The accompanying notes are an integral part of the consolidated financial statements
The accompanying notes are an integral part of the consolidated financial statements
The accompanying notes are an integral part of the consolidated financial statements
The accompanying notes are an integral part of the consolidated financial statements
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
1. Significant Accounting
Policies
Basis of Presentation
In the opinion of management, the
accompanying unaudited consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments
and elimination of intercompany transactions necessary for a fair presentation of results for such periods. Albany International
Corp. (“Albany”) consolidates the financial results of its subsidiaries for all periods presented. The results for
any interim period are not necessarily indicative of results for the full year.
The preparation of financial statements
in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and
assumptions that affect the amounts reported in Albany International Corp.’s Consolidated Financial Statements and accompanying
Notes. Actual results could differ materially from those estimates.
The information included in this
Quarterly Report on Form 10-Q should be read in conjunction with “Risk Factors,” “Legal Proceedings,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operation,” “Quantitative and Qualitative Disclosures
about Market Risk” and the Consolidated Financial Statements and Notes thereto included in Items 1A, 3, 7, 7A and 8, respectively,
of the Albany International Corp. Annual Report on Form 10-K for the year ended December 31, 2015.
Except as described herein, there
has been no material change to the accounting policies applied to our consolidated results and footnote disclosures. In accordance
with the accounting guidance for business combinations, we use the acquisition method of accounting to allocate costs of acquired
businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The
excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed are recognized as goodwill.
The valuations of acquired assets and liabilities will impact the determination of future operating results. In addition to using
management estimates and negotiated amounts, we use a variety of information sources to determine the estimated fair values of
the assets and liabilities, including third-party appraisals for the estimated value and lives of identifiable intangible assets
and property and equipment. The business and technical judgment of management is used in determining the useful lives of finite-lived
intangible assets in accordance with the accounting guidance for goodwill and intangible assets.
2.
Business Acquisition
On April 8, 2016, the Company acquired
the outstanding shares of Harris Corporation’s composite aerostructures business for cash of $187 million, plus the assumption
of certain liabilities. The Company funded the cash payable at closing by utilizing proceeds from a $550 million, unsecured credit
facility agreement that was completed April 8, 2016 (see Note 14). The acquired entity has been renamed Albany Aerostructures Composites
LLC (“AAC”), and is part of the Albany Engineered Composites (“AEC”) segment.
The following table summarizes the
provisional allocation of the purchase price of AAC to the fair value of the assets and liabilities acquired:
(in thousands)
|
April 8, 2016
|
Assets acquired
|
|
|
|
Accounts receivable
|
|
$15,688
|
|
Inventories
|
|
17,715
|
|
Prepaid expenses and other current assets
|
|
402
|
|
Property, plant and equipment
|
|
81,701
|
|
Intangibles
|
|
59,360
|
|
Goodwill
|
|
67,034
|
|
Total assets acquired
|
|
$241,900
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
Accounts payable
|
|
$8,745
|
|
Accrued liabilities
|
|
2,364
|
|
Capital lease obligation
|
|
16,927
|
|
Deferred income taxes
|
|
25,318
|
|
Other noncurrent liabilities
|
|
1,546
|
|
Total liabilities assumed
|
|
$54,900
|
|
|
|
|
|
Net assets acquired
|
|
$187,000
|
|
The Company is continuing to
perform procedures to verify the value of assets and liabilities acquired, and the useful lives of amortizable assets. Accordingly,
adjustments to the values in the above table may be required in future periods. Goodwill of $67.0 million reflects that the acquisition
broadens and deepens AEC’s products, experience and manufacturing capabilities, and significantly increases opportunities
for future growth. The goodwill is non-deductible for tax purposes.
The seller has provided representations,
warranties and indemnities customary for acquisition transactions, including indemnities for certain customer claims identified
before closing. As of September 30, 2016, Accounts receivable includes $3.2 million which is expected to be recovered from the
seller under the terms of the indemnity arrangement.
In the course of performing its
ongoing opening balance sheet procedures during the third quarter of 2016, management identified certain adjustments to the provisional
value of assets and liabilities acquired reported in the Form 10-Q for the period ended June 30, 2016. The Consolidated Statement
of Income for the third quarter of 2016 includes the cumulative effect of adjusting the provisional amounts, as illustrated in
the table below:
(in
thousands)
|
|
Increase / (decrease) to provisional amount
|
|
Additional expense / (income) in third quarter
|
|
Expense / (income) recognized in third quarter which relates to second quarter
|
|
Line item in the Statement of income affected
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
($576
|
)
|
|
$ -
|
|
|
$ -
|
|
|
|
Inventories, net
|
|
(12,024
|
)
|
|
(2,291
|
)
|
|
(1,282
|
)
|
|
Cost of goods sold
|
Property, plant and equipment, net
|
|
(4,101
|
)
|
|
1,096
|
|
|
548
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Obligation under capital lease
|
|
(6,888
|
)
|
|
(325
|
)
|
|
(115
|
)
|
|
Interest expense
|
Deferred income tax liabilities
|
|
25,318
|
|
|
-
|
|
|
-
|
|
|
|
Other noncurrent liabilities
|
|
577
|
|
|
18
|
|
|
8
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase to goodwill
|
|
$35,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase to income before income taxes
|
|
|
|
|
$(1,502
|
)
|
|
$(841
|
)
|
|
|
The following table presents
operational results of AAC that are included in the Consolidated Statements of Income:
(in
thousands, except per share amounts)
|
|
Three months ended
September 30, 2016
|
|
April 8 to
September 30, 2016
|
Net sales
|
|
$20,354
|
|
|
$45,990
|
|
Operating income/(loss)
|
|
(1,460
|
)
|
|
249
|
|
Income/(loss) before income taxes
|
|
(1,642
|
)
|
|
(377
|
)
|
Net loss attributable to the Company
|
|
(985
|
)
|
|
(226
|
)
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
Basic
|
|
($0.03
|
)
|
|
($0.01
|
)
|
Diluted
|
|
($0.03
|
)
|
|
($0.01
|
)
|
|
|
|
|
|
|
|
The Consolidated Statements of
Income reflect operational activity of AAC for only the period subsequent to the closing, which affects comparability of results.
The following table shows total Company pro forma statements of operations for the three- and nine-month periods ended September
30, 2016 and 2015, as if the acquisition had occurred on January 1, 2015. This pro forma information does not purport to represent
what the Company’s actual results would have been if the acquisitions had occurred as of the date indicated, or what such
results would be for any future periods.
|
|
Unaudited - Pro forma
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
(in thousands, except per share amounts)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Combined Net sales
|
|
$191,272
|
|
|
$198,193
|
|
|
$588,978
|
|
|
$591,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Income before income taxes
|
|
$20,897
|
|
|
$23,552
|
|
|
$59,812
|
|
|
$42,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma increase/(decrease) to income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition expenses
|
|
-
|
|
|
-
|
|
|
5,367
|
|
|
-
|
|
Interest expense related to purchase price
|
|
-
|
|
|
(1,283
|
)
|
|
(1,382
|
)
|
|
(3,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase accounting adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization on property, plant and equipment, and intangible assets
|
|
548
|
|
|
(1,821
|
)
|
|
(1,919
|
)
|
|
(4,367
|
)
|
Valuation of contract inventories
|
|
(1,282
|
)
|
|
970
|
|
|
1,109
|
|
|
2,939
|
|
Interest expense on asset retirement obligation
|
|
8
|
|
|
(8
|
)
|
|
(8
|
)
|
|
(25
|
)
|
Interest expense on capital lease obligation
|
|
(115
|
)
|
|
115
|
|
|
339
|
|
|
346
|
|
Pro forma Income before income taxes
|
|
20,056
|
|
|
21,525
|
|
|
63,318
|
|
|
37,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma Net Income attributable to the Company
|
|
$12,461
|
|
|
$8,432
|
|
|
$40,506
|
|
|
$18,417
|
|
3.
