What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-27 compared with 2020-10-29 · 132 added, 247 removed, 235 unchanged (62% of the section changed)

7 unchanged sentences

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 and Albany Engineered Composites segments compete, along with the general risks associated with macroeconomic conditions;

• Conditions in the industries in which our Machine Clothing and Albany Engineered Composites segments compete, along with the general risks associated with macroeconomic conditions, including continuation of COVID-19 pandemic effects for an extended period of time;

• In the Machine Clothing segment, greater than anticipated declines in the demand for publication grades of paper, or lower than anticipated growth in other paper grades;

and continuation of coronavirus effects for an extended period;

• In the Albany Engineered Composites segment, extended weakness in commercial aerospace activity, further delays in the Boeing 737 MAX return to service, or unanticipated reductions in demand, delays, technical difficulties, or delays/cancellations in other aerospace programs;

• In the Albany Engineered Composites segment, longer than expected timeframe for the aerospace industry to utilize existing inventories, and unanticipated reductions in demand, delays, technical difficulties, or cancellations in aerospace programs that are expected to generate revenue and drive long-term growth;

• Failure to achieve or maintain anticipated profitable growth in our Albany Engineered Composites segment;

7 unchanged sentences

The MC segment is the Company’s long-established core business and primary generator of cash.

While it has suffered from well-documented declines in publication grades in the Company’s traditional markets, the paper and paperboard industry has stabilized in recent years, 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 key markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, technical product support, and manufacturing

Because of pricing pressures and industry overcapacity, the machine clothing and paper industries will continue to face top line pressure.

Despite continued market pressure on revenue, the business retains the potential for maintaining stable earnings in the future.

It 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 continuous focus on cost reduction initiatives, and competing vigorously by using our differentiated and technically superior products to reduce our customers’ total cost of operation and improve their paper quality.

The AEC segment provides long-term growth potential for our Company.

While it has been negatively impacted by well-documented declines in publication grades in the Company’s traditional markets, there has been some offsetting effect due to growth in 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 well-positioned in key markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets,

and continued strength in new product development, technical product support, and manufacturing technology.

Some of the markets in which our products are sold are expected to have low levels of growth and we face pricing pressures in all markets.

Despite these market pressures on revenue, the MC business retains the potential for maintaining stable earnings in the future.

MC 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 have achieved through continuous focus on cost-reduction initiatives, and competing vigorously by using our differentiated and technically superior products to reduce our customers’ total cost of operation and improve their paper quality.

The AEC segment provides significant longer term growth potential for our Company.

Our strategy is to grow by focusing our proprietary 3D-woven technology, as well as our non-3D technology capabilities, on high-value aerospace (both commercial and defense) applications, while at the same time performing successfully on our portfolio of growth programs.

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government contracts or programs.

A number of countries, including the United States, have issued orders grounding Boeing 737 MAX aircraft.

If these groundings cause a further decrease in demand in production for this aircraft, it could have an adverse impact on demand for LEAP engines, which, in turn, could have an adverse impact on demand for our LEAP engine parts.

The Company is continuing to monitor developments with our customer.

Considerable uncertainty exists with respect to the return-to-service of the 737-MAX and the subsequent ramp-up in our production of LEAP-1B components, which may lead to additional impacts to our revenues from LEAP-1B components in 2020 and future periods.

The nature of our cost-plus fee arrangement, however, should somewhat mitigate the impact of such factors on gross margin rate in such future periods.

In April 2020, the Company announced the temporary closure of all three of its LEAP production facilities, resulting from depressed demand, due to the ongoing Boeing 737 MAX situation and a pause in production of the Airbus A320neo family.

As a result, the year-over-year comparisons for LEAP revenue in the fourth quarter are expected to continue to be unfavorable.

Consolidated Results of Operations

The following table summarizes our Net sales by business segment:

Three months ended September 30, Nine months ended September 30,

(in thousands, except percentages) 2020 2019 % Change 2020 2019 % Change

Three months ended

(in thousands, except percentages)

2021 2020 % Change

Machine Clothing $148,206 $136,602 8.5 %

Albany Engineered Composites

Consolidated total $ 211,999 $ 271,133 (21.8) % $ 673,753 $ 796,454 (15.4) %

74,156 99,162 -25.2 %

Total $222,362 $235,764 -5.7 %

The following tables provide a comparison of 2021 Net sales, excluding the impact of currency translation effects, to 2020 Net sales:

(in thousands, except percentages) Net sales as reported, Q3 2020 Increase due to changes in currency translation rates Q3 2020 sales on same basis as Q3 2019 currency translation rates Net sales as reported, Q3 2019 % Change compared to Q3 2019, excluding currency rate effects

Machine Clothing $ 138,747 $ 1,837 $ 136,910 $ 151,324 (9.5) %

Albany Engineered Composites 73,252 350 72,902 119,809 (39.2) %

Consolidated total $ 211,999 $ 2,187 $ 209,812 $ 271,133 (22.6) %

(in thousands, except percentages) Net sales as reported, YTD 2020 Decrease due to changes in currency translation rates YTD 2020 sales on same basis as 2019 currency translation rates Net sales as reported, YTD 2019 % Change compared to 2019, excluding currency rate effects

(in thousands, except percentages)

Net sales as reported, Q1 2021 Increase due to changes in currency translation rates Q1 2021 sales on same basis as Q1 2020 currency translation rates Net sales as reported, Q1 2020 % Change compared to Q1 2020, excluding currency rate effects

Machine Clothing $ 148,206 $ 4,861 $ 143,345 $ 136,602 4.9 %

Albany Engineered Composites

Consolidated total $ 673,753 $ (1,423) $ 675,176 $ 796,454 (15.2) %

74,156 1,178 72,978 99,162 -26.4 %

Total $ 222,362 $ 6,039 $ 216,323 $ 235,764 -8.2 %

Three month comparison

• Changes in currency translation rates had the effect of increasing Net sales by $2.2 million during the third quarter of 2020, as compared to 2019, principally due to the stronger euro in 2020.

