SEC Company Response from ALBANY INTERNATIONAL (AIN) — Jun 6, 2008
ALBANY INTERNATIONAL CORP /DE/ (AIN) (CIK 0000819793)
Date: June 6, 2008 · CIK: 0000819793 · Accession: 0000903423-08-000480
AI Filing Summary & Sentiment
Reasoning
Referenced dates: May 5, 2008
Letter
United States Securities and Exchange Commission Washington, D.C. 20549 Re: Albany International Corp. – Form 10-K for the Year Ended December 31, 2007, and Definitive Proxy Statement on Schedule14A SEC File No. 1-10026
Dear Mr. Owings:
We are pleased to respond to your letter dated May 5, 2008. For ease of review, we have set forth below the numbered comments from your letter and our responses thereto.
With respect to those responses that involve proposed revisions to the manner in which the related items were addressed in the 2007 10-K, we have included in our response an illustration of how we expect the disclosure to appear in future filings.
Annual Report on Form 10-K for Fiscal Year Ended December 31, 2007
Cover Page
1.
Please replace the SEC file number you have identified on the Form 10-K with the file number indicated above.
Response: We will update the SEC file number on future filings and have incorporated that change in the first quarter 10-Q that was recently filed.
Employees, page 22
2.
Please disclose whether any of your employees are union members that are subject to collective bargaining agreements.
Response: Approximately 100 of our U.S. employees are union members subject to a total of three collective bargaining agreements. The Company recently renegotiated two of these, and renegotiation of the third will commence shortly. Following renegotiation of the third agreement, the agreements will remain in effect until 2011. A number of hourly employees outside of the United States are also members of various unions. We will disclose this in future filings.
Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 36
3.
Throughout your document, you disclose that you have initiated a deliberate, intensive three-year process of restructuring and performance improvement initiatives. Please expand your disclosure to describe your performance improvement initiatives, including the specific actions you have taken and will take to implement your plans. We note your discussion of the outlook of this plan on page 49; however, due to the significance of this plan, we believe this should be highlighted in the overview section of MD&A since it provides context for the remainder of your MD&A discussion.
Furthermore, please discuss the types of expenses included as part of your performance improvement initiatives, including the line item(s) these expenses are classified on your statement of operations and the reasons why they are classified as such. Please quantify the impact of these expenses when describing the changes in segmental gross margin and segmental selling, general, technical and research expense, since a significant portion of the increase in these line items relates to expense for performance improvement initiatives.
Response: Please see below our proposed expanded disclosure of the Company’s three-year process of restructuring and performance improvement initiatives and related costs:
(The text below would replace and supplement the 7th paragraph under “Trends”.)
The Company’s response to that pricing disruption has been to initiate a deliberate, intensive three-year process of restructuring and performance improvement initiatives. In the mature paper machine clothing markets of North America and Europe, the Company is driving for growth in market share, while the Company is positioning itself to expand in the rapidly growing markets of Asia and South America. During this process of adjusting its manufacturing footprint to align with these regional markets, the Company has incurred restructuring charges. Specific charges reported have been incurred in connection with the reduction of PMC manufacturing capacity in the United States, Canada, and Finland, and of Door Systems in Sweden. The Company has also incurred costs for idle capacity and equipment relocation that are related to the shutdown of these plants, and start-up costs related to the new PMC plant that is under construction in China. Expenses related to these items are included in “Cost of Goods Sold”. In addition, the Company also incurred restructuring charges related to the centralization of PMC administrative functions in Europe.
In addition to these restructuring and restructuring-related activities, management has launched significant cost reduction and process improvement initiatives. In
2006, the Company announced a plan to migrate its global enterprise resource planning system to SAP, and began a strategic procurement initiative designed to establish a world-class supply chain organization and processes that would lead to significant cost savings. Additionally, the Company has reorganized its PMC research and product development function to improve its ability to bring value-added products to market faster. Expenses incurred in connection with these actions are included in STG&R expenses. These expenses are not allocated to the reportable segments because they are Corporate-wide initiatives.
