UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(√) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2014

OR

(  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number: 1-10026

ALBANY INTERNATIONAL CORP.

(Exact name of registrant as specified in its charter)

 

 Delaware    14-0462060
 (State or other jurisdiction of    (IRS Employer Identification No.)
incorporation or organization)     
     
 216 Airport Drive, Rochester, New Hampshire    03867
 (Address of principal executive offices)   (Zip Code) 
     

Registrant’s telephone number, including area code 518-445-2200

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 [ √ ] No [    ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ √ ] No [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

       
Large accelerated filer  [ √ ]  Accelerated filer  [    ] 
Non-accelerated filer  [    ]  Smaller reporting company  [    ] 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [    ] No [ √ ]

 

The registrant had 28.6 million shares of Class A Common Stock and 3.3 million shares of Class B Common Stock outstanding as of October 17, 2014.

 

 
 

ALBANY INTERNATIONAL CORP.

TABLE OF CONTENTS

Page
No.
 
Part I Financial information
 
Item 1. Financial Statements  
Consolidated statements of income– three and nine months ended September 30, 2014 and 2013 3
Consolidated statements of comprehensive income– three and nine months ended September 30, 2014 and 2013 4
Consolidated balance sheets – September 30, 2014 and December 31, 2013 5
Consolidated statements of cash flows – three and nine months ended September 30, 2014 and 2013 6
Notes to consolidated financial statements 7
Forward-looking statements 25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
Item 4. Controls and Procedures 41
 
Part II Other Information
 
Item 1. Legal Proceedings 41
Item 1A. Risk Factors 42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
Item 3. Defaults upon Senior Securities 42
Item 4.  Mine Safety Disclosures 42
Item 5. Other Information 42
Item 6. Exhibits 42
2
 

 

ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
             
             
Three Months Ended     Nine Months Ended
September 30,     September 30,
2014  2013     2014  2013
$179,861   $183,147   Net sales  $553,686   $567,775 
111,242   115,146   Cost of goods sold  334,915   349,572 
                 
68,619   68,001   Gross profit  218,771   218,203 
33,618   39,143      Selling, general, and administrative expenses  112,787   117,690 
14,924   13,347      Technical, product engineering, and research    expenses  43,190   41,040 
919   2,256      Restructuring and other, net  4,058   27,213 
                 
19,158   13,255   Operating income  58,736   32,260 
2,486   3,484      Interest expense, net  8,121   11,056 
(1,864)  2,692      Other (income)/expenses, net  (4,464)  5,637 
                 
18,536   7,079   Income before income taxes  55,079   15,567 
6,762   2,381      Income tax expense  21,435   6,386 
                 
11,774   4,698   Income from continuing operations  33,644   9,181 
                 
-   -   Loss from operations of discontinued business  -   (575)
-   -      Income tax benefit on discontinued operations  -   (224)
-   -   Loss from discontinued operations  -   (351)
11,774   4,698    Net income  33,644   8,830 
(38)  -   Net loss attributable to the noncontrolling interest  (8)  - 
$11,812   $4,698    Net income attributable to the Company  $33,652   $8,830 
                 
        Earnings per share attributable to Company shareholders - Basic        
$0.37   $0.15   Income from continuing operations  $1.06   $0.29 
0.00   0.00   Discontinued operations  0.00   (0.01)
$0.37   $0.15   Net income attributable to the Company  $1.06   $0.28 
                 
        Earnings per share attributable to Company shareholders - Diluted        
$0.37   $0.15   Income from continuing operations  $1.05   $0.29 
0.00   0.00   Discontinued operations  0.00   (0.01)
$0.37   $0.15   Net income attributable to the Company  $1.05   $0.28 
                 
        Shares of the Company used in computing earnings per share:        
31,848   31,719     Basic  31,822   31,615 
31,946   31,841     Diluted  31,924   31,744 
                 
$0.16   $0.15   Dividends per share  $0.47   $0.44 
                 

The accompanying notes are an integral part of the consolidated financial statements

 

3
 

ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
               
               
Three Months Ended     Nine Months Ended
September 30,     September 30,
        
2014   2013      2014   2013 
$11,774   $4,698   Net income  $33,644   $8,830 
                 
        Other comprehensive income, before tax:        
(27,765)  17,805      Foreign currency translation adjustments  (29,705)  4,536 
-   14,417      Pension/postretirement plan remeasurement  -   14,417 
-   7,974      Pension/postretirement plan amendment  -   7,974 
           Amortization of pension liability adjustment:        
-   17      Transition obligation  -   51 
(1,108)  (974)     Prior service (credit)/cost  (3,325)  (2,791)
1,343   1,635      Net actuarial loss  4,026   4,963 
480   467      Payments related to interest rate swaps included in earnings  1,431   1,377 
446   (865)     Derivative valuation adjustment  (869)  1,096 
                 
        Income taxes related to items of other comprehensive income:        
-   (5,623)     Pension/postretirement plan remeasurement  -   (5,623)
-   (3,110)     Pension/postretirement plan amendment  -   (3,110)
(94)  (265)     Amortization of pension liability adjustment  (280)  (806)
(187)  (183)     Payments related to interest rate swaps included in earnings  (558)  (537)
(174)  338      Derivative valuation adjustment  339   (427)
(15,285)  36,331      Comprehensive income/(loss)  4,703   29,950 
(31)  -   Net loss and comprehensive income attributable to the noncontrolling interest  (1)  - 
($15,316)  $36,331   Comprehensive income/(loss) attributable to the Company  $4,702   $29,950 
                 
The accompanying notes are an integral part of the consolidated financial statements

4
 

ALBANY INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
       
       
   September 30,  December 31,
   2014  2013
ASSETS        
  Cash and cash equivalents  $195,461   $222,666 
  Accounts receivable, net  147,483   163,547 
  Inventories  121,592   112,739 
  Deferred income taxes  13,666   13,873 
  Prepaid expenses and other current assets  9,238   9,659 
      Total current assets  487,440   522,484 
         
  Property, plant and equipment, net  408,096   418,830 
  Intangibles  443   616 
  Goodwill  74,022   78,890 
  Income taxes receivable and deferred  110,609   119,612 
  Other assets  31,331   26,456 
      Total assets  $1,111,941   $1,166,888 
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
  Notes and loans payable  $551   $625 
  Accounts payable  32,211   36,397 
  Accrued liabilities  100,809   112,331 
  Current maturities of long-term debt  15   3,764 
  Income taxes payable and deferred  5,898   5,391 
      Total current liabilities  139,484   158,508 
         
  Long-term debt  283,100   300,111 
  Other noncurrent liabilities  96,991   106,014 
  Deferred taxes and other credits  52,895   54,476 
      Total liabilities  572,470   619,109 
         
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        
    37,076,689 in 2014 and 36,997,277 in 2013  37   37 
  Class B Common Stock, par value $.001 per share;        
    authorized 25,000,000 shares; issued and        
    outstanding 3,235,048 in 2014 and 2013  3   3 
  Additional paid in capital  418,546   416,728 
  Retained earnings  453,286   434,598 
  Accumulated items of other comprehensive income:        
    Translation adjustments  (30,841)  (138)
    Pension and postretirement liability adjustments  (46,964)  (48,383)
    Derivative valuation adjustment  (634)  (977)
  Treasury stock (Class A), at cost 8,459,498 shares        
    in 2014 and 8,463,635 in 2013  (257,481)  (257,571)
      Total Company shareholders' equity  535,952   544,297 
  Noncontrolling interest  3,519   3,482 
 Total equity  539,471   547,779 
      Total liabilities and shareholders' equity  $1,111,941   $1,166,888 
         
The accompanying notes are an integral part of the consolidated financial statements

5
 

ALBANY INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
(unaudited)
                     
                     
Three Months Ended     Nine Months Ended
September 30,     September 30,
2014  2013     2014  2013
        OPERATING ACTIVITIES        
$11,774   $4,698   Net income  $33,644   $8,830 
        Adjustments to reconcile net income to net cash provided by operating activities:        
13,737   14,230   Depreciation  42,120   42,868 
1,999   1,567   Amortization  5,621   4,884 
(2,637)  (283)  Change in long-term liabilities, deferred taxes and other credits  95   (4,274)
557   264   Provision for write-off of property, plant and equipment  1,286   329 
-   -   Gain on disposition or involuntary conversion of assets  (961)  (3,763)
(16)  (420)  Excess tax benefit of options exercised  (161)  (944)
213   287   Compensation and benefits paid or payable in Class A Common Stock  1,160   (887)
                 
        Changes in operating assets and liabilities that provide/(use) cash, net of business divestitures:        
(4,368)  5,759   Accounts receivable  9,929   (479)
(1,279)  290   Inventories  (12,238)  (240)
661   327   Prepaid expenses and other current assets  275   (1,706)
100   129   Income taxes prepaid and receivable  114   309 
(2,128)  4,516   Accounts payable  (2,867)  3,924 
4,414   4,076   Accrued liabilities  (8,265)  25,005 
1,819   (4,101)  Income taxes payable  760   (8,978)
(2,383)  (593)  Other, net  (6,512)  (1,824)
22,463   30,746   Net cash provided by operating activities  64,000   63,054 
                 
        INVESTING ACTIVITIES        
(18,704)  (18,378)  Purchases of property, plant and equipment  (46,106)  (46,186)
(189)  (728)  Purchased software  (504)  (1,376)
-   -   Proceeds from sale or involuntary conversion of assets  961   6,268 
-   13,000   Proceeds from sale of discontinued operations, net of expenses  -   13,000 
(18,893)  (6,106)  Net cash used in investing activities  (45,649)  (28,294)
                 
        FINANCING ACTIVITIES        
5,420   5,271   Proceeds from borrowings  10,090   57,176 
(6,815)  (18,562)  Principal payments on debt  (30,924)  (69,221)
223   1,661   Proceeds from options exercised  610   4,629 
16   420   Excess tax benefit of options exercised  161   944 
-   -   Debt acquisition costs  -   (1,639)
(5,094)  (4,747)  Dividends paid  (14,633)  (9,170)
(6,250)  (15,957)  Net cash used in financing activities  (34,696)  (17,281)
                 
(8,695)  6,805   Effect of exchange rate changes on cash and cash equivalents  (10,860)  4,612 
                 
(11,375)  15,488   (Decrease)/increase in cash and cash equivalents  (27,205)  22,091 
206,836   197,321   Cash and cash equivalents at beginning of period  222,666   190,718 
$195,461   $212,809   Cash and cash equivalents at end of period  $195,461   $212,809 
                 
The accompanying notes are an integral part of the consolidated financial statements

6
 

ALBANY INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. 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 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 fiscal year ended December 31, 2013.

