Albany International's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.11.14 | About: Albany International (AIN)

Albany International Corporation (NYSE:AIN)

Q4 2013 Earnings Conference Call

February 11, 2014 9:00 AM ET

Executives

John Cozzolino - CFO and Treasurer

Joe Morone - President and CEO

Analyst

Jason Ursaner - CJS Securities

John Franzreb - Sidoti & Company

Steve Levenson - Stifel Nicolaus

J.B. Groh - D.A. Davidson & Company

Rick D'Auteuil - Columbia Management Investment Advisers

Operator

Ladies and gentlemen, thank you for standing-by and welcome to the Fourth Quarter Earnings Call for Albany International. At this time, all participants are in a listen-only mode. Later, we’ll conduct the question-and-answer session and instructions will be given at that time. At the request of Albany International, this conference call on Tuesday, February 11, 2014, will be webcast and recorded.

I would now like to turn the conference over to the Chief Financial Officer and Treasurer, John Cozzolino for introductory comments. Please go ahead sir.

John Cozzolino

Thank you, operator and good morning everyone. As a reminder for those listening on the call, please refer to our detailed press release issued last night regarding our quarterly financial results, with particular reference to the Safe Harbor notice contained in the text of the release about our forward-looking statements and the use of certain non-GAAP financial measures and associated reconciliation of GAAP. And for purposes of this conference call, those same statements also apply to our verbal remarks this morning. And for a full discussion, please refer to that earnings release, as well as our SEC filings, including our 10-K.

Now, I will turn the call over to Joe Morone, our Chief Executive Officer, who’ll provide some opening remarks before we go to Q&A. Joe?

Joe Morone

Thanks John. Good morning everyone. As is our custom, I’ll open with a few comments that summarize what we see as the key themes for the quarter and then we’ll quickly turn to your questions.

Q4 results were heavily influenced by the containerboard or packaging market in North America and as we discussed in the release this is by far our most important market in Machine Clothing, both in revenue and profitability. And it softened significantly in the first two months of Q4. The result was a substantial drop in our North American Machine Clothing sales, a 7.5% decline sequentially and a 10% decline year-over-year. This hurt our margins for the quarter which held back EBITDA, everything else in Machine Clothing came in as expected. South America, Europe and Asia were all stable both year-over-year and sequentially.

We continue to expect a strong first half of 2014 for Machine Clothing, orders in Q4 were well ahead of the previous year and that all important North American containerboard market bounced back in December which in turn triggered a rebound in our North American Machine Clothing shipments in January.

As we pointed out in the release, our positive outlook assumes an improving macroeconomic environment and more generally, we view the macroeconomic environment rather than structural or competitive factors as the primary source of risk, both up side and down for Machine Clothing in 2014.

Turning to Composites, AEC performed very well in Q4 on all fronts, financially, on the LEAP ramp-up and in R&D. We attempted in the release to provide a bit more detail about the expansion of our R&D portfolio to reiterate our most promising areas of potential for the first wave of growth beyond the LEAP fan module, our enhancements to the LEAP engine and initial airframe applications. At the same time, we’re also exploring applications that hold potential for subsequent ways of growth. The most promising application areas that we’re currently working on are future versions of LEAP, next generation engines, broader airframe applications and possible applications in the automotive industry.

In some -- while the softness in the North American containerboard market in Q4 dampened our performance in Machine Clothing, in other respects the Company performed well and to expectation and our positive outlook for the first half of 2014 for both businesses remains unchanged. We expect to rebound in Machine Clothing driven by return to normal in North America and steady or incrementally improve performance in Europe and Asia, coupled with continued good performance on all fronts in Albany Engineered Composites.

So it’s a pretty straight forward quarter and outlook and with that let’s go to your questions. Steven?

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session of our conference. (Operator Instructions) Our first question will come from the line of Jason Ursaner of CJS Securities. Please go ahead.

Jason Ursaner - CJS Securities

Good morning.

Joe Morone

Good morning Jason.

Jason Ursaner - CJS Securities

Just first maybe couple of questions on the Machine Clothing segment. The restructuring credit on the pension curtailment, the offset to that was it embedded in SG&A or gross margin?

John Cozzolino

Well, hey Jason this is John. So, basically that is lowering a pension liability that we would have had for our employees in France. So we reduced the liability and recorded the pension curtailment gain. Now in the future, that would probably result in lower pension expense for those French employees and that would be -- that's a much smaller number and that would be in our SG&A expenses.

