
|
|
|
|
|
409 |
|
|
|
409 |
|
|
|
262 |
|
Non-U.S.
|
|
|
|
|
(2,569 |
) |
|
|
2,870 |
|
|
|
(4,875 |
) |
|
|
|
|
|
(9,703 |
) |
|
|
(144 |
) |
|
|
(350 |
) |
Total
provision for income taxes |
|
|
|
$ |
2,155 |
|
|
$ |
20,530 |
|
|
$ |
29,420 |
|
The significant components of
deferred income tax benefit are as follows:
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
2005
|
Net effect of
temporary differences |
|
|
|
$ |
(5,273 |
) |
|
$ |
17 |
|
|
$ |
(200 |
) |
Adjustments
to deferred tax assets and liabilities for enacted changes in tax laws and rates |
|
|
|
|
1,655 |
|
|
|
198 |
|
|
|
244 |
|
Adjustments
to beginning-of-the-year valuation allowance balance for changes in circumstances |
|
|
|
|
(3,595 |
) |
|
|
1,028 |
|
|
|
(4,132 |
) |
Net
(benefit)/expense of tax loss carryforwards |
|
|
|
|
(2,490 |
) |
|
|
(1,387 |
) |
|
|
3,738 |
|
Total
|
|
|
|
$ |
(9,703 |
) |
|
$ |
(144 |
) |
|
$ |
(350 |
) |
75
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
11. Income Taxes —
(Continued)
A reconciliation of the U.S.
Federal statutory tax rate to the Company’s effective tax rate is as follows:
|
|
|
|
2007
|
|
2006
|
|
2005
|
U.S. federal
statutory tax rate |
|
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State taxes,
net of federal benefit |
|
|
|
|
(0.2 |
) |
|
|
1.4 |
|
|
|
0.8 |
|
Other non-US
current taxes |
|
|
|
|
10.7 |
|
|
|
2.3 |
|
|
|
5.0 |
|
Non-U.S. tax
rates |
|
|
|
|
(33.4 |
) |
|
|
(12.2 |
) |
|
|
(16.4 |
) |
Changes in
prior year non-US estimated taxes |
|
|
|
|
(25.8 |
) |
|
|
0.8 |
|
|
|
(0.4 |
) |
U.S. tax on
non-U.S. earnings and foreign withholding |
|
|
|
|
10.6 |
|
|
|
(0.9 |
) |
|
|
4.8 |
|
Statutory tax
rate changes |
|
|
|
|
8.3 |
|
|
|
0.3 |
|
|
|
0.2 |
|
Net
addition/(reversal) for income tax contingencies |
|
|
|
|
15.4 |
|
|
|
2.5 |
|
|
|
(0.4 |
) |
Expiration of
non-U.S. net operating loss |
|
|
|
|
13.1 |
|
|
|
— |
|
|
|
— |
|
Research and
development and other tax credits |
|
|
|
|
(9.4 |
) |
|
|
(2.0 |
) |
|
|
(1.7 |
) |
Net
addition/(reversal) to valuation allowances for
non-U.S. taxes |
|
|
|
|
(1.0 |
) |
|
|
2.6 |
|
|
|
(0.7 |
) |
Other
|
|
|
|
|
(12.5 |
) |
|
|
(3.6 |
) |
|
|
3.0 |
|
Effective
income tax rate |
|
|
|
|
10.8 |
% |
|
|
26.2 |
% |
|
|
29.2 |
% |
Deferred income taxes reflect the
net tax effects of temporary differences between the carrying amounts of certain assets and liabilities for financial reporting and the amounts used
for income tax expense purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
|
|
|
U.S.
|
|
Non-U.S.
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Current
deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
|
$ |
2,003 |
|
|
$ |
1,089 |
|
|
$ |
1,561 |
|
|
$ |
1,326 |
|
Inventories
|
|
|
|
|
1,169 |
|
|
|
898 |
|
|
|
647 |
|
|
|
1,019 |
|
Tax losses
carry-forward |
|
|
|
|
— |
|
|
|
1,517 |
|
|
|
— |
|
|
|
— |
|
Restructuring
costs |
|
|
|
|
3,413 |
|
|
|
1,408 |
|
|
|
— |
|
|
|
— |
|
Deferred
compensation |
|
|
|
|
578 |
|
|
|
481 |
|
|
|
— |
|
|
|
— |
|
Other
|
|
|
|
|
449 |
|
|
|
882 |
|
|
|
6,809 |
|
|
|
7,670 |
|
Total current
deferred tax assets |
|
|
|
|
7,612 |
|
|
|
6,275 |
|
|
|
9,017 |
|
|
|
10,015 |
|
Noncurrent
deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
compensation |
|
|
|
|
3,024 |
|
|
|
3,406 |
|
|
|
— |
|
|
|
— |
|
Depreciation
and amortization |
|
|
|
|
3,171 |
|
|
|
2,504 |
|
|
|
1,400 |
|
|
|
686 |
|
Post-retirement benefits |
|
|
|
|
43,403 |
|
|
|
55,423 |
|
|
|
7,787 |
|
|
|
12,030 |
|
Tax loss
carry-forward |
|
|
|
|
4,982 |
|
|
|
773 |
|
|
|
34,582 |
|
|
|
35,773 |
|
Impairment of
investment |
|
|
|
|
1,560 |
|
|
|
1,560 |
|
|
|
— |
|
|
|
— |
|
Tax credit
carryforwards |
|
|
|
|
12,226 |
|
|
|
10,454 |
|
|
|
— |
|
|
|
— |
|
Other
|
|
|
|
|
458 |
|
|
|
197 |
|
|
|
1,310 |
|
|
|
1,870 |
|
Noncurrent
deferred tax assets before valuation allowance |
|
|
|
|
68,824 |
|
|
|
74,317 |
|
|
|
45,079 |
|
|
|
50,359 |
|
Less:
valuation allowance |
|
|
|
|
— |
|
|
|
— |
|
|
|
(13,299 |
) |
|
|
(12,396 |
) |
Total
noncurrent deferred tax assets |
|
|
|
|
68,824 |
|
|
|
74,317 |
|
|
|
31,780 |
|
|
|
37,963 |
|
Total
deferred tax assets |
|
|
|
$ |
76,436 |
|
|
$ |
80,592 |
|
|
$ |
40,797 |
|
|
$ |
47,978 |
|
76
Albany International Corp.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (CONTINUED)
11. Income Taxes —
(Continued)
|
|
|
|
U.S.
|
|
Non-U.S.
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Current
deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
280 |
|
|
$ |
571 |
|
Deferred
Income |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,936 |
|
Other
|
|
|
|
|
— |
|
|
|
— |
|
|
|
1,831 |
|
|
|
333 |
|
Total current
deferred tax liabilities |
|
|
|
|
— |
|
|
|
— |
|
|
|
2,111 |
|
|
|
3,840 |
|
Noncurrent
deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
|
|
— |
|
|
|
— |
|
|
|
29,064 |
|
|
|
32,888 |
|
Post-retirement benefits |
|
|
|
|
— |
|
|
|
— |
|
|
|
2,896 |
|