ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: September 30, 2001
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-16214
ALBANY INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware |
|
14-0462060 |
(State or other jurisdiction of incorporation or organization) |
|
(IRS Employer Identification No.) |
|
|
|
1373 Broadway, Albany, New York |
|
12204 |
(Address of principal executive offices) |
|
(Zip Code) |
|
|
|
518-445-2200 |
||
Registrant's telephone number, including area code |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports,) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
The registrant had 25,356,596 shares of Class A Common Stock and 5,867,476 shares of Class B Common Stock outstanding as of September 30, 2001.
ALBANY INTERNATIONAL CORP.
INDEX
ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(unaudited)
(in thousands except per share data)
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2001 |
|
2000 |
|
2001 |
|
2000 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net sales |
|
$ |
202,651 |
|
$ |
201,081 |
|
$ |
618,267 |
|
$ |
629,822 |
|
Cost of goods sold |
|
125,711 |
|
121,661 |
|
368,308 |
|
377,817 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Gross profit |
|
76,940 |
|
79,420 |
|
249,959 |
|
252,005 |
|
||||
Selling, technical, general and research expenses |
|
58,575 |
|
55,932 |
|
175,823 |
|
172,675 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Operating income |
|
18,365 |
|
23,488 |
|
74,136 |
|
79,330 |
|
||||
Interest expense, net |
|
6,988 |
|
10,645 |
|
23,720 |
|
31,374 |
|
||||
Other (income) expense, net |
|
(3,424 |
) |
(909 |
) |
(1,001 |
) |
923 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income before income taxes |
|
14,801 |
|
13,752 |
|
51,417 |
|
47,033 |
|
||||
Income taxes |
|
5,476 |
|
4,502 |
|
19,024 |
|
18,813 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income before associated companies |
|
9,325 |
|
9,250 |
|
32,393 |
|
28,220 |
|
||||
Equity in earnings of associated companies |
|
72 |
|
93 |
|
205 |
|
534 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income before cumulative effect of a change in accounting principle |
|
9,397 |
|
9,343 |
|
32,598 |
|
28,754 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Cumulative effect of change in accounting principle, net of taxes |
|
- |
|
- |
|
(1,129 |
) |
- |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
9,397 |
|
9,343 |
|
31,469 |
|
28,754 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Retained earnings, beginning of period |
|
336,711 |
|
295,965 |
|
314,639 |
|
276,554 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Retained earnings, end of period |
|
$ |
346,108 |
|
$ |
305,308 |
|
$ |
346,108 |
|
$ |
305,308 |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share - basic: |
|
|
|
|
|
|
|
|
|
||||
Income before cumulative effect of a change in accounting principle |
|
$ |
0.30 |
|
$ |
0.30 |
|
$ |
1.05 |
|
$ |
0.94 |
|
Cumulative effect of change in accounting principle |
|
$ |
0.00 |
|
$ |
0.00 |
|
$ |
(0.04 |
) |
$ |
0.00 |
|
Net income |
|
$ |
0.30 |
|
$ |
0.30 |
|
$ |
1.01 |
|
$ |
0.94 |
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share - diluted: |
|
|
|
|
|
|
|
|
|
||||
Income before cumulative effect of change in accounting principle |
|
$ |
0.30 |
|
$ |
0.30 |
|
$ |
1.04 |
|
$ |
0.94 |
|
Cumulative effect of change in accounting principle |
|
$ |
0.00 |
|
$ |
0.00 |
|
$ |
(0.03 |
) |
$ |
0.00 |
|
Net income |
|
$ |
0.30 |
|
$ |
0.30 |
|
$ |
1.01 |
|
$ |
0.94 |
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Average number of shares used in basic earnings per share computations |
|
31,189 |
|
30,671 |
|
31,022 |
|
30,592 |
|
||||
Average number of shares used in diluted earnings per share computations |
|
31,450 |
|
30,671 |
|
31,266 |
|
30,592 |
|
The accompanying notes are an integral part of the financial statements.
ALBANY INTERNATIONAL CORP.