Reportable Segments
The following tables show data by
reportable segment, reconciled to consolidated totals included in the financial statements:
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Machine Clothing
|
|
$143,248
|
|
|
$154,522
|
|
|
$437,445
|
|
|
463,577
|
|
Albany Engineered Composites
|
|
48,024
|
|
|
24,267
|
|
|
129,348
|
|
|
68,625
|
|
Consolidated total
|
|
$191,272
|
|
|
$178,789
|
|
|
$566,793
|
|
|
$532,202
|
|
Operating income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Machine Clothing
|
|
$40,039
|
|
|
$41,956
|
|
|
$112,583
|
|
|
$110,969
|
|
Albany Engineered Composites
|
|
(4,529
|
)
|
|
(4,191
|
)
|
|
(14,083
|
)
|
|
(26,635
|
)
|
Corporate expenses
|
|
(10,690
|
)
|
|
(11,922
|
)
|
|
(33,554
|
)
|
|
(35,304
|
)
|
Operating income
|
|
24,820
|
|
|
25,843
|
|
|
64,946
|
|
|
49,030
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
(675
|
)
|
|
(428
|
)
|
|
(1,347
|
)
|
|
(1,205
|
)
|
Interest expense
|
|
4,356
|
|
|
3,099
|
|
|
10,957
|
|
|
9,254
|
|
Other income, net
|
|
242
|
|
|
1,249
|
|
|
(2,103
|
)
|
|
784
|
|
Income before income taxes
|
|
$20,897
|
|
|
$21,923
|
|
|
$57,439
|
|
|
$40,197
|
|
Total assets of the AEC segment
increased by approximately $242 million during 2016 due to the acquisition of AAC.
Total capital expenditures for the
nine months of 2016 were $53.8 million, including amounts that were included in Accounts payable. In the Consolidated Statements
of Cash Flows, capital expenditures and accounts payable were each adjusted by $2.5 million to reflect the non-cash nature of the
transactions.
During the first nine months of
2016, the Company recorded expense of $5.4 million for costs directly related to the acquisition. These costs are included in Selling,
general and administrative expenses of the AEC segment.
The table below presents restructuring
costs by reportable segment (also see Note 5):
|
|
Three months ended
September 30,
|
|
Nine months ended
June 30,
|
(in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Restructuring expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Machine Clothing
|
|
($212
|
)
|
|
$3,717
|
|
|
$5,921
|
|
|
$13,929
|
|
Albany Engineered Composites
|
|
640
|
|
|
-
|
|
|
1,787
|
|
|
-
|
|
Corporate expenses
|
|
(102
|
)
|
|
-
|
|
|
(55
|
)
|
|
-
|
|
Consolidated total
|
|
$326
|
|
|
$3,717
|
|
|
$7,653
|
|
|
$13,929
|
|
4.
Pensions and Other Postretirement Benefit Plans
Pension Plans
The Company has defined benefit
pension plans covering certain U.S. and non-U.S. employees. The U.S. qualified defined benefit pension plan has been closed to
new participants since October 1998 and, as of February 2009, benefits accrued under this plan were frozen. As a result of the
freeze, employees covered by the pension plan will receive, at retirement, only those benefits accrued through February 2009. Benefit
accruals under the U.S. Supplemental Executive Retirement Plan ("SERP") were similarly frozen. The eligibility, benefit
formulas, and contribution requirements for plans outside of the U.S. vary by location.
Other Postretirement Benefits
The Company also provides certain
postretirement life insurance benefits to retired employees in Canada. The Company accrues the cost of providing postretirement
benefits during the active service period of the employees. The Company currently funds the plan as claims are paid.
The composition of the net periodic
benefit plan cost for the nine months ended September 30, 2016 and 2015 was as follows:
|
|
Pension plans
|
|
Other postretirement benefits
|
(in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$1,991
|
|
|
$2,268
|
|
|
$190
|
|
|
$250
|
|
Interest cost
|
|
6,110
|
|
|
5,779
|
|
|
1,832
|
|
|
1,831
|
|
Expected return on assets
|
|
(6,763
|
)
|
|
(6,418
|
)
|
|
-
|
|
|
-
|
|
Curtailment gain
|
|
(130
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization of prior service cost/(credit)
|
|
28
|
|
|
36
|
|
|
(3,366
|
)
|
|
(3,366
|
)
|
Amortization of net actuarial loss
|
|
1,756
|
|
|
1,924
|
|
|
2,114
|
|
|
2,504
|
|
Net periodic benefit cost
|
|
$2,992
|
|
|
$3,589
|
|
|
$770
|
|
|
$1,219
|
|
5. Restructuring
During the first quarter of 2016
the Company announced the initiation of discussions with the relevant employee Works Council regarding a proposal
to discontinue research and development activities at its Machine Clothing production facility in Sélestat, France.
In May 2016, we reached agreement with the Works Council on the restructuring plan and we recorded $2.0 million of
restructuring expense in the first nine months of 2016 as our current estimate of the cost for severance, outplacement, and
the write-off of equipment. Cost savings associated with this action will reduce research and development expenses in future
periods.
Machine Clothing restructuring charges
for the first nine months of 2016 also include $1.9 million for the relocation of equipment from our former manufacturing facility
in Germany.
Albany Engineered Composites restructuring
expenses in 2016 were principally related to the consolidation of the Company’s legacy programs into Boerne, Texas.
Machine Clothing restructuring costs
in 2015 were principally related to plant closure costs in Göppingen, Germany.