• Excluding the effect of changes in currency translation rates:

• Net sales decreased 22.6% compared to the same period in 2019.

• Net sales in MC decreased 9.5% compared to the third quarter of 2019, driven by declines across all major product grades.

• Net sales in AEC decreased 39.2% primarily driven by a significant decline in the LEAP program.

Net sales also decreased in the Boeing 787 program.

Those declines were partially offset by growth in the F-35 and CH53K platforms.

Nine month comparison

• Changes in currency translation rates had the effect of decreasing Net sales by $1.4 million during the first nine months of 2020, as compared to 2019, principally due to the weaker Chinese renminbi in 2020.

• Changes in currency translation rates had the effect of increasing Net sales by $6.0 million during the first quarter of 2021, as compared to 2020, principally due to the stronger euro in 2021.

• Excluding the effect of changes in currency translation rates:

• Net sales decreased 8.2% compared to the same period in 2020.

• Net sales in MC decreased 4.6% compared to the first nine months of 2019.

A decline in sales for the publication, tissue and pulp grades sales was partially offset by an increase in packaging grades.

• Net sales in AEC decreased 29.1% primarily driven by declines in the LEAP and Boeing 787 program sales partially offset by growth on the F-35 and CH-53K platforms.

• Net sales in MC increased 4.9% compared to the first quarter of 2020, principally due to growth in sales for packaging and other grades, which more than offset decreases in sales for publication grades.

• Net sales in AEC decreased 26.4% principally due to declines in sales for the LEAP and Boeing 787 programs.

The following table summarizes Gross profit by business segment:

Three months ended September 30, Nine months ended September 30,

Three months ended

(in thousands, except percentages)

1 unchanged sentence

Albany Engineered Composites

Consolidated total $ 87,302 $ 104,107 $ 279,754 $ 301,060

12,153 16,820

Total $ 88,546 $ 89,472

% of Net sales

39.8 % 37.9 %

Three month comparison

The decrease in 2020 Gross profit, as compared to the same period in 2019, was principally due to the effect of lower Net sales in AEC, partially offset by an increase in gross profit as a percentage of sales.

Gross profit as a percentage of sales:

• Decreased from 52.4% in 2019 to 51.5% in 2020 in Machine Clothing, principally due to lower absorption of fixed costs due to the lower Net sales, partially offset by favorable foreign currency exchange rates (Brazilian real and Mexican peso).

• Increased from 20.8% in 2019 to 21.6% in 2020 in AEC, driven by a favorable mix in program revenue and an increase in favorable adjustments to the estimated profitability of long-term contracts, which increased third quarter 2020 Gross profit by $3.5 million, compared to $3.3 million in the third quarter of 2019.

Nine month comparison

The decrease in 2021 Gross profit, as compared to the same period in 2020, was principally due to the effect of lower Net sales in AEC, partially offset by an increase in Machine Clothing Net sales.

Gross profit as a percentage of sales:

• Increased from 51.9% in 2019 to 53.1% in 2020 in Machine Clothing, principally due to lower depreciation expense.

The gross profit margin in 2020 was also favorably impacted by a weaker Brazilian real and Mexican peso.

• Increased from 19.4% in 2019 to 21.2% in 2020 in AEC, principally due to a favorable shift in the mix of program revenue.

• Decreased from 53.2% in 2020 to 51.5% in 2021 in Machine Clothing, principally due to an increase in production costs and lower cost absorption.

• Decreased from 17.0% in 2020 to 16.4% in 2021 in AEC, principally due to changes in the estimated profitability of long-term contracts, which increased Gross profit by $0.9 million in the first quarter of 2020, but had an insignificant effect on gross profit for the same period of 2021.

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

2 unchanged sentences

The following table summarizes STG&R expenses by business segment:

Three months ended September 30, Nine months ended September 30,

Three months ended

(in thousands, except percentages)

2 unchanged sentences

Corporate expenses 11,451 15,204

Consolidated total $ 47,819 $ 48,673 $ 144,471 $ 149,925

$ 46,676 $ 49,236

% of Net sales 21.0 % 20.9 %

Three month comparison

The overall decrease in STG&R expenses in the third quarter of 2020, compared to the same period in 2019, was principally due to the net effect of the following individually significant items:

• In MC, revaluation of nonfunctional currency assets and liabilities resulted in third-quarter losses of $1.3 million in 2020, compared to gains of $1.0 million in 2019.

That effect was offset by lower travel and incentive compensation expense.

• In AEC, STG&R expenses increased $1.1 million, principally due STG&R costs of CirComp, which the Company acquired in November 2019.

