Albany International Corp

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Albany International Corp. designs, manufactures, and markets engineered components, using advanced materials in paper, aerospace, and other industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Albany International Corp. (AIN) operates through two main segments: Machine Clothing (MC) and Albany Engineered Composites (AEC). The Machine Clothing segment focuses on the design, manufacturing, and marketing of consumable products, primarily paper machine clothing used in the manufacture of paper, paperboard, tissue and towel, pulp, nonwoven and other textiles. The Albany Engineered Composites (AEC) segment manufactures highly engineered, advanced composite structures for commercial and defense aerospace applications, as well as for industrial applications.

Revenue Distribution:

  • Machine Clothing (MC) - 58%
  • Albany Engineered Composites (AEC) - 42%

Industry Trends: The paper industry, a key market for MC, is seeing stable to slightly declining demand, and therefore, market share is becoming more important. Aerospace continues to be a growth market, driven by increasing passenger travel and demand for fuel-efficient aircraft.

Margins:

  • Machine Clothing: Generally characterized by higher margins due to a more commodity-like market.
  • Albany Engineered Composites: Gross profit margins in this segment are more variable depending on contract details and require substantial investment in R&D and technical expertise.

Competitive Landscape:

  • Machine Clothing: This industry is relatively consolidated and mature, with key players including Valmet and Voith, alongside AIN. Competitive differentiators are primarily related to product quality, performance, and cost-effectiveness. The industry is increasingly subject to pricing pressure from large purchasers of paper machine clothing.
  • Albany Engineered Composites: This segment is characterized by high technical barriers to entry and faces competition from a limited number of companies with the required expertise in advanced composite structures. These include such companies as Spirit AeroSystems, GKN Aerospace, and Collins Aerospace, among others, along with some smaller, privately-held players. The AEC segment requires significant research, development, and technical expertise.

What Makes AIN Different:

  • Vertical Integration: AIN’s strong vertical integration and materials expertise, particularly in the MC segment, enables it to have a very diverse supply chain, and produce a wide range of specialty products. The AEC segment has established itself as a major player in the aerospace composites and advanced materials space, serving a critical need for specialty engineering.
  • Technology and Innovation: Both segments have an emphasis on technology and innovation, but it is particularly crucial for the aerospace sector, where continuous material development and stringent certification processes create significant barriers.
  • Long-Standing Relationships: AIN has long and steady relationships with its customers.

Moat Assessment Based on the information available, Albany International appears to have a limited moat. I have given it a 2/5 Moat rating.

Sources of Competitive Advantage:

  • Intangible assets: While the brand is not a key moat for AIN, it does possess a number of patents, production, and technical expertise that could give it an edge over its rivals in the near future.
  • Switching Costs: The use of engineered products in the AEC segment gives rise to a high switching cost because the designs are specific for the company, making it difficult for customers to simply switch suppliers. However, there is little switching cost in the commodity-like MC business.
  • Cost Advantage: AIN possesses manufacturing expertise in the textile and composites industries that can allow it to drive down costs. Also, it sources its main raw material, polymers and filaments, from multiple suppliers which gives it an edge on costs.

Rating Justification: The company’s competitive advantages mainly arise from niche expertise and customer relationships in both segments. These attributes, however, do not provide strong and durable protection against competitors in both the MC and AEC segments. The intense competition, lack of network effects, and lack of pricing power in the MC business makes it difficult to build a wider moat. The strong vertical integration in the MC segment and the proprietary technologies, innovation, and customer relationships in the AEC segment provide some defense from competitors, but are not enough to guarantee above-average profits over a longer time horizon. Thus, this analysis brings us to a narrow moat, but on the weaker side.

Risks to the Moat and Business Resilience The primary risks to AIN’s moat and business resilience are:

  • Intensifying competition: especially in the MC segment, which could put pressure on margins.
  • Technological advancements: In the aerospace market, new technologies or materials could render AIN’s current offerings less competitive.
  • Dependence on key customers and contracts: both segments are dependent on maintaining contracts with a small number of large customers, losing which could severely impact the company’s revenues.
  • Economic cyclicality: The paper, textile, aerospace and construction industries are sensitive to economic changes. Economic downturns could have an impact on demand and therefore, the profits.
  • Supply chain risks: Raw materials and logistics issues could potentially disrupt production and raise costs.
  • Integration of Heimbach: After the acquisition, there is execution risk relating to integrating Hemibach’s operations into AIN’s.
  • Global expansion: AIN does have manufacturing facilities globally, but it may incur operational and financial risks during an expansion to unfamiliar international markets.
  • Geopolitical Risks: Political instability and conflicts, like Russia’s invasion of Ukraine, could also have an effect on certain AIN operations, and impact their supply chain.
  • Debt level: AIN has a debt level of $428.1 million, so significant movements in rates could affect their ability to pay back debts.

The company’s resilience largely depends on their capability to adapt to new technologies, manage their supply chain efficiently, and maintain their relationships with customers.

Financials

Revenue:

  • AIN’s net sales were $1.147 billion in 2023, a slight increase compared to $1.141 billion in 2022, demonstrating growth in the business despite the difficult macroeconomic environment.
  • In the first quarter of 2024, the net sales came in at $271.4 million, a significant dip of 16.4% Y-O-Y, indicating tough business conditions.
  • Revenue is derived from two segments: Machine Clothing and Engineered Composites.

Profitability:

  • Operating profit came in at $170.2 million in 2023 which increased from $123 million in 2022.
  • However, in the first quarter of 2024, the company’s operating profit turned to a loss at ($15.9) million.
  • The company’s profit margin has a tendency to fluctuate because it is susceptible to the change in demand from industries it operates in.

Key Metrics:

  • The return on equity (ROE) is roughly 10.6%.
  • The debt-to-capital ratio for the company is around 26%, and this may change due to acquisition payments in future quarters.

Balance Sheet:

  • The company has a total cash of $338 million.
  • The total long-term debt is $375 million. This is a substantial increase from the $200.7 million figure in 2021, because of the Hemibach acquisition.

Recent Concerns / Controversies and Management’s Thoughts:

  • The company is continuing to face challenges, as shown by the recent dip in revenues and profits. It is being affected by supply chain disruptions, inflation and economic instability.
  • However, senior management still insists that the company is in a good position for growth.
  • The company is focused on generating cash and has been able to cut costs, and so improve its operational performance. Management remains cautiously optimistic about long-term growth.
  • The company had made acquisitions of certain textile facilities in Russia before the Ukrainian conflict. This has caused them to write-off some assets and reduce revenue due to disruptions from the conflict.
  • A recent CFO change may lead to a shift in leadership and accounting, although there is no evidence of any wrongdoing or fraudulent reporting as of yet.
  • There was a high employee turn over rate, especially in the AEC segment.

Understandability: 3 / 5 The business is a little complex, but not too difficult to grasp. The Machine Clothing segment is easy to understand, but the Engineered Composites business requires a deeper understanding of manufacturing, material development, and the intricacies of aerospace contracts. Also, analysis of financial statements needs a good understanding of financial metrics to properly assess a business like AIN.

Balance Sheet Health: 3 / 5 The company’s balance sheet has become more leveraged with the recent debt it acquired to complete acquisitions. However, the company’s current assets and free cash flow are adequate to meet immediate financial needs and debt obligations, hence given a 3/5.