The following table summarizes
charges reported in the Consolidated Statements of Income under “Restructuring expenses, net”:
|
|
Three months ended September 30,
|
|
Nine months ended
September 30,
|
(in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Machine Clothing
|
|
($212
|
)
|
|
$3,717
|
|
|
$5,921
|
|
|
$13,929
|
|
Albany Engineered Composites
|
|
640
|
|
|
-
|
|
|
1,787
|
|
|
-
|
|
Corporate Expenses
|
|
(102
|
)
|
|
-
|
|
|
(55
|
)
|
|
-
|
|
Total
|
|
$326
|
|
|
$3,717
|
|
|
$7,653
|
|
|
$13,929
|
|
Nine months ended September 30, 2016
(in thousands)
|
|
Total restructuring costs incurred
|
|
Termination and other costs
|
|
Impairment of plant and equipment
|
|
Benefit plan curtailment/ settlement
|
Machine Clothing
|
|
$5,921
|
|
|
$5,751
|
|
|
$300
|
|
|
$(130
|
)
|
Albany Engineered Composites
|
|
1,787
|
|
|
1,498
|
|
|
289
|
|
|
-
|
|
Corporate Expenses
|
|
(55
|
)
|
|
(55
|
)
|
|
-
|
|
|
-
|
|
Total
|
|
$7,653
|
|
|
$7,194
|
|
|
$589
|
|
|
$(130
|
)
|
Nine months ended September 30, 2015
(in thousands)
|
|
Total restructuring costs incurred
|
|
Termination and other costs
|
|
Impairment of plant and equipment
|
|
Benefit plan curtailment/ settlement
|
Machine Clothing
|
|
$13,929
|
|
|
$10,704
|
|
|
$3,225
|
|
|
$-
|
|
Albany Engineered Composites
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Corporate Expenses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
$13,929
|
|
|
$10,704
|
|
|
$3,225
|
|
|
$-
|
|
We
expect that approximately $6.0 million of Accrued liabilities for restructuring at September 30, 2016 will be paid within one year
and approximately $1.5 million will be paid in the following year. The table below presents the year-to-date changes in restructuring
liabilities for 2016 and 2015, all of which related to termination costs:
(in thousands)
|
|
December
31,
2015
|
|
Restructuring
charges accrued
|
|
Payments
|
|
Currency
translation/other
|
|
September
30,
2016
|
Total termination costs
|
|
$10,177
|
|
|
$7,194
|
|
|
($9,862
|
)
|
|
$2
|
|
|
$7,511
|
|
(in thousands)
|
|
December 31,
2014
|
|
Restructuring charges accrued
|
|
Payments
|
|
Currency translation/other
|
|
September 30,
2015
|
Total termination costs
|
|
$1,874
|
|
|
$10,607
|
|
|
($10,637
|
)
|
|
$96
|
|
|
$1,940
|
|
6. Other Income, net
The components of other (income)/expense,
net are:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
(in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Currency transaction (gains)/losses
|
|
($312
|
)
|
|
$953
|
|
|
($2,361
|
)
|
|
$404
|
|
Bank fees and amortization of debt issuance costs
|
|
106
|
|
|
219
|
|
|
652
|
|
|
764
|
|
Gain on sale of investment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(872
|
)
|
Other
|
|
448
|
|
|
77
|
|
|
(394
|
)
|
|
488
|
|
Total
|
|
$242
|
|
|
$1,249
|
|
|
($2,103
|
)
|
|
$784
|
|
In March 2015, the Company sold
its total equity investment in an unaffiliated company, resulting in a gain of $0.9 million. The value of the investment had been
written off in 2004.
7. Income Taxes
The following table presents components
of income tax expense for the three and nine months ended September 30, 2016 and 2015:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
(in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Income tax based on income from continuing
operations, at estimated tax rates of 37.5% in 2016 and 38.0% in 2015
|
|
$7,838
|
|
|
$8,331
|
|
|
$21,545
|
|
|
$15,285
|
|
Effect of change in estimated tax rate
|
|
(424
|
)
|
|
(1,002
|
)
|
|
-
|
|
|
-
|
|
Income tax expense before discrete items
|
|
7,414
|
|
|
7,329
|
|
|
21,545
|
|
|
15,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discrete tax expense/(benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for/resolution of tax audits and contingencies, net
|
|
-
|
|
|
4,521
|
|
|
(825
|
)
|
|
4,505
|
|
Adjustments to prior period tax liabilities
|
|
(11
|
)
|
|
(581
|
)
|
|
(254
|
)
|
|
(641
|
)
|
Other discrete tax adjustments, net
|
|
85
|
|
|
968
|
|
|
113
|
|
|
1,152
|
|
Enacted tax legislation
|
|
-
|
|
|
6
|
|
|
34
|
|
|
97
|
|
Total income tax expense
|
|
$7,488
|
|
|
$12,243
|
|
|
$20,613
|
|
|
$20,398
|
|
The third
quarter estimated income tax rate based on continuing operations was 37.5 percent in 2016, compared to 38.0 percent for the same
period in 2015.
The Company
records the residual U.S. and foreign taxes on certain amounts of current year foreign earnings that have been targeted for repatriation
to the U.S. As a result, such amounts are not considered to be permanently reinvested, and the income tax provision before discrete
items includes the residual taxes on these earnings to the extent they cannot be repatriated in a tax-free manner. As of September
30, 2016, the Company has recorded a deferred tax liability on $59.0 million of prior year non-U.S. earnings that have been targeted
for future repatriation to the U.S.
The Company
conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world
and we are currently under audit in various jurisdictions, including Canada, France and Italy. The open tax years range from 2007
to 2015.
It is reasonably
possible that over the next twelve months the amount of unrecognized tax benefits may change within a range of $0.0 to a net decrease
of $2.3 million, from the reevaluation of uncertain tax positions arising in examinations, in appeals, or in the courts, or from
the closure of tax statutes.
In the first
quarter of 2016, the Company reached a settlement with the German tax authorities over matters that had been outstanding for many
years. The German Tax Authority had denied tax positions taken by the Company related to a 1999 reorganization. In 2009, the Company
made a payment of $14.5 million in order to appeal the German Tax Authority decision, and we recorded that payment as an income
tax receivable. As additional information became available in recent years, we wrote down the receivable by $6.3 million
in 2014 and $6.4 million in 2015 ($5.8 million in the third quarter and $0.6 million in the fourth quarter). In April 2016, we
received $3.7 million representing the final settlement of this matter, and accordingly, we adjusted our income tax receivable
as of March 31, 2016 to that amount, and recorded a discrete tax benefit of $0.5 million for the first quarter of 2016.