• Corporate expenses increased in 2020 due to higher incentive compensation expense, partially offset by lower travel expenses as a result of the COVID-19 pandemic.

Nine month comparison

The overall decrease in STG&R expenses in the first nine months of 2020, compared to the same period in 2019, was principally due to the net effect of the following individually significant items:

• In MC, the following items impacted STG&R expenses

◦ Revaluation of nonfunctional currency assets and liabilities resulted in a gain of $1.3 million in the first nine months of 2020, compared to a gain of $0.7 million in 2019.

◦ Travel expenses were significantly lower in 2020, as a result of the COVID-19 pandemic.

◦ Changes in currency translation rates had the effect of decreasing STG&R by $1.5 million.

◦ The factors above were partially offset by a charge of $1.0 million in the first quarter of 2020 for additional estimated credit losses recognized in accordance with ASC 326.

• In AEC, STG&R expenses increased due to expenses at CirComp, which the Company acquired in November 2019, and a charge of $0.5 million in the first quarter of 2020 for additional estimated credit losses recognized in accordance with ASC 326.

• Corporate STG&R expenses increased principally due to former CEO termination costs and higher incentive compensation expense partially offset by lower professional fees and travel expenses.

Restructuring Expense

In addition to the items discussed above affecting Gross profit, and STG&R expenses, operating income was affected by restructuring costs of $4.2 million in the first nine months of 2020, compared to $1.1 million for the same period of 2019.

The following table summarizes restructuring expenses by business segment:

Three months ended September 30, Nine months ended September 30,

The overall decrease in STG&R expenses in the first quarter of 2021, compared to the same period in 2020, was principally due to the net effect of the following individually significant items:

• In MC, STG&R expenses increased due to revaluation of nonfunctional currency assets and liabilities which resulted in a first-quarter gain of $0.5 million in 2021, compared to a gain of $3.7 million in 2020.

That effect was partially offset by lower travel costs and effects of cost reduction initiatives in 2020.

• In Corporate, STG&R expenses decreased principally due to former CEO termination costs recorded in the first quarter of 2020.

Restructuring Expense, net

In addition to the items discussed above affecting Gross profit, and STG&R expenses, operating income was affected by restructuring costs of $0.1 million in the first three months of 2021, and $0.6 million for the same period in 2020.

The following table summarizes Restructuring expenses, net by business segment:

Three months ended

(in thousands) 2021 2020

2 unchanged sentences

Corporate expenses 32 —

Consolidated total $ 710 $ (244) $ 4,189 $ 1,139

In 2020, AEC reduced its workforce at various locations, principally in the United States, leading to restructuring charges of $2.6 million for the first three quarters of 2020.

As a result of these actions, annual cost savings associated with this action will principally lower Cost of goods sold and Selling, general, and administrative expenses in 2020.

Machine Clothing restructuring charges for the first nine months of 2020 and 2019 were principally related to dthe plant closure of its MC production facility in Sélestat, France that was announced in 2017.

Total $ 52 $ 642

Machine Clothing restructuring charges or credits in both years principally related to discontinued operations at its production facility in Sélestat, France announced in 2017.

The restructuring program was driven by the Company’s need to balance manufacturing capacity with demand.

Since 2017, we have recorded $13.9 million of restructuring charges related to this action.

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/(loss) by business segment:

Three months ended September 30, Nine months ended September 30,

Three months ended

(in thousands) 2021 2020

2 unchanged sentences

Corporate expenses (11,483) (15,204)

Consolidated total $ 38,773 $ 55,678 $ 131,094 $ 149,996

Total $ 41,818 $ 39,594

Other Earnings Items

Three months ended September 30, Nine months ended September 30,

Three months ended

(in thousands) 2021 2020

4 unchanged sentences

Interest Expense, net

Year-to-date 2020 Interest expense, net, was lower as compared to 2019 due to lower average debt and lower interest rate.

The successful resolution of a claim for rebate of foreign sales tax paid reduced interest expense,net by $0.9 million.

Year-to-date 2021 Interest expense, net, was lower as compared to 2020, principally due to lower average debt.

See the Capital Resources section for further discussion of borrowings and interest rates.

Other (income)/expense, net

Three and nine month comparison

The increase in Other (income)/expense, net included the following individually significant items:

• The revaluation of nonfunctional currency cash and intercompany balances resulted in a gain of $2.0 million in the third quarter of 2019 compared to a gain of $0.1 million for the same period of 2020.

• For the first nine months of 2020, revaluation of nonfunctional currency cash and intercompany balances resulted in a loss of $14.7 million, compared to a net gain of $3.7 million in 2019.

The loss in 2020 principally resulted from intercompany demand loans payable by Mexican subsidiaries, combined with the effects of a much weaker peso in 2020.

• In the third quarter of 2020, the Company successfully resolved a claim for a rebate of foreign sales tax paid in previous years, resulting in a gain of $2.6 million.

Three month comparison

The decrease in Other (income)/expense, net included the following individually significant items:

• For the first quarter of each year, revaluation of nonfunctional currency cash and intercompany balances resulted in a loss of $0.2 million in 2021, compared to a loss of $14.8 million in 2020.

The loss in 2020 principally resulted from an intercompany demand loan payable by a Mexican subsidiary.

