ALBANY, NY, Aug. 4, 2008 (Business Wire) - Albany International Corp. reported second-quarter net income per share of $0.20, after reductions of $0.47 from net restructuring charges, idle-capacity costs related to restructuring, and costs related to continuing performance-improvement initiatives. Discrete income tax adjustments reduced net income by $0.01 per share.
Net income per share for Q2 2007 was $0.15, after expenses related to restructuring and performance-improvement initiatives reduced net income per share by $0.31, and discrete tax adjustments increased net income per share by $0.09.
In July 2008, the Company closed on the sale of its Filtration Technologies business, the principal operations of which are in Gosford, Australia, and Zhangjiagang, China. At closing, the Company received $45.5 million, which amount is subject to certain post-closing adjustments. The Company does not expect these post-closing adjustments to reduce the purchase price. The activities of this business are reported as a discontinued operation in the second-quarter financial statements and, accordingly, are excluded from Tables 1, 2, and 3, below.
Net sales from continuing operations increased $40.5 million, or 15.8 percent compared to the same period last year. Excluding the effect of changes in currency translation rates, net sales increased 7.9 percent.
Gross profit was 34.7 percent of net sales in the second quarter of 2008, compared to 36.8 percent in the same period of 2007. The difference was principally due to costs associated with performance-improvement initiatives. As described in the paragraphs that follow Table 3, costs associated with idle-capacity and performance-improvement initiatives were $7.9 million in Q2 2008 and $0.8 million in Q2 2007.
Selling, technical, general, and research (STG&R) expenses were 29.3 percent of net sales in the second quarter of 2008, compared to 31.7 percent in the second quarter of 2007. STG&R expenses were $86.9 million in the second quarter of 2008, in comparison to $81.4 million in the second quarter of 2007. Compared to Q2 2007, Q2 2008 STG&R expenses included a $5.8 million increase in expenses related to the effect of changes in currency translation rates, a $3.7 million increase in expenses related to performance-improvement initiatives, and a $1.0 million reduction in expenses related to incentive compensation resulting from the Company's lower share price.
Operating income was $14.5 million in the second quarter of 2008, compared to $5.9 million for the same period of 2007.
Q2 2008 net restructuring costs totaled $1.7 million ($0.05 per share) and included costs associated with the shutdown of the Company's Mansfield, Massachusetts, facility, and residual costs related to previously announced restructuring in PMC and Albany Door Systems. Those expenses were partially offset by a restructuring-related curtailment gain of $1.0 million.
Q2 2008 idle-capacity costs of $1.7 million ($0.05 per share) are related to previously announced closures of PMC plants in the U.S. The Company expects idle-capacity costs at these plants to be significantly lower in the third and fourth quarters.
Q2 2008 performance-improvement costs, other than idle-capacity costs, totaled $14.1 million ($0.37 per share), of which $6.2 million was reported in cost of goods sold, and $7.9 million was reported in STG&R expenses. Items charged into costs of goods sold include $4.3 million for equipment relocation and $1.7 million related to the new capacity start-up in China. Costs for equipment relocation will continue in future quarters, but are expected to be lower than Q2 2008. Start-up costs related to the greenfield PMC plant in China will continue until the anticipated production launch late in the third quarter. Due to underutilization of the facility and high depreciation costs relative to production rates during the ramp-up period, the Company expects the plant to show losses through the middle of 2009.
Performance-improvement costs reported as STG&R expenses included $5.3 million related to the implementation of SAP and the final $1.4 million of consulting fees related to the establishment of the global procurement organization. The Company expects that quarterly SAP implementation expenses will decrease to approximately $4 million in the third and fourth quarters of 2008, approximately $2 million in the first two quarters of 2009, and $1 million in Q3 2009. Additionally, the Company expects to begin recording approximately $1 million of quarterly amortization expense related to the SAP implementation.
Q2 2007 costs for restructuring and performance-improvement initiatives amounted to $12.1 million, of which $7.1 million was reported as restructuring, $4.2 million was included in STG&R expenses, and $0.8 million was included in cost of goods sold.
The effective second-quarter income tax rate before discrete tax items was 20 percent in 2008 and 25 percent in 2007. Included in second-quarter income tax expense are discrete tax adjustments that decreased net income by $0.01 per share in 2008 and increased 2007 net income per share by $0.09.
Net cash provided by operating activities was $15.2 million in the second quarter of 2008, compared to $17.4 million for the same period of 2007. Capital spending during the second quarter of 2008 was $41.9 million, and totaled $73.6 million for the first six months of 2008. The Company expects capital spending to be approximately $150 million in 2008 and $70 million in 2009. Depreciation and amortization were $15.2 million and $1.2 million, respectively, for the second quarter of 2008. Depreciation and amortization are estimated to be $64 million and $7 million for 2008, and $73 million and $9 million for 2009.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) were $28.8 million in the second quarter of 2008, compared to $21.5 million in the same quarter of 2007. Included in second-quarter EBITDA are expenses related to restructuring and performance-improvement initiatives totaling $17.5 million in 2008, and $12.1 million in 2007.
Paper Machine Clothing (PMC)
This segment includes Paper Machine Clothing and Process Belts used in the manufacture of paper and paperboard products.
Q2 2008 net sales increased 8.2 percent compared to the second quarter of 2007. Excluding the effect of currency translation rates, net sales increased 1.6 percent. PMC gross profit as a percentage of net sales decreased from 39.3 percent in Q2 2007 to 37.2 percent in Q2 2008. However, the PMC gross profit percentage shows improvement when excluding costs associated with idle-capacity and performance-improvement initiatives.
Compared to the second quarter of 2007, trade sales in the Americas Business Corridor declined 1.0 percent. Trade sales in South America increased 5.2 percent, while sales in North America declined 2.0 percent due to lower sales in Canada. Lower operating costs from plant closings and performance-improvement initiatives in North America helped to offset top-line pressures in the corridor.
In Western Europe, compared to the second quarter of 2007, trade sales in euros increased 8.4 percent as lower average prices were more than offset by higher volume. Despite lower prices, operating income improved due to higher sales volume and lower costs resulting from previously announced restructuring and performance-improvement activities.
Trade sales in the Pacific Business Corridor were 6.6 percent higher than the second quarter of 2007, led by strong growth in China. The new capacity in Asia continues to come onstream as planned.
Albany Door Systems (ADS)
This segment includes products, parts, and service sales of High Performance Doors to a variety of industrial customers.
Net sales in Europe in euros were up 24.7 percent compared to the second quarter of 2007. This increase was due to the continued strength in product sales and growth in the aftermarket. Compared to last year, operating income improved due to both higher sales and the 2007 consolidation of European manufacturing operations.
In North America, net sales increased 43.5 percent compared to the same period last year. Most of this increase was due to the second-quarter 2007 R-Bac acquisition. The U.S. market continues to be negatively affected by the construction slowdown.
Albany Engineered Composites (AEC)
This segment includes sales of specialty materials and composite structures for aircraft and other applications.
Net sales increased 95.7 percent compared to the second quarter of 2007. AEC generated an operating loss of $0.2 million during the quarter, compared to a loss of $1.7 million in the second quarter of 2007. The improvement was due to both higher sales and better operating efficiencies.
Albany Engineered Fabrics
This segment includes sales of a variety of products similar to PMC for application in the corrugator, pulp, nonwovens, building products, tannery, and textile industries.
Excluding the effect of changes in currency translation rates, net sales compared to the second quarter of 2007 decreased 3.2 percent. Sales were negatively affected by the downturn in the U.S. economy and the related decline in new construction.
PrimaLoft(r) Products
This segment includes sales of insulation for outdoor clothing, gloves, footwear, sleeping bags, and home furnishings.
Net sales excluding the effect of changes in currency translation rates increased 23.3 percent compared to the same period last year. Outerwear sales in North America and Europe continued to show good growth, while home furnishings sales in North America continued to be negatively affected by weakness in the retail market.
CEO Comments
President and CEO Joe Morone said, "For the past two years, we have been pursuing a cash flow and growth strategy with two near-term objectives: restore the long-term cash-generating potential of PMC, and establish a family of new businesses with significant potential for sustainable and profitable growth. As we have discussed in recent earnings calls, the primary near-term measure of success for this strategy is strong free cash flow, beginning in 2009. Our Q2 2008 results suggest that, despite a weak North American paper industry and general economy, a weakening European paper industry and general economy, and growing pressure on costs from rising oil and commodities prices, we are on track toward realizing those two near-term objectives and strong 2009 cash flow.
"In PMC, our strategy for the past two years has been to offset the impacts of the maturation of the North American and Western European markets by (a) growing volume in these mature markets, (b) growing with the emerging markets in Asia and South America, and (c) reducing costs significantly through a company-wide, three-year restructuring and process-improvement program. This is precisely what took place in Q2: excluding currency effects, global PMC sales were up slightly, with increased volume more than offsetting declines in prices. Sales were strong in Asia and South America, which grew by 7 percent and 5 percent, respectively. And, despite accelerating inflationary pressures, costs in PMC declined as the effects of last year's plant closures and establishment of the European shared services center were clearly reflected in operating income. Excluding the costs associated with restructuring and performance-improvement initiatives, Q2 2008 earnings per share and EBITDA showed strong improvement compared to Q2 2007. About half of that improvement is due to lower operating costs in PMC.
"Expenditures associated with the restructuring and performance-improvement activities that contributed to these lower operating costs will decline over the next few quarters. SAP expenditures accounted for nearly 40 percent of the Q2 performance-improvement initiatives detailed in Table 3, as the project passed its toughest and most important milestone: go-live in North America at the beginning of July. We are now planning to accelerate SAP implementation through the rest of the enterprise. We expect expenditures to decline from the North American go-live peak and for the project to be substantially complete by the end of Q3 2009.
"Machine relocation costs associated with the various plant closures accounted for a third of the performance-improvement costs in Table 3, and start-up costs associated with the new capacity in Asia accounted for nearly 20 percent of that total. Machine relocations should continue through the year while the Asian expansion is entering a new and critical phase. Construction in China and Korea should be completed this quarter, with operations starting to ramp up no later than the start of the fourth quarter. Our goal for these plants is to produce world-class, quality PMC products. This will require a measured, deliberate pace of scale-up over the next few quarters, which will depress earnings in Asia because of higher depreciation and underutilized capacity. Once fully operational, these plants will dramatically enhance the long-term prospects of our global PMC business.
"Regarding the outlook for PMC revenues, as the Q2 increases in PMC volume suggest, our competitive position in North America and Europe continues to strengthen, and we have made good progress on a number of important contract negotiations in both markets. Nonetheless, the short-term outlook for PMC remains clouded by the economic environment, the cascading effects of the rise in oil and commodities prices, and the impact of both on the already struggling paper industry. In Q2, we did once again see the sharp slowdown in North American PMC consumption at the end of the quarter, and we now expect that pattern to continue through the economic slowdown. Moreover, in four of the last five years, PMC revenues were weaker in Q3 than in Q2, largely because of the effect of summer slowdowns in Europe. Still, the strong Q2 and our growing competitive strength suggest that we should see continued improvement in year-over-year performance.
"AEC also performed well in Q2. Sales were 96 percent ahead of last year, and the business broke even for the second and third months of the quarter. New business development opportunities continue to emerge, and we remain optimistic about the near- and long-term growth prospects of this business. One indicator of those prospects is the array of customers that we are now working with, both on current revenue-generating and future business development projects. On commercial engines, our customers include Snecma, Rolls-Royce, Pratt & Whitney, Honeywell, and GE; our current and future projects range from engine parts for business jets to regional jets to the next-generation single-aisle aircraft. For commercial airframe applications, customers include Messier-Dowty, for the Boeing 787 landing gear struts, and Eclipse Aviation, for the E500 Very Light Jet (VLJ). Finally, for military platforms, involving engine, airframe, and other applications, our customers include Boeing, Northrop Grumman, Rolls-Royce, the U.S. Army, and the U.S. Navy.
"The primary challenge facing this business is to take full advantage of an expanding array of new business development opportunities, most of which won't generate significant revenue until 2013 and beyond. Most of the costs associated with these new program development activities are included in Corporate R&D rather than in segment earnings, so beginning next year, we will disclose the portion of Corporate R&D expenses associated with these new aerospace composite development projects. But for now, the important point is that our optimism about the future prospects of this business is based on a growing stable of new business development projects that are laying the foundation for significant, growing, and sustainable cash flows at attractive returns.
"Albany Door Systems continues to perform exceptionally well. This business does have a seasonal cycle with Q4 by far the strongest quarter. But the top-line strength exhibited in Q4 of last year has continued through the first half of 2008, thanks to outstanding performance in Europe, in both product and aftermarket sales. We estimate the aftermarket in Europe to be roughly twice the size of the product market, with the potential for operating income at least three times as large. This business continues to demonstrate the ability to grow rapidly while generating cash. The only downside to the Doors business right now is its vulnerability to economic slowdowns, which held back performance in North America in Q2, and which will likely affect Europe by the fourth quarter. The increases in energy and material costs will also dampen results going forward.
"The only major business that underperformed this quarter was Engineered Fabrics; sales were held back by the weak housing market, which has a direct effect on about a quarter of this business.
"But with this one exception, each of the major businesses performed well, despite a weak paper industry and economic environment, and spiraling inflation. We believe this strong performance is indicative of the progress we are making both internally, through our restructuring and performance-improvement activities, and externally, as we strengthen our market position, and it reinforces our confidence that we are on track toward strong cash flows in 2009. At the same time, because of the economic environment coupled with the seasonal effects in PMC, our short-term outlook is cautious, although, for all the reasons cited above, we expect a continuation of the improvement in year-over-year performance."
Albany International is a global advanced textiles and materials processing company. Its core business is the world's leading producer of custom-designed fabrics and belts essential to the production of paper and paperboard. Albany's family of emerging businesses extends its advanced textiles and materials capabilities into a variety of other industries, most notably aerospace composites, nonwovens, building products, and high-performance industrial doors.
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