(in thousands)
|
|
(unaudited) |
|
|
|
||
|
|
September 30, |
|
December 31, |
|
||
|
|
2001 |
|
2000 |
|
||
ASSETS |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
6,993 |
|
$ |
5,359 |
|
Accounts receivable, net |
|
146,716 |
|
236,810 |
|
||
Note receivable |
|
25,482 |
|
|
|
||
Inventories: |
|
|
|
|
|
||
Finished goods |
|
109,570 |
|
119,619 |
|
||
Work in process |
|
50,753 |
|
54,408 |
|
||
Raw material and supplies |
|
34,736 |
|
42,846 |
|
||
|
|
195,059 |
|
216,873 |
|
||
|
|
|
|
|
|
||
Deferred taxes |
|
31,249 |
|
27,711 |
|
||
Prepaid expenses |
|
7,704 |
|
7,534 |
|
||
Total current assets |
|
413,203 |
|
494,287 |
|
||
Property, plant and equipment, net |
|
359,100 |
|
387,658 |
|
||
Investments in associated companies |
|
4,066 |
|
4,300 |
|
||
Intangibles |
|
149,549 |
|
161,709 |
|
||
Deferred taxes |
|
18,577 |
|
19,095 |
|
||
Other assets |
|
35,199 |
|
45,203 |
|
||
Total assets |
|
$ |
979,694 |
|
$ |
1,112,252 |
|
|
|
|
|
|
|
||
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
||
Notes and loans payable |
|
$ |
12,505 |
|
$ |
37,760 |
|
Accounts payable |
|
33,674 |
|
47,005 |
|
||
Accrued liabilities |
|
82,764 |
|
80,678 |
|
||
Current maturities of long-term debt |
|
53,284 |
|
44,092 |
|
||
Income taxes payable and deferred |
|
13,765 |
|
12,499 |
|
||
Total current liabilities |
|
195,992 |
|
222,034 |
|
||
Long-term debt |
|
277,094 |
|
398,087 |
|
||
Other noncurrent liabilities |
|
145,634 |
|
129,741 |
|
||
Deferred taxes and other credits |
|
33,471 |
|
37,473 |
|
||
Total liabilities |
|
652,191 |
|
787,335 |
|
||
|
|
|
|
|
|
||
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 27,553,782 in 2001 and 27,138,064 in 2000 |
|
28 |
|
27 |
|
||
Class B Common Stock, par value $.001 per share; authorized 25,000,000 shares; issued and outstanding 5,867,476 in 2001 and 5,869,457 in 2000 |
|
6 |
|
6 |
|
||
Additional paid in capital |
|
231,352 |
|
223,897 |
|
||
Retained earnings |
|
346,108 |
|
314,639 |
|
||
Accumulated items of other comprehensive income: |
|
|
|
|
|
||
Translation adjustments |
|
(187,185 |
) |
(165,691 |
) |
||
Derivative valuation adjustment |
|
(14,932 |
) |
- |
|
||
Pension liability adjustment |
|
(2,223 |
) |
(2,223 |
) |
||
|
|
373,154 |
|
370,655 |
|
||
Less treasury stock (Class A), at cost (2,197,186 shares in 2001 and 2,201,232 in 2000) |
|
45,651 |
|
45,738 |
|
||
Total shareholders' equity |
|
327,503 |
|
324,917 |
|
||
Total liabilities and shareholders' equity |
|
$ |
979,694 |
|
$ |
1,112,252 |
|
The accompanying notes are an integral part of the financial statements.
ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
|
|
Nine Months Ended September 30, |
|
||||
|
|
|
|||||
|
|
2001 |
|
2000 |
|
||
OPERATING ACTIVITIES |
|
|
|
|
|
||
Net income |
|
$ |
31,469 |
|
$ |
28,754 |
|
Adjustments to reconcile net cash provided by operating activities: |
|
|
|
|
|
||
Equity in earnings of associated companies |
|
(205 |
) |
(534 |
) |
||
Depreciation and amortization |
|
43,662 |
|
47,777 |
|
||
Provision for deferred income taxes, other credits and long-term liabilities |
|
(3,212 |
) |
(1,088 |
) |
||
Increase in cash surrender value of life insurance, net of premiums paid |
|
(841 |
) |
(420 |
) |
||
Unrealized currency transaction (gains)/losses |
|
(5,514 |
) |
(2,659 |
) |
||
Loss on disposition of assets |
|
56 |
|
1,868 |
|
||
Shares contributed to ESOP |
|
3,876 |
|
3,611 |
|
||
Tax benefit of options exercised |
|
407 |
|
|
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Accounts receivable |
|
29,081 |
|
18,766 |
|
||
Sale of accounts receivable |
|
66,527 |
|
|
|
||
Note receivable |
|
(26,232 |
) |
|
|
||
Inventories |
|
21,814 |
|
2,418 |
|
||
Prepaid expenses |
|
(171 |
) |
(2,438 |
) |
||
Accounts payable |
|
(13,330 |
) |
(11,694 |
) |
||
Accrued liabilities |
|
5,664 |
|
(1,759 |
) |
||
Income taxes payable |
|
3,552 |
|
780 |
|
||
Other, net |
|
1,316 |
|
1,723 |
|
||
Net cash provided by operating activities |
|
157,919 |
|
85,105 |
|
||
|
|
|
|
|
|
||
INVESTING ACTIVITIES |
|
|
|
|
|
||
Purchases of property, plant and equipment |
|
(18,003 |
) |
(26,943 |
) |
||
Purchased software |
|
(820 |
) |
(925 |
) |
||
Proceeds from sale of assets |
|
33 |
|
8,348 |
|
||
Proceeds from life insurance policies |
|
10,602 |
|
|
|
||
Acquisitions, net of cash acquired |
|
(1,037 |
) |
|
|
||
Premiums paid for life insurance policies |
|
(1,161 |
) |
(1,161 |
) |
||
Net cash used in investing activities |
|
(9,349 |
) |
(21,718 |
) |
||
|
|
|
|
|
|
||
FINANCING ACTIVITIES |
|
|
|
|
|
||
Proceeds from borrowings |
|
38,996 |
|
19,118 |
|
||
Principal payments on debt |
|
(175,812 |
) |
(69,026 |
) |
||
Proceeds from options exercised |
|
3,174 |
|
|
|
||
Net cash used in financing activities |
|
(133,642 |
) |
(49,908 |
) |
||
|
|
|
|
|
|
||
Effect of exchange rate changes on cash flows |
|
(13,294 |
) |
(16,763 |
) |
||
|
|
|
|
|
|
||
Increase (decrease) in cash and cash equivalents |
|
1,634 |
|
(3,284 |
) |
||
Cash and cash equivalents at beginning of year |
|
5,359 |
|
7,025 |
|
||
Cash and cash equivalents at end of period |
|
$ |
6,993 |
|
$ |
3,741 |
|
The accompanying notes are an integral part of the financial statements.