The Company has operations, which constitute a taxable presence in 18 countries outside of the United States.

The majority of these countries had income tax rates that are above the United States federal tax rate of 21% during the periods reported.

The majority of these countries had income tax rates that are above the United States federal tax rate of 21 percent during the periods reported.

The jurisdictional location of earnings is a significant component of our effective tax rate each year.

2 unchanged sentences

From period to period, the jurisdictional mix of earnings can vary as a result of operating fluctuations in the normal course of business, as well as the extent and location of other income and expense items, such as pension settlement and restructuring charges.

Three and nine month comparison

The Company’s effective tax rates for the third quarter of 2020 and 2019 were 24.7% and 24.7%, respectively, and for the first three quarters of 2020 and 2019, were 35.0% and 25.3%, respectively.

Three month comparison

The Company’s effective tax rates for the first quarter of 2021 and 2020 were 26.7% and 62.1%, 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.

1 unchanged sentence

tax costs on foreign earnings, and by discrete items that may occur in any given year but are not consistent from year to year.

Significant items that impacted the effective tax rate in the third quarters of 2020 and 2019 included the following (percentages reflect the effect of each item as a percentage of income before income taxes):

Three months ended September 30, Nine months ended September 30,

2020 2019 2020 2019

(in thousands, except percentages) Tax Amount % Tax Amount % Tax Amount % Tax Amount %

It should be noted that the effective tax rate for the first quarter of 2020 was significantly affected by a non-recurring tax adjustment due to non-deductible foreign exchange losses, as illustrated in the table below.

Significant items that impacted the effective tax rate in the first quarter of 2021 and 2020 included the following (percentages reflect the effect of each item as a percentage of income before income taxes):

Three months ended

(in thousands, except percentages)

Continuing operations (excluding discrete items) $ 11,332 30.1 % $ 7,309 36.5 %

Audit settlements (8) — % — — % (1,500) (1.4) % — — %

Changes in uncertain tax positions (38) (0.1) % (558) (1.0) % (279) (0.3) % (2,785) (2.0) %

Out-of-period adjustments to deferred tax assets — — % — — % 1,830 1.7 % — — %

Impact of Mexico foreign currency revaluation losses — — % — — % 3,658 3.4 % — — %

Changes in opening valuation allowance — — % (20) — % — — % (1,366) (1.0) %

Changes in valuation allowance 8 — % (11) — % 230 0.2 % 830 0.6 %

Adjustment of prior year taxes (1,750) (4.5) % (160) (0.3) % (983) (0.9) % 187 0.1 %

Other tax adjustments (1,192) (2.9) % (719) (1.5) % (2) 0.1 % (47) 0.1 %

Provision for/resolution of tax audits and contingencies, net 278 0.7 % (244) (1.2) %

Adjustments to prior period tax liabilities (1,443) (3.8) % (112) (0.6) %

Out-of-period adjustments — — % 1,830 9.1 %

Tax effect of non-deductible foreign exchange loss on intercompany loan — — % 3,668 18.3 %

Other adjustments (127) (0.3) % 3 0.0 %

Effective tax rate $ 10,040 26.7 % $ 12,454 62.1 %

2 unchanged sentences

Machine Clothing Segment

Machine Clothing is our primary business segment and accounted for 64% of our consolidated revenues during the first nine months of 2020.

Machine Clothing is our primary business segment and accounted for 67% of our consolidated revenues during the first three months of 2021.

MC products are purchased primarily by manufacturers of paper and paperboard.

While the MC business has suffered from well-documented declines in publication grades in the Company’s traditional markets, the paper and paperboard industry is still expected to grow slightly 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 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, technical product support, and manufacturing technology.

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.

Additionally, we face pricing pressures in all of our markets.

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 MC manufacturing capacity and administrative positions in various countries.

We have incurred significant restructuring charges in recent years as we reduced MC manufacturing capacity and administrative positions in various countries.

Review of Operations

Three months ended September 30, Nine months ended September 30,

Three months ended

(in thousands, except percentages)

2020 2019 2020 2019

$ 138,747 $ 151,324 $ 428,782 $ 450,673

Net sales $ 148,206 $ 136,602

76,393 72,652

% of Net sales 51.5 % 53.2 %

51.5 % 52.4 % 53.1 % 51.9 %

STG&R expenses

1 unchanged sentence

Operating income 50,363 47,175

45,699 51,906 149,418 145,688

Three month comparison

• Net sales decreased by 8.3%.

• Changes in currency translation rates had the effect of increasing third-quarter 2020 sales by $1.8 million compared to the same period in 2019.

That currency translation effect was principally due to the stronger euro in the third quarter of 2020, compared to 2019.

• Excluding the effect of changes in currency translation rates, Net sales in MC decreased 9.5% compared to the third quarter of 2019, driven by declines across all major product grades.

Nine month comparison

• Net sales decreased by 4.9%.

• Changes in currency translation rates had the effect of decreasing sales for the first nine months of 2020 by $1.3 million compared to the same period in 2019.

That currency translation effect was principally due to the weaker Chinese renminbi in the first nine months of 2020, compared to 2019.

• Excluding the effect of changes in currency translation rates, Net sales in MC decreased 4.6% compared to the first nine months of 2019.