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.

 

2. Noncontrolling Interest

Effective October 31, 2013, Safran S.A. (Safran) acquired a 10 percent equity interest in a new Albany subsidiary, Albany Safran Composites, LLC (ASC). Under the terms of the transaction agreements, ASC is the exclusive supplier to Safran of advanced 3D-woven composite parts for use in aircraft and rocket engines, thrust reversers and nacelles, and aircraft landing and braking systems (the “Safran Applications”). AEC may develop and supply parts other than advanced 3D-woven composite parts for all aerospace applications, as well as advanced 3D-woven composite parts for any aerospace applications that are not Safran Applications (such as airframe applications) and any non-aerospace applications.

The agreement provides Safran an option to purchase Albany’s remaining 90 percent interest upon the occurrence of certain bankruptcy or performance default events, or if Albany’s Engineered Composites business is sold to a direct competitor of Safran. The purchase price is based initially on the same valuation of ASC used to determine Safran’s 10% equity interest, and increases over time as LEAP production increases.

In accordance with the operating agreement, Albany received a $28 million preferred holding in ASC which includes a preferred return based on the Company’s revolving credit agreement. The common shares of ASC are owned 90 percent by Albany and 10 percent by Safran.

7
 

The table below presents a reconciliation of income attributable to the noncontrolling interest and noncontrolling equity:

(in thousands, except percentages)  Nine months ended
September 30, 2014
Net income of ASC  $679 
Less: Return attributable to the Company's preferred holding  759 
Net loss of ASC available for common ownership  (80)
Ownership percentage of noncontrolling shareholder  10%
Net loss attributable to noncontrolling interest  ($8)
     
Noncontrolling interest as of December 31, 2013  $3,482 
Adjustment to net assets contributed by Albany  38 
Net loss attributable to noncontrolling interest  (8)
Changes in other comprehensive income attributable to noncontrolling interest  7 
Noncontrolling interest as of September 30, 2014  $3,519 

 

3. Reportable Segments

Effective January 1, 2014, Albany International Corp. (the “Company”)  changed its business segment reporting by recasting, for all prior periods, certain expenses previously identified as Research and Unallocated expenses to existing segments.  The Company has two reportable segments: Machine Clothing (MC) and Albany Engineered Composites (AEC), and had Research and Unallocated expenses that were not allocated to these segments.  Substantially all research and development expenses are now included in segment operating expenses. Prior to this change, Unallocated expenses included long-term incentive compensation for all Company employees.  To the extent such programs are related to MC and AEC employees, such expenses are now included in segment operating expenses. Additionally, the amounts previously referred to as “Unallocated expenses,” is now referred to as “Corporate expenses.”  These changes are being made to be consistent with how the chief operating decision-maker assesses Company performance.  On April 10, 2014, we filed a Form 8-K to show the effect of these changes on previously reported results and, accordingly, the 2013 segment results in this report reflect the effect of this change.

8
 

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)  2014  2013  2014  2013
Net sales                
Machine Clothing  $157,891   $162,864   $494,788   $507,809 
Albany Engineered Composites  21,970   20,283   58,898   59,966 
Consolidated total  $179,861   $183,147   $553,686   $567,775 
Operating income                
Machine Clothing  $33,308   $27,910   $103,329   $80,287 
Albany Engineered Composites  (2,765)  (3,951)  (9,785)  (13,032)
Corporate expenses  (11,385)  (10,704)  (34,808)  (34,995)
Operating income before reconciling items  19,158   13,255   58,736   32,260 
Reconciling items:                
   Interest income  (527)  (351)  (1,079)  (951)
   Interest expense  3,013   3,835   9,200   12,007 
   Other expense/ (income), net  (1,864)  2,692   (4,464)  5,637 
Income before income taxes  $18,536   $7,079   $55,079   $15,567 

The table below presents restructuring costs by reportable segment (also see Note 5):

   Three months ended
September 30,
  Nine months ended
September 30,
(in thousands)  2014  2013  2014  2013
Restructuring expense                
Machine Clothing  $968   $2,250   $3,127   $26,673 
Albany Engineered Composites  (49)  6   931   540 
Consolidated total  $919   $2,256   $4,058   $27,213 

Machine Clothing restructuring expense was principally related to the reduction in manufacturing capacity at the production facilities in France. Restructuring expenses in the Albany Engineered Composites operations were principally related to organizational changes and exiting certain aerospace programs.

There were no material changes in the total assets of the reportable segments during this period.

 

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, benefits already accrued through February 2009, but no new benefits accrue after that date. 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.

9
 

Other Postretirement Benefits

In addition to providing pension benefits, the Company provides various medical, dental, and life insurance benefits for certain retired United States employees. U.S. employees hired prior to 2005 may become eligible for these benefits if they reach normal retirement age while working for the Company. Benefits provided under this plan are subject to change. Retirees share in the cost of these benefits. Effective January 2005, any new employees who wish to be covered under this plan will be responsible for the full cost of such benefits. In September 2008, we changed the cost sharing arrangement under this program such that increases in health care costs are the responsibility of plan participants. In August 2013, we reduced the life insurance benefit for retirees and eliminated the benefit for active employees.

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, 2014 and 2013 was as follows:

   Pension plans  Other postretirement benefits
(in thousands)  2014   2013   2014   2013 
                 
Components of net periodic benefit cost:                
Service cost  $2,521   $2,526   $236   $789 
Interest cost  7,217   5,999   2,057   2,374 
Expected return on assets  (7,260)  (6,103)  -   - 
Amortization of prior service cost/(credit)  41   27   (3,366)  (2,818)
Amortization of transition obligation  -   51   -   - 
Amortization of net actuarial loss  1,845   2,357   2,181   2,606 
Curtailment  (710)  -   -   - 
Settlement  -   315   -   - 
Net periodic benefit cost  $3,654   $5,172   $1,108   $2,951 

In September 2014, certain participants of the U.S. pension plan were notified of a limited-time opportunity whereby they could elect to receive the value of their pension benefit in a lump-sum payment. All lump-sum payments will be funded from pension plan assets and are expected to be made before the end of 2014. As a result of this initiative, and depending on the number of participants that elect the lump-sum payment, the Company expects to record a non-cash settlement charge of approximately $5 to $10 million in 2014. The payments are not expected to have a significant impact on the plan’s funded status.

 

5. Restructuring

During the second quarter of 2013, the Company commenced a program to restructure operations at the Company’s Machine Clothing production facilities in France. The restructuring, when completed, will have reduced employment by approximately 200 positions at these locations. As of September 30, 2014, approximately 190 positions had been eliminated.

Under the terms of the restructuring plan, the Company provides training, outplacement and other benefits, the costs of which are recorded as restructuring when they are incurred. The Company recorded a curtailment gain of $0.7 million for the first nine months of 2014 related to the elimination of pension accruals, which reduced net restructuring expense as reflected in the table below. Such curtailment gains are recorded as employees terminate employment and, accordingly, we expect to

10
 

record additional gains during 2014. Remaining costs for this program are expected to be between $1 and $2 million, and we expect these costs to occur over the next several quarters.

Restructuring expenses in the Albany Engineered Composites operations were principally related to organizational changes and exiting certain aerospace programs.

The following table summarizes charges reported in the Statements of Income under “Restructuring and other, net”:

   Three months ended
September 30,
  Nine months ended
September 30,
(in thousands)  2014  2013  2014  2013
 Machine Clothing  $968   $2,250   $3,127   $26,673 
 Albany Engineered Composites   (49)  6   931   540 
 Total    $919   $2,256   $4,058   $27,213 

Nine months ended September 30, 2014
(in thousands)
  Total restructuring costs incurred     Termination and other costs    Impairment of plant and equipment   Benefit plan curtailment/ settlement  
 Machine Clothing  $3,127   $3,837   $-   ($710)
 Albany Engineered Composites     931   320   611   - 
 Total    $4,058   $4,157   $611   ($710)

Nine months ended September 30, 2013
(in thousands)
  Total restructuring costs incurred     Termination and other costs    Impairment of plant and equipment   Benefit plan curtailment/ settlement  
 Machine Clothing   $26,673   $26,837   $-   ($164)
 Albany Engineered Composites    540   452   88   - 
 Total    $27,213   $27,289   $88   ($164)

We expect that substantially all Accrued liabilities for restructuring will be paid within one year. The table below presents year-to-date changes in restructuring liabilities for 2014 and 2013, all of which related to termination costs:

(in thousands)  December 31, 2013  Restructuring charges accrued  Payments  Currency translation/other  September 30, 2014
Total Termination costs  $9,656   $4,148   ($10,904)  ($277)  $2,623 

 

(in thousands)  December 31, 2012  Restructuring charges accrued  Payments  Currency translation/other  September 30, 2013
Total Termination costs  $4,947   $25,860   ($5,529)  $609   $25,887 

11
 

6. Other (Income)/Expenses, net

The components of Other (income)/expenses, net, are:

   Three months ended
September 30,
  Nine months ended
September 30,
 (in thousands)    2014  2013  2014  2013
 Currency transactions   ($1,916)  $1,975   ($3,819)  $3,879 
 Bank fees and amortization of debt issuance costs  271   203   868   1,201 
 Gain on insurance recovery  (165)  -   (1,126)  - 
 Organizational costs related to Albany Safran Composites  -   500   -   500 
 Other    (54)  14   (387)  57 
 Total    ($1,864)  $2,692   ($4,464)  $5,637 

In July 2013, the Company’s manufacturing facility in Germany was damaged by severe weather. At that time, the Company expensed the remaining book value of the damaged property, but that value was minimal. The gain recorded in the third quarter of 2014 represented the finalization of the insurance claim.