ALBANY INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Management Opinion
In the opinion of management the accompanying unaudited consolidated financial statements contain all adjustments, consisting of only normal, recurring adjustments, necessary for a fair presentation of results for such periods. The results for any interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These consolidated financial statements should be read in conjunction with financial statements and notes thereto for the year ended December 31, 2000.
2. Accounts and Notes Receivable
On September 28, 2001, the Company entered into a trade accounts receivable securitization program whereby it sells designated accounts receivable, with no recourse. The accounts receivable are sold on an ongoing basis to a subsidiary of the Company which is a qualified special purpose entity and, in accordance with Financial Accounting Standards Board Statement No. 140, is not consolidated into the Company’s financial statements. The Company receives fees for collecting accounts receivable and for performing certain other administrative functions. The amount of accounts receivable sold is subject to change based upon certain criteria, and was approximately $66.5 million as of September 30, 2001. Included in other (income) expense is a charge of $0.9 million representing the discount applied to the initial sale of accounts receivable and initial transaction costs. The discount factor is based on estimated timing of cash receipts, interest rates and anticipated credit losses.
3. Accounting for Derivatives
The Financial Accounting Standards Board (FASB) issued, then subsequently amended, Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, which the Company adopted effective January 1, 2001. SFAS 133 requires that all derivative instruments (including instruments embedded in other contracts) are recognized on the balance sheet at their fair value and changes in fair value are recognized immediately in earnings, unless the derivatives qualify as hedges in accordance with the Standard. The change in fair value for those derivatives that qualify as hedges are recorded in other comprehensive income.
The Company has a lease for manufacturing facilities that must be recorded under the provisions of SFAS 133 due to the lease payments being denominated in a nonfunctional currency. The Company has also entered into interest rate swap agreements that qualify as cash flow hedges in accordance with the Standard.
At January 1, 2001, the Company’s financial statements were adjusted to record a cumulative effect of accounting for the lease described above in accordance with SFAS 133:
(in thousands) |
|
|
|
|
|
|||
Adjustments to fair value of derivatives |
|
|
|
$ |
(1,882 |
) |
||
Income tax benefit |
|
|
|
753 |
|
|||
Cumulative effect of change in accounting principle |
|
|
|
|
$ |
(1,129 |
) |
|
A reconciliation of marking to market of interest rate swap agreements resulted in recording a noncurrent liability with an offset to the separate component of shareholders’ equity labeled, “Derivative valuation adjustment”, as follows:
|
|
Nine Months Ended |
|
Three Months Ended |
|
||
(in thousands) |
|
September 30, 2001 |
|
September 30, 2001 |
|
||
Transition adjustments as of January 1, 2001 |
|
$ |
(4,888 |
) |
$ |
- |
|
Current period (decrease) increase in fair value |
|
(10,044 |
) |
(9,401 |
) |
||
|
|
|
|
|
|
||
Total derivative fair value adjustment |
|
$ |
(14,932 |
) |
$ |
(9,401 |
) |
Gains or losses on forward exchange contracts that function as an economic hedge against currency fluctuation effects on future revenue streams are recorded in “Other (income) expense, net”.
Gains or losses on forward exchange contracts that are designated a hedge of a foreign operation’s net assets and/or long-term intercompany loans are recorded in “Translation adjustments”, a separate component of shareholders’ equity. These contracts reduce the risk of currency exposure on foreign currency net assets and do not exceed the foreign currency amount being hedged. To the extent the above criteria are not met, or the related assets are sold, extinguished, or terminated, activity associated with such hedges is recorded in “Other (income) expense, net”.
All open positions on forward exchange contracts are valued at fair value using the estimated forward rate of a matching contract.
Gains or losses on futures contracts have been recorded in “Other (income) expense, net”. Open positions have been valued at fair value using quoted market rates.