8. Earnings Per Share
The amounts used in computing earnings
per share and the weighted average number of shares of potentially dilutive securities are as follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
(in thousands, except market price and earnings per share)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Company
|
|
$13,069
|
|
|
$9,658
|
|
|
$36,937
|
|
|
$19,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in
|
|
|
|
|
|
|
|
|
|
|
|
|
calculating basic net income per share
|
|
32,104
|
|
|
32,012
|
|
|
32,079
|
|
|
31,965
|
|
Effect of dilutive stock-based compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
37
|
|
|
43
|
|
|
39
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in
|
|
|
|
|
|
|
|
|
|
|
|
|
calculating diluted net income per share
|
|
32,141
|
|
|
32,055
|
|
|
32,118
|
|
|
32,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average market price of common stock used
|
|
|
|
|
|
|
|
|
|
|
|
|
for calculation of dilutive shares
|
|
$42.03
|
|
|
$33.89
|
|
|
$38.97
|
|
|
$37.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Company shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$0.41
|
|
|
$0.30
|
|
|
$1.15
|
|
|
$0.62
|
|
Diluted
|
|
$0.41
|
|
|
$0.30
|
|
|
$1.15
|
|
|
$0.62
|
|
9. Noncontrolling Interest
The table below presents a reconciliation
of income attributable to the noncontrolling interest and noncontrolling equity:
|
|
Nine months ended
September 30,
|
(in thousands)
|
|
2016
|
|
2015
|
Net (loss)/income of Albany Safran Composites (ASC)
|
|
($374
|
)
|
|
$1,747
|
|
Less: Return attributable to the Company's preferred holding
|
|
732
|
|
|
748
|
|
Net (loss)/income of ASC available for common ownership
|
|
($1,106
|
)
|
|
$999
|
|
Ownership percentage of noncontrolling shareholder
|
|
10
|
%
|
|
10
|
%
|
Net (loss)/income attributable to noncontrolling interest
|
|
($111
|
)
|
|
$100
|
|
|
|
|
|
|
|
|
Noncontrolling interest, beginning of year
|
|
$3,690
|
|
|
$3,699
|
|
Net (loss)/income attributable to noncontrolling interest
|
|
(111
|
)
|
|
100
|
|
Changes in other comprehensive income attributable to noncontrolling interest
|
|
(1
|
)
|
|
1
|
|
Noncontrolling interest
|
|
$3,578
|
|
|
$3,800
|
|
10. Accumulated Other Comprehensive
Income (AOCI)
The table below presents changes
in the components of AOCI for the period December 31, 2015 to September 30, 2016:
(in thousands)
|
|
Translation adjustments
|
|
Pension and postretirement liability adjustments
|
|
Derivative valuation adjustment
|
|
Total Other Comprehensive Income
|
December 31, 2015
|
|
($108,655
|
)
|
|
($48,725
|
)
|
|
($1,464
|
)
|
|
($158,844
|
)
|
Other comprehensive income/(loss) before reclassifications
|
|
2,216
|
|
|
330
|
|
|
(4,300
|
)
|
|
(1,754
|
)
|
Interest expense related to swaps reclassified to the Statement of Income, net of tax
|
|
-
|
|
|
-
|
|
|
1,045
|
|
|
1,045
|
|
Pension and postretirement liability adjustments reclassified to Statement of Income, net of tax
|
|
-
|
|
|
372
|
|
|
-
|
|
|
372
|
|
Net current period other comprehensive income/(loss)
|
|
2,216
|
|
|
702
|
|
|
(3,255
|
)
|
|
(337
|
)
|
September 30, 2016
|
|
($106,439
|
)
|
|
($48,023
|
)
|
|
($4,719
|
)
|
|
($159,181
|
)
|
The table below presents changes
in the components of AOCI for the period December 31, 2014 to September 30, 2015:
(in thousands)
|
|
Translation adjustments
|
|
Pension and postretirement liability adjustments
|
|
Derivative valuation adjustment
|
|
Total Other Comprehensive Income
|
December 31, 2014
|
|
($55,240
|
)
|
|
($51,666
|
)
|
|
($861
|
)
|
|
($107,767
|
)
|
Other comprehensive income/(loss) before reclassifications
|
|
(44,316
|
)
|
|
1,735
|
|
|
(2,374
|
)
|
|
(44,955
|
)
|
Interest expense related to swaps reclassified to the Statement of Income, net of tax
|
|
-
|
|
|
-
|
|
|
939
|
|
|
939
|
|
Pension and postretirement liability adjustments reclassified to Statement of Income, net of tax
|
|
-
|
|
|
714
|
|
|
-
|
|
|
714
|
|
Net current period other comprehensive income/(loss)
|
|
(44,316
|
)
|
|
2,449
|
|
|
(1,435
|
)
|
|
(43,302
|
)
|
September 30, 2015
|
|
($99,556
|
)
|
|
($49,217
|
)
|
|
($2,296
|
)
|
|
($151,069
|
)
|
The table below presents the
expense/(income) amounts reclassified, and the line items of the Consolidated Statements of Income that were affected for the periods
ended September 30, 2016 and 2015.
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
(in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Pretax Derivative valuation reclassified from Accumulated Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments made on interest rate swaps included in Income
before taxes(a)
|
|
$1,100
|
|
|
$587
|
|
|
$1,686
|
|
|
$1,540
|
|
Income tax effect
|
|
(418
|
)
|
|
(229
|
)
|
|
(641
|
)
|
|
(601
|
)
|
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income
|
|
$682
|
|
|
$358
|
|
|
$1,045
|
|
|
$939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit
|
|
($1,113
|
)
|
|
($1,110
|
)
|
|
($3,338
|
)
|
|
($3,330
|
)
|
Amortization of net actuarial loss
|
|
1,296
|
|
|
1,462
|
|
|
3,870
|
|
|
4,428
|
|
Total pretax amount reclassified (b)
|
|
183
|
|
|
352
|
|
|
532
|
|
|
1,098
|
|
Income tax effect
|
|
(55
|
)
|
|
(123
|
)
|
|
(160
|
)
|
|
(384
|
)
|
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income
|
|
$128
|
|
|
$229
|
|
|
$372
|
|
|
$714
|
|
|
(a)
|
Included in Interest expense.
|
|
(b)
|
These accumulated other comprehensive income/(loss) components are included
in the computation of net periodic pension cost (see Note 4).
|
11. Accounts Receivable
Accounts receivable includes trade
receivables, and revenue in excess of progress billings on long-term contracts in the AEC segment. The Company maintains allowances
for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company
determines allowances based on historical write-off experience, customer-specific facts and economic conditions. If the financial
condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional
allowances may be required.
As of September 30, 2016 and December
31, 2015, Accounts receivable consisted of the following:
(in thousands)
|
|
September 30,
2016
|
|
December 31,
2015
|
Trade and other accounts receivable
|
|
$149,403
|
|
|
$123,179
|
|
Bank promissory notes
|
|
17,293
|
|
|
15,845
|
|
Revenue in excess of progress billings
|
|
11,626
|
|
|
15,889
|
|
Allowance for doubtful accounts
|
|
(7,583
|
)
|
|
(8,530
|
)
|
Total accounts receivable
|
|
$170,739
|
|
|
$146,383
|
|
In connection with certain sales
in Asia Pacific, the Company accepts a bank promissory note as customer payment. The notes may be presented for payment at maturity,
which is less than one year.
12. Inventories
Inventories are stated at the lower
of cost or market, with cost determined using the first-in-first out method. The Company writes down the inventory for estimated
obsolescence and to lower of cost or market value based upon assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Once established,
the original cost of the inventory less the related inventory allowance represents the new cost basis of such inventories. The
AEC segment has long-term contracts under which we incur engineering and development costs that are allocable to parts that will
be delivered over multiple years. These costs are included in Work in process in the table below.
As of September 30, 2016 and December
31, 2015, inventories consisted of the following:
(in thousands)
|
|
September 30,
2016
|
|
December 31,
2015
|
Raw materials
|
|
$37,278
|
|
|
$27,636
|
|
Work in process
|
|
59,351
|
|
|
41,823
|
|
Finished goods
|
|
42,059
|
|
|
36,947
|
|
Total inventories
|
|
$138,688
|
|
|
$106,406
|
|
13.