A decline in sales for the publication, tissue and pulp grades was partially offset by an increase in packaging grades.

Three and Nine month comparison

• The decrease in third-quarter MC Gross profit was principally due to lower Net sales which led to lower fixed cost absorption, partially offset by favorable foreign currency movements (a weaker Brazilian real and Mexican peso).

• The decrease in year-to-date MC gross profit was principally due to lower depreciation expense.

Gross profit was also favorably impacted by a weaker Brazilian real and Mexican peso in 2020.

• Net sales increased by 8.5%.

• Changes in currency translation rates had the effect of increasing first-quarter 2021 sales by $4.9 million compared to the same period in 2020.

That currency translation effect was principally due to the stronger euro in the first quarter of 2021, compared to 2020.

• Excluding the effect of changes in currency translation rates, Net sales in MC increased 4.9% compared to the first quarter of 2020, as growth in sales for packaging and other grades more than offset declines in publication grades.

Three month comparison

• The increase in MC Gross profit was principally due to higher sales as noted above, partially offset by a decrease in gross profit percentage that was principally due to an increase in production costs and lower cost absorption compared to 2020.

Operating Income

Three month comparison

The decrease in operating income was principally due to the net effect of lower Gross profit, partially offset by lower STG&R expenses.

Nine month comparison

The decrease in operating income was principally due to the net effect of lower Gross profit, partially offset by lower STG&R expenses.

The increase in Operating income was principally due to the net effect of higher sales, partially offset by higher STG&R expenses.

Albany Engineered Composites Segment

2 unchanged sentences

AEC, through ASC, is the exclusive supplier of advanced composite fan blades and cases for this program under a long-term supply contract.

The LEAP engine is used on the Airbus A320neo and Boeing 737 MAX family of jets, the latter of which is currently under a grounding order, as described above.

The LEAP engine is used on the Airbus A320neo and Boeing 737 MAX family of jets.

Other significant AEC programs include components for the F-35, fuselage frames for the Boeing 787, components for the CH53-K helicopter, and the fan case for the GE9X engine.

Review of Operations

Three months ended September 30, Nine months ended September 30,

Three months ended

(in thousands, except percentages)

2020 2019 2020 2019

$ 73,252 $ 119,809 $ 244,971 $ 345,781

Net sales $ 74,156 $ 99,162

12,153 16,820

% of Net sales 16.4 % 17.0 %

21.6 % 20.8 % 21.2 % 19.4 %

STG&R expenses

8,646 7,572 26,664 22,404

Operating income 2,938 7,623

6,828 17,345 22,749 44,598

Three and nine month comparison

The decrease in Net sales was principally due to lower LEAP and Boeing 787 program sales partially offset by growth on the F-35 and CH-53K platforms, which is consistent with the outlook for these programs provided by the Company in its last quarterly report.

Three and nine month comparison

The decrease in Gross profit was principally due to the decrease in Net sales, partially offset by an increase in gross profit percentage, which was partially due to a favorable shift in the mix of program revenue.

Three month comparison

The decrease in Net sales was principally due to lower sales in the LEAP and Boeing 787 programs, partially offset by growth on the F-35 and CH-53K platforms.

Three month comparison

The decrease in Gross profit of $4.7 million was principally due to the decrease in Net sales.

Adjustments in the estimated profitability of long-term contracts increased operating income by $0.9 million for the first quarter of 2020, compared to an insignificant effect for the first quarter of 2021.

Long-term contracts

AEC has contracts with certain customers, including its contract for the LEAP program, where revenue is determined by a cost-plus-fee agreement.

Revenue earned under these arrangements accounted for approximately 29 percent of segment revenue for the first nine months of 2020 and 47 percent in 2019.

Revenue earned under these arrangements accounted for approximately 40 percent of segment revenue for each of the first three months of 2021 and 2020.

LEAP engines are currently used on the Boeing 737 MAX, Airbus A320neo and COMAC aircraft.

A number of countries, including the United States, have issued orders grounding Boeing 737 MAX aircraft.

If these groundings cause a continued reduction in

production of this aircraft, this would have an adverse impact on demand for our LEAP engine parts.

Such a decrease could, in turn, trigger an increase in demand for A320neo aircraft, which could somewhat offset this negative impact.

In addition, AEC has long-term contracts in which the selling price is fixed.

4 unchanged sentences

Expected losses on projects include losses on contract options that are probable of exercise, excluding profitable options that often follow.

The sum of net adjustments to the estimated profitability of long-term contracts increased AEC Gross profit by $9.5 million in the first nine months of 2020, compared to an increase of $8.8 million for the first nine months of 2019.

Operating Income

Three month comparison

The decrease in operating income of $10.5 million in the third quarter of 2020 was principally due to the decrease in Net sales, as described above.

Nine month comparison

The decrease in operating income of $21.8 million in the first nine months of 2020 was principally due to the decrease in Net sales, as described above.

The decrease in Operating income of $4.7 million in the first quarter of 2021 was principally due to the decrease in Net sales, as described above.