Jason Ursaner - CJS Securities

And then Joe you mentioned stability in Europe and Asia. I guess that sounds good for Europe maybe not so much for Asia that had been the region expected to grow and kind of offset some of the structural decline. Is there any change you are seeing in the long-term fundamental outlook for flat to moderate growth or is that still pretty much intact at this point?

Joe Morone

The latest production statistics for paper consumption and production statistics for China actually show that in 2013 it was down a bit, maybe domestic consumption of paper, it looks like it was down about 2%, domestic production down a little less than that. And we’re not seeing anything in the short-term to change that it is dealing flat. And that as you are suggesting a significant change over what we’ve all been accustomed to.

We don’t think -- we don’t see any evidence to suggest a change in the long-term structural picture of China as a growth market. We and everybody else think the growth will be somewhat slower, but there are still the new machines coming in, there is still that growing middle-class that’s going to consume packaging and tissue and food containers and even some printing and writing. So, we think in the short-term what we’ve been seeing is what we continue to expect to see more or less flat.

And structurally for the long-term, we’re still in the same place and we don’t see any reason to deviate from that place that, as that economy grows over the long haul there’ll be more and more paper production, more and more paper consumption. And it should be at least enough growth to offset the long-term sectoral decline in Europe. We’re still in the same place.

Jason Ursaner - CJS Securities

Okay. And longer in I guess in North America excluding the current quarter, you still think the brown paper markets and the tissue markets are growth that are offsetting printing and writing?

Joe Morone

Yes, we’re still in the place there. The combination of overall growth in South America coupled with GNP-like growth in the packaging and tissue grades should more or less offset the steady larger declines in the digitally-displaced grades in North America, the newsprint and printing and writing. Yes, so that’s how we get to our long-term stability, essentially long-term growth in Asia, offsetting long-term erosion in Europe, long-term strengthened South America packaging and tissue, North America offsetting decline in newsprint and printing and writing in North America.

Jason Ursaner - CJS Securities

Okay. And then just quickly on composites. I guess can you just remind us what the milestones are in 2014 and are any of them in Q1?

Joe Morone

The story for 2014 in LEAP is engine tests. I think there will be something like 15 full engine tests in 2014 and we’re supplying the parts for those engine tests. So, those are the milestones and you’ll be hearing about them on a pretty regular basis from CFM, they’ll be in the media. Less visible will be another set of milestones that will be more directly related to our ability to ramp. We’re going to be running a couple of essentially tests of our production capability, some full runs of the parts of the plant that are already in place. We’ll do some all-out full rate production runs to really test where we are in terms of yield and cycle-time and overall performance. So, those are the main milestones for 2014.

Now at the same time on the pipeline side, we’ll be continuing to work with customers to explore and expand the portfolio of applications. And the key milestones there, sometime in the next two years we should start, if we’re going to see some contracts popping-in that would have an effect on revenue in the back-end of this decade, some of those contracts should start to pop -in sometime in that next 24 months. So, those are the primary milestones on the AEC side. Engine test, production runs and whether or not we see some of these projects turn into near-term contracts.

Jason Ursaner - CJS Securities

Okay, great. I’ll give some others a chance to ask questions. Thanks Joe.

Joe Morone

Thanks Jason.

Operator

Our next question will be from the line of John Franzreb of Sidoti & Company. Please go ahead sir.

John Franzreb - Sidoti & Company

Hi, good morning, Joe and John.

Joe Morone

Hey, John.

John Franzreb - Sidoti & Company

Joe, can you just talk a little bit about the rebound you’re seeing in orders in PMC, can you give us a sense of magnitude that gives you that confidence that the first half is going to be relatively good?

Joe Morone

Well, there are multiple variables here and the most important is simply the seasonal variability in our key markets. So, the first half of the year in North America in particular has historically been quite a bit stronger than the second half of the year. And all of the order patterns that we’re seeing and all of the interactions we’re having with our customers, reinforce the expectation that we’re going to see in normal first half of the year in our customer base, which will be normal first half of the year for us, and normal means a nice leap out.