 

7. Income Taxes

The following table presents components of income tax expense/(benefit) for the three and nine months ended September 30, 2014 and 2013:

   Three months ended
September 30,
  Nine months ended
September 30,
(in thousands)  2014  2013  2014  2013
        
Income tax based on income from continuing operations, at estimated tax rates of 34.9% and 41.0%, respectively  $6,470   $2,902   $19,226   $6,382 
Provision for change in estimated tax rates  (243)  170   -   - 
Income tax before discrete items  6,227   3,072   19,226   6,382 
                 
Discrete tax expense/(benefit):                
Provision for/adjustment to beginning of year valuation allowances  -   -   437   - 
Provision for/resolution of tax audits and contingencies, net  330   -   1,310   425 
Adjustments to prior period tax liabilities  205   (818)  459   (734)
Enacted legislation change  -   (269)  -   (269)
Repatriation of non-U.S. prior years' earnings  -   396   -   582 
Other discrete tax adjustments, net  -   -   3   - 
Total income tax expense/(benefit)  $6,762   $2,381   $21,435   $6,386 

The third quarter estimated effective tax rate on continuing operations was 34.9 percent in 2014, as compared to 41.0 percent for the same period in 2013. The change in the estimated effective tax rate was primarily attributable to changes in the anticipated amount and distribution of income and loss among the countries in which we operate. 

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 Company accrued as part of the income tax provision before discrete items, for the residual taxes on these earnings to the extent they cannot be repatriated in a tax-free manner. At September 30, 2014 the Company reported a deferred tax liability

12
 

of $0.1 million on $3.6 million of prior year non-U.S. earnings that had been targeted for future repatriation to the U.S.

We conduct business globally and, as a result, the Company 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, including major jurisdictions such as the United States, Brazil, Canada, France, Germany, Italy, Mexico, and Switzerland. The open tax years in these jurisdictions range from 2000 to 2013. We are currently under audit in the U.S. and in other non-U.S. tax jurisdictions, including but not limited to Canada, Germany, and Italy.

It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change within a range of a net increase of $0 million to a net decrease of $2.6 million, from the reevaluation of uncertain tax positions arising in examinations, in appeals, or in the courts, or from the closure of tax statutes.

Not included in the range is $24 million of tax benefits in Germany related to a 1999 reorganization that have been challenged by the German tax authorities in the course of an audit.  In 2008 the German Federal Tax Court (FTC) denied tax benefits to other taxpayers in a case involving German tax laws relevant to our reorganization. One of these cases involved a non-German party, and in the ruling in that case, the FTC acknowledged that the German law in question may be violative of European Union (EU) principles and referred the issue to the European Court of Justice (ECJ) for its determination on this issue. In September 2009, the ECJ issued an opinion in this case that is generally favorable to the other taxpayer and referred the case back to the FTC for further consideration. In May 2010 the FTC released its decision, in which it resolved certain tax issues that may be relevant to our audit and remanded the case to a lower court for further development.  In 2012, the lower court decided in favor of the taxpayer and the government appealed the findings to the FTC.  On July 2, 2014, The FTC conducted a hearing in the aforementioned case involving the other taxpayer, and the taxpayer lost.  The final written decision of the FTC will be issued in the fourth quarter of 2014.  Although we believe that the relevant German tax law is violative of EU principles, management views the conclusion of this case as an opportunity to approach the German tax authorities with the goal of a settlement agreement.  We were required to pay tax and interest of approximately $13 million to the German tax authorities in order to pursue our appeal position.  In anticipation of a settlement, a portion of the prepaid taxes and interest along with certain deferred tax assets were adjusted downward by $6 million during the third quarter of 2014, which is included in Provision for/resolution of tax audits and contingencies in the above table. Also included on that line, for the third quarter of 2014, is a tax benefit related to the lapse of a tax statute.

13
 

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 data) 2014 2013 2014 2013
         
Net income attributable to the Company $11,812 $4,698 $33,652 $8,830
         
Weighted average number of shares:        
         
   Weighted average number of shares used in        
   calculating basic net income per share         31,848        31,719     31,822     31,615
         
Effect of dilutive stock-based compensation plans:        
         
   Stock options               98            122         102         129
         
         
Weighted average number of shares used in        
calculating diluted net income per share         31,946        31,841     31,924     31,744
         
Average market price of common stock used        
for calculation of dilutive shares $37.20 $34.43 $36.38 $30.53
         
Net income per share:        
         
   Basic $0.37 $0.15 $1.06 $0.28
         
   Diluted $0.37 $0.15 $1.05 $0.28

The following table presents the number of shares issued and outstanding:

 

 

  Class A   Class B   Treasury   Net shares
  Shares   Shares   Shares   Outstanding
               
September 30, 2014 37,076,689   3,235,048   (8,459,498)   31,852,239
June 30, 2014 37,064,939   3,235,048   (8,459,498)   31,840,489
September 30, 2013 36,954,027   3,236,098   (8,463,635)   31,726,490
               

 

14
 

9. Accumulated Other Comprehensive Income

The table below presents changes in the components of Accumulated Other Comprehensive Income for the period December 31, 2013 to September 30, 2014:

(in thousands)  Translation adjustments  Pension and postretirement liability adjustments  Derivative valuation adjustment  Total Other Comprehensive Income
        
December 31, 2013  ($138)  ($48,383)  ($977)  ($49,498)
Other comprehensive income before reclassifications  (30,703)  998   (530)  (30,235)
Interest expense related to swaps reclassified to the
    Statements of Income, net of tax
  -   -   873   873 
Pension and postretirement liability adjustments
    reclassified to Statements of Income, net of tax
  -   421   -   421 
Net current period other comprehensive income  (30,703)  1,419   343   (28,941)
                 
September 30, 2014  ($30,841)  ($46,964)  ($634)  ($78,439)

The components of our Accumulated Other Comprehensive Income that are reclassified to the Statements of Income relate to our pension and postretirement plans and interest rate swaps. The table below presents the amounts reclassified, and the line items of the Statements of Income that were affected:

   Three months ended
September 30,
  Nine months ended
September 30,
Expense/(income)(in thousands)  2014  2013  2014  2013
Pretax Derivative valuation reclassified from Accumulated Other Comprehensive Income:                
Payments made on interest rate swaps included in earnings  $480   $467   $1,431   $1,377 
Income tax effect  (187)  (183)  (558)  (537)
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income  $293   $284   $873   $840 
                 
Pretax pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income:                
   Amortization of prior service cost/(credit)  ($1,108)  ($974)  ($3,325)  ($2,791)
   Amortization of transition obligation  -   17   -   51 
   Amortization of net actuarial loss  1,343   1,635   4,026   4,963 
Total pretax amount reclassified (a)  235   678   701   2,223 
                 
Income tax effect  (94)  (265)  (280)  (806)
Effect on net income due to items reclassified from Accumulated Other Comprehensive Income  $141   $413   $421   $1,417 

 

(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 4).

15
 

10. Accounts Receivable

Accounts receivable includes trade receivables and revenue in excess of progress billings on long-term contracts in the Albany Engineered Composites business. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company determines the allowance 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.

 

The components of Accounts receivable are summarized below:

     
 (in thousands)  September 30, 2014  December 31, 2013
Trade and other accounts receivable  $146,348   $154,296 
Revenue in excess of progress billings  9,799   20,525 
Allowance for doubtful accounts  (8,664)  (11,274)
Total Accounts Receivable  $147,483   $163,547 

 

11. Inventories

Inventories are stated at the lower of cost or market, and are valued at average cost, net of reserves. The Company maintains reserves for possible impairment in the value of inventories. Such reserves can be specific to certain inventory, or general based on judgments about the overall condition of the inventory. General reserves are established based on percentage write-downs applied to aged inventories, or for inventories that are slow-moving. If actual results differ from estimates, additional inventory write-downs may be necessary. These general reserves for aged inventory are relieved through income only when the inventory is sold.

As of September 30, 2014 and December 31, 2013, inventories consisted of the following:

     
 (in thousands)   September  30, 2014 December 31, 2013
Raw materials $29,208 $25,754
Work in process                       47,383                    45,998
Finished goods                       45,001                    40,987
Total inventories $121,592 $112,739

During the second quarter of 2014, the Company identified an error in the value of Machine Clothing inventories reported in prior periods. Included in cost of goods sold for the first nine months of 2014 is a charge of $1.6 million to correct the errors by reducing inventories to their proper carrying values. The error relates to intercompany transfers of inventory and originated when the Company transitioned to a new ERP system in the Americas in 2008 and Europe in 2011.

16
 

12. 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.

 

The entire balance of goodwill on our books is attributable to the Machine Clothing business. In the second quarter of 2014, the Company applied the qualitative assessment approach in performing its annual evaluation of goodwill and concluded that no impairment provision was required. In addition, 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, customer contracts and technology assets that have finite lives. The changes in intangible assets and goodwill from December 31, 2013 to September 30, 2014, were as follows:

 

(in thousands)  December 31, 2013  Amortization  Currency Translation  September 30, 2014
                 
Amortized intangible assets:                
   AEC trade names  $33   ($4)  $-   $29 
   AEC customer contracts  404   (151)  -   253 
   AEC technology  179   (18)  -   161 
Total amortized intangible assets  $616   ($173)  $-   $443 
                 
Unamortized intangible assets:                
       Goodwill  $78,890   $-   ($4,868)  $74,022 

 

Estimated amortization expense of intangibles for the years ending December 31, 2014 through 2018, is as follows:

17
 

    Annual amortization
Year   (in thousands)
2014   $231
2015                          231
2016                            29
2017                            29
2018                            29

 

 

13. Financial Instruments

Long-term debt, principally to banks and bondholders, consists of:

(in thousands, except interest rates)  September 30, 2014  December 31, 2013
         
Private placement with a fixed interest rate of 6.84%, due 2015 and 2017  $100,000   $100,000 
         
Credit agreement with borrowings outstanding at an end of period interest rate of 2.62% in 2014 and 2.53% in 2013 (including the effect of interest rate hedging transactions, as described below), due in 2018  183,000   200,000 
         
Various notes and mortgages relative to operations principally outside the United States, at an average end of period rate of 5.50% in 2014 and 3.10% in 2013, due in varying amounts through 2021  115   3,875 
         
Long-term debt  283,115   303,875 
         
Less: current portion  (15)  (3,764)
         
Long-term debt, net of current portion  $283,100   $300,111 

A note agreement and guaranty (“Prudential Agreement”) was entered into in October 2005, and was amended and restated as of September 17, 2010 and March 26, 2013, with the Prudential Insurance Company of America, and certain other purchasers with interest at 6.84% and a maturity date of October 25, 2017. The remaining obligation under the Prudential Agreement has a mandatory payment of $50 million due on October 25, 2015, and the final payment is due 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 (as described below). For disclosure purposes, we are required to measure the fair value of outstanding debt on a recurring basis. As of September 30, 2014, the fair value of this debt was approximately $112.2 million, and was measured using active market interest rates, which would be considered Level 2 for fair value measurement purposes.

 

On March 26, 2013, we entered into a $330 million, unsecured Five-Year Revolving Credit Facility Agreement (“Credit Agreement”), under which $183 million of borrowings were outstanding as of September 30, 2014. The Credit Agreement replaces the previous $390 million five-year Credit Agreement made in 2010. The applicable interest rate for borrowings under the Credit Agreement, as well as under the former agreement, is LIBOR plus a spread, based on our leverage ratio at the time of

18
 

borrowing. At the time of the last borrowing on September 22, 2014, the spread was 1.375%. The spread is based on a pricing grid, which ranges from 1.25% to 1.875%, based on our leverage ratio.

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. Based on our maximum leverage ratio and our consolidated EBITDA (as defined in the Credit Agreement), and without modification to any other credit agreements, as of September 30, 2014, we would have been able to borrow an additional $147 million under our agreement.

On July 16, 2010, we entered into interest rate hedging transactions that have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $105 million of the indebtedness drawn under the Credit Agreement at the rate of 2.04% until July 16, 2015. Under the terms of these transactions, we pay the fixed rate of 2.04% and the counterparties pay a floating rate based on the three-month LIBOR rate at each quarterly calculation date, which on July 16, 2014 was 0.24%. The net effect is to fix the effective interest rate on $105 million of indebtedness at 2.04%, plus the applicable spread, until these swap agreements expire. On September 30, 2014, the all-in rate on the $105 million of debt was 3.415%.

On May 20, 2013, we entered into interest rate hedging transactions for the period July 16, 2015 through March 16, 2018. These transactions have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $110 million of indebtedness drawn under the Credit Agreement at the rate of 1.414% during this period. Under the terms of these transactions, we pay the fixed rate of 1.414% and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly calculation date, which on September 30, 2014 was 0.1525%. The net effect is to fix the effective interest rate on $110 million of indebtedness at 1.414%, plus the applicable spread, during the swap period.

These interest rate swaps are accounted for as a hedge of future cash flows, as further described in Note 14 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, 2014, our leverage ratio was 1.46 to 1.00 and our interest coverage ratio was 12.10 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, 2014.

 

14. 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

19
 

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. As of September 30, 2014 and December 31, 2013, we have no Level 3 financial assets or liabilities.

The following table presents the fair-value hierarchy for our Level 1 and Level 2 financial assets and liabilities measured at fair value on a recurring basis:

   September 30, 2014    December 31, 2013  
   Quoted prices in active markets  Significant other observable inputs    Quoted prices in active markets  Significant other observable inputs  
(in thousands)  (Level 1)  (Level 2)    (Level 1)  (Level 2)  
Fair Value                    
Assets:                    
   Cash equivalents  $37,037   $-     $25,073   $-   
   Other Assets:                    
      Common stock of foreign public company  781   -     952   -   
      Interest rate swap  -   830 (a)  -   1,517 (c)
Liabilities:                    
   Other noncurrent liabilities:                    
      Interest rate swap  -   (1,869) (b)  -   (3,119) (d)

(a)Net of $4.9 million receivable floating leg and $4.1 million liability fixed leg
(b)Net of $0.3 million receivable floating leg and $2.2 million liability fixed leg
(c)Net of $5.6 million receivable floating leg and $4.1 million liability fixed leg

(d)    Net of $0.7 million receivable floating leg and $3.8 million liability fixed leg

During the nine months ended September 30, 2014, there were no transfers between levels 1, 2, and 3.

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 a 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.

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.

20
 

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.

We operate our business in many regions of the world, and currency rate movements can have a significant effect on operating results.

Changes in exchange rates can result in revaluation gains and losses that are recorded in Selling, 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 income statement 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 Other noncurrent liabilities in the Consolidated Balance Sheets. Unrealized gains and losses on the swaps will 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, 2014, these interest rate swaps were determined to be 100% effective hedges of interest rate cash flow risk. 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) affect earnings. Interest expense related to the swaps totaled $1.4 million each of the nine month periods ended September 30, 2014 and 2013.

 Gains/ (losses) related to changes in fair value of derivative instruments that were recognized in Other (income)/expenses, net in the Statements of Income were as follows:

  Three months ended
September 30,
Nine months ended
September 30,
(in thousands) 2014 2013 2014 2013
         
Derivatives not designated as hedging instruments        
     Forward currency options  ($142)  $108 $12  $108

21
 

15. 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 3,925 claims as of September 30, 2014.

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             233               85          4,315                 82
           
As of September 30, 2014          4,315             466               76          3,925  $433

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, 2014 we had resolved, by means of settlement or dismissal, 37,069 claims. The total cost of resolving all claims was $9.2 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 7,731 claims as of September 30, 2014.

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:

22
 

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                  -   
As of September 30, 2014          7,815               86                 2          7,731  $-

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, 2014, Brandon has resolved, by means of settlement or dismissal, 9,874 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,

23
 

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.

 

16. Changes in Shareholders’ Equity

The following table summarizes changes in Shareholders’ Equity:

 

(in thousands) Class A
Common
Stock
Class B
Common
Stock
Additional
paid in
capital
Retained
earnings
Accumulated
items of other
comprehensive
income
Treasury
stock
Noncontrolling
Interest
Total
Shareholders’
Equity
December 31, 2013 $37 $3 $416,728 $434,598 ($49,498)   ($257,571) $3,482 $547,779
Net income - - - 33,652 - - (8) 33,644
Dividends declared - - - (14,964) - - - (14,964)
Changes in equity related to noncontrolling interest in ASC - - (24) - - -  38  14
Compensation and benefits paid or payable in Class A Common Stock - -  1,011 - - - -  1,011
Options exercised - -  771 - - - -  771
Shares issued to Directors' - -  60 - -  90 -  150
Cumulative translation adjustment - - - - (30,703) -  7 (30,696)
Change in pension liability adjustment - - - -  1,419 - -  1,419
Change in derivative valuation adjustment - - - -  343 - -  343
 September 30, 2014 $37 $3 $418,546 $453,286 ($78,439) ($257,481) $3,519 $539,471

 

17. Recent Accounting Pronouncements

 

 

In March 2013, an accounting update was issued that addressed the accounting for the cumulative translation adjustment upon derecognition of subsidiaries.  Upon the sale of part of a foreign entity, or if the parent no longer holds a controlling financial interest in a subsidiary or group of assets, the parent company must transfer the cumulative translation adjustment to net income.  We adopted this update January 1, 2014, and it had no effect on our financial statements.

In July 2013, amended accounting guidance was issued regarding the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. This guidance was adopted in the first quarter of 2014 and had the effect of reducing noncurrent deferred tax assets and noncurrent deferred tax liabilities by $7.1 million.

24
 

In April 2014, an accounting update was issued regarding which disposals qualify for reporting as discontinued operations.  Additionally, new disclosures will apply for discontinued operations.  This accounting update is to be applied prospectively to new disposals and new classifications of disposal groups as held for sale beginning in periods after December 15, 2014.  We do not expect the adoption of this update to have a significant effect on our financial statements.

 

In June 2014, an accounting update was issued that replaces the existing revenue recognition framework regarding contracts with customers. This accounting update is effective for reporting periods beginning after December 15, 2016. We have not determined the impact of this update on our financial statements.

 

In June 2014, an accounting update was issued relating to accounting for share-based payments with a performance target that could be achieved after the requisite service period. The adoption of this accounting guidance will be effective for reporting periods beginning after December 15, 2015. We do not expect the adoption of this update to have a significant effect on our financial statements.

 

In August 2014, an accounting update was issued relating to how management assesses conditions and events that could raise substantial doubt about an entity’s ability to continue as a going concern. 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.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking statements

This quarterly report and the documents incorporated or deemed to be incorporated by reference in this quarterly report contain statements concerning our future results and performance and other matters that are “forward-looking” statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” “should” and similar expressions identify forward-looking statements, which generally are not historical in nature. Forward-looking statements are subject to certain risks and uncertainties (including, without limitation, those set forth in the Company’s most recent Annual Report on Form 10-K or prior Quarterly Reports on Form 10-Q) that could cause actual results to differ materially from the Company’s historical experience and our present expectations or projections.

There are a number of risks, uncertainties, and other important factors that could cause actual results to differ materially from the forward-looking statements, including, but not limited to:

·Conditions in the industries in which our Machine Clothing segment competes, including the paper industry, along with general risks associated with economic downturns;
·Failure to remain competitive in the industries in which our Machine Clothing segment competes;
·Failure to have, achieve, or maintain anticipated profitable growth in our Albany Engineered Composites segment; and
·Other risks and uncertainties detailed in this report.

Further information concerning important factors that could cause actual events or results to be materially different from the forward-looking statements can be found in “Business Environment and

25
 

“Trends,” “Liquidity,” and “Legal Proceedings” sections of this quarterly report, as well as in the “Risk Factors,” section of our most recent Annual Report on Form 10-K. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to foresee or identify all factors that could have a material and negative impact on future performance. The forward-looking statements included or incorporated by reference in this quarterly report are made on the basis of our assumptions and analyses, as of the time the statements are made, in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate under the circumstances.

Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained or incorporated by reference in this report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes.

 

 

Overview

 

See Note 3, “Reportable Segments”, under Item 1, Financial Statements, for a discussion of recasting Research and Unallocated expenses to reportable segments.

 

Our reportable segments: Machine Clothing (MC) and Albany Engineered Composites (AEC), draw on many of the same advanced textiles and materials processing capabilities, and compete on the basis of proprietary, product-based advantage that is grounded in those core capabilities. As a result, technology and manufacturing advances in one tend to benefit the other.

 

MC is the Company’s long-established core business and primary generator of cash. While the paper and paperboard industry in our traditional geographic markets has suffered from well-documented overcapacity in publication grades, especially newsprint, the industry is still expected to grow on a global basis, driven by demand for packaging and tissue grades, as well as the expansion of paper consumption and production in Asia and South America. We feel we are now well-positioned in these markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, field services, and manufacturing technology. Although we consider the market for Machine Clothing as having flat growth potential, the business has been a significant generator of cash, and we seek to maintain the cash-generating potential of this business by maintaining the low costs that we achieved through restructuring, and competing vigorously by using our differentiated products and services to reduce our customers’ total cost of operation and improve their paper quality.

 

We believe that AEC provides the greatest growth potential, both near and long term, for our Company. Our strategy is to grow organically by focusing our proprietary technology on high-value aerospace and defense applications that cannot be served effectively by conventional composites. AEC (including Albany Safran Composites, LLC (“ASC”), in which our customer SAFRAN Group owns a 10% noncontrolling interest) supplies a number of customers in the aerospace industry. AEC’s largest aerospace customer is the SAFRAN Group. Through ASC, AEC develops and sells composite aerospace components to SAFRAN, with the most significant program at present being the production of fan blades and other components for the LEAP engine. AEC (through ASC and otherwise) is also

26
 

developing other new and potentially significant composite products for aerospace (engine and airframe) applications.

 

 

Consolidated Results of Operations

 

Net sales

 

The following table summarizes our net sales by business segment:

 

  Three months ended
September 30,
% Change Nine months ended
September 30,
% Change
(in thousands, except percentages) 2014 2013 2014 2013
Machine Clothing  $157,891 $162,864 -3.1% $494,788 $507,809 -2.6%
Albany Engineered Composites        21,970       20,283 8.3%       58,898       59,966 -1.8%
Total $179,861 $183,147 -1.8% $553,686 $567,775 -2.5%

 

Net sales were affected by the following:

 

Three month comparison

·Changes in currency translation rates had the effect of decreasing net sales by $0.9 million during the third quarter of 2014 as compared to 2013.
·The year-over-year decline in third-quarter MC sales was primarily attributable to lower sales in the Americas.
·AEC sales increased due to growth in the LEAP and JSF LiftFan® programs.
·Excluding the effect of changes in currency translation rates:
·Total Company Net sales decreased 1.3% compared to the same period in 2013
·Net sales in MC decreased 2.5%
·Net sales in AEC increased 8.3%

 

Nine month comparison

·Changes in currency translation rates had the effect of increasing net sales by $1.4 million during 2014 as compared to 2013.
·The year-over-year decline in the first nine months MC sales was attributable to lower sales in the Americas.
·The decrease in AEC sales was principally due to the shift during the first quarter to larger scale LEAP part production, together with the related change in invoicing terms, resulting in a build-up of inventory and an associated temporary lag in sales in the first quarter of 2014.
·Excluding the effect of changes in currency translation rates:
·Total Company Net sales decreased 2.7% compared to the same period in 2013
·Net sales in MC decreased 2.8%
·Net sales in AEC decreased 1.8%

 

 

27
 

Gross Profit

 

The following table summarizes gross profit by business segment:

 

   Three months ended
September 30,
  Nine months ended
September 30,
(in thousands, except percentages)  2014  2013  2014  2013
Machine Clothing  $66,117   $67,773   $213,326   $219,559 
Albany Engineered Composites  2,855   1,061   6,506   1,542 
Corporate expenses  (353)  (833)  (1,061)  (2,898)
Total  $68,619   $68,001   $218,771   $218,203 
% of Net sales  38.2%  37.1%  39.5%  38.4%

 

Three month comparison

The increase in gross profit, compared to the same period in 2013, was principally due to the net effect of the following:

·Gross profit margins in MC increased from 41.6 percent to 41.9 percent principally due to the effect of restructuring in France.
·AEC gross margin for the third quarter of 2014 was 13.0 percent compared to 5.2 percent in 2013 principally due to improvements in profitability at the Company’s Boerne, Texas operation.

 

Nine month comparison

The increase in gross profit during 2014 was principally due to the net effect of the following:

·A $5.6 million decrease due to lower sales in MC.
·A $5.1 million increase due to higher gross profit margin in AEC due to improvements in profitability at the Company’s Boerne, Texas operation.
·A charge of $1.6 million in the second quarter of 2014 to correct an error in the value of Machine Clothing inventories reported in prior periods.
·A $1.8 million reduction in cost associated with the Company’s U.S. postretirement plan, resulting from plan changes in 2013.

 

 

Selling, Technical, General, and Research (STG&R)

 

The following table summarizes STG&R by business segment:

 

   Three months ended
September 30,
  Nine months ended
September 30,
(in thousands)  2014  2013  2014  2013
Machine Clothing  $31,843   $37,613   $106,870   $112,599 
Albany Engineered Composites  5,668   5,006   15,361   14,034 
Corporate expenses  11,031   9,871   33,746   32,097 
Total  $48,542   $52,490   $155,977   $158,730 
% of Net sales  27.0%  28.7%  28.2%  28.0%

 

Three month comparison

STG&R expenses decreased $3.9 million, compared to the same period in 2013, principally due to the net effect of the following:

 

·Revaluation of nonfunctional currency assets and liabilities resulted in gains of $2.2 million during the third quarter of 2014 and losses of $1.3 million in the comparable quarter of 2013.
·Currency translation decreased 2014 STG&R expenses by $0.5 million.

 

 

28
 

Nine month comparison

STG&R expenses decreased $2.8 million, compared to the same period in 2013, principally due to the net effect of the following:

 

·Revaluation of nonfunctional currency assets and liabilities resulted in gains of $1.6 million during the first nine months of 2014 and losses of $0.1 million in comparable period of 2013.
·A gain on the sale of former manufacturing facility in Australia reduced 2013 expenses by $3.8 million.
·Compared to the first nine months of 2013, bad debt expense was $1.6 million lower.
·Compared to the first nine months of 2013, corporate professional fee expenses were reduced by $1.0 million.
·Currency translation decreased STG&R expense by $0.7 million.

 

 

Pension Plan

 

In September 2014, certain participants of the U.S. pension plan were notified of a limited-time opportunity whereby they could elect to receive the value of their pension benefit in a lump-sum payment. All lump-sum payments will be funded from pension plan assets and are expected to be made before the end of 2014. As a result of this initiative, and depending on the number of participants that elect the lump-sum payment, the Company expects to record a non-cash settlement charge of approximately $5 to $10 million in 2014. The payments are not expected to have a significant impact on the plan’s funded status.

 

Research and Development

 

The following table summarizes expenses associated with internally funded research and development by business segment:

 

  Three months ended
September 30,
Nine months ended
September 30,
(in thousands) 2014 2013 2014 2013
Machine Clothing $4,510 $4,142 $14,532 $13,343
Albany Engineered Composites          3,593          2,874          8,179          7,321
Corporate expenses                                           159             402             550          1,418
Total $8,262 $7,418 $23,261 $22,082

 

Restructuring Expense

 

In addition to the items discussed above affecting gross profit and STG&R, operating income was affected by restructuring costs of $0.9 million in the third quarter of 2014 and $2.3 million in the third quarter of 2013.

 

The following table summarizes restructuring expense by business segment:

 

  Three months ended
September 30,
Nine months ended
September 30,
(in thousands) 2014 2013 2014 2013
Machine Clothing $968 $2,250 $3,127 $26,673
Albany Engineered Composites             (49)                6             931             540
Total $919 $2,256 $4,058 $27,213

 

29
 

Machine Clothing restructuring expense was principally related to the reduction in manufacturing capacity at production facilities in France. Restructuring expenses in the Albany Engineered Composites operations were principally related to organizational changes and exiting certain aerospace programs.

During the second quarter of 2013, the Company commenced a program to restructure operations at the Company’s Machine Clothing production facilities in France. The restructuring, when completed, will have reduced employment by approximately 200 positions at these locations. As of September 30, 2014, approximately 190 positions had been eliminated. Accordingly, the Company is now realizing substantially all of the expected $10 million of annual cost savings, which principally impacts the Cost of goods sold line in the Statements of Income.

Under the terms of the restructuring plan, the Company provides training, outplacement and other benefits, the costs of which are recorded as restructuring when they are incurred. The Company recorded a curtailment gain of $0.7 million for the first nine months of 2014 related to the elimination of pension accruals, which reduced net restructuring expense as reflected in the table above. Such curtailment gains are recorded as employees terminate employment and, accordingly, we expect to record additional gains during 2014. Remaining costs for this program are expected to be between $1 and $2 million, and we expect these costs to occur over the next several quarters.

For more information on our restructuring charges, see Note 5 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.

Operating Income

The following table summarizes operating income by business segment:

   Three months ended
September 30,
  Nine months ended
September 30,
(in thousands)  2014  2013  2014  2013
Machine Clothing  $33,308   $27,910   $103,329   $80,287 
Albany Engineered Composites  (2,765)  (3,951)  (9,785)  (13,032)
Corporate expenses  (11,385)  (10,704)  (34,808)  (34,995)
Total  $19,158   $13,255   $58,736   $32,260 

Other Earnings Items

 

   Three months ended
September 30,
  Nine months ended
September 30,
(in thousands)  2014  2013  2014  2013
Interest expense, net  $2,486   $3,484   $8,121   $11,056 
Other (income)/expenses, net  (1,864)  2,692   (4,464)  5,637 
Income tax expense/(benefit)  6,762   2,381   21,435   6,386 
Loss from discontinued operations, net of tax  -   -   -   (351)
Net loss attributable to the noncontrolling interest  (38)  -   (8)  - 

 

Interest Expense, net

 

Third quarter Interest expense, net, decreased $1.0 million principally due to lower average interest rates that resulted from using the revolving credit facility for the first $50 million payment in October 2013 under the Prudential Agreement. For more information on borrowings and interest rates, see Note 13 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.

30
 

Other (Income)/Expenses, net

 

Other (income)/expenses, net included the following:

 

Three month comparison

·Foreign currency revaluations of intercompany balances resulted in gains of $1.9 million during the third quarter of 2014 and losses of $2.0 million in the third quarter 2013.
 ·In July 2013, the Company’s MC manufacturing facility in Germany was damaged by severe weather. In the third quarter of 2014, we recorded a gain of $0.2 million, related to the finalization of the insurance claim.

 

Nine month comparison

·Foreign currency revaluations of intercompany balances resulted in gains of $3.8 million for the first nine months of 2014 and a $3.9 million loss for the comparable period of 2013.
·Bank fees and amortization of debt issuance costs were $0.9 million in the first nine months of 2014 and $1.2 million for the comparable period of 2013.
·The insurance recovery gain described above resulted in income of $1.1 million for the first nine months of 2014.

 

Income Tax

 

The Company has operations which constitute a taxable presence in 19 countries outside of the United States. All of these countries except one had income tax rates that were lower than the United States federal tax rate of 35% during the periods reported. The jurisdictional location of earnings is a significant component of our effective tax rate each year and therefore on our overall income tax expense.

 

Three month comparison

The Company’s effective tax rates for the third quarters of 2014 and 2013 were 36.5% and 33.6%, respectively. The tax rate is affected by recurring items, such as the income tax rate in the U.S. and in non-U.S. jurisdictions and the mix of income earned in those jurisdictions. The tax rate is also affected by U.S. tax costs on foreign earnings that have been or will be repatriated to the U.S., and by discrete items that may occur in any given year but are not consistent from year to year.

Significant items that impacted the tax rates in the third quarter of 2014 included the following (percentages reflect the effect of each item as a percentage of Income before income taxes):

·The income tax rate on continuing operations, excluding discrete items, was 34.9%.
·A tax charge of $7.1 million (38.3%), primarily related to a recent unfavorable outcome in the tax court pertaining to another taxpayer with similar facts to the Company.
·A net tax benefit was recognized in the amount of $6.8 million (-36.5%) primarily due to the lapse of a tax statute.
·A $0.2 million (1.1%) net expense related to adjustments to prior year estimated tax liabilities and $0.2 million (-1.3%) tax benefit for the effect of a change in the estimated tax rate for the year.

Significant items that impacted the third-quarter 2013 tax rate included the following:

·The income tax rate on continuing operations, excluding discrete items, was 41.0%.
·A $0.5 million (7.4%) net benefit related to discrete items and the effect of a change in the estimated tax rate for the year.

31
 

Nine month comparison

The Company’s effective tax rates for the first nine-month periods of 2014 and 2013 were 38.9% and 41.0%, respectively.

Significant items that impacted the 2014 tax rate included the following (percentages reflect the effect of each item as a percentage of Income before income taxes):

·The income tax rate on continuing operations, excluding discrete items, was 34.9%.
·A net charge of $1.3 million (2.4%) for the resolution of and provision for income tax controversies.
·A $0.5 million (0.8%) net charge for adjustments to estimated prior year tax liabilities.
·A charge of $0.4 million (0.8%) for a change to the beginning of year valuation allowance.

Significant items that impacted the 2013 tax rate included the following:

·The income tax rate on continuing operations, excluding discrete items, was 41.0%.

 

 

Segment Results of Operations

 

Machine Clothing Segment

Business Environment and Trends

 

MC is our primary business segment and accounted for nearly 90% of our consolidated revenues during the first nine months of 2014. Machine clothing is purchased primarily by manufacturers of paper and paperboard.

 

According to RISI, Inc., global production of paper and paperboard is expected to grow at an annual rate of approximately 2% over the next five years, driven primarily by secular demand increases in Asia and South America, with stabilization in the mature markets of Europe and North America.

 

Shifting demand for paper, across different paper grades as well as across geographical regions, continues to drive the elimination of papermaking capacity in areas with significant established capacity, primarily in the mature markets of Europe and North America. At the same time, the newest, most efficient machines are being installed in areas of growing demand, including Asia and South America generally, as well as tissue and towel paper grades in all regions. Recent technological advances in Paper Machine Clothing, while contributing to the papermaking efficiency of customers, have lengthened the useful life of many of our products and had an adverse impact on overall paper machine clothing demand. These factors help to explain why Paper Machine Clothing revenue growth grows at a lesser rate than growth in paper production.

 

The Company’s manufacturing and product platforms position us well to meet these shifting demands across product grades and geographic regions. Our strategy for meeting these challenges continues to be to grow share in all markets, with new products and technology, and to maintain our manufacturing footprint to align with global demand, while we offset the effects of inflation through continuous productivity improvement.

 

We have incurred significant restructuring charges in recent periods as we reduced Paper Machine Clothing manufacturing capacity in the United States, Canada, Germany, Finland, France, the Netherlands, Sweden, and Australia.

 

32
 

Review of Operations

   Three months ended
September 30,
  Nine months ended
September 30,
(in thousands, except percentages)  2014  2013  2014  2013
Net sales  $157,891   $162,864   $494,788   $507,809 
Gross profit  66,117   67,773   213,326   219,559 
% of net sales  41.9%  41.6%  43.1%  43.2%
Operating income  33,308   27,910   103,329   80,287 

 

Net Sales

 

Net sales were affected by the following:

 

Three month comparison

·Changes in currency translation rates had the effect of decreasing 2014 sales by $0.9 million.
·Excluding the effect of changes in currency translation rates, sales decreased 2.5% compared to the same period in 2013.
·The year-over-year decline in third-quarter MC sales was primarily attributable to lower sales in the Americas.

 

Nine month comparison

·Changes in currency translation rates had the effect of increasing 2014 sales by $1.4 million.
·The year-over-year decline in the first nine months MC sales was attributable to lower sales in the Americas.
·Excluding the effect of changes in currency translation rates, sales decreased 2.8% compared to the same period in 2013.

 

Gross Profit

 

Three month comparison

The decrease in gross profit was principally due to lower sales as described above.

 

Nine month comparison

The decrease in gross profit was principally due to the net effect of the following:

·A $5.6 million decrease due to lower sales.
·A $0.6 million decrease due to lower gross margin, including the charge for the inventory valuation error reported in the second quarter.

 

Operating Income

 

The increase in operating income was principally due to the net effect of the following:

 

Three month comparison

·Restructuring charges of $1.0 million in the third quarter 2014, compared to $2.3 million in 2013.

33
 
·Revaluation of nonfunctional currency assets and liabilities resulted in third quarter gains of $2.3 million in 2014, compared to losses of $1.3 million in 2013.

 

Nine month comparison

·Restructuring charges of $3.1 million in the first nine months of 2014, compared to $26.7 million in 2013.
·Revaluation of nonfunctional currency assets and liabilities resulted in gains of $1.8 million for the first nine months of 2014, compared to $0.1 million of losses in 2013.

 

 

Albany Engineered Composites Segment

Business Environment and Trends

The Albany Engineered Composites segment (AEC), including Albany Safran Composites, LLC (ASC), in which our customer SAFRAN Group owns a 10 percent noncontrolling interest, provides custom-designed advanced composite structures based on proprietary technology to customers in the aerospace and defense industries. AEC’s largest current development program relates to the LEAP engine being developed by CFM International. Under this program, AEC, through ASC, is developing a family of composite parts, including fan blades, to be incorporated into the LEAP engine. In 2013, approximately 10 percent of this segment’s sales were related to U.S. government contracts or programs.

 

Review of Operations

 

   Three months ended
September 30,
  Nine months ended
September 30,
(in thousands, except percentages)  2014  2013  2014  2013
Net sales  $21,970   $20,283   $58,898   $59,966 
Gross profit  2,855   1,061   6,506   1,542 
% of net sales  13.0%  5.2%  11.0%  2.6%
Operating income/(loss)  (2,765)  (3,951)  (9,785)  (13,032)

Net Sales

 

Three and nine month comparisons

 ·Third quarter sales increased in 2014 due to growth in the LEAP and JSF LiftFan® programs.
·Sales for the first nine months of 2014 were lower than 2013 due to the shift during the first quarter of 2014 to larger scale LEAP part production, together with the related change in invoicing terms, resulting in a build-up of inventory and an associated temporary lag in sales.

 

Gross Profit

 

Three and nine month comparisons

The increase in gross profit included the following:

·AEC gross margin was higher in 2014 principally due to improvements in profitability at the Company’s Boerne, Texas operation.

 

Long-term contracts

In the accounting for long-term fixed price contracts, we estimate the profit margin expected at the completion of the contract and recognize a pro-rata share of that profit during the course of the contract using a cost-to-cost or units of delivery approach. Changes in estimated contract profitability will affect revenue and gross profit when the change occurs, which could have a significant favorable

34
 

or unfavorable effect on revenue and gross profit in any reporting period. The table below provides a summary of long-term contracts that were in process at the end of each period.

  September 30, 
(in thousands) 2014 2013
Total value of contracts in process $21,475 $24,686
Revenue recognized to date     12,017     20,230
Revenue to be recognized in future periods      9,458       4,456

  

Operating Income

 

Three and nine month comparisons

Operating income improved in 2014 principally due to the increase in gross profit as described above.

 

 

Liquidity and Capital Resources

 

Cash Flow Summary

   Nine months ended
September 30,
(in thousands)  2014  2013
Net income  $33,644   $8,830 
   Depreciation and amortization  47,741   47,752 
   Changes in working capital  (18,804)  16,011 
   Gain on involuntary conversion or disposition of assets  (961)  (3,763)
   Changes in long-term liabilities, deferred taxes and other credits  95   (4,274)
   Other operating items  2,285   (1,502)
Net cash provided by/(used in) operating activities  64,000   63,054 
Net cash provided by/(used in) investing activities  (45,649)  (28,294)
Net cash (used in)/provided by financing activities  (34,696)  (17,281)
Effect of exchange rate changes on cash flows  (10,860)  4,612 
(Decrease)/increase in cash and cash equivalents  (27,205)  22,091 
Cash and cash equivalents at beginning of year  222,666   190,718 
Cash and cash equivalents at end of period  $195,461   $212,809 

 

 

Operating activities

 

Cash provided by operating activities was $64.0 million for the first nine months of 2014, compared to $63.1 million in the same period last year. Significant changes in working capital include a $2.9 million decrease in Accounts payable in the first nine months of 2014 resulting from timing of payments, compared to a $3.9 million increase in Accounts payable for the first nine months of 2013. Cash paid for income taxes was $14.4 million and $21.2 million for the first nine months of 2014 and 2013, respectively. Compared to the first nine months of 2013, cash flows from Accounts receivable provided $10.4 million of cash flow, while the cash flows from Inventories had a net cash use of $12.0 million. Cash paid for restructuring was $10.9 million and $5.5 million for the first nine months of 2014 and 2013, respectively.

 

At September 30, 2014, we had $195 million of cash and cash equivalents, of which $173 million was held by subsidiaries outside of the United States. As disclosed in Note 7 contained in Item

35
 

1, “Notes to Consolidated Financial Statements”, we determined that all but $3.6 million of this amount (which represents the amount of prior year earnings to be repatriated to the United States at some point in the future) is intended to be utilized by these non-U.S. operations for an indefinite period of time. Our current plans do not anticipate that we will need funds generated from foreign operations to fund our domestic operations or satisfy debt obligations in the United States. In the event that such funds were to be needed to fund operations in the U.S., and if associated accruals for U.S. tax have not already been provided, we would be required to accrue and pay additional U.S. taxes to repatriate these funds.

 

Investing Activities

 

Capital spending for equipment and software was $46.6 million for the first nine months of 2014, including $24.1 million for AEC. The Company expects full-year capital expenditure spending of $60 to $70 million. During the first quarter of 2013, the Company completed the sale of its production facility in Gosford, Australia, resulting in net proceeds of about $6.3 million.

 

 

 

Financing Activities

 

Dividends have been declared each quarter since the fourth quarter of 2001. Decisions with respect to whether a dividend will be paid, and the amount of the dividend, are made by the Board of Directors each quarter. The dividend declared in the fourth quarter of 2012 was also paid during that quarter which resulted in two dividend payments during the fourth quarter of 2012, and no cash payments for dividends during the first quarter of 2013. To the extent the Board declares cash dividends in the future, we expect to pay such dividends out of operating cash flows. Future cash dividends will also depend on debt covenants and on the Board’s assessment of our ability to generate sufficient cash flows.

 

Capital Resources

 

We finance our business activities primarily with cash generated from operations and borrowings, largely through our revolving credit agreement as discussed below. Our subsidiaries outside of the United States may also maintain working capital lines with local banks, but borrowings under such local facilities tend not to be significant. Substantially all of our cash balance at September 30, 2014 was held by non-U.S. subsidiaries. Based on cash on hand and credit facilities, we anticipate that the Company has sufficient capital resources to operate for the foreseeable future. We were in compliance with all debt covenants as of September 30, 2014.

On March 26, 2013, we entered into a $330 million, unsecured Five-Year Revolving Credit Facility Agreement ("Credit Agreement"), under which $183 million of borrowings were outstanding as of September 30, 2014. The applicable interest rate for borrowings under the Credit Agreement is LIBOR plus a spread, based on our leverage ratio at the time of borrowing. At the time of the last borrowing on September 22, 2014, the spread was 1.375%. The spread is based on a pricing grid, which ranges from 1.25% to 1.875%, based on our leverage ratio.

On July 16, 2010, we entered into interest rate hedging transactions that have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $105 million of the indebtedness drawn under the Credit Agreement at the rate of 2.04% until July 16, 2015. Under the terms of these transactions, we pay the fixed rate of 2.04% and the counterparties pay a floating rate based on the three-month LIBOR rate at each quarterly calculation date, which on July 16, 2014

 

36
 

was 0.24%. The net effect is to fix the effective interest rate on $105 million of indebtedness at 2.04%, plus the applicable spread, until these swap agreements expire. On September 30, 2014, the all-in rate on the $105 million of debt was 3.415%.

 

On May 20, 2013, we entered into interest rate hedging transactions for the period July 16, 2015 through March 16, 2018. These transactions have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $110 million of indebtedness drawn under the Credit Agreement at the rate of 1.414% during this period. Under the terms of these transactions, we pay the fixed rate of 1.414% and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly calculation date, which on September 30, 2014 was 0.1525%. The net effect is to fix the effective interest rate on $110 million of indebtedness at 1.414%, plus the applicable spread, during the swap period.

 

As of September 30, 2014, our leverage ratio was 1.46 to 1.00 and our interest coverage ratio was 12.10 to 1.00. We may purchase our Common Stock or pay dividends to the extent our leverage ratio remains at or below 3.5 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.

 

These interest rate swaps are accounted for as hedges of future cash flows. For more information on our interest rate swaps, see Note 13 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.

 

 

Off-Balance Sheet Arrangements

 

As of September 30, 2014, we have no off-balance sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.

 

 

Recent Accounting Pronouncements

 

The information set forth under Note 17 contained in Item 1, “Notes to Consolidated Financial Statements” which is incorporated herein by reference.

 

Non-GAAP Measures

 

This Form 10-Q contains certain items, such as earnings before interest, taxes, depreciation and amortization (EBITDA), Adjusted EBITDA, sales excluding currency effects, income tax rate excluding adjustments, net debt, net income attributable to the Company, excluding adjustments (on an absolute and per-share basis), and certain income and expense items on a per- share basis that could be considered non-GAAP financial measures. Such items are provided because management believes that, when presented together with the GAAP items to which they relate, they provide additional useful information to investors regarding the Company’s operational performance. Presenting increases or decreases in sales, after currency effects are excluded, can give management and investors insight into underlying sales trends. An understanding of the impact in a particular period of specific restructuring costs, or other gains and losses, on operating income or EBITDA can give management and investors additional insight into performance, especially when compared to periods in which such items had a greater or lesser effect, or no effect. All non-GAAP financial measures in this report relate to the Company’s continuing operations.

The effect of changes in currency translation rates is calculated by converting amounts reported in local currencies into U.S. dollars at the exchange rate of a prior period. That amount is then

 

37
 

compared to the U.S. dollar amount reported in the current period. The Company calculates Income tax adjustments by adding discrete tax items to the effect of a change in tax rate for the reporting period. The Company calculates its income tax rate, exclusive of income tax adjustments, by removing income tax adjustments from total Income tax expense, then dividing that result by Income before income taxes. The Company calculates EBITDA by removing the following from Net income: Interest expense net, Income tax expense, Depreciation and amortization, and Income or loss from Discontinued Operations. Adjusted EBITDA is calculated by adding to EBITDA, costs associated with restructuring and pension settlement charges, adding or subtracting revaluation losses or gains, subtracting building sale and insurance-recovery gains, and subtracting Income attributable to the noncontrolling interest in ASC. The Company believes that EBITDA and Adjusted EBITDA provide useful information to investors because they provide an indication of the strength and performance of the Company's ongoing business operations, including its ability to fund discretionary spending such as capital expenditures and strategic investments, as well as its ability to incur and service debt. While depreciation and amortization are operating costs under GAAP, they are non-cash expenses equal to current period allocation of costs associated with capital and other long-lived investments made in prior periods. While restructuring expenses, foreign currency revaluation losses or gains, pension settlement charges, and building sale and insurance-recovery gains have an impact on the Company's net income, removing them from EBITDA can provide, in the opinion of the Company, a better measure of operating performance. EBITDA is also a calculation commonly used by investors and analysts to evaluate and compare the periodic and future operating performance and value of companies. EBITDA, as defined by the Company, may not be similar to EBITDA measures of other companies. Such EBITDA measures may not be considered measurements under GAAP, and should be considered in addition to, but not as substitutes for, the information contained in the Company’s Statements of Income.

 

The following tables show the calculation of EBITDA and Adjusted EBITDA:

Three months ended September 30, 2014       
(in thousands)  Machine Clothing  AEC      Corporate expenses and other  Total Company
Net income  $33,308   ($2,765)  ($18,769)  $11,774 
Interest expense, net  -   -   2,486   2,486 
Income tax expense  -   -   6,762   6,762 
Depreciation and amortization  11,060   2,607   2,069   15,736 
EBITDA  44,368   (158)  (7,452)  36,758 
Restructuring and other, net  968   (49)  -   919 
Foreign currency revaluation losses/(gains)  (2,308)  135   (1,915)  (4,088)
Gain on insurance recovery  -   -   (165)  (165)
Pretax loss attributable to noncontrolling interest in ASC  -   77   -   77 
Adjusted EBITDA  $43,028   $5   ($9,532)  $33,501 

 

38
 
Nine months ended September 30, 2014       
(in thousands)  Machine Clothing  AEC      Corporate expenses and other  Total Company
Net income  $103,329   ($9,785)  ($59,900)  $33,644 
Interest expense, net  -   -   8,121   8,121 
Income tax expense  -   -   21,435   21,435 
Depreciation and amortization  34,069   7,382   6,290   47,741 
EBITDA  137,398   (2,403)  (24,054)  110,941 
Restructuring and other, net  3,127   931   -   4,058 
Foreign currency revaluation losses/(gains)  (1,806)  234   (3,815)  (5,387)
Gain on insurance recovery  -   -   (1,126)  (1,126)
Pretax loss attributable to noncontrolling interest in ASC  -   63   -   63 
Adjusted EBITDA  $138,719   ($1,175)  ($28,995)  $108,549 

 

 

Three months ended September 30, 2013       
(in thousands)  Machine Clothing  AEC      Corporate expenses and other  Total Company
Net income  $27,910   ($3,951)  ($19,261)  $4,698 
Interest expense, net  -   -   3,484   3,484 
Income tax expense  -   -   2,381   2,381 
Depreciation and amortization  11,404   2,299   2,094   15,797 
EBITDA  39,314   (1,652)  (11,302)  26,360 
Restructuring and other, net  2,250   6   -   2,256 
Foreign currency revaluation losses/(gains)  1,328   -   1,975   3,303 
Adjusted EBITDA  $42,892   ($1,646)  ($9,327)  $31,919 

 

Nine months ended September 30, 2013       
(in thousands)  Machine Clothing  AEC      Corporate expenses and other  Total Company
Net income  $80,287   ($13,032)  ($58,425)  $8,830 
Loss/(income) from discontinued operations          $351   $351 
Interest expense, net  -   -   11,056   11,056 
Income tax expense  -   -   6,386   6,386 
Depreciation and amortization  35,083   6,094   6,575   47,752 
EBITDA  115,370   (6,938)  (34,057)  74,375 
Restructuring and other, net  26,673   540   -   27,213 
Foreign currency revaluation losses/(gains)  133   -   3,882   4,015 
Gain on sale of former manufacturing facility  -   -   (3,763)  (3,763)
Adjusted EBITDA  $142,176   ($6,398)  ($33,938)  $101,840 

 

 

The Company discloses certain income and expense items on a per-share basis. The Company believes that such disclosures provide important insight into the underlying quarterly earnings and are financial performance metrics commonly used by investors. The Company calculates the per-share amount for items included in continuing operations by using the effective tax rate utilized in that reporting period and the weighted average number of shares outstanding for each period.

 

39
 

The following tables show the earnings per share effect of certain income and expense items:

 

Three months ended September 30, 2014 Pre tax Tax After tax Per Share
(in thousands, except per share amounts) Amounts Effect Effect Effect
Restructuring and other, net $919 $321 $598 $0.02
Foreign currency revaluation gains          4,088        1,427    2,661          0.08
Gain on insurance recovery             165             -          165          0.01
Net discrete income tax charges                 -           536       536          0.02
Favorable effect of change in income tax rate                 -           243       243          0.01

 

 

Nine months ended September 30, 2014 Pre tax Tax After tax Per Share
(in thousands, except per share amounts) Amounts Effect Effect Effect
Restructuring and other, net $4,058 $1,455 $2,603 $0.08
Foreign currency revaluation gains          5,387 $1,024 $4,363         0.14
Gain on insurance recovery          1,126             -        1,126         0.04
Net discrete income tax charges                 -        2,209     2,209         0.07

 

 

Three months ended September 30, 2013 Pre tax Tax After tax Per Share
(in thousands, except per share amounts) Amounts Effect Effect Effect
Restructuring and other, net $2,256 $925 $1,331 $0.04
Foreign currency revaluation losses          3,303         1,354    1,949          0.06
Unfavorable effect of change in income tax rate                 -           170       170          0.01
Net discrete income tax benefit                 -           691       691          0.02

 

 

Nine months ended September 30, 2013 Pre tax Tax After tax Per Share
(in thousands, except per share amounts) Amounts Effect Effect Effect
Restructuring and other, net $27,213 $10,626 $16,587 $0.52
Foreign currency revaluation losses          4,015         1,668        2,347          0.07
Gain on sale of former manufacturing facility          3,763         1,279        2,484          0.08
Net discrete income tax charges                 -               4              4          0.00

 

The following table contains the calculation of net income per share attributable to the Company, excluding adjustments:

   Three months ended
September 30,
  Nine months ended
September 30,
Per share amounts (Basic)  2014  2013  2014  2013
Net income attributable to the Company  $0.37   $0.15   $1.06   $0.28 
Adjustments:                
Loss on discontinued operations  -   -   -   0.01 
Restructuring and other, net  0.02   0.04   0.08   0.52 
Discrete tax charges and effect of change in income tax rate  0.01   (0.01)  0.07   - 
Foreign currency revaluation (gains)/losses  (0.08)  0.06   (0.11)  0.07 
Gain on insurance recovery  (0.01)  -   (0.04)  - 
Gain on sale of former manufacturing facility  -   -   -   (0.08)
Net income attributable to the Company, excluding adjustments  $0.31   $0.24   $1.06   $0.80 

40
 

The following table contains the calculation of net debt:

 

(in thousands) September 30,
 2014
June 30,
 2014
March 31,
 2014
December 31,
2013
Notes and loans payable $551 $692 $797 $625
Current maturities of long-term debt                   15               1,265               2,514               3,764
Long-term debt           283,100           283,104           299,108           300,111
Total debt           283,666           285,061           302,419           304,500
Cash           195,461           206,836           208,379           222,666
Net debt $88,205 $78,225 $94,040 $81,834

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For discussion of our exposure to market risk, refer to “Quantitative and Qualitative Disclosures About Market Risk”, which is included as an exhibit to this Form 10-Q.

Item 4. Controls and Procedures

 

a) Disclosure controls and procedures.

The principal executive officers and principal financial officer, based on their evaluation of disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that the Company’s disclosure controls and procedures are effective for ensuring that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in filed or submitted reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.

 

(b) Changes in internal control over financial reporting. 

There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The information set forth above under Note 15 in Item 1, “Notes to Consolidated Financial Statements” is incorporated herein by reference.

 

41
 

Item 1A. Risk Factors .

There have been no material changes in risks since December 31, 2013. For discussion of risk factors, refer to Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

We made no share purchases during the third quarter of 2014. We remain authorized by the Board of Directors to purchase up to 2 million shares of our Class A Common Stock.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

 

Exhibit No. Description 
31.1  Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act.  
31.2  Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act.
32.1 

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of

Section 1350, Chapter 63 of Title 18, United States Code).

99.1  Quantitative and qualitative disclosures about market risks as reported at September 30, 2014. 
101 

The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in eXtensible Business Reporting Language (XBRL), filed herewith: 

(i)Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013.

 

(ii)Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013.

(iii)Consolidated Balance Sheets at September 30, 2014 and December 31, 2013.

(iv)Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2014 and 2013.

(v)Notes to Consolidated Financial Statements.

As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act and Section 18 of the Securities Exchange Act or otherwise subject to liability under those sections. 

 

42
 

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 4, 2014

By /s/ John B. Cozzolino


John B. Cozzolino
Chief Financial Officer and Treasurer

(Principal Financial Officer)

 

43

EXHIBIT (31.1)

CERTIFICATION PURSUANT TO

RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joseph G. Morone, certify that:

1.I have reviewed this report on Form 10-Q of Albany International Corp.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 4, 2014

By /s/ Joseph G. Morone
  Joseph G. Morone
  President and Chief Executive Officer
(Principal Executive Officer)

 

EXHIBIT (31.2)

CERTIFICATION PURSUANT TO

RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John B. Cozzolino, certify that:

1.I have reviewed this report on Form 10-Q of Albany International Corp.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 4, 2014

By /s/ John B. Cozzolino
  John B. Cozzolino
  Chief Financial Officer and Treasurer
  (Principal Financial Officer)

 

EXHIBIT (32.1)

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Albany International Corp. (the Company) on Form 10-Q for the period ending September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the Report), Joseph G. Morone, President and Chief Executive Officer, and John B. Cozzolino, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 Dated: November 4, 2014

/s/ Joseph G. Morone

Joseph G. Morone

President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

/s/ John B. Cozzolino

John B. Cozzolino

Chief Financial Officer and Treasurer

(Principal Financial Officer)

 

EXHIBIT (99.1)

MARKET RISK SENSITIVITY – AS OF September 30, 2014

We have market risk with respect to foreign currency exchange rates and interest rates. The market risk is the potential loss arising from adverse changes in these rates as discussed below.

Foreign Currency Exchange Rate Risk

We have manufacturing plants and sales transactions worldwide and therefore are subject to foreign currency risk. This risk is composed of both potential losses from the translation of foreign currency financial statements and the remeasurement of foreign currency transactions. To manage this risk, we periodically enter into forward exchange contracts either to hedge the net assets of a foreign investment or to provide an economic hedge against future cash flows. The total net assets of non-U.S. operations and long-term intercompany loans denominated in nonfunctional currencies subject to potential loss amount to approximately $592.5 million. The potential loss in fair value resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounts to $59.3 million. Furthermore, related to foreign currency transactions, we have exposure to various nonfunctional currency balances totaling $133.5 million. This amount includes, on an absolute basis, exposures to assets and liabilities held in currencies other than our local entity’s functional currency. On a net basis, we had $56.1 million of foreign currency liabilities as of September 30, 2014. As currency rates change, these nonfunctional currency balances are revalued, and the corresponding adjustment is recorded in the income statement. A hypothetical change of 10% in currency rates could result in an adjustment to the income statement of approximately $5.6 million. Actual results may differ.

Interest Rate Risk

We are exposed to interest rate fluctuations with respect to our variable rate debt, depending on general economic conditions.

On September 30, 2014, we had the following variable rate debt:

 

Assuming borrowings were outstanding for an entire year, an increase of one percentage point in weighted average interest rates would increase interest expense by $0.8 million. To manage interest rate risk, we may periodically enter into interest rate swap agreements to effectively fix the interest rates on variable debt to a specific rate for a period of time.