Liquidity and Capital Resources

Cash Flow Summary

Nine months ended September 30,

Three months ended

(in thousands)

$ 69,633 $ 103,792

Net income $ 27,609 $ 7,594

Depreciation and amortization 18,882 18,070

2 unchanged sentences

Other operating items (9,158) 10,043

Net cash provided by operating activities 83,693 126,593

Net cash provided by/(used in) operating activities 33,686 (6,638)

Net cash used in investing activities (12,536) (12,805)

Net cash used in financing activities (31,703) (94,191)

Net cash (used in)/provided by financing activities (21,694) 54,231

Effect of exchange rate changes on cash and cash equivalents (2,901) (7,648)

Increase/(decrease) in cash and cash equivalents 19,764 (24,016)

Cash and cash equivalents at beginning of period 195,540 197,755

(Decrease)/increase in cash and cash equivalents (3,445) 27,140

Cash and cash equivalents at beginning of year 241,316 195,540

Cash and cash equivalents at end of period

$ 237,871 $ 222,680

(a) Includes Accounts receivable, Contract assets, Inventories, Accounts payable, and Accrued liabilities.

Operating activities

Cash flow provided by operating activities was $83.7 million and $126.6 million in the first nine months of 2020 and 2019.

The decrease of cash generated in 2020 was primarily due to increased working capital and decreased income from the LEAP program, which is consistent with the outlook for this program provided by the Company in its last quarterly report.

Cash paid for income taxes remained relatively flat year over year at $21.9 million and $21.4 million for the first nine months of 2020 and 2019, respectively.

At September 30, 2020, we had $215.3 million of cash and cash equivalents, of which $180.1 million was held by subsidiaries outside of the United States.

Cash flow provided by operating activities was $33.7 million in the first three months of 2021, compared to cash flow used by operating activities of $6.6 million in the first three months of 2020.

The improvement in cash provided by operating activities in 2021 was due to improved working capital cash flows in AEC and an increase in Net income.

Cash paid for income taxes was $15.7 million and $9.6 million for the first three months of 2021 and 2020, respectively.

The increase is primarily due to an increase in corporate income tax payments in Brazil, China and Switzerland related to prior year tax liabilities.

At March 31, 2021, we had $237.9 million of cash and cash equivalents, of which $209.0 million was held by subsidiaries outside of the United States.

Investing and Financing Activities

Capital expenditures for the first nine months were $31.5 million in 2020 and $49.2 million in 2019.

In March 2020, the Company purchased, in cash, the primary CirComp GmbH operating facility in Germany for $5.8 million.

This resulted in the recording of land and building assets, and the removal of the Right of use assets and associated lease liabilities that were included in the acquisition-date balance sheet, and is reflected as Principal payments on finance lease liabilities in Financing activities in the Consolidated Statements of Cash Flow.

Capital expenditures for the first three months were $12.5 million in 2021 and $12.8 million in 2020.

Dividends have been declared each quarter since the fourth quarter of 2001.

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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.

The majority of our cash balance at September 30, 2020 was held by non-U.S.

Our subsidiaries outside of the United States may also maintain working capital lines with local banks, but borrowings under such local facilities tend to be insignificant.

The majority of our cash balance at March 31, 2021 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, 2020.

We were in compliance with all debt covenants as of March 31, 2021.

On October 27, 2020, we entered into a $700 million unsecured Four-Year Revolving Credit Facility Agreement (the “Credit Agreement”) which amended and restated the prior amended and restated $685 million Five-Year Revolving Credit Facility Agreement, which we had entered into on November 7, 2017 (the “Prior Agreement”).

The Credit Agreement matures on October 27, 2024.

Under the Prior Agreement, $418 million of borrowings were outstanding as of September 30, 2020.

The applicable interest rate for borrowings was LIBOR plus a spread, based on our leverage ratio at the time of borrowing, with an option to borrow at base rate.

At the time of the last borrowing on September 28, 2020, the spread was 1.375%.

Under the Prior Agreement, the spread was based on a pricing grid, which ranged from 1.250% to 1.750% and, after giving effect to the amendments, the applicable spread under the Credit Agreement increased by 25 basis points, now ranging from 1.50% to 2.00%, in each case, based on our leverage ratio.

Under the Prior Agreement, we were required to maintain a leverage ratio (as defined in the agreement) of not greater than 3.50 to 1.00 and minimum interest coverage (as defined) of 3.00 to 1.00.

Under the prior agreement, our leverage ratio was 1.50 to 1.00 and our interest coverage ratio was 14.62 to 1.00 as of September 30, 2020 and, at that date, we would have been able to borrow an additional $267 million.

Under the Credit Agreement, $384 million of borrowings were outstanding as of March 31, 2021.

The applicable interest rate for borrowings was LIBOR plus a spread, based on our leverage ratio at the time of borrowing.

At the time of the last borrowing on March 31, 2021, the spread was 1.625%.

The spread was based on a pricing grid, which ranged from 1.500% to 2.000%, based on our leverage ratio.

Based on our maximum leverage ratio and our Consolidated EBITDA, and without modification to any other credit agreements, as of March 31, 2021, we would have been able to borrow an additional $316 million under the Agreement.

For more information, see Note 14 to the Consolidated Financial Statements in Item 1, which is incorporated herein by reference.

Off-Balance Sheet Arrangements

As of September 30, 2020, we have no off-balance sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.

As of March 31, 2021, we have no off-balance sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.

Recent Accounting Pronouncements

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Such items are provided because management believes that they provide additional useful information to investors regarding the Company’s operational performance.