The only counter piece of evidence and whether that’s orders, direct contact with our mills, shipment dates, what we’re seeing in the way of trends in the containerboard market, the only counter indication that’s potentially out there would be macroeconomic. If we get the kind -- it's the kind of nervousness that equity markets are showing the last few weeks translated into general nervousness in the economy then you could see containerboard shipments starting to slowdown and move back into the dampened cycle. But normally first half of the year in our key markets are good -- are strong at the same time there are no -- none of those seasonal factors that tend to dampen our margins in the first half of the year. So there is no summer shutdown or no equivalent of the summer shutdown or the year-end shutdowns that tend to pull back gross margin. So there is a combination of seasonal factors in our markets, strong seasonal factors in our markets coupled with the absence of those drags on margin that we get in the second half of the year due to seasonal factors, coupled with all of the evidence pointing toward normality, all the evidence from order patterns and shipment patterns, that leaves us pretty confident.

John Franzreb - Sidoti & Company

Okay. One of your competitors recently closed a facility in Europe. You mentioned that you don’t view competitive factors as one of the potential headwinds in the first half outlook. Could you talk a little bit about what’s going on as far as capacity equilibrium out there, pricing, anything to elaborate on some of those factors going forward?

Joe Morone

The punch line is there are no major contract renegotiations for the first three quarters of the year. So, usually we get pricing instability during the period when we have contract renegotiation.

John Franzreb - Sidoti & Company

Right.

Joe Morone

So, that’s why for us -- from everything we see and if you just go back to my answer to your previous question, the only variable we’re seeing out there that we can’t quite nail with confidence is what’s going to happen to the economy? We have not seen any fundamental change structurally or competitively. We have not seen any major take-out -- enough of a take-out of capacity in our markets to change any of the structural dynamics that we’ve always described to investors before that in the Americas there is pretty good alignment of capacity and demand, in Europe there is still too much capacity.

And the small shutdown that you’re referring to was really not in Paper Machine Clothing and it was a pretty small shutdown. So, no we haven’t seen anything yet that would lead us long-term to say the exposure to price erosion in Europe has alleviated.

John Franzreb - Sidoti & Company

Okay. Could you just review some of the…

Joe Morone

John just before -- as I’ve said nor have we seen anything that leads us away from the conclusion that this is a flat business overtime, because while we think there’ll be continuing erosion in Europe, we do think long-term that gets offset by continuing growth in Asia, that’s back to our previous conversation.

John Franzreb - Sidoti & Company

Right, right, right, thank you for that. Could you just maybe review for us the cost saving actions you’ve taken in the past year? And when you expect to realize the benefits from those actions in the coming year?

Joe Morone

Well there are two kinds of cost savings actions; one is just normal incremental productivity improvements and they are going on all the time to pursuit of lean manufacturing and we’re always working to improve productivity in the plants to basically offset inflation. The other type of cost savings are of course actual substantial restructuring and capacity take-out and the last big one which took place in 2013 were the downsizing of our two plants in France. We expect, I think we said at the time the total impact on EBITDA will be about annual $10 million so about quarter of that per quarter. And we think that some of it started -- some of that started flowing in, in Q4 but we would expect the full impact to show up by Q2.

John Franzreb - Sidoti & Company

Okay. And one last question, you identified a number of programs in PMC, ex LEAP that could roll-in with the various type of revenue potentials. The earliest you said was in two years time, which of those programs would be the ones that hit first?

Joe Morone

I think the best way to think about this is, I used this term before and it confused some people. S curve, so I think waves of growth. And the next wave of growth that will start slow, then will accelerate and then eventually will flatten should be toward the very end of the decade. And the two most likely areas of application are number one, enhancements to the LEAP engine, once an engine is introduced, there tend to be performance improvement packages every two years or so or every 30 months thereabouts. So, we are actively working with our customer on possible improvements to the LEAP engine. So that’s number one.

Number two, we’re actively working, as we laid out in the release on a number of airframe applications on wings for example. Now if you ask what are the platforms on which those would come on? There aren’t many major new aircraft that are now scheduled to be introduced that would allow us to get some big hits. The next big wave of the airframe applications are out in the middle of next decade with the next generation set the single-aisle and now increasing speculation about a next generation 757. And that’s -- we’re positioning ourselves for, we think for the next wave of growth on those platforms.

Nearer term, this decade there is no secret about what the possible platforms will be and our applications on theirs will be relatively small, but if we are on their some could be interesting. There is the 777X Wing is certainly a potential application. And then there are new derivatives of the 787 and the A350 that are potential opportunities for us. Whether or not we get on those, how much we get on those, that remains to be seen but that’s where you would expect logically to see an initial wave of airframe applications, just look to see where the new extensions to existing platforms are and when they are entering into service. And you get an idea what the applications are.