4. Other (income) expense, Net
Included in other (income) expense, net for the nine months ended September 30 are: currency transactions, income of $6.4 million in 2001 and $2.9 million in 2000; amortization of debt issuance costs and loan origination fees, $1.7 million in 2001 and $1.8 million in 2000, $0.7 million expense in 2001 related to the SFAS 133 lease adjustment, expenses related to the sale of accounts receivable of $0.9 million in 2001, and $2.1 million in 2001 and $2.0 million in 2000 for other miscellaneous expenses, none of which are significant.
Included in other (income) expense, net for the three months ended September 30 are: currency transactions, income of $5.6 million in 2001 and $2.8 million in 2000; amortization of debt issuance costs and loan origination fees, $0.6 million in 2001 and $0.7 million in 2000, $0.3 million income in 2001 related to the SFAS 133 lease adjustment, expenses related to the sale of accounts receivable of $0.9 million in 2001, and $1.0 million in 2001 and $1.2 million in 2000 for other miscellaneous expenses, none of which are significant.
5. Earnings Per Share
Net income per share is computed using the weighted average number of shares of Class A and Class B Common Stock outstanding during the period. Diluted net income per share includes the effect of all potentially dilutive securities.
The amounts used in computing earnings per share, including the effect on income and the weighted average number of shares of potentially dilutive securities, are as follows:
|
|
Nine Months Ended |
|
Three Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
(in thousands) |
|
2001 |
|
2000 |
|
2001 |
|
2000 |
|
||||
Income available to common stockholders: |
|
|
|
|
|
|
|
|
|
||||
Income available to common stockholders |
|
$ |
31,469 |
|
$ |
28,754 |
|
$ |
9,397 |
|
$ |
9,343 |
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average number of shares: |
|
|
|
|
|
|
|
|
|
||||
Weighted average number of shares used in net income per share |
|
31,022 |
|
30,592 |
|
31,189 |
|
30,671 |
|
||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
||||
Stock options |
|
244 |
|
- |
|
261 |
|
- |
|
||||
Weighted average number of shares used in diluted net income per share |
|
31,266 |
|
30,592 |
|
31,450 |
|
30,671 |
|
||||
For all periods ended September 30, 2000, all options were excluded from the computation of diluted net income per share because the options’ exercise price was greater than the average market price of the common shares for the period. For the periods ending September 30, 2001, the calculation of diluted earnings per share excluded options to purchase 1,985,700 shares for the nine month period and 1,759,700 shares for the three month period because the options’ exercise price was greater than the average market price of the common shares.
6. Comprehensive (Loss)/Income
Total comprehensive (loss) income consists of:
|
|
Nine Months Ended |
|
Three Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
(in thousands) |
|
2001 |
|
2000 |
|
2001 |
|
2000 |
|
||||
Net income |
|
$ |
31,469 |
|
$ |
28,754 |
|
$ |
9,397 |
|
$ |
9,343 |
|
Other adjustments to comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation adjustments |
|
(21,494 |
) |
(55,268 |
) |
(10,121 |
) |
(25,439 |
) |
||||
Income tax related to items of other comprehensive income |
|
- |
|
248 |
|
- |
|
- |
|
||||
Swap transition adjustment as of January 1, 2001 |
|
(4,888 |
) |
- |
|
- |
|
- |
|
||||
Current period (decrease) increase in fair values of swaps |
|
(10,044 |
) |
- |
|
(9,401 |
) |
- |
|
||||
Total comprehensive (loss) income |
|
$ |
(4,957 |
) |
$ |
(26,266 |
) |
$ |
(10,125 |
) |
$ |
(16,096 |
) |
7. Operating Segment Data
The following table shows data by operating segment, reconciled to consolidated totals included in the financial statements:
|
|
Nine Months Ended |
|
Three Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
(in thousands) |
|
2001 |
|
2000 |
|
2001 |
|
2000 |
|
||||
Net Sales |
|
|
|
|
|
|
|
|
|
||||
Engineered Fabrics |
|
$ |
517,802 |
|
$ |
525,472 |
|
$ |
169,035 |
|
$ |
166,673 |
|
High Performance Doors |
|
73,343 |
|
71,624 |
|
24,117 |
|
24,834 |
|
||||
All other |
|
27,122 |
|
32,726 |
|
9,499 |
|
9,574 |
|
||||
Consolidated Total |
|
$ |
618,267 |
|
$ |
629,822 |
|
$ |
202,651 |
|
$ |
201,081 |
|
|
|
|
|
|
|
|
|
|
|
||||
Operating Income |
|
|
|
|
|
|
|
|
|
||||
Engineered Fabrics |
|
$ |
115,162 |
|
$ |
112,305 |
|
$ |
32,236 |
|
$ |
37,217 |
|
High Performance Doors |
|
5,704 |
|
4,067 |
|
1,898 |
|
972 |
|
||||
All other |
|
1,085 |
|
4,435 |
|
(75 |
) |
1,774 |
|
||||
Research expense |
|
(17,881 |
) |
(16,995 |
) |
(6,179 |
) |
(6,142 |
) |
||||
Unallocated expenses |
|
(29,934 |
) |
(24,482 |
) |
(9,515 |
) |
(10,333 |
) |
||||
Operating income before reconciling items |
|
74,136 |
|
79,330 |
|
18,365 |
|
23,488 |
|
||||
Reconciling items: |
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
(23,720 |
) |
(31,374 |
) |
(6,988 |
) |
(10,645 |
) |
||||
Other income (expense), net |
|
1,001 |
|
(923 |
) |
3,424 |
|
909 |
|
||||
Consolidated income before income taxes |
|
$ |
51,417 |
|
$ |
47,033 |
|
$ |
14,801 |
|
$ |
13,752 |
|
Except for the sale of accounts receivable (Note 2), there has been no material change in the total assets of the reportable segments between December 31, 2000 and September 30, 2001.
8. Income Taxes
The Company’s effective tax rate for the first nine months of 2001 and 2000 was 37% and 40%, respectively. During the third quarter of 2000, the Company’s estimated tax rate was reduced from 43% to 40%.
9. Contingencies
The Company is a defendant in a number of proceedings for injuries allegedly suffered as a result of exposure to asbestos-containing products formerly manufactured by the Company. It is the position of the Company that any exposure to asbestos from products manufactured by the Company would be insufficient to cause asbestos-related injury to any plaintiff. In 2001, the Company was named as defendant in additional proceedings. The Company believes all asbestos-related claims to be without merit. While there can be no assurance as to their outcome, based upon its current understanding of the policies of insurance available, its recent settlement experience, how settlement amounts have been allocated to such policies, the absence of any judgements against the Company, and the defenses available, the Company believes that the ultimate resolution of the aforementioned proceedings is unlikely to have a material effect on its financial position, results of operations or cash flows.
10. Recent Accounting Pronouncements:
On June 29, 2001, Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations”, was approved by the Financial Accounting Standards Board (FASB). SFAS No. 141 requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. The Company does not expect the adoption of this Standard to have a material effect on its financial statements.
On June 29, 2001, SFAS No. 142, “Goodwill and Other Intangible Assets” was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. The Company plans to adopt SFAS No. 142 on its effective date of January 1, 2002. Goodwill amortization expense is estimated to be approximately $7.5 million for 2001. Except for the elimination of goodwill amortization expense, the Company is currently assessing, but has not yet determined the impact of SFAS 142 on its financial statements.
On August 16, 2001, SFAS No. 143, “Accounting for Asset Retirement Obligations” was approved by the FASB. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred beginning for fiscal years beginning after June 15, 2002. The Company is currently assessing, but has not yet determined the impact of SFAS No. 143 on its financial statements.
On October 3, 2001, SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, was approved by the FASB. SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell. The Company is required to adopt this Standard on January 1, 2002. The Company is currently assessing, but has not yet determined the impact of SFAS No. 144 on its financial statements.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
For the Three and Nine Months Ended September 30, 2001
The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto.
RESULTS OF OPERATIONS:
Net sales increased to $202.7 million for the three months ended September 30, 2001 as compared to $201.1 million for the same period in 2000. The effect of the stronger U.S. dollar in 2001 was to decrease net sales by $4.8 million. Excluding the effect of currency translation, net sales increased by 3.2% as compared to the third quarter of 2000.
Net sales decreased to $618.3 million for the nine months ended September 30, 2001 as compared to $629.8 million for the same period in 2000. The effect of the stronger U.S. dollar as compared to the first nine months of 2000 was to decrease net sales by $26.5 million. Excluding the effect of currency translation, 2001 net sales were up 2.4% as compared to 2000.
Geographically, United States net sales of paper machine clothing and engineered products were up 1.1% in the third quarter, and 0.8% for the first nine months, as compared to the same periods of 2000. In the Canada, Pacific and Latin America regions, combined sales of paper machine clothing and engineered products, excluding currency effects, were up 3.1% in the third quarter, and 5.0% for the first nine months, as compared to the same periods of 2000. European net sales, in euros, of paper machine clothing and other engineered products were down 2.9% for the third quarter, but were up 2.3% for the first nine months, as compared to the same periods of 2000. For the three months ended September 30, 2001, net sales in the high performance door segment were down 2.9% in U.S. dollars and were up 1.6% in local currencies. For the nine months ended September 30, 2001, net sales in the high performance door segment were up 2.4% in U.S. dollars and were up 9.8% in local currencies.
Gross profit was 38.0% of net sales for the three months ended September 30, 2001 as compared to 39.5% for the same period in 2000 bringing the nine month gross profit to 40.4% for 2001 as compared to 40.0% for 2000. During the three months ended September 30, 2001, the Company slowed production in order to reduce inventory levels. The production slowdown had the effect of reducing gross profit by $4.8 million. Excluding the effect of the production slowdown, and the additional effect of currency translation, gross profit was 40.3% for the three months ended September 30, 2001. Third quarter variable costs, as a percent of net sales, were 37.7% in 2001 and 36.4% in 2000. Excluding currency translation and production slowdown effects, variable costs were 36.9% of sales for the three months ended September 30, 2001. For the first nine months of 2001, variable costs as a percentage of net sales were 36.1% in 2001 and 35.2% in 2000. The higher variable cost percentage for the first nine months of 2001 is primarily due to a higher percentage of net sales being generated by the high performance door business and the production slowdown.
Selling, technical, general and research expenses, were 4.7% higher in the third quarter of 2001, in comparison to 2000. Excluding the effect of currency rates, these costs were 6.8% higher. For the first nine months of 2001, selling, technical, general and research expenses, excluding the effect of currency rates, were 5.3% higher than 2000. The higher costs in 2001 were due principally to an insurance benefit received in 2000, increases in salaries and benefits, and the unfavorable change in the remeasurement of foreign currency transactions incurred principally in Europe.
Third quarter operating income decreased 21.8% to $18.4 million, compared to the third quarter of 2000. Excluding the effects of changes in currency translation rates and the production slowdown, operating income increased 1.9% in the third quarter of 2001 as compared to the same period in 2000. For the first nine months of 2001, operating income was down 6.5% in comparison to 2000. Excluding currency translation and production slowdown effects, operating income for the first nine months of 2001 was 5.6% higher than the comparable period of 2000.
Interest expense, net, decreased 34.4% to $7.0 million in the third quarter of 2001, as compared to the same period in 2000. For the first nine months of 2001, interest expense, net was 24.4% lower than the first nine months of 2000. The decrease in interest expense was due to lower total debt and lower average interest rates.
The tax rate for the three and nine month periods ended September 30, 2001 was 37%. During the third quarter of 2000, the Company reduced its estimated annual tax rate from 43% to 40%, which had the effect of increasing earnings in the third quarter of 2000 by $0.05 per share.
Net income for the three months ended September 30, 2001 was $9.4 million, compared to $9.3 million for the same quarter of 2000. In addition to the factors described above, the third quarter of 2001 was aided by currency transaction income of $5.6 million compared to $2.8 million in the same quarter of 2000. Currency transaction income, which is reported in other (income) expense, includes economic hedging that is designed to offset fluctuations is operating income and cash flows that are caused by changes in currency rates. For the first nine months, income before cumulative effect of change in accounting principle rose to $32.6 million in 2001, compared to $28.8 million in 2000 as lower operating income was offset by lower interest expense, greater currency transaction income and a lower tax rate.
The Company is taking steps to remove at least $25 million from its existing cost structure by the end of 2002. The cost reduction will be accomplished by a combination of consolidating product lines and production facilities, reducing sales and administration costs, and reorganizing the high performance door business in Europe. A restructuring charge in the fourth quarter of this year will result from these actions.
Effective January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The Company has a lease of manufacturing facilities in Italy that is impacted by this Standard. The cumulative after-tax effect of adopting this standard was a charge to earnings of $1.1 million. Additionally, the derivative liability associated with this lease increased $0.7 million during the nine months ended September 30, 2001. This expense is included in other (income) expense, net.
Reasons for the changes in operating results for the three month period ended September 30, 2001 as compared to the corresponding period in 2000 are similar to those which affected the nine month comparisons, except where specifically noted.
LIQUIDITY AND CAPITAL RESOURCES:
On September 28, 2001, the Company entered into a trade accounts receivable securitization program whereby it sells designated accounts receivable, with no recourse. The accounts receivable are sold on an ongoing basis to a subsidiary of the Company which is a qualified special purpose entity and, in accordance with Financial Accounting Standards Board Statement No. 140, is not consolidated into the Company’s financial statements. The Company receives fees for collecting accounts receivable and for performing certain other administrative functions. The amount of accounts receivable sold is subject to change based upon certain criteria, and was approximately $66.5 million as of September 30, 2001. Included in other (income) expense is a charge of $0.9 million representing the discount applied to the initial sale of accounts receivable and initial transaction costs. The discount factor is based on estimated timing of cash receipts, interest rates and anticipated credit losses.
Excluding the effect of the accounts receivable sale, accounts receivable decreased $25.0 million since December 31, 2000. Excluding the additional effect of the stronger U.S. dollar, accounts receivable decreased $17.5 million. Inventories decreased $15.1 million during the three months ended September 30, 2001. Excluding the effect of currency translation, inventories decreased $17.8 million. The decrease in inventories is primarily attributable to the production slowdowns. Excluding currency translation, inventory decreased $16.2 million for the nine months ended September 30, 2001.
During the first nine months of 2001, total debt decreased $137.1 million. The Company’s debt structure provides approximately $225 million in committed and available unused debt capacity with financial institutions. Management believes that this debt capacity, in combination with informal commitments and expected cash flows, should be sufficient to meet anticipated operating requirements and normal business opportunities that support corporate strategies.
Capital expenditures for the nine months ended September 30, 2001 were $18.0 million as compared to $26.9 million for the same period last year. The Company anticipates that capital expenditures, including capitalized leases, will be approximately $35 million for the full year and the Company will continue to finance these expenditures with cash from operations and existing credit facilities.
Adjusted free cash flow (defined as cash provided by operating activities, minus: capital expenditures, cash dividends, and increases in net cash from accounts receivable sold) improved to $41.4 million for the three months ended September 30, 2001, compared to $19.6 million for the comparable period of 2000. For the first nine months, adjusted free cash flow improved to $100.3 million in 2001, compared to $58.2 million in 2000.
The Company improved its leverage ratio, as defined in its principal credit agreements, to below 2.25, compared to 2.68 at the end of 2000. Reducing the leverage ratio to below 2.25 allows the Company to enjoy a 25 basis-point reduction in interest rates on its principal revolving credit and term loan facilities, beginning in mid-November.
RECENT ACCOUNTING PRONOUNCEMENTS:
On June 29, 2001, Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations”, was approved by the Financial Accounting Standards Board (FASB). SFAS No. 141 requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. The Company does not expect the adoption of this Standard to have a material effect on its financial statements.
On June 29, 2001, SFAS No. 142, “Goodwill and Other Intangible Assets” was approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. The Company plans to adopt SFAS No. 142 on its effective date of January 1, 2002. Goodwill amortization expense is estimated to be approximately $7.5 million for 2001. Except for the elimination of goodwill amortization expense, the Company is currently assessing, but has not yet determined the impact of SFAS 142 on its financial statements.
On August 16, 2001, SFAS No. 143, “Accounting for Asset Retirement Obligations” was approved by the FASB. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred beginning for fiscal years beginning after June 15, 2002. The Company is currently assessing, but has not yet determined the impact of SFAS No. 143 on its financial statements.
On October 3, 2001, SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, was approved by the FASB. SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell. The Company is required to adopt this Standard on January 1, 2002. The Company is currently assessing, but has not yet determined the impact of SFAS No. 144 on its financial statements.
This Form 10-Q contains “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These statements include statements about such matters as future earnings, pricing, markets, cost reductions, new products, paper industry consolidation and outlook, tax rate, inventory and accounts receivable reduction, capital expenditures, and amortization. Actual future events and circumstances (including future performance, results and trends) could differ materially from those set forth in such statements due to various factors. These factors include even more competitive marketing conditions resulting from customer consolidations, possible softening of customer demand, unanticipated events or circumstances related to recently acquired businesses, the occurrence of unanticipated events or difficulties relating to divestiture, joint venture, operating, capital, global integration and other projects, changes in currency exchange rates, changes in general economic and competitive conditions, technological developments, and other risks and uncertainties, including those detailed in the Company’s filings with the Securities and Exchange Commission.
The Company is named as a defendant in a number of suits by plaintiffs claiming injury as a result of exposure to asbestos-containing products formerly manufactured by the Company. The Company’s subsidiary, Brandon Drying Fabrics, Inc., is named as a defendant in most of these same proceedings.
Albany International Corp.
The Company was named as a defendant in two actions in state court in Louisiana, seeking damages from the Company and approximately fifty other defendants (including primary suppliers of asbestos, asbestos abatement and removal companies, paper machine builders, pump manufacturers, insulation and building materials suppliers, boiler manufacturers and other suppliers of products alleged to have contained asbestos) for injuries allegedly suffered by approximately 2,000 employees at two paper mills in Bogalusa and St. Francisville, Louisiana, due to exposure to asbestos. Liberty Mutual, the underwriter of insurance coverage applicable to these claims, defended these matters on the Company’s behalf, subject to a standard reservation of any rights under the applicable policies.
The information identified during the discovery process suggests that the Company’s production of asbestos-containing paper machine clothing products was limited to certain dryer fabrics marketed to paper mills during the period from 1967 to 1976. Other companies that manufactured asbestos-containing dryer fabrics prior to or during this period are also named as defendants in most of these proceedings. It is the position of the Company 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 the Company’s products was encapsulated in a resin-coated yarn woven into the interior of the fabric, further reducing the likelihood of fiber release.
Discovery by both plaintiffs and defendants in the Bogalusa proceeding was essentially completed in late 1998. The first trial commenced in January 1999. (All claims relating to this first trial against the Company were settled prior to that time.) A unanimous jury verdict in favor of the remaining defendants (including two dryer fabric producers) was returned in early March 1999.
All remaining claims against Albany International Corp. pending in each of the Bogalusa and St. Francisville proceedings (approximately 2,000 plaintiffs in the aggregate) were settled during 2000. All settlement amounts were funded by Liberty Mutual.
The Company currently remains a defendant in a number of asbestos proceedings involving an aggregate of 4,664 claimants.
One proceeding, in Jefferson County, Mississippi, accounts for 1,192 claimants. Based upon preliminary work histories provided by counsel, it appears that as many as half of these plaintiffs were never employed in paper mills. Of the remaining cases, a large number do not provide sufficient employment histories to determine whether the claimants would have ever had any contact with any asbestos-containing dryer fabrics sold by the Company.
A second proceeding, in Jones County, Mississippi, accounts for another 2,099 claimants. Based on preliminary histories, it appears that as many as three-quarters of these plaintiffs were never employed in paper mills. Such histories also do not indicate how many of the remaining claimants would have had contact with the Company’s products.
Mount Vernon
In some of these proceedings, the Company is named both as a direct defendant and as the “successor in interest” to Mount Vernon Mills. The Company acquired certain assets from Mount Vernon Mills in 1993. These proceedings allege injury caused by asbestos-containing products alleged to have been sold by Mount Vernon Mills many years prior to this acquisition. Mount Vernon Mills, Inc. 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 Mills prior to the acquisition of the Mount Vernon assets, and has successfully moved for dismissal in several proceedings before the first trial. Similar motions will be filed in other proceedings.
Brandon Drying Fabrics, Inc.
Brandon Drying Fabrics, Inc., a subsidiary of Geschmay Corp., is also a party to most of the above asbestos proceedings (including the Bogalusa and St. Francisville proceedings). The Company acquired Geschmay Corp., formerly known as Wangner Systems Corporation, in 1999.
Brandon Drying Fabrics, Inc. was created in 1978 in connection with the purchase of certain assets from Abney Mills, a South Carolina textile manufacturing entity. Brandon Sales, Inc. was a wholly-owned subsidiary of Abney and its assets were among those purchased from Abney Mills. After the purchase, Brandon Drying Fabrics, Inc. manufactured drying fabrics under its own name, none of which contained asbestos. It is believed that Abney Mills ceased production of asbestos-containing products prior to the 1978 purchase. Affidavits obtained from former Abney Mills employees confirm that belief.
Under the terms of the Assets Purchase Agreement between Brandon Drying Fabrics, Inc. and Abney Mills, Abney Mills agreed to indemnify, defend and hold harmless from any actions or claims on account of products manufactured by Abney Mills 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. While it appears that Abney Mills has since been dissolved, an attorney has been appointed to represent the Abney Mills interests, and demand has been made that it assume the defense of these actions.
Brandon has succeeded in securing dismissals of a number of claims on the basis of the foregoing.
The Company believes all asbestos-related claims against it are without merit. While there can be no assurance as to their outcome, based upon its current understanding of the policies of insurance available, its recent settlement experience, how settlement amounts have been allocated to such policies, the absence of any judgments against Albany or Brandon, and the defenses available, the Company currently does not anticipate any material liability relating to resolution of the aforementioned pending proceedings in excess of existing insurance coverage limits. Consequently, the Company does not believe, based upon 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. While the Company anticipates that additional claims may be filed, it cannot control or predict the number or timing of future claims. The Company and Brandon intend vigorously to defend themselves against any such claims.
There are no other material pending legal proceedings, other than ordinary routine litigation incidental to the business.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 2001.
Credit and Finance Agreement
Exhibit No. |
|
Description |
|
|
|
|
|
10(j)(I) |
|
Receivables Sale Agreement, dated as of September 28, 2001, among the Registrant, as the Collection Agent, Albany International Receivables Corporation, as the Seller, ABN AMRO Bank N.V., as the Agent, the Committed Purchasers party thereto and Amsterdam Funding Corporation. (11) |
|
|
|
|
|
10(j)(ii) |
|
Purchase and Sale Agreement, dated as of September 28, 2001, among the Registrant, Geschmay Corp., Albany International Research Co., Albany International Techniweave, Inc., Albany International Canada Inc., M&I Door Systems LTD, as Originators, and Albany International Receivables Corporation as Buyer. (11) |
|
Executive Compensation
Exhibit No. |
|
Description |
|
|
|
10(o)(I) |
|
Form of Executive Deferred Compensation Plan adopted September 1, 1985, as amended and restated as of August 8, 2001. (11) |
|
|
|
10(o)(ii) |
|
Form of Directors’ Deferred Compensation Plan adopted September 1, 1985, as amended and restated as of August 8, 2001. (11) |
|
|
|
10(o)(iii) |
|
Deferred Compensation Plan of Albany International Corp., as amended and restated as of August 8, 2001. (11) |
|
|
|
10(o)(iv) |
|
Centennial Deferred Compensation Plan, as amended and restated as of August 8, 2001. (11) |
|
|
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
||
|
ALBANY INTERNATIONAL CORP. |
|
||
|
|
(Registrant) |
||
|
|
|
||
Date: November 9, 2001 |
|
|
||
|
|
|
||
|
By |
/s/ Michael C. Nahl |
|
|
|
|
Michael C. Nahl |
||
|
|
Sr. Vice President and |
||
|
|
Chief Financial Officer |
||