Presenting sales and increases or decreases in Net sales, after currency effects are excluded, can give management and investors insight into underlying sales trends.

Presenting Net sales and increases or decreases in Net sales, after currency effects are excluded, can give management and investors insight into underlying sales trends.

EBITDA, Adjusted EBITDA and Adjusted EPS are performance measures that relate to the Company’s continuing operations.

EBITDA, or net income with interest, taxes, depreciation, and amortization added back, is a common indicator of financial performance used, among other things, to analyze and compare core profitability between companies and industries because it eliminates effects due to differences in financing, asset bases and taxes.

An understanding of the impact in a particular quarter of specific restructuring costs, acquisition and related retention agreement expenses, former CEO severance costs, integration expenses, currency revaluation, pension settlement/curtailment charges, inventory write-offs associated with discontinued businesses, or other gains and losses, on net income (absolute as well as on a per-share basis), operating income or EBITDA can give management and investors additional insight into core financial performance, especially when compared to quarters in which such items had a greater or lesser effect, or no effect.

Restructuring expenses in the MC segment, while frequent in recent years, are reflective of significant reductions in manufacturing capacity and associated headcount in response to shifting markets, and not of the profitability of the business going forward as restructured.

An understanding of the impact in a particular quarter of specific restructuring costs, former CEO termination costs, acquisition/integrations costs, currency revaluation, pension settlement/curtailment charges, inventory write-offs associated with discontinued businesses, or other gains and losses, on net income (absolute as well as on a per-share basis), operating income or EBITDA can give management and investors additional insight into core financial performance, especially when compared to quarters in which such items had a greater or lesser effect, or no effect.

Restructuring expenses, while frequent in recent years, are reflective of significant reductions in manufacturing capacity and associated headcount in response to shifting markets, and not of the profitability of the business going forward as restructured.

Net sales, or percent changes in Net sales, excluding currency rate effects, are calculated by converting amounts reported in local currencies into U.S.

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Adjusted EBITDA is calculated by:

adding to EBITDA costs associated with restructuring, former CEO severance costs, inventory write-offs associated with discontinued businesses;

adding to EBITDA costs associated with restructuring, former CEO termination costs, and inventory write-offs associated with discontinued businesses;

adding charges and credits related to pension plan settlements and curtailments;

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subtracting (or adding) gains (or losses) from the sale of buildings or investments;

subtracting insurance recovery gains in excess of previously recorded losses;

adding acquisition and related retention agreement expenses;

adding integration expenses and subtracting (or adding) Income (or loss) attributable to the non-controlling interest in Albany Safran Composites (ASC).

Adjusted earnings per share is calculated by adding to (or subtracting from) net income attributable to the Company per share, on an after-tax basis:

adding acquisition/integration costs and subtracting (or adding) Income (or loss) attributable to the non-controlling interest in Albany Safran Composites (ASC).

Adjusted earnings per share (Adjusted EPS) is calculated by adding to (or subtracting from) net income attributable to the Company per share, on an after-tax basis:

restructuring charges;

former CEO severance costs;

inventory write-offs associated with discontinued businesses;

pension settlement/curtailments;

the effect of changes in the income tax rate;

charges and credits related to pension settlements and curtailments;

foreign currency revaluation losses (or gains);

acquisition-related expenses;

and losses (or gains) from the sale of investments.

and acquisition-related expenses.

EBITDA, Adjusted EBITDA, and Adjusted earnings per share as defined by the Company may not be similar to similarly named measures of other companies.

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

Three months ended September 30, 2020

Three months ended March 31, 2021

(in thousands) Machine Clothing Albany Engineered

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EBITDA (non-GAAP) 55,485 15,803 (11,188) 60,100

Restructuring expenses 384 358 (32) 710

Restructuring expenses, net (69) 89 32 52

Foreign currency revaluation (gains)/losses (492) 575 167 250

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Adjusted EBITDA (non-GAAP) $ 54,924 $ 16,735 $ (10,989) $ 60,670

Three months ended September 30, 2019

(in thousands) Machine Clothing Albany Engineered

Composites Corporate expenses

and other Total Company

Operating income/(loss) (GAAP) $ 51,906 $ 17,345 $ (13,573) $ 55,678

Interest, taxes, other income/(expense) — — (15,553) (15,553)

Net income/(loss) (GAAP) 51,906 17,345 (29,126) 40,125

Interest expense, net — — 3,987 3,987

Income tax expense — — 13,194 13,194

Depreciation and amortization expense 5,149 11,087 1,018 17,254

EBITDA (non-GAAP) 57,055 28,432 (10,927) 74,560

Restructuring expenses (211) (33) — (244)

Foreign currency revaluation (gains)/losses (1,021) 341 (2,026) (2,706)

Pre-tax (income) attributable to noncontrolling interest — (161) — (161)

Adjusted EBITDA (non-GAAP) $ 55,823 $ 28,579 $ (12,953) $ 71,449

Nine months ended September 30, 2020

Three months ended March 31, 2020

(in thousands) Machine Clothing Albany Engineered

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EBITDA (non-GAAP) 52,262 19,608 (29,775) 42,095

Restructuring expenses 1,414 2,606 169 4,189

Restructuring expenses, net 642 — — 642

Foreign currency revaluation (gains)/losses (3,661) 697 14,830 11,866

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Acquisition/integration costs — 298 — 298