Goodwill and Other Intangible Assets
Goodwill and intangible assets with
indefinite useful lives are not amortized, but are tested for impairment at least annually. Goodwill represents the excess of the
purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination.
Our reporting units are consistent with our operating segments.
Determining the fair value of a
reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount
rates, and future market conditions, among others. Goodwill and other long-lived assets are reviewed for impairment whenever events,
such as significant changes in the business climate, plant closures, changes in product offerings, or other circumstances indicate
that the carrying amount may not be recoverable.
To determine fair value, we utilize
two market-based approaches and an income approach. Under the market-based approaches, we utilize information regarding the Company
as well as publicly available industry information to determine earnings multiples and sales multiples. Under the income approach,
we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average
cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor
would expect to earn.
On April 8, 2016, the Company acquired
the outstanding shares of Harris Corporation’s composite aerostructures business. Management is in the process of determining
the fair value of assets and liabilities acquired. Based on procedures performed through September 30, 2016, we acquired amortizable
intangible assets of $59.4 million and goodwill of $67.0 million. The amounts are subject to change as management completes its
review of assets and liabilities acquired.
Prior to the acquisition, the entire
balance of goodwill on our books was attributable to the Machine Clothing business. In the second quarter of 2016, the Company
applied the qualitative assessment approach in performing its annual evaluation of Machine Clothing goodwill and concluded that
no impairment provision was required. There were no amounts at risk due to the large spread between the fair and carrying values.
We are continuing to amortize certain
patents, trade names and technology assets that have finite lives. The changes in intangible assets and goodwill from December
31, 2015 to September 30, 2016, were as follows:
(in thousands)
|
|
December 31, 2015
|
|
Assets acquired April 8, 2016
|
|
Amortization
|
|
Currency Translation
|
|
September 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AEC trade names
|
|
$25
|
|
|
$-
|
|
|
$(4
|
)
|
|
$-
|
|
|
$21
|
|
AEC technology
|
|
129
|
|
|
-
|
|
|
(19
|
)
|
|
-
|
|
|
110
|
|
Customer relationships
|
|
-
|
|
|
40,740
|
|
|
(1,354
|
)
|
|
-
|
|
|
39,386
|
|
Customer contracts
|
|
-
|
|
|
16,900
|
|
|
(62
|
)
|
|
-
|
|
|
16,838
|
|
Other intangibles
|
|
-
|
|
|
1,720
|
|
|
(1,031
|
)
|
|
-
|
|
|
689
|
|
Total amortized intangible assets
|
|
$154
|
|
|
$59,360
|
|
|
($2,470
|
)
|
|
$-
|
|
|
$57,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MC Goodwill
|
|
$66,373
|
|
|
$-
|
|
|
$-
|
|
|
$1,317
|
|
|
$67,690
|
|
AEC Goodwill
|
|
-
|
|
|
67,034
|
|
|
-
|
|
|
-
|
|
|
67,034
|
|
Total unamortized intangible assets:
|
|
$66,373
|
|
|
$67,034
|
|
|
$-
|
|
|
$1,317
|
|
|
$134,724
|
|
The estimated useful lives for intangibles
acquired during the second quarter of 2016 are 19 years for customer relationships, 6 years for customer contracts, and 7 to 22
years for other intangibles. The estimate of intangible amortization expense for 2016 and beyond is significantly influenced by
the preliminary valuation of intangibles acquired in the second quarter of 2016 and is subject to adjustment when the valuation
work is completed. Based on the preliminary valuation, estimated amortization expense of intangibles for the years ending December
31, 2016 through 2020, is as follows:
|
|
Annual amortization
|
Year
|
|
(in thousands)
|
2016
|
|
$3,749
|
|
2017
|
|
5,119
|
|
2018
|
|
5,119
|
|
2019
|
|
5,119
|
|
2020
|
|
5,119
|
|
14. Financial Instruments
Long-term debt, principally to banks
and bondholders, consists of:
(in thousands, except interest rates)
|
|
September
30, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Private placement with a fixed interest rate of 6.84%, due 2017
|
|
$50,000
|
|
|
$50,000
|
|
|
|
|
|
|
|
|
Credit agreement with borrowings outstanding at an end of period interest rate of 2.53% in 2016 and 2.36% in 2015 (including the effect of interest rate hedging transactions, as described below)
|
|
425,000
|
|
|
215,000
|
|
|
|
|
|
|
|
|
Various notes and mortgages, at an average end of period rate of 5.50% in 2016 and 2015, due in varying amounts through 2021
|
|
84
|
|
|
96
|
|
|
|
|
|
|
|
|
Obligation under capital lease, matures 2022
|
|
16,381
|
|
|
-
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
491,465
|
|
|
265,096
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
(1,462
|
)
|
|
(16
|
)
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$490,003
|
|
|
$265,080
|
|
A note agreement and guaranty
(“Prudential Agreement”) was originally entered into in October 2005 with the Prudential Insurance Company of America,
and certain other purchasers, with interest at 6.84%. The remaining principal under the Prudential Agreement is $50 million, and
is due on the maturity date of October 25, 2017. 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, under certain
market conditions. The Prudential Agreement contains customary terms, as well as affirmative covenants, negative covenants, and
events of default, comparable to those in our current principal credit facility agreement (as described below). The Prudential
Agreement has been amended a number of times, most recently in April 2016, in order to maintain terms comparable to our current
principal credit facility. For disclosure purposes, we are required to measure the fair value of outstanding debt on a recurring
basis. As of September 30, 2016, the fair value of this debt was approximately $53.5 million, and was measured using active market
interest rates, which would be considered Level 2 for fair value measurement purposes.
On April 8, 2016, we entered into
a $550 million unsecured Five-Year Revolving Credit Facility Agreement (the “Credit Agreement”) which amends and restates
the prior $400 million Agreement, entered into on June 18, 2015 (the “Prior Agreement”). Under the Credit Agreement,
$425 million of borrowings were outstanding as of September 30, 2016. The applicable interest rate for borrowings was LIBOR plus
a spread, based on our leverage ratio at the time of borrowing. At the time of the last borrowing on September 16, 2016, the spread
was 1.500%. The spread was based on a pricing grid, which ranged from 1.250% to 1.750%, based on our leverage ratio. Based on our
maximum leverage ratio and our Consolidated EBITDA, and without modification to any other credit agreements, as of September 30,
2016, we would have been able to borrow an additional $125 million under the Agreement.
The Credit Agreement contains customary
terms, as well as affirmative covenants, negative covenants and events of default comparable to those in the Prior Agreement. The
Borrowings are guaranteed by certain of the Company's subsidiaries.
Our ability to borrow additional
amounts under the Credit Agreement is conditional upon the absence of any defaults, as well as the absence of any material adverse
change (as defined in the Credit Agreement).
In connection with the acquisition
of AAC, the Company has a long-term capital lease obligation for real property in Salt Lake City, Utah. The lease has an implied
interest rate of 6.08% and matures in 2022.
The
following schedule presents future minimum annual lease payments under the capital
lease obligation and the present value of the minimum lease payments, as of September 30, 2016.