John Franzreb - Sidoti & Company

Right, Joe. What I was really kind of looking for here is adjacent opportunities, you say, I mean even it’s a small limited something outside of fan blades you say that initial production revenue ranging from two years. I am looking for those other opportunities outside the fan blade market that is two years from now and even if it’s only nominal on top-line impact?

Joe Morone

So I’ll just say it again if we get on some airframe applications and they are going to turn into revenue this decade, then they would need to have contracts announced over the two years and start seeing some initial revenue in the 2017 to 2018 timeframe, 2019 timeframe. There might be smaller stuff than that before then on platforms that are less visible, may be defense platforms.

And on the engine, the most likely near-term applications would be enhancements to LEAP. When you get farther out into next decade, there are some very significant potential applications that we’re working on, that our customers are talking about on, Safran has talked about a ceramic metrics composite low pressure turbine blades for a future version of LEAP’s and then beyond LEAP. They have talked about the open rotor and our participation on the open rotor which is a next-generation engine for smaller aircraft like single-aisle aircraft.

Boeing has talked about the ceramic metrics composite nozzle which has very interesting promises of technology. So, there’s big families of applications out in the 2020s. This decade the most likely applications, enhancements to LEAP and then if we can make it getting onto derivatives of the 787 and 777X and A350.

John Franzreb - Sidoti & Company

Okay. Thank you. I’ll get back into queue.

Operator

Our next question will come from the line of Steve Levenson of Stifel. Please go ahead sir.

Steve Levenson - Stifel Nicolaus

Thanks. Good morning Joe and John.

Joe Morone

Hey, Steve.

Steve Levenson - Stifel Nicolaus

Just in terms of those new products that you talked about, I know they are out in the future. Excuse me, but are those 3D woven parts, it would be within the joint venture, are those more traditional parts that would not be?

Joe Morone

The low pressure turbine and the open rotor would certainly be part of the agreement, anything on the airframe would not, anything on LEAP would.

Steve Levenson - Stifel Nicolaus

Got it, thank you. Right around the time of your last conference call Boeing announced that they were going to go to 47 single-aisle planes per month, now they are talking about going to 52. And while Airbus hasn’t said anything, you would expect them to want to try to keep up and there certainly seems to be plenty of demand for single-aisle planes out there. So, my question is in terms of the capacity expansion that you ‘re doing right now for LEAP blades, how many can you service before you have to start adding more capacity and can you do that within the existing brick and mortar?

Joe Morone

Yes, the short answer is yes we can do it within the existing, we think we can do it within the existing brick and mortar. And we’re planning for 1,800 engines a year by the end of the decade, which is pretty consistent with about 52 a month, 52 a month single-aisles by Boeing and Airbus if you do the math.

Steve Levenson - Stifel Nicolaus

Okay, thank you. And the last item just goes back to Paper Machine Clothing. Can you quantify the margin impact of the North American containerboard situation; is that basis points impact or percentage points impact?

Joe Morone

We still think our normal gross margin for that business should be in the 43% range and when it comes down to where it was 41, 41.5ish, there are two variables going on; one is the end of the year shutdowns that just create negative variances and then on top of that the larger than expected containerboard slowdown. And those two variables together push us below the 43.

Steve Levenson - Stifel Nicolaus

Got it and thank you very much.

Joe Morone

Thanks, Steve.

Operator

Our next question will come from the line of J.B. Groh of DA Davidson. Please go ahead.

J.B. Groh - D.A. Davidson & Company

Hey guys, thanks for taking my call. Couple of quick ones, on the product that you’re working on, the airframe stuff and enhancements, can you sort of characterize what is stuff that you’re pushing and prototyping on your own and what is being driven by the -- your customers are asking for it?

Joe Morone

I’d say it’s somewhere in between, the 10 or so, dozen or so projects that we’re actively exploring with customers, we’re actively exploring. So, we’re in conversations with them and they are showing some interest and so we start developing the prototype and that leads to a conversation. And so, it’s not a contract but it’s an active exploration where we are visiting with them and they are visiting with us and we’re attempting to qualify and demonstrate the capability of our parts, our sample, in some cases sample parts, in some case overall technological capability.

J.B. Groh - D.A. Davidson & Company

So, it’s a mix and I guess sponsor other parts that you may be interested in doing and…

Joe Morone

Yes, we basically, see if you think of this like a funnel, when we start saying we’re exploring for a variety of applications, we’re only including applications in which there is an active conversation going on with the customer, but that’s not yet a contract but it’s an active conversation. It’s a two-way conversation that’s not, hey, would you guys be interested?

J.B. Groh - D.A. Davidson & Company

Right, okay. And so that activity is multiples of what it was last year?

Joe Morone

Yes.

J.B. Groh - D.A. Davidson & Company

Okay. And then maybe one for John, how should we think about R&D spending in this fiscal year or in this year, obviously the more of these prototypes you’re working on in different projects that that’s going to be elevated. How should we look at that this year?

John Cozzolino

I’d say J.B. I think as the pipeline continues to expand for the business, the R&D spending that we’re going to have in the business is going to go up. It’s not going to be very high percentage point increases, but I would see it going up. It’s probably going to start going up in line with the sales growth that we’re going to see over the next few years, but we should start seeing increases in that as the activity goes up.

J.B. Groh - D.A. Davidson & Company

So, better way to do it is percentage to sales, the sales ramp to.

John Cozzolino

Well, the ramp is so dramatic that it wouldn’t, once it starts to kick-in, the percent of sales will go down.

J.B. Groh - D.A. Davidson & Company

Right, okay.

John Cozzolino

I think if you -- first approximation if you’re adding a $1 million of R&D per year that’s probably not a outrageous way to do it.

J.B. Groh - D.A. Davidson & Company

Okay, alright. Thank for your help.

John Cozzolino

Thanks J.B.

Operator

(Operator Instructions) Our next question will come from the line of Mr. Rick D’Auteuil of Columbia Management. Please go ahead sir.

Rick D’Auteuil - Columbia Management Investment Advisers

Good morning.

Joe Morone

Hey Rick.

Rick D’Auteuil - Columbia Management Investment Advisers

I think you mostly touched on this, but let me just probe a little bit. In the release the talks about the opportunity pipeline as it relates to airframe applications. And then you size it some as small as 5 million a year and tens of millions. And then you also throw a timeframe out there of 2 to 10 years. Are any of the tens of millions in that earlier side of the -- I mean are they in the 2 to 3 year kind of or are those mostly the smaller, the 5 million and under? I am just wondering if there is -- we're still looking at a decade for any of the sizeable opportunities or in that 2 year timeframe is there anything of size?

Joe Morone

Well if you -- I think the best way to map all this out and this is what I was trying to get to before, and let me take another whack at it. The best way to map out the potential size of opportunities is to look where there are platforms that our parts could go on. And so, the biggest near-term platform is still LEAP. And if we can get another major part or a couple of major parts on LEAP that will be the single biggest near-term opportunity. And you just can’t -- I know we’ve talked about this before, but it bears repeating there has never been and may never be an application with the size of the sheer volume of LEAP.

And so anytime you can get a little more content on a program of that volume. It’s just -- that’s what leads to revenue. And every new -- the true history every major engine program will after the introduction there will be periodic performance improvement programs in the next generations. And they come every 2 to 3 years, every 30 to 36 months. So now that’s a very promising platform on the engine side. That if history is any guide there will be more opportunities for additional content 30 months after the things introduced into service. So we’ll see if we get on that content or not.

Now on the airframe side, the big opportunities for major revenue occur when there is a whole new aircraft, so the 787 which is a whole new aircraft with the last major platform for all kinds of new applications, and the A350 as well. As you know we got started too late to really be a major player on either of those platforms. The next big platform, so the ones that offer significant new revenue potential are the ones that Boeing and Airbus are now starting to talk to, that’s the next generation single-aisle and possibly a new 757. Those are going to create significant waves of opportunity for us and everybody else in the industry.

In the near-term for somebody trying to break into the airframe, if there are opportunities there’ll be smaller opportunities and they will be compared to those whole new aircraft and they will be on the derivatives of aircrafts that are now being introduced. So, 787 is going to have a new version, the A350 is going to have a new version and they will be incrementally different from the current versions that are being introduced and so they offer potentially to us and everybody else incremental opportunities for new revenue.

And then the other chance of somebody trying to break into the airframe has for new business in the short-term as if any of those airframes have a weight problem. And so they need to go back and do performance improvement package sooner than might otherwise be anticipated then that tends to open an incremental opportunity.

So you go between now and 2020 on the engine there should be an enhancement to LEAP and there should be incremental opportunities on these new platforms that the airframe manufacturers are making. When you get out next decade it’s whole new engines and whole new aircraft and so if we do our jobs right this decade we will position ourselves very well for those next waves.

We keep saying, we think the revenue potential for this business by 2020 is 300 million to 500 million. LEAP plus the current projects we’re on get us to in the 2020 range. So, we still think that 300 to 500 is the right range and it will only take one or two incremental parts on LEAP to get us to the bottom of that range and then if you can layer in some airframe applications and some applications we’re not yet working on, then you start getting toward the middle of that range and then if there is a surprise on the automotive side, you get to the upper-end of that range.

We’re not seeing anything yet that would lead us to back away from seeing 300 to 500 as the revenue potential for this business when we’ll have the contracts in hand.

Rick D’Auteuil - Columbia Management Investment Advisers

That’s very helpful range of that. Thanks.

Operator

Our next question will be a follow-up from the line of Jason Ursaner. Please go ahead.

Jason Ursaner - CJS Securities

Hi, Joe.

Joe Morone

Hey, Jason.

Jason Ursaner - CJS Securities

I just wanted to follow-up on, you mentioned before that 43% gross margin kind of normal range and just getting back to the restructuring in this quarter. I guess normally it’s an add-back for non-operating expenses that are in the numbers. This quarter obviously it’s a negative to offset a non-operating gain from the curtailment. So, I am just trying to figure out if that gain was in SG&A or COGS and whether that 42% gross margin for this quarter is a good figure or if that was artificially bumped up by the gain from the curtailment?

John Cozzolino

Yes Jason, it is John. The restructuring curtailment gains is booked on its own line in the financials. And when we report the gross profit numbers it’s not in there. So, it’s not in cost of goods sold, it’s not in SG&A, it’s on its own line. The only place that you really would see it affecting it, it is in the Machine Clothing operating income line in that table.

Jason Ursaner - CJS Securities

Okay.

John Cozzolino

That’s the only place. But if you look at the face of the financial statements it’s on the restructuring line, so it’s not affecting the margin numbers.

Jason Ursaner - CJS Securities

Well but it seems that the GAAP operating income is being impacted by it, so it’s got to either come out of SG&A or gross margins because it’s a negative in the recent?

John Cozzolino

It is right, but we pull it out, if you want to call it SG&A you can but we pull it out and put it on its own line restructuring. And correct it does impact the GAAP operating income numbers that we report for Machine Clothing.

Jason Ursaner - CJS Securities

Okay, but it’s not in that 41.7% gross margin?

John Cozzolino

No, no.

Jason Ursaner - CJS Securities

And then on AEC.

John Cozzolino

And just staying on the gross margin, if you look at the full year it was like 42.8%, just a tad under 43 and that’s to the lot of softness in the second half of the year. So, 43 is still a good number.

Jason Ursaner - CJS Securities

Okay. And on AEC the 10% growth that’s related almost exclusively to commercial programs or some of the joint R&D would show up as revenue in the short-term?

John Cozzolino

Some of the joint R&D would show up as revenue in the short-term, but it’s not big enough to move the needle very much. Most of the growth is in commercial programs and it’s mostly LEAP.

Jason Ursaner - CJS Securities

Okay. And if some of the pipeline moves towards contracts, is it going to be a different type of inflection because LEAP was customer funded early on just in terms from a GAAP profit or loss perspective or it would have a similar type of trajectory. I am just wondering if it would kind of hit all…?

Joe Morone

No it’s, and we’ll just have to go case-by-case and we’ll discuss it as they come along but our goal is to get to normal aircraft engine industry margins which is, we’ve discussed before, if an EBIT margin around 15% should be our normal objective and expectation. Now there may, you could imagine that an opportunity comes along that’s so strategic for us that it’s enabling us to break-in with a customer that we haven’t been able to break-in with, that -- we would be willing to go for a lower margin on the expectation that is going to lead to more business later. But that’s basically our guiding expectation and internally we don’t see any reason to deviate from that.

Jason Ursaner - CJS Securities

Right. I guess I am just wondering if the revenue, if it’s going to show up as kind of reimbursement revenue or if it won’t show up I guess on the revenue line if it’s joint funded as opposed to customer funded?

Joe Morone

Right, if the customer does not pay for the non-recurring costs and we bare them so then those costs typically in the industry get amortized over the life of the program. But if the customer bares it and is paying for the non-recurring tooling and engineering and development then it gets treated as revenue.

Jason Ursaner - CJS Securities

Okay.

Joe Morone

And that -- so you got to go contract-by-contract and as we get more established in the industry and as our reputation grows, as our capability gets recognized there is going to be I think a greater expectation on the part of customers to, for us to bare, start baring those costs which means they wouldn’t get, the development wouldn’t get booked as revenue it would be amortized.

Jason Ursaner - CJS Securities

Got it. And then on the balance sheet, there was pretty significant interest savings from paying back the first tranche on the prudential term loan, just given what you have on your revolver and the balance sheet in the position it’s in. What is the prepay penalty on the 2015 tranche and/or if you had to go into the market for permanent debt where do you think you would see rates at this point, does it make sense to maybe do anything early there?

Joe Morone

Yes and Jason it is certainly is something that we think about best without getting into the specifics of the agreement, the best way to think about the prepayment penalty is look at the savings that we’re getting now and basically put -- and value that back to when those other payments are due. And essentially we would have to pay that upfront. So, I think that’s one of the things kind of holding back doing that it’s -- we would really just be prepaying that interest savings upfront.

So, it is all about what type of rates could we get in the market now. And we’re looking at it, it certainly is a favorable environment but the penalty is pretty significant to pay that all at once and upfront. But we haven’t ruled anything out, and we’ll keep looking at it.

Jason Ursaner - CJS Securities

Okay, great. I appreciate it.

Operator

And our last question in queue at this time is also a follow-up from the line of Mr. John Franzreb of Sidoti. Please go ahead.

John Franzreb - Sidoti & Company

Yes, John this might dovetail into Jason’s question, you’ve repatriated $35 million during the year. Could you just talk about how much cash is overseas and maybe a little bit about the priority uses of cash going forward?

John Cozzolino

Yes, so the roughly 223 million in cash that we have about 80% to 85% of that is held overseas. And so, we have a pretty structured, disciplined program to try repatriate a certain amount each year, but it tends to range in the 20 million to 30 million range, because we’re trying to basically limit the tax cost of that to as minimal as possible if any at all. So we’ll keep working on that. But as far as cash uses go, well obviously our first priority is to ensure that we can make the investments in both businesses that we need to make, also in the U.S. and overseas. And then from there we’re continuing to try to ensure we have the best and strongest balance sheet that we can have from both a total debt and a net debt standpoint. So we’ll keep working on the debt side of the balance sheet.

And in the past we’ve been, we’ve had a long-term dividend and we’ve been giving, we’ve been steadily increasing the dividend that obviously will continue to be something that our Board looks at each quarter to continue doing. So, I think the cash priorities that we’ve had over the past couple of years, few years are really the same priorities that we’ll have going forward.

John Franzreb - Sidoti & Company

Okay, fair enough. And I know this has always been a moving target depending on the geographic sales mix. But for modeling purposes, what should we be thinking about for tax rate for 2014?

John Cozzolino

Yes, the tax rate does get to be pretty complicated when you look at the pre-tax mix, but I think the easiest way to think about it is look out the rate we had in 2012 which was about 38.5% and we went up about 10 percentage points this year. But it was an unusual year with a large restructuring charge that we had in France that really affects the way that we have to record. So, if you start from where we were in 2012, that’s a pretty good range to start with. We’re now prepared to really to give any real guidance on the rate right now, but that’s a good place to start and then as we see how the mix starts coming in 2014, we’ll try to provide some better guidance on how the year is looking.

John Franzreb - Sidoti & Company

Okay, thank you very much John.

Operator

There are no further questions in queue at this time. I would now like to turn the conference back over to today’s panel for any closing remarks.

Joe Morone

Well, thank you everyone. Thanks especially for the questions and for participating on the call. And John and I will look forward to seeing all of you in the near future at one conference or another. So, thank you and have a good day.

Operator

Ladies and gentlemen, a replay of this conference call will be available by the Albany International website beginning at approximately noon Eastern Time today. That does conclude our conference call for today. We’d like to thank you for your participation and thank you for using AT&T. Have a wonderful day. You may now disconnect.

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