Review of Operations, page 38
2007 vs. 2006, page 38
4.
We note that you have quantified the impact of changes in currency translation rates on consolidated and segmental net sales and on consolidated STG&R expenses. Please tell us how you considered quantifying the impact of changes in currency translation rates on consolidated gross profit. Also tell us, and clarify to your readers, whether the impact of changes in currency translation rates on gross profit and STG&R expenses is allocated to your segments. If so, please address these items in your analysis of segmental gross profit and segmental operating income.
Response: We have quantified the effect of changes in currency translation rates on net sales and STG&R expenses because we feel that those two data points are key metrics for readers of our financial reports, and that those readers would be looking for analysis of the nominal changes from the prior year. Regarding your comment about currency effects on the nominal amount of gross profit, we believe that most readers of our financial reports first want to understand factors affecting net sales, and then want to understand factors affecting the gross profit percentage. Since changes in currency translation rates generally affect net sales and nominal gross profit in a proportionate way, we feel that providing information about gross profit percentage is consistent with the way investors analyze income statement data.
Segment operating results include the effect of changes in currency translation rates and since that is very clear in our reporting of net sales by segment, we believe that readers of the financial reports understand that changes in currency translation rates are included in segment results.
5.
To the extent material to understanding your results of operations, please separately discuss the changes in the “selling and general expenses” and “technical, product engineering, and research expenses” line items as presented on your income statement. Also, please consider discussing the changes in research expense and unallocated expenses disclosed on page 40 as a subset to your discussion of consolidated STG&R expenses, as your current presentation of these segmental reconciling items directly beneath your
discussion of consolidated operating income, which includes these segmental reconciling items, may be confusing to your readers.
Response: We have considered whether separate MD&A discussion about “Selling and general expenses”, and “Technical, product engineering, and research expenses” would provide readers of the financial reports with additional data that is important. Organizational changes that have taken place have affected each of those expense types in relatively proportionate amounts, except for perhaps “Research expenses”. As you know, our current Review of Operations includes separate discussion about changes affecting “Research expenses”. Accordingly, based on current expenses and changes affecting our results of operations, we believe that additional discussion of those income statement line items is not necessary.
We have also considered whether it would be helpful to move the discussion about changes in “Research expenses” and “Unallocated expenses” closer to the analysis of changes in STG&R expenses. Please see below a proposed modified disclosure in the MD&A (changes underlined):
Selling, general, technical and research (STG&R) expenses increased to $316.5 million or 29.0% of net sales in 2007, as compared to $295.1 million or 29.2% of net sales in 2006. The increase includes $15.6 million related to performance improvement initiatives and $14.1 million related to the effect of changes in currency translation rates. Included in STG&R expenses are research expenses that increased $1.7 million or 7.9% in 2007, principally due to higher project expenses and wages. STG&R expenses also include Corporate headquarters and other expenses that are not allocated to the Company’s reportable segments. Unallocated expenses increased $9.4 million to $49.0 million in 2007 principally due to $7.6 million of costs associated with performance improvement initiatives, including the Company’s implementation of the SAP enterprise resource planning system.
6.
We note your discussion of income tax expense in the middle of page 40. Please tell us and better explain to your readers why your effective income tax rate appears unusually low for 2007. In this regard, we note your reconciliation of the effective tax rate on page 76, but it is unclear from your current disclosures why many of these line items are significantly different from the previous two years.
Response: While the effective tax rate for 2007 appears to be unusually low, in fact the lower tax rate can be attributed to the proportionately larger impact of non-recurring favorable tax adjustments in estimated tax liabilities in relation to the overall pretax income earned by the company. The non-recurring favorable tax adjustments in 2007 and 2006 amounted to $2,723,000 and $3,470,000, respectively. Although the amounts of the tax adjustments did not vary greatly from year to year,
their favorable impact on the effective tax rate increased due primarily to the lower pool of income.
The company’s lower income in 2007 magnified the impact of the favorable non-recurring tax adjustments and other components of the tax rate that are disclosed in the reconciliation of the effective tax rate.
Paper Machine Clothing Segment, page 40
7.
We note that net sales and operating income for 2006 were reduced due to a change in contract terms with a major customer. Please elaborate on the circumstances of this contract change, including how and why this impacted your revenue and expense recognition.
Response: In 2006, the Company finalized negotiations of a supply contract with a major customer. The terms and conditions of the previous contract with that customer specified that title of products transferred to the customer at the time of delivery to the customer’s site. The new contract specifies that title transfers to the customer only when the product is installed on their equipment. Additionally, the contract specifies that the language regarding transfer of title is retroactive to January 1, 2006. Accordingly, the Company reversed sales of products transferred to the customer under the terms of the old contract that no longer qualified as sales under the retroactive provisions of the new contract.
It should also be noted that we informed investors of this probable event in our 2005 annual report. In the Outlook section of the 2005 MD&A, we wrote, “In addition, net sales and operating income are expected to be reduced in 2006 by approximately $8 million and $3 million, respectively, due to an anticipated change in inventory practices associated with a major customer.”
Albany Door Systems Segment, page 41
8.
Please discuss in more detail the underlying reasons for the increased sales of new products and the aftermarket business in Europe, and quantify the impact of each contributing factor if possible. Additionally, please quantify the impact of the R-Bac acquisition on net sales, and tell us how you considered disclosing this acquisition’s impact on gross profit and operating income. If this acquisition did not have a significant impact on your results, please clarify this matter to your readers.
Response: We note that net sales in the Albany Doors Systems segment increased by $28.3 million in 2007, and in the Review of Operations we reported that $10.8 million was due to currency translation and $7.3 million was due to an increase in aftermarket service and parts. We also explained that part of the sales improvement was related to the acquisition of R-Bac Industries. In previous filings, we reported
that R-Bac’s sales prior to the June 30th acquisition were at an annualized rate of approximately $9 million. While we noted that the R-Bac acquisition was certainly a factor in the sales increase, we did not attempt to quantify the impact due to the fact that business was fully integrated into the Company’s existing business during 2007, and it was no longer possible to state with precision the incremental effect on operations related to the acquisition.
The Company disclosed that sales of new doors can be highly sensitive to changes in economic climate (see discussion under “Risk Factors” and “Trends”). The Company has been positioning itself to grow the aftermarket portion of the business which could potentially offset some of the effects of a slow-down in sales of new products. Please see below a proposal for enhanced disclosure in the “Trends” section of the MD&A (changes underlined):
The Albany Door Systems segment derives most of its revenue from the sale of high-performance doors, particularly to customers in Europe. The purchase of these doors is normally a capital expenditure item for customers and, as such, market opportunities tend to fluctuate with industrial capital spending. If economic conditions weaken, customers may reduce levels of capital expenditures, which could have a negative effect on sales and earnings in the Albany Door Systems segment. The Company’s response to this trend includes expansion of its aftermarket business which tends to be less sensitive to economic changes than sales of new doors. The large amount of revenue derived from sales and manufacturing outside the United States could cause the reported financial results for the Albany Door Systems segment to be more sensitive than the other segments of the Company to changes in currency rates.
Liquidity and Capital Resources, page 43
9.
We note that your increase in capital expenditures in 2007 and 2006 were principally due to the PMC strategic investment program announced in January 2006. Please elaborate on the fundamentals of this plan and how this has and will affect your operations.
Response: The Company’s increased capital expenditures in the PMC segment referred to on page 43 are also discussed in the following sections of the annual report: Item 1a, 6th risk factor; MD&A Trends, 7th paragraph; and MD&A Outlook, 2nd and 3rd paragraphs. Disclosure about these investments has been a topic discussed in each quarterly filing since the a
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CORRESP
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filename1.htm
Albany International Corp.
PO Box 1907
Albany, NY 12201-1907 USA
(1373 Broadway, Albany, NY 12204)
Tel: 518 445 2225
Fax: 518 445 2250
michael.nahl@albint.com
www.albint.com
Michael C. Nahl
Executive Vice President & Chief Financial Officer
May 30, 2008
Mr. H. Christopher Owings, Assistant Director
United States Securities and Exchange Commission
Washington, D.C. 20549
Re:
Albany International Corp. – Form 10-K for the Year Ended December 31, 2007,
and Definitive Proxy Statement on Schedule14A SEC File No. 1-10026
Dear Mr. Owings:
We are pleased to respond to your letter dated May 5, 2008. For ease of review, we have set forth below the numbered comments from your letter and our responses thereto.
With respect to those responses that involve proposed revisions to the manner in which the related items were addressed in the 2007 10-K, we have included in our response an illustration of how we expect the disclosure to appear in future filings.
Annual Report on Form 10-K for Fiscal Year Ended December 31, 2007
Cover Page
1.
Please replace the SEC file number you have identified on the Form 10-K with the file number indicated above.
Response: We will update the SEC file number on future filings and have incorporated that change in the first quarter 10-Q that was recently filed.
Employees, page 22
2.
Please disclose whether any of your employees are union members that are subject to collective bargaining agreements.
Response: Approximately 100 of our U.S. employees are union members subject to a total of three collective bargaining agreements. The Company recently renegotiated two of these, and renegotiation of the third will commence shortly. Following renegotiation of the third agreement, the agreements will remain in effect until 2011. A number of hourly employees outside of the United States are also members of various unions. We will disclose this in future filings.
Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 36
3.
Throughout your document, you disclose that you have initiated a deliberate, intensive three-year process of restructuring and performance improvement initiatives. Please expand your disclosure to describe your performance improvement initiatives, including the specific actions you have taken and will take to implement your plans. We note your discussion of the outlook of this plan on page 49; however, due to the significance of this plan, we believe this should be highlighted in the overview section of MD&A since it provides context for the remainder of your MD&A discussion.
Furthermore, please discuss the types of expenses included as part of your performance improvement initiatives, including the line item(s) these expenses are classified on your statement of operations and the reasons why they are classified as such. Please quantify the impact of these expenses when describing the changes in segmental gross margin and segmental selling, general, technical and research expense, since a significant portion of the increase in these line items relates to expense for performance improvement initiatives.
Response: Please see below our proposed expanded disclosure of the Company’s three-year process of restructuring and performance improvement initiatives and related costs:
(The text below would replace and supplement the 7th paragraph under “Trends”.)
The Company’s response to that pricing disruption has been to initiate a deliberate, intensive three-year process of restructuring and performance improvement initiatives. In the mature paper machine clothing markets of North America and Europe, the Company is driving for growth in market share, while the Company is positioning itself to expand in the rapidly growing markets of Asia and South America. During this process of adjusting its manufacturing footprint to align with these regional markets, the Company has incurred restructuring charges. Specific charges reported have been incurred in connection with the reduction of PMC manufacturing capacity in the United States, Canada, and Finland, and of Door Systems in Sweden. The Company has also incurred costs for idle capacity and equipment relocation that are related to the shutdown of these plants, and start-up costs related to
the new PMC plant that is under construction in China. Expenses related to these items are included in “Cost of Goods Sold”. In addition, the Company also incurred restructuring charges related to the centralization of PMC administrative functions in Europe.
In addition to these restructuring and restructuring-related activities, management has launched significant cost reduction and process improvement initiatives. In
2
2006, the Company announced a plan to migrate its global enterprise resource planning system to SAP, and began a strategic procurement initiative designed to establish a world-class supply chain organization and processes that would lead to significant cost savings. Additionally, the Company has reorganized its PMC research and product development function to improve its ability to bring value-added products to market faster. Expenses incurred in connection with these actions are included in STG&R expenses. These expenses are not allocated to the reportable segments because they are Corporate-wide initiatives.
Review of Operations, page 38
2007 vs. 2006, page 38
4.
We note that you have quantified the impact of changes in currency translation rates on consolidated and segmental net sales and on consolidated STG&R expenses. Please tell us how you considered quantifying the impact of changes in currency translation rates on consolidated gross profit. Also tell us, and clarify to your readers, whether the impact of changes in currency translation rates on gross profit and STG&R expenses is allocated to your segments. If so, please address these items in your analysis of segmental gross profit and segmental operating income.
Response: We have quantified the effect of changes in currency translation rates on net sales and STG&R expenses because we feel that those two data points are key metrics for readers of our financial reports, and that those readers would be looking for analysis of the nominal changes from the prior year. Regarding your comment about currency effects on the nominal amount of gross profit, we believe that most readers of our financial reports first want to understand factors affecting net sales, and then want to understand factors affecting the gross profit percentage. Since changes in currency translation rates generally affect net sales and nominal gross profit in a proportionate way, we feel that providing information about gross profit percentage is consistent with the way investors analyze income statement data.
Segment operating results include the effect of changes in currency translation rates and since that is very clear in our reporting of net sales by segment, we believe that readers of the financial reports understand that changes in currency translation rates are included in segment results.
5.
To the extent material to understanding your results of operations, please separately discuss the changes in the “selling and general expenses” and “technical, product engineering, and research expenses” line items as presented on your income statement. Also, please consider discussing the changes in research expense and unallocated expenses disclosed on page 40 as a subset to your discussion of consolidated STG&R expenses, as your current presentation of these segmental reconciling items directly beneath your
3
discussion of consolidated operating income, which includes these segmental reconciling items, may be confusing to your readers.
Response: We have considered whether separate MD&A discussion about “Selling and general expenses”, and “Technical, product engineering, and research expenses” would provide readers of the financial reports with additional data that is important. Organizational changes that have taken place have affected each of those expense types in relatively proportionate amounts, except for perhaps “Research expenses”. As you know, our current Review of Operations includes separate discussion about changes affecting “Research expenses”. Accordingly, based on current expenses and changes affecting our results of operations, we believe that additional discussion of those income statement line items is not necessary.
We have also considered whether it would be helpful to move the discussion about changes in “Research expenses” and “Unallocated expenses” closer to the analysis of changes in STG&R expenses. Please see below a proposed modified disclosure in the MD&A (changes underlined):
Selling, general, technical and research (STG&R) expenses increased to $316.5 million or 29.0% of net sales in 2007, as compared to $295.1 million or 29.2% of net sales in 2006. The increase includes $15.6 million related to performance improvement initiatives and $14.1 million related to the effect of changes in currency translation rates. Included in STG&R expenses are research expenses that increased $1.7 million or 7.9% in 2007, principally due to higher project expenses and wages. STG&R expenses also include Corporate headquarters and other expenses that are not allocated to the Company’s reportable segments. Unallocated expenses increased $9.4 million to $49.0 million in 2007 principally due to $7.6 million of costs associated with performance improvement initiatives,
including the Company’s implementation of the SAP enterprise resource planning system.
6.
We note your discussion of income tax expense in the middle of page 40. Please tell us and better explain to your readers why your effective income tax rate appears unusually low for 2007. In this regard, we note your reconciliation of the effective tax rate on page 76, but it is unclear from your current disclosures why many of these line items are significantly different from the previous two years.
Response: While the effective tax rate for 2007 appears to be unusually low, in fact the lower tax rate can be attributed to the proportionately larger impact of non-recurring favorable tax adjustments in estimated tax liabilities in relation to the overall pretax income earned by the company. The non-recurring favorable tax adjustments in 2007 and 2006 amounted to $2,723,000 and $3,470,000, respectively. Although the amounts of the tax adjustments did not vary greatly from year to year,
4
their favorable impact on the effective tax rate increased due primarily to the lower pool of income.
The company’s lower income in 2007 magnified the impact of the favorable non-recurring tax adjustments and other components of the tax rate that are disclosed in the reconciliation of the effective tax rate.
Paper Machine Clothing Segment, page 40
7.
We note that net sales and operating income for 2006 were reduced due to a change in contract terms with a major customer. Please elaborate on the circumstances of this contract change, including how and why this impacted your revenue and expense recognition.
Response: In 2006, the Company finalized negotiations of a supply contract with a major customer. The terms and conditions of the previous contract with that customer specified that title of products transferred to the customer at the time of delivery to the customer’s site. The new contract specifies that title transfers to the customer only when the product is installed on their equipment. Additionally, the contract specifies that the language regarding transfer of title is retroactive to January 1, 2006. Accordingly, the Company reversed sales of products transferred to the customer under the terms of the old contract that no longer qualified as sales under the retroactive provisions of the new contract.
It should also be noted that we informed investors of this probable event in our 2005 annual report. In the Outlook section of the 2005 MD&A, we wrote, “In addition, net sales and operating income are expected to be reduced in 2006 by approximately $8 million and $3 million, respectively, due to an anticipated change in inventory practices associated with a major customer.”
Albany Door Systems Segment, page 41
8.
Please discuss in more detail the underlying reasons for the increased sales of new products and the aftermarket business in Europe, and quantify the impact of each contributing factor if possible. Additionally, please quantify the impact of the R-Bac acquisition on net sales, and tell us how you considered disclosing this acquisition’s impact on gross profit and operating income. If this acquisition did not have a significant impact on your results, please clarify this matter to your readers.
Response: We note that net sales in the Albany Doors Systems segment increased by $28.3 million in 2007, and in the Review of Operations we reported that $10.8 million was due to currency translation and $7.3 million was due to an increase in aftermarket service and parts. We also explained that part of the sales improvement was related to the acquisition of R-Bac Industries. In previous filings, we reported
5
that R-Bac’s sales prior to the June 30th acquisition were at an annualized rate of approximately $9 million. While we noted that the R-Bac acquisition was certainly a factor in the sales increase, we did not attempt to quantify the impact due to the fact that business was fully integrated into the Company’s existing business during 2007, and it was no longer possible to state with precision the incremental effect on operations related to the acquisition.
The Company disclosed that sales of new doors can be highly sensitive to changes in economic climate (see discussion under “Risk Factors” and “Trends”). The Company has been positioning itself to grow the aftermarket portion of the business which could potentially offset some of the effects of a slow-down in sales of new products. Please see below a proposal for enhanced disclosure in the “Trends” section of the MD&A (changes underlined):
The Albany Door Systems segment derives most of its revenue from the sale of high-performance doors, particularly to customers in Europe. The purchase of these doors is normally a capital expenditure item for customers and, as such, market opportunities tend to fluctuate with industrial capital spending. If economic conditions weaken, customers may reduce levels of capital expenditures, which could have a negative effect on sales and earnings in the Albany Door Systems segment. The Company’s response to this trend includes expansion of its aftermarket business which tends to be less sensitive to economic changes than sales of new doors. The large amount of revenue derived from sales and manufacturing outside the United States could cause the reported financial results for the Albany Door Systems segment to be more sensitive than the other
segments of the Company to changes in currency rates.
Liquidity and Capital Resources, page 43
9.
We note that your increase in capital expenditures in 2007 and 2006 were principally due to the PMC strategic investment program announced in January 2006. Please elaborate on the fundamentals of this plan and how this has and will affect your operations.
Response: The Company’s increased capital expenditures in the PMC segment referred to on page 43 are also discussed in the following sections of the annual report: Item 1a, 6th risk factor; MD&A Trends, 7th paragraph; and MD&A Outlook, 2nd and 3rd paragraphs. Disclosure about these investments has been a topic discussed in each quarterly filing since the a