Years ending December 31,
|
(in
thousands)
|
|
|
|
|
2016
|
|
$674
|
|
2017
|
|
2,696
|
|
2018
|
|
2,743
|
|
2019
|
|
2,743
|
|
2020
|
|
2,790
|
|
Thereafter
|
|
5,628
|
|
Total minimum lease payments
|
|
17,274
|
|
Less: Amount representing interest
|
|
(893
|
)
|
|
|
|
|
Present value of minimum lease payments
|
|
$16,381
|
|
On May 6, 2016, we terminated
our interest rate swap agreements that had effectively fixed the interest rate on up to $120 million of revolving credit borrowings,
in order to enter into a new interest rate swap with a greater notional amount, and the same maturity as the Credit Agreement.
We paid $5.2 million to terminate the swap agreements and that cost will be amortized into interest expense through June 2020.
On May 9, 2016, we entered into
interest rate hedges for the period May 16, 2016 through March 16, 2021. These transactions have the effect of fixing the LIBOR
portion of the effective interest rate (before addition of the spread) on $300 million of indebtedness drawn under the Credit Agreement
at the rate of 1.245% during the period. Under the terms of these transactions, we pay the fixed rate of 1.245% and the counterparties
pay a floating rate based on the one-month LIBOR rate at each monthly calculation date, which on September 16, 2016 was 0.530%.
The net effect is to fix the effective interest rate on $300 million of indebtedness at 1.245%, plus the applicable spread, during
the swap period. On September 16, 2016, the all-in-rate on the $300 million of debt was 2.745%.
These interest rate swaps are accounted
for as a hedge of future cash flows, as further described in Note 15 of the Notes to Consolidated Financial Statements. No cash
collateral was received or pledged in relation to the swap agreements.
Under the Credit Agreement and Prudential
Agreement, we are currently required to maintain a leverage ratio (as defined in the agreements) of not greater than 3.50 to 1.00
and minimum interest coverage (as defined) of 3.00 to 1.00.
As of September 30, 2016, our leverage
ratio, including the pro-forma effect of the acquisition, was 2.38 to 1.00 and our interest coverage ratio was 12.93 to 1.00. We
may purchase our Common Stock or pay dividends to the extent our leverage ratio remains at or below 3.50 to 1.00, and may make
acquisitions with cash provided our leverage ratio would not exceed 3.50 to 1.00 after giving pro forma effect to the acquisition.
Indebtedness under each of the Prudential
Agreement and the Credit Agreement is ranked equally in right of payment to all unsecured senior debt.
We were in compliance with all debt
covenants as of September 30, 2016.
15. Fair-Value Measurements
Fair value is defined as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting principles
establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use
of unobservable inputs by requiring that the most observable inputs be used when available. Level 3 inputs are unobservable data
points for the asset or liability, and include situations in which there is little, if any, market activity for the asset or liability.
In 2015 we reclassified land and building related to the former manufacturing facility in Germany as Asset held for sale in the
accompanying Consolidated Balance Sheets. As of September 30, 2016 and December 31, 2015, we have Level 3 financial assets of $5.2
million and $5.0 million, respectively. The value as of September 30, 2016 was determined based on a contract which is expected
to close in the fourth quarter of 2016.
The following table presents
the fair-value hierarchy for our Level 1 and Level 2 financial and non-financial assets and liabilities, which are measured at
fair value on a recurring basis, and Level 3 non-financial measured at fair value:
|
|
September 30, 2016
|
|
December 31, 2015
|
(in thousands)
|
|
Quoted prices in active markets
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Unobservable inputs
(Level 3)
|
|
Quoted prices in active markets
(Level 1)
|
|
Significant other observable inputs
(Level
2)
|
|
Unobservable inputs
(Level 3)
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$22,274
|
|
|
$-
|
|
|
$-
|
|
|
$5,189
|
|
|
$-
|
|
|
$-
|
|
Asset held for sale
|
|
-
|
|
|
-
|
|
|
5,179
|
|
|
-
|
|
|
-
|
|
|
4,988
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency options
|
|
-
|
|
|
148
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock of unaffiliated foreign public company
|
|
762
|
(a)
|
|
-
|
|
|
-
|
|
|
819
|
|
|
-
|
|
|
-
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
-
|
|
|
(2,951
|
)
(b)
|
|
|
|
|
-
|
|
|
(2,400
|
)
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Original cost basis $0.5 million
|
|
(b)
|
Net of $13.8 million receivable floating leg and $16.8 million liability
fixed leg
|
|
(c)
|
Net of $7.4 million receivable floating leg and $9.8 million liability
fixed leg
|
Cash equivalents include short-term
securities that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in
active markets for identical securities.
The common stock of the unaffiliated
foreign public company is traded in an active market exchange. The shares are measured at fair value using closing stock prices
and are recorded in the Consolidated Balance Sheets as Other assets. The securities are classified as available for sale, and as
a result any unrealized gain or loss is recorded in the Shareholders’ Equity section of the Consolidated Balance Sheets rather
than in the Consolidated Statements of Income. When the security is sold or impaired, gains and losses are reported on the Consolidated
Statements of Income. Investments are considered to be impaired when a decline in fair value is judged to be other than temporary.
We operate our business in many
regions of the world, and currency rate movements can have a significant effect on operating results. Foreign currency instruments
are entered into periodically, and consist of foreign currency option contracts and forward contracts that are valued using quoted
prices in active markets obtained from independent pricing sources. These instruments are measured using market foreign exchange
prices and are recorded in the Consolidated Balance Sheets as Other current assets and Accounts payable, as applicable. Changes
in fair value of these instruments are recorded as gains or losses within Other (income)/expenses, net.
When exercised, the foreign currency
instruments are net settled with the same financial institution that bought or sold them. For all positions, whether options or
forward contracts, there is risk from the possible inability of the financial institution to meet the terms of the contracts and
the risk of unfavorable changes in interest and currency rates, which may reduce the value of the instruments. We seek to control
risk by evaluating the creditworthiness of counterparties and by monitoring the currency exchange and interest rate markets while
reviewing the hedging risks and contracts to ensure compliance with our internal guidelines and policies.
Changes in exchange rates can result
in revaluation gains and losses that are recorded in Selling, General and Administrative expenses or Other (income)/expenses, net.
Revaluation gains and losses occur when our business units have cash, intercompany (recorded in Other (income)/expenses, net) or
third-party trade (recorded in Selling, General and Administrative expenses) receivable or payable balances in a currency other
than their local reporting (or functional) currency.
Operating results can also be affected
by the translation of sales and costs, for each non-U.S. subsidiary, from the local functional currency to the U.S. dollar. The
translation effect on the Consolidated Statements of Income is dependent on our net income or expense position in each non-U.S.
currency in which we do business. A net income position exists when sales realized in a particular currency exceed expenses paid
in that currency; a net expense position exists if the opposite is true.
The interest rate swaps are accounted
for as hedges of future cash flows. The fair value of our interest rate swaps are derived from a discounted cash flow analysis
based on the terms of the contract and the interest rate curve, and is included in Other assets and/or Other noncurrent liabilities
in the Consolidated Balance Sheets. Unrealized gains and losses on the swaps flow through the caption Derivative valuation adjustment
in the Shareholders’ equity section of the Consolidated Balance Sheets, to the extent that the hedges are highly effective.
As of September 30, 2016, these interest rate swaps were determined to be highly effective hedges of interest rate cash flow risk.
Any gains and losses related to the ineffective portion of the hedges will be recognized in the current period in earnings. Amounts
accumulated in Other comprehensive income are reclassified as Interest expense, net when the related interest payments (that is,
the hedged forecasted transactions), and amortization related to the swap buyouts, affect earnings. Interest expense related to
the current swaps totaled $1.2 million for the nine month period ended September 30, 2016 and $1.5 million for the nine month period
ended September 30, 2015. Interest expense related to the swap buyouts totaled $0.5 million for the nine month period ended September
30, 2016 and $0.0 million for the nine month period ended September 30, 2015.
Gains/(losses) related to changes
in fair value of derivative instruments that were recognized in Other (income)/expenses, net in the Consolidated Statements of
Income were as follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
(in thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency options
|
|
($218
|
)
|
|
$25
|
|
|
$237
|
|
|
$150
|
|
16. Contingencies
Asbestos Litigation
Albany International Corp. is a
defendant in suits brought in various courts in the United States by plaintiffs who allege that they have suffered personal injury
as a result of exposure to asbestos-containing products that we previously manufactured. We 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.
We were defending 3,753 claims as
of September 30, 2016.
The following table sets forth the
number of claims filed, the number of claims settled, dismissed or otherwise resolved, and the aggregate settlement amount during
the periods presented:
Year ended December 31,
|
|
Opening Number of Claims
|
|
Claims Dismissed, Settled, or Resolved
|
|
New Claims
|
|
Closing Number of Claims
|
|
Amounts Paid (thousands) to Settle or Resolve
|
2005
|
|
29,411
|
|
|
6,257
|
|
|
1,297
|
|
|
24,451
|
|
|
$504
|
|
2006
|
|
24,451
|
|
|
6,841
|
|
|
1,806
|
|
|
19,416
|
|
|
3,879
|
|
2007
|
|
19,416
|
|
|
808
|
|
|
190
|
|
|
18,798
|
|
|
15
|
|
2008
|
|
18,798
|
|
|
523
|
|
|
110
|
|
|
18,385
|
|
|
52
|
|
2009
|
|
18,385
|
|
|
9,482
|
|
|
42
|
|
|
8,945
|
|
|
88
|
|
2010
|
|
8,945
|
|
|
3,963
|
|
|
188
|
|
|
5,170
|
|
|
159
|
|
2011
|
|
5,170
|
|
|
789
|
|
|
65
|
|
|
4,446
|
|
|
1,111
|
|
2012
|
|
4,446
|
|
|
90
|
|
|
107
|
|
|
4,463
|
|
|
530
|
|
2013
|
|
4,463
|
|
|
230
|
|
|
66
|
|
|
4,299
|
|
|
78
|
|
2014
|
|
4,299
|
|
|
625
|
|
|
147
|
|
|
3,821
|
|
|
437
|
|
2015
|
|
3,821
|
|
|
116
|
|
|
86
|
|
|
3,791
|
|
|
164
|
|
As of September 30,
2016
|
|
3,791
|
|
|
127
|
|
|
89
|
|
|
3,753
|
|
|
$733
|
|
We anticipate that additional
claims will be filed against the Company and related companies in the future, but are unable to predict the number and timing of
such future claims.
Exposure and disease information
sufficient to meaningfully estimate a range of possible loss of a particular claim is typically not available until late in the
discovery process, and often not until a trial date is imminent and a settlement demand has been received. For these reasons, we
do not believe a meaningful estimate can be made regarding the range of possible loss with respect to pending or future claims.
While we believe we have meritorious
defenses to these claims, we have settled certain claims for amounts we consider reasonable given the facts and circumstances of
each case. Our insurer, Liberty Mutual, has defended each case and funded settlements under a standard reservation of rights. As
of September 30, 2016 we had resolved, by means of settlement or dismissal, 37,468 claims. The total cost of resolving all claims
was $10.1 million. Of this amount, almost 100% was paid by our insurance carrier. The Company’s insurer has confirmed that
although the coverage limits under two (of approximately 23) primary insurance policies have been exhausted, there still remains
approximately $3 million in coverage limits under other applicable primary policies, and $140 million in coverage under excess
umbrella coverage policies that should be available with respect to current and future asbestos claims.
Brandon Drying Fabrics, Inc. (“Brandon”),
a subsidiary of Geschmay Corp., which is a subsidiary of the Company, is also a separate defendant in many of the asbestos cases
in which Albany is named as a defendant. Brandon was defending against 7,707 claims as of September 30, 2016.
The following table sets forth the
number of claims filed, the number of claims settled, dismissed or otherwise resolved, and the aggregate settlement amount during
the periods presented:
Year ended December 31,
|
|
Opening Number of Claims
|
|
Claims
Dismissed, Settled, or Resolved
|
|
New Claims
|
|
Closing Number of Claims
|
|
Amounts Paid (thousands) to Settle or Resolve
|
2005
|
|
9,985
|
|
|
642
|
|
|
223
|
|
|
9,566
|
|
|
$-
|
|
2006
|
|
9,566
|
|
|
1,182
|
|
|
730
|
|
|
9,114
|
|
|
-
|
|
2007
|
|
9,114
|
|
|
462
|
|
|
88
|
|
|
8,740
|
|
|
-
|
|
2008
|
|
8,740
|
|
|
86
|
|
|
10
|
|
|
8,664
|
|
|
-
|
|
2009
|
|
8,664
|
|
|
760
|
|
|
3
|
|
|
7,907
|
|
|
-
|
|
2010
|
|
7,907
|
|
|
47
|
|
|
9
|
|
|
7,869
|
|
|
-
|
|
2011
|
|
7,869
|
|
|
3
|
|
|
11
|
|
|
7,877
|
|
|
-
|
|
2012
|
|
7,877
|
|
|
12
|
|
|
2
|
|
|
7,867
|
|
|
-
|
|
2013
|
|
7,867
|
|
|
55
|
|
|
3
|
|
|
7,815
|
|
|
-
|
|
2014
|
|
7,815
|
|
|
87
|
|
|
2
|
|
|
7,730
|
|
|
-
|
|
2015
|
|
7,730
|
|
|
18
|
|
|
1
|
|
|
7,713
|
|
|
-
|
|
As
of September 30, 2016
|
|
7,713
|
|
|
6
|
|
|
-
|
|
|
7,707
|
|
|
$-
|
|
We 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. Although Brandon manufactured and sold dryer fabrics under its own name
subsequent to the asset purchase, none of such fabrics contained asbestos. 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. As of September 30, 2016, Brandon has resolved, by means of settlement or dismissal, 9,899 claims for a total of $0.2 million.
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.
For the same reasons set forth above
with respect to Albany’s claims, as well as the fact that no amounts have been paid to resolve any Brandon claims since 2001,
we do not believe a meaningful estimate can be made regarding the range of possible loss with respect to these remaining claims.
In some of these asbestos cases,
the Company is named both as a direct defendant and as the “successor in interest” to Mount Vernon Mills (“Mount
Vernon”). We acquired certain assets from Mount Vernon in 1993. Certain plaintiffs allege injury caused by asbestos-containing
products alleged to have been sold by Mount Vernon many years prior to this acquisition. Mount Vernon is contractually obligated
to indemnify the Company against any liability arising out of such products. We deny any liability for products sold by Mount Vernon
prior to the acquisition of the Mount Vernon assets. Pursuant to its contractual indemnification obligations, Mount Vernon has
assumed the defense of these claims. On this basis, we have successfully moved for dismissal in a number of actions.
Although we do 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 our understanding of the insurance policies available, how settlement amounts have
been allocated to various policies, our 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, we currently do not anticipate any material liability
relating to the resolution of the aforementioned pending proceedings in excess of existing insurance limits.
Consequently, we currently do not
anticipate, based on currently available information, that the ultimate resolution of the aforementioned proceedings will have
a material adverse effect on the financial position, results of operations, or cash flows of the Company. Although we cannot predict
the number and timing of future claims, based on the foregoing factors and the trends in claims against us to date, we do not anticipate
that additional claims likely to be filed against us in the future will have a material adverse effect on our financial position,
results of operations, or cash flows. We are aware that litigation is inherently uncertain, especially when the outcome is dependent
primarily on determinations of factual matters to be made by juries.
17. Changes in Shareholders’
Equity
The following table summarizes
changes in Shareholders’ Equity:
(in thousands)
|
|
Common Stock Class
A and B
|
|
Additional paid in capital
|
|
Retained earnings
|
|
Accumulated items of other comprehensive income/(loss)
|
|
Treasury stock
|
|
Noncontrolling Interest
|
|
Total Equity
|
December 31, 2015
|
|
$40
|
|
|
$423,108
|
|
|
$491,950
|
|
|
($158,844
|
)
|
|
($257,391
|
)
|
|
$3,690
|
|
|
$502,553
|
|
Net income
|
|
-
|
|
|
-
|
|
|
36,937
|
|
|
-
|
|
|
-
|
|
|
(111
|
)
|
|
36,826
|
|
Compensation and benefits paid or payable in shares
|
|
-
|
|
|
1,447
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,447
|
|
Options exercised
|
|
-
|
|
|
570
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
570
|
|
Shares issued to Directors'
|
|
-
|
|
|
190
|
|
|
-
|
|
|
-
|
|
|
245
|
|
|
-
|
|
|
435
|
|
Dividends declared
|
|
-
|
|
|
-
|
|
|
(16,370
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(16,370
|
)
|
Cumulative translation adjustments
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,216
|
|
|
-
|
|
|
(1
|
)
|
|
2,215
|
|
Pension and postretirement liability adjustments
|
|
-
|
|
|
-
|
|
|
-
|
|
|
702
|
|
|
-
|
|
|
-
|
|
|
702
|
|
Derivative valuation adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,255
|
)
|
|
-
|
|
|
-
|
|
|
(3,255
|
)
|
September 30, 2016
|
|
$40
|
|
|
$425,315
|
|
|
$512,517
|
|
|
($159,181
|
)
|
|
($257,146
|
)
|
|
$3,578
|
|
|
$525,123
|
|
18. Recent Accounting Pronouncements
In May 2014, an accounting update
was issued that replaces the existing revenue recognition framework regarding contracts with customers. There have been several
revisions to the update, the latest occurring in May 2016. This accounting update is effective for reporting periods beginning
after December 31, 2017. Early adoption is permitted but not before the original effective date, which is for reporting periods
beginning after December 31, 2016. We have not determined the impact of this update on our financial statements.
In February 2015, amended accounting
guidance was issued which changes the evaluation of variable interest entities regarding whether they should consolidate limited
partnerships and similar entities, or whether fees are paid to a decision maker or service provider, or whether they are held by
related parties. We adopted this provision as of January 1, 2016 and it did not affect our financial statements.
In April 2015 and August 2015, accounting
updates were issued which require that debt issuance costs related to certain types of recognized debt liability be presented in
the balance sheet as a direct reduction of that debt, which could result in a minor netting down of assets and liabilities. We
adopted this provision as of January 1, 2016 and it did not affect our financial statements.
In May 2015, an accounting update
was issued which eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measured
at net asset value (NAV) per share. We adopted this provision as of January 1, 2016 and it did not affect our financial statements.
In July 2015, an accounting update
was issued simplifying the measurement of inventory from the lower of cost or market to lower of cost or net realizable value.
This accounting update eliminates the requirement for consideration of replacement cost or net realizable value less normal profit
margin measurements. This accounting update is effective for reporting periods beginning after December 15, 2016. We do not expect
the adoption of this update to have a significant effect on our financial statements.
In September 2015, an accounting
update was issued which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period
adjustments that occur in periods after a business combination is consummated. This accounting update was adopted January 1, 2016.
Note 2 includes a table of measurement period adjustments related to the Company’s acquisition in the second quarter of 2016.
In January 2016, an accounting update
was issued which requires entities to present separately in Other comprehensive income the portion of the total change in the fair
value of a liability resulting from a change in the instrument-specific credit risk if the entity has elected to measure the liability
at fair value in accordance with the fair value option for financial instruments. This accounting update is effective for reporting
periods beginning after December 15, 2017. We have not determined the impact of this update on our financial statements.
In February 2016, an accounting
update was issued which requires lessees to recognize most leases on the balance sheet. The update may significantly increase reported
assets and liabilities. This accounting update is effective for reporting periods beginning after December 15, 2018. We have not
determined the impact of this update on our financial statements.
In March 2016, an accounting update
was issued which clarifies that a change in counterparty to a derivative contract, through novation, that is part of a hedge accounting
relationship does not, by itself, require de-designation of that relationship, as long as all other hedge accounting criteria continue
to be met. This accounting update is effective for reporting periods beginning after December 15, 2016. We do not expect the adoption
of this update to have a significant effect on our financial statements.
In March 2016, an accounting update
was issued which simplifies the transition to the equity method of accounting by eliminating the requirement for an investor to
retroactively apply the equity method when its increase in ownership interest, or degree of influence, triggers equity method accounting.
This accounting update is effective for reporting periods beginning after December 15, 2016. We do not expect the adoption of this
update to have a significant effect on our financial statements.
In March 2016, an accounting update
was issued which simplifies several aspects related to the accounting for share-based payment transactions, including the income
tax consequences, statutory tax withholding requirements, and classification of excess tax benefits on the statements of cash flows.
This accounting update is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. Adoption
of this accounting update could increase the volatility of income tax expense. We have not determined the effect of this update
on our financial statements.
In August 2016, an accounting update
was issued in order to reduce diversity in practice in how certain transactions are classified in the statement of cash flows.
This accounting update is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. We do
not expect the adoption of this update to have a significant effect on our financial statements.
In October 2016, an accounting update
was issued which modifies the recognition of income tax effects on intracompany transfers of assets, other than inventory. This
accounting update is effective for reporting periods beginning after December 15, 2017. We have not determined the effect of this
update on our financial statements.