Pre-tax loss attributable to noncontrolling interest — 1,412 — 1,412

Adjusted EBITDA (non-GAAP) $ 164,709 $ 64,327 $ (34,400) $ 194,636

Nine months ended September 30, 2019

(in thousands) Machine Clothing Albany Engineered

Composites Corporate expenses

and other Total Company

Operating income/(loss) (GAAP) $ 145,688 $ 44,598 $ (40,290) $ 149,996

Interest, taxes, other income/(expense) — — (46,204) (46,204)

Net income/(loss) (GAAP) 145,688 44,598 (86,494) 103,792

Interest expense, net — — 13,035 13,035

Income tax expense — — 35,075 35,075

Depreciation and amortization expense 16,674 33,059 3,231 52,964

EBITDA (non-GAAP) 162,362 77,657 (35,153) 204,866

Restructuring expenses 1,125 18 (4) 1,139

Foreign currency revaluation (gains)/losses (734) 655 (3,716) (3,795)

Pre-tax (income) attributable to noncontrolling interest — (722) — (722)

Pre-tax expense attributable to noncontrolling interest — 1,492 — 1,492

Adjusted EBITDA (non-GAAP) $ 49,243 $ 22,095 $ (12,203) $ 59,135

The Company discloses certain income and expense items on a per-share basis.

The Company believes that such disclosures provide important insight into underlying quarterly earnings and are financial performance metrics commonly used by investors.

The Company calculates the quarterly per-share amount for items included in continuing operations by using an income tax rate based on either the tax rates in specific countries or the estimated tax rate applied to total company results.

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 quarterly per-share amount for items included in continuing operations by using the income tax rate based on either the tax rates in specific countries or the estimated tax rate applied to total company results.

The after-tax amount is then divided by the weighted-average number of shares outstanding for each period.

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

Three months ended September 30, 2020

Three months ended March 31, 2021

(in thousands, except per share amounts) Pre tax

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Effect Per share

Restructuring expenses $ 710 $ 232 $ 478 $ 0.01

Restructuring expenses, net $ 52 $ 15 $ 37 $ 0.00

Foreign currency revaluation (gains)/losses 250 (135) 385 0.01

Acquisition/integration costs 314 94 220 0.01

Three months ended September 30, 2019

(in thousands, except per share amounts) Pre tax

Effect After tax

Effect Per share

Restructuring expenses $ (244) $ (67) $ (177) $ (0.01)

Foreign currency revaluation (gains)/losses (2,706) (744) (1,962) (0.06)

Nine months ended September 30, 2020

Three months ended March 31, 2020

(in thousands, except per share amounts) Pre tax

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Effect Per share

Restructuring expenses $ 4,189 $ 1,377 $ 2,812 $ 0.08

Restructuring expenses, net $ 642 $ 192 $ 450 $ 0.01

Foreign currency revaluation (gains)/losses (a) 11,866 (1,545) 13,411 0.42

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Acquisition/integration costs 298 89 209 0.01

Nine months ended September 30, 2019

(in thousands, except per share amounts) Pre tax

Effect After tax

Effect Per share

Restructuring expenses $ 1,139 $ 330 $ 809 $ 0.02

Foreign currency revaluation (gains)/losses (3,795) (1,073) (2,722) (0.08)

(a) In Q1 2020, the company recorded losses of approximately $17 million in jurisdictions where it cannot record a tax benefit from the losses, which results in an unusual relationship between the pre-tax and after-tax amounts.

The following table contains the calculation of Adjusted Earnings per share:

Three months ended September 30, Nine months ended September 30,

(a) In Q1 2020, the company incurred losses of approximately $17 million in jurisdictions where it cannot record a benefit from the losses, which results in an unusual relationship between the pre-tax and after-tax amounts.

The following table contains the calculation of Adjusted EPS:

Three months ended March 31,

Per share amounts (Basic)

2020 2019 2020 2019

Earnings per share (GAAP) $ 0.85 $ 0.28

$ 0.92 $ 1.24 $ 2.20 $ 3.20

Adjustments, after tax:

Restructuring expenses 0.01 (0.01) 0.08 0.02

Restructuring expenses, net — 0.01

Foreign currency revaluation (gains)/losses 0.01 0.42

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Acquisition/integration costs 0.01 0.01

Adjusted Earnings per share

$ 0.96 $ 1.17 $ 2.83 $ 3.14

Adjusted Earnings per share (non-GAAP) $ 0.87 $ 0.78

Net debt is, in the opinion of the Company, helpful to investors wishing to understand what the Company’s debt position would be if all available cash were applied to pay down indebtedness.

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(in thousands)

September 30, 2020 June 30, 2020 March 31, 2020

December 31, 2019

March 31, 2021 December 31, 2020 March 31, 2020

Current maturities of long-term debt $ 2 $ 9 $ 20

$ 12 $ 17 $ 20 $ 20

Long-term debt

384,000 398,000 491,002

418,012 435,017 491,022 424,029

Total debt 384,002 398,009 491,022

Cash and cash equivalents

237,871 241,316 222,680

$ 202,708 $ 230,980 $ 268,342 $ 228,489

Net debt (non GAAP) $ 146,131 $ 156,693 $ 268,342

Quantitative and Qualitative Disclosures about Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis