ALBANY INTERNATIONAL CORP /DE/ 10-Q

ITEM 1. FINANCIAL STATEMENTS ALBANY INTERNATIONAL CORP. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited) Three Months Ended March 31, 2021 2020 Net sales $ 222,362 $ 235,764 Cost of goods sold 133,816 146,292 Gross profit 88,546 89,472 Selling, general, and administrative expenses 37,195 40,106 Technical and research expenses 9,481 9,130 Restructuring expenses, net 52 642 Operating income 41,818 39,594 Interest expense, net 3,569 3,977 Other expense/(income), net 600 15,569 Income before income taxes 37,649 20,048 Income tax expense 10,040 12,454 Net income 27,609 7,594 Net income/(loss) attributable to the noncontrolling interest 27 ( 1,515 ) Net income attributable to the Company $ 27,582 $ 9,109 Earnings per share attributable to Company shareholders - Basic $ 0.85 $ 0.28 Earnings per share attributable to Company shareholders - Diluted $ 0.85 $ 0.28 Shares of the Company used in computing earnings per share: Basic 32,352 32,312 Diluted 32,401 32,320 Dividends declared per share, Class A and Class B $ 0.20 $ 0.19 The accompanying notes are an integral part of the consolidated financial statements 3 Index ALBANY INTERNATIONAL CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (in thousands) (unaudited) Three Months Ended March 31, 2021 2020 Net income $ 27,609 $ 7,594 Other comprehensive income/(loss), before tax: Foreign currency translation and other adjustments ( 15,439 ) ( 24,955 ) Amortization of pension liability adjustments: Prior service credit ( 1,119 ) ( 1,114 ) Net actuarial loss 1,109 1,244 Payments and amortization related to interest rate swaps included in earnings 1,476 407 Derivative valuation adjustment ( 478 ) ( 10,764 ) Income taxes related to items of other comprehensive income/(loss): Amortization of prior service cost 336 279 Amortization of net actuarial loss ( 333 ) ( 311 ) Payments and amortization related to interest rate swaps included in earnings ( 381 ) ( 104 ) Derivative valuation adjustment 135 2,753 Comprehensive income/(loss) 12,915 ( 24,971 ) Comprehensive income/(loss) attributable to the noncontrolling interest ( 183 ) ( 1,406 ) Comprehensive income/(loss) attributable to the Company $ 13,098 $ ( 23,565 ) The accompanying notes are an integral part of the consolidated financial statements 4 Index ALBANY INTERNATIONAL CORP. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited) March 31, 2021 December 31, 2020 ASSETS Cash and cash equivalents $ 237,871 $ 241,316 Accounts receivable, net 188,066 188,423 Contract assets, net 121,767 139,289 Inventories 117,022 110,478 Income taxes prepaid and receivable 7,362 5,940 Prepaid expenses and other current assets 32,306 31,830 Total current assets $ 704,394 $ 717,276 Property, plant and equipment, net 435,976 448,554 Intangibles, net 44,675 46,869 Goodwill 184,374 187,553 Deferred income taxes 33,436 38,757 Noncurrent receivables, net 34,945 36,265 Other assets 74,366 74,662 Total assets $ 1,512,166 $ 1,549,936 LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 54,533 $ 49,173 Accrued liabilities 104,988 125,459 Current maturities of long-term debt 2 9 Income taxes payable 7,439 16,222 Total current liabilities 166,962 190,863 Long-term debt 384,000 398,000 Other noncurrent liabilities 124,167 130,424 Deferred taxes and other liabilities 10,826 10,784 Total liabilities 685,955 730,071 SHAREHOLDERS' EQUITY Preferred stock, par value $ 5.00 per share; authorized 2,000,000 shares; none issued — — Class A Common Stock, par value $ .001 per share; authorized 100,000,000 shares; 39,141,483 issued in 2021 and 39,115,405 in 2020 39 39 Class B Common Stock, par value $ .001 per share; authorized 25,000,000 shares; issued and outstanding 1,617,998 in 2021 and 2020 2 2 Additional paid in capital 433,811 433,696 Retained earnings 791,854 770,746 Accumulated items of other comprehensive income: Translation adjustments ( 99,158 ) ( 83,203 ) Pension and postretirement liability adjustments ( 39,152 ) ( 39,661 ) Derivative valuation adjustment ( 8,792 ) ( 9,544 ) Treasury stock (Class A), at cost; 8,391,011 shares in 2021 and 8,391,011 shares in 2020 ( 256,009 ) ( 256,009 ) Total Company shareholders' equity 822,595 816,066 Noncontrolling interest 3,616 3,799 Total equity 826,211 819,865 Total liabilities and shareholders' equity $ 1,512,166 $ 1,549,936 The accompanying notes are an integral part of the consolidated financial statements 5 Index ALBANY INTERNATIONAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three Months Ended March 31, 2021 2020 OPERATING ACTIVITIES Net income $ 27,609 $ 7,594 Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Depreciation 16,589 15,506 Amortization 2,293 2,564 Change in deferred taxes and other liabilities 4,442 5,817 Impairment of property, plant and equipment 185 197 Non-cash interest expense 45 151 Compensation and benefits paid or payable in Class A Common Stock ( 13 ) ( 682 ) Provision for credit losses from uncollected receivables and contract assets ( 110 ) 1,655 Foreign currency remeasurement (gain)/loss on intercompany loans ( 308 ) 15,387 Fair value adjustment on foreign currency options 139 64 Changes in operating assets and liabilities that provided/(used) cash: Accounts receivable ( 3,236 ) ( 3,394 ) Contract assets 16,104 ( 8,840 ) Inventories ( 8,563 ) ( 19,750 ) Prepaid expenses and other current assets ( 899 ) ( 2,156 ) Income taxes prepaid and receivable ( 1,465 ) ( 237 ) Accounts payable 9,188 ( 1,046 ) Accrued liabilities ( 19,485 ) ( 15,072 ) Income taxes payable ( 8,077 ) ( 3,571 ) Noncurrent receivables 488 ( 231 ) Other noncurrent liabilities ( 2,097 ) ( 60 ) Other, net 857 ( 534 ) Net cash provided by/(used in) operating activities 33,686 ( 6,638 ) INVESTING ACTIVITIES Purchases of property, plant and equipment ( 12,534 ) ( 12,759 ) Purchased software ( 2 ) ( 46 ) Net cash used in investing activities ( 12,536 ) ( 12,805 ) FINANCING ACTIVITIES Proceeds from borrowings 8,000 70,000 Principal payments on debt ( 22,007 ) ( 3,006 ) Principal payments on finance lease liabilities ( 349 ) ( 6,134 ) Taxes paid in lieu of share issuance ( 998 ) ( 490 ) Proceeds from options exercised 128 — Dividends paid ( 6,468 ) ( 6,139 ) 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 ) (Decrease)/increase in cash and cash equivalents ( 3,445 ) 27,140 Cash and cash equivalents at beginning of period 241,316 195,540 Cash and cash equivalents at end of period $ 237,871 $ 222,680 The accompanying notes are an integral part of the consolidated financial statements 6 Index ALBANY INTERNATIONAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Significant Accounting Policies Basis of Presentation In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of results for such periods. Albany International Corp. (Albany, the Registrant, the Company, we, us, or our) consolidates the financial results of its subsidiaries for all periods presented. The results for any interim period are not necessarily indicative of results for the full year. The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in Albany International Corp.’s Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with Albany International Corp.’s Annual Report on Form 10-K for the year ended December 31, 2020. 2. Reportable Segments and Revenue Recognition In accordance with applicable disclosure guidance for enterprise segments and related information, the internal organization that is used by management for making operating decisions and assessing performance is used as the basis for our reportable segments. The Machine Clothing (“MC”) segment supplies permeable and impermeable belts used in the manufacture of paper, paperboard, tissue and towel, nonwovens, fiber cement and several other industrial applications. We sell our MC products directly to customer end-users in countries across the globe. Our products, manufacturing processes, and distribution channels for MC are substantially the same in each region of the world in which we operate. We design, manufacture, and market paper machine clothing (used in the manufacturing of paper, paperboard, tissue and towel) for each section of the paper machine and for every grade of paper. Paper machine clothing products are customized, consumable products of technologically sophisticated design that utilize polymeric materials in a complex structure. The Albany Engineered Composites (“AEC”) segment, including Albany Safran Composites, LLC (“ASC”), in which our customer SAFRAN Group (“Safran”) owns a 10 percent noncontrolling interest, provides highly engineered, advanced composite structures to customers in the commercial and defense aerospace industries. AEC’s largest program relates to CFM International’s LEAP engine. Under this program, AEC through ASC, is the exclusive supplier of advanced composite fan blades and cases under a long-term supply contract. AEC net sales to Safran were $ 27.7 million and $ 38.0 million in the first three months of 2021 and 2020, respectively. The total of Accounts receivable, Contract assets and Noncurrent receivables due from Safran amounted to $ 107.7 million and $ 127.1 million as of March 31, 2021 and December 31, 2020, respectively. Other significant programs by AEC include the F-35, Boeing 787, Sikorsky CH-53K and JASSM, as well as the fan case for the GE9X engine. In 2020, approximately 46 percent of AEC sales were related to U.S. government contracts or programs. 7 Index The following tables show data by reportable segment, reconciled to consolidated totals included in the financial statements: Three months ended March 31, (in thousands) 2021 2020 Net sales Machine Clothing $ 148,206 $ 136,602 Albany Engineered Composites 74,156 99,162 Consolidated total $ 222,362 $ 235,764 Operating income/(loss) Machine Clothing $ 50,363 $ 47,175 Albany Engineered Composites 2,938 7,623 Corporate expenses ( 11,483 ) ( 15,204 ) Operating income $ 41,818 $ 39,594 Reconciling items: Interest income ( 529 ) ( 447 ) Interest expense 4,098 4,424 Other expense/(income), net 600 15,569 Income before income taxes $ 37,649 $ 20,048 There were no material changes to total assets of the reportable segments in the first three months of 2021. The table below presents restructuring costs by reportable segment (also see Note 4): Three months ended March 31, (in thousands) 2021 2020 Machine Clothing $ ( 69 ) $ 642 Albany Engineered Composites 89 — Corporate expenses 32 — Total $ 52 $ 642 Products and services provided under long-term contracts represent a significant portion of sales in the Albany Engineered Composites segment and we account for these contracts using the percentage of completion (actual cost to estimated cost) method. That method requires significant judgment and estimation, which could be considerably different if the underlying circumstances were to change. When adjustments in estimated contract revenues or costs are required, any changes from prior estimates are included in earnings in the period the change occurs. 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. 8 Index We disaggregate revenue earned from contracts with customers for each of our business segments and product groups based on the timing of revenue recognition, and groupings used for internal review purposes. The following table disaggregates revenue for each product group by timing of revenue recognition: Three months ended March 31, 2021 (in thousands) Point in Time Revenue Recognition Over Time Revenue Recognition Total Machine Clothing $ 147,341 $ 865 $ 148,206 Albany Engineered Composites ASC — 27,084 27,084 Other AEC 3,880 43,192 47,072 Total Albany Engineered Composites 3,880 70,276 74,156 Total revenue $ 151,221 $ 71,141 $ 222,362 Three months ended March 31, 2020 (in thousands) Point in Time Revenue Recognition Over Time Revenue Recognition Total Machine Clothing $ 135,754 $ 848 $ 136,602 Albany Engineered Composites ASC — 37,894 37,894 Other AEC 6,320 54,948 61,268 Total Albany Engineered Composites 6,320 92,842 99,162 Total revenue $ 142,074 $ 93,690 $ 235,764 The following table disaggregates MC segment revenue by significant product groupings (paper machine clothing (PMC) and engineered fabrics), and, for PMC, the geographical region to which the paper machine clothing was sold: Three months ended March 31, (in thousands) 2021 2020 Americas PMC $ 73,302 $ 73,677 Eurasia PMC 55,143 45,131 Engineered Fabrics 19,761 17,794 Total Machine Clothing Net sales $ 148,206 $ 136,602 As permitted by ASC 606, we only disclose the value of unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Contracts in the MC segment are generally for periods of less than a year. Most contracts in the AEC segment are short duration firm-fixed-price orders representing performance obligations with an original maturity of less than one year. Remaining performance obligations on contracts that had an original duration of greater than one year totaled $ 76 million and $ 82 million as of March 31, 2021 and 2020, respectively, and related primarily to firm contracts in the AEC segment. Of the remaining performance obligations as of March 31, 2021, we expect to recognize as revenue approximately $ 51 million during 2021 and the remainder during 2022. 9 Index 3. Pensions and Other Postretirement Benefit Plans The Company has defined benefit pension plans covering certain U.S. and non-U.S. employees. The Company also provides certain postretirement benefits to retired employees in the U.S. and Canada. The Company accrues the cost of providing these benefits during the active service period of the employees. The composition of the net periodic benefit cost for the three months ended March 31, 2021 and 2020, was as follows: Pension plans Other postretirement benefits (in thousands) 2021 2020 2021 2020 Components of net periodic benefit cost: Service cost $ 545 $ 580 $ 33 $ 50 Interest cost 1,338 1,550 276 428 Expected return on assets ( 1,606 ) ( 1,723 ) — — Amortization of prior service cost/(credit) 3 8 ( 1,122 ) ( 1,122 ) Amortization of net actuarial loss 544 596 565 648 Net periodic benefit cost $ 824 $ 1,011 $ ( 248 ) $ 4 The amount of net periodic benefit cost is determined at the beginning of each year and generally only varies from quarter to quarter when a significant event occurs, such as a curtailment or a settlement. There were no such events in the first three months of 2021 or 2020. Service cost for defined benefit pension and postretirement plans are reported in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net periodic benefit cost are included in the line item Other (income)/expense, net in the Consolidated Statements of Income. 4. Restructuring Restructuring costs in the first quarter of 2021 were not significant while Machine Clothing restructuring charges for the first three months of 2020 principally related to discontinued operations at its MC production facility in Sélestat, France. Since 2017, we have recorded $ 13.9 million of restructuring charges related to this action. There were no charges related to the impairment of assets for the periods presented. The following table summarizes charges reported in the Consolidated Statements of Income under “Restructuring expenses, net”: Three months ended March 31, (in thousands) 2021 2020 Machine Clothing $ ( 69 ) $ 642 Albany Engineered Composites 89 — Corporate expenses 32 — Total $ 52 $ 642 The table below presents the year-to-date changes in restructuring liabilities for 2021 and 2020, all of which are related to termination and other costs: (in thousands) December 31, 2020 Restructuring charges accrued Payments Currency translation /other March 31, 2021 Total termination and other costs $ 2,195 $ 52 $ ( 1,216 ) $ ( 15 ) $ 1,016 (in thousands) December 31, 2019 Restructuring charges accrued Payments Currency translation /other March 31, 2019 Total termination and other costs $ 2,042 $ 642 $ ( 731 ) $ ( 92 ) $ 1,861 We expect that approximately $ 0.8 million of Accrued liabilities for restructuring at March 31, 2021 will be paid within one year and approximately $ 0.2 million will be paid the following year. 10 Index 5. Other (Income)/Expense, net The components of Other (Income)/Expense, net are: Three months ended March 31, (in thousands) 2021 2020 Currency transaction (gains)/losses $ 166 $ 14,834 Bank fees and amortization of debt issuance costs 107 75 Components of net periodic pension and postretirement cost other than service ( 2 ) 385 Other 329 275 Total $ 600 $ 15,569 Other (income)/expense, net includes losses related to the revaluation of nonfunctional-currency balances of $ 0.2 million for the first three months of 2021, compared to losses of $ 14.8 million for the first three months of 2020, which principally resulted from an intercompany demand loan payable by a Mexican subsidiary. As a result of changes in business conditions that occurred in the first quarter of 2020, loan repayments on that intercompany loan are not expected in the foreseeable future and, beginning April 1, 2020, revaluation effects are recorded in Other comprehensive income. 6. Income Taxes The following table presents components of income tax expense for the three months ended March 31, 2021 and 2020: Three months ended March 31, (in thousands, except percentages) 2021 2020 Income tax based on income from continuing operations, at estimated tax rates of 30.1 % and 36.5 %, respectively $ 11,332 $ 7,309 Income tax before discrete items 11,332 7,309 Discrete tax expense: Exercise of U.S. stock options ( 142 ) — Adjustments to prior period tax liabilities ( 1,443 ) ( 112 ) Provision for/resolution of tax audits and contingencies, net 278 ( 244 ) Out-of-period adjustments — 1,830 Tax effect of non-deductible foreign exchange loss on intercompany loan — 3,668 Other 15 3 Total income tax expense $ 10,040 $ 12,454 The first-quarter estimated annual effective tax rate on continuing operations was 30.1 percent in 2021, compared to 36.5 percent for the same period in 2020. Income tax expense for the quarter was computed in accordance with ASC 740-270, Income Taxes – Interim Reporting. Under this method, loss jurisdictions, which cannot recognize a tax benefit with regard to their generated losses, are excluded from the annual effective tax rate (AETR) calculation and their taxes will be recorded discretely in each quarter. The Company’s 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, including changes in losses and income from excluded loss jurisdictions, and the impact of discrete items in the respective quarter. The decrease in the estimated Q1 2021 income tax rate was primarily driven by a decrease in losses in a foreign jurisdiction that were excluded in calculating the quarterly income tax provision. The Company records the residual U.S. and foreign taxes on certain amounts of foreign earnings that have been targeted for repatriation to the U.S. These amounts are not considered to be indefinitely reinvested, and the Company accrued for the tax cost on these earnings to the extent they cannot be repatriated in a tax-free manner. The Company has targeted for repatriation $ 203 million of current year and prior year earnings of the Company’s foreign 11 Index operations. If these earnings were distributed, the Company would be subject to foreign withholding taxes of $ 3.4 million and state income taxes of $ 2.0 million, which have already been recorded. The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including major jurisdictions such as the United States, Brazil, Canada, France, Germany, Italy, Mexico, and Switzerland. The open tax years in these jurisdictions range from 2015 to 2021 . The Company is currently under audit in U.S and certain non-U.S. tax jurisdictions. In the first quarter of 2021, the Company recorded a net tax benefit of $ 1.4 million related to a U.S. adjustment of prior period liabilities and, additionally, the Company recorded an expense of $ 0.3 million related to the establishment of a foreign uncertain tax position. In the first quarter of 2020, the Company recorded a $ 1.8 million out-of-period charge related to developments in ongoing tax audits, which resulted in a corresponding decrease in deferred tax assets. 7. Earnings Per Share The amounts used in computing earnings per share and the weighted average number of shares of potentially dilutive securities are as follows: Three months ended March 31, (in thousands, except market price and earnings per share) 2021 2020 Net income attributable to the Company $ 27,582 $ 9,109 Weighted average number of shares: Weighted average number of shares used in calculating basic net income per share 32,352 32,312 Effect of dilutive stock-based compensation plans: Stock options 3 8 RSU shares 46 — Weighted average number of shares used in calculating diluted net income per share 32,401 32,320 Average market price of common stock used for calculation of dilutive shares $ 79.30 $ 65.47 Net income attributable to the Company per share: Basic $ 0.85 $ 0.28 Diluted $ 0.85 $ 0.28 8. Accumulated Other Comprehensive Income (AOCI) The table below presents changes in the components of AOCI for the period December 31, 2020 to March 31, 2021: 12 Index (in thousands) Translation adjustments Pension and postretirement liability adjustments Derivative valuation adjustment Total Other Comprehensive Income December 31, 2020 $ ( 83,203 ) $ ( 39,661 ) $ ( 9,544 ) $ ( 132,408 ) Other comprehensive income/(loss) before reclassifications, net of tax ( 15,955 ) 516 ( 343 ) ( 15,782 ) Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax — — 1,095 1,095 Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax — ( 7 ) — ( 7 ) Net current period other comprehensive income ( 15,955 ) 509 752 ( 14,694 ) March 31, 2021 $ ( 99,158 ) $ ( 39,152 ) $ ( 8,792 ) $ ( 147,102 ) The table below presents changes in the components of AOCI for the period December 31, 2019 to March 31, 2020: (in thousands) Translation adjustments Pension and postretirement liability adjustments Derivative valuation adjustment Total Other Comprehensive Income December 31, 2019 $ ( 122,852 ) $ ( 49,994 ) $ ( 3,135 ) $ ( 175,981 ) Other comprehensive income/(loss) before reclassifications, net of tax ( 25,747 ) 792 ( 8,011 ) ( 32,966 ) Interest expense related to swaps reclassified to the Consolidated Statements of Income, net of tax — — 303 303 Pension and postretirement liability adjustments reclassified to Consolidated Statements of Income, net of tax — 98 — 98 Net current period other comprehensive income ( 25,747 ) 890 ( 7,708 ) ( 32,565 ) March 31, 2020 $ ( 148,599 ) $ ( 49,104 ) $ ( 10,843 ) $ ( 208,546 ) The components of our Accumulated Other Comprehensive Income that are reclassified to the Statement of Income relate to our pension and postretirement plans and interest rate swaps. The table below presents the expense/(income) amounts reclassified from AOCI, and the line items of the Statement of Income that were affected for the three months ended March 31, 2021 and 2020: Three months ended March 31, (in thousands) 2021 2020 Pretax Derivative valuation reclassified from Accumulated Other Comprehensive Income: Expense/(income) related to interest rate swaps included in Income before taxes (a) $ 1,476 $ 407 Income tax effect ( 381 ) ( 104 ) Effect on net income due to items reclassified from Accumulated Other Comprehensive Income $ 1,095 $ 303 Pretax pension and postretirement liabilities reclassified from Accumulated Other Comprehensive Income: Amortization of prior service credit ( 1,119 ) ( 1,114 ) Amortization of net actuarial loss 1,109 1,244 Total pretax amount reclassified (b) ( 10 ) 130 Income tax effect 3 ( 32 ) Effect on net income due to items reclassified from Accumulated Other Comprehensive Income $ ( 7 ) $ 98 13 Index (a) Included in Interest expense, net are payments related to the interest rate swap agreements and amortization of swap buyouts (see Notes 14 and 15). (b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 3). 9. Noncontrolling Interest Effective October 31, 2013, Safran S.A. (Safran) acquired a 10 percent equity interest in a new Albany subsidiary, Albany Safran Composites, LLC (ASC). The table below presents a reconciliation of income attributable to the noncontrolling interest and noncontrolling equity in the Company’s subsidiary Albany Safran Composites, LLC: Three months ended March 31, (in thousands, except percentages) 2021 2020 Net income/(loss) of Albany Safran Composites (ASC) $ 585 $ ( 14,849 ) Less: Return attributable to the Company's preferred holding 318 302 Net /income/(loss) of ASC available for common ownership $ 267 $ ( 15,151 ) Ownership percentage of noncontrolling shareholder 10 % 10 % Net /income/(loss) attributable to the noncontrolling interest $ 27 $ ( 1,515 ) Noncontrolling interest, beginning of year $ 3,799 $ 4,006 Net income/(loss) attributable to noncontrolling interest 27 ( 1,515 ) Changes in other comprehensive income attributable to the noncontrolling interest ( 210 ) 109 Noncontrolling interest, end of interim period $ 3,616 $ 2,600 10. Accounts Receivable Accounts receivable includes trade receivables. In connection with certain sales in Asia, the Company accepts a bank promissory note as customer payment. The notes may be presented for payment at maturity, which is less than one year. As of March 31, 2021 and December 31, 2020, Accounts receivable consisted of the following: (in thousands) March 31, 2021 December 31, 2020 Trade and other accounts receivable $ 165,005 $ 167,370 Bank promissory notes 26,837 24,860 Allowance for expected credit losses ( 3,776 ) ( 3,807 ) Accounts receivable, net $ 188,066 $ 188,423 The Company has Noncurrent receivables in the AEC segment that represent revenue earned, which has extended payment terms. The Noncurrent receivables will be invoiced to the customer over a 10-year period, which began in 2020. As of March 31, 2021 and December 31, 2020, Noncurrent receivables consisted of the following: (in thousands) March 31, 2021 December 31, 2020 Noncurrent receivables $ 35,209 $ 36,539 Allowance for expected credit losses ( 264 ) ( 274 ) Noncurrent receivables, net $ 34,945 $ 36,265 11. Contract Assets and Liabilities Contract assets includes unbilled amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is utilized, and revenue recognized exceeds the amount billed to the customer. Contract assets are transferred to Accounts receivable, net when the entitlement to pay becomes unconditional. Contract liabilities include advance payments and billings in excess of revenue recognized. Contract liabilities are included in Accrued liabilities in the Consolidated Balance Sheets. 14 Index Contract assets and Contract liabilities are reported on the Consolidated Balance Sheets in a net position on a contract-by-contract basis at the end of each reporting period. As of March 31, 2021 and December 31, 2020, Contract assets and Contract liabilities consisted of the following: (in thousands) March 31, 2021 December 31, 2020 Contract assets $ 122,688 $ 140,348 Allowance for expected credit losses ( 921 ) ( 1,059 ) Contract assets, net $ 121,767 $ 139,289 Contract liabilities $ 7,899 $ 8,206 Contract assets decreased $ 17.5 million during the three-month period ended March 31, 2021. The decrease was primarily due to invoicing to customers exceeding revenue recognized for satisfied performance obligations for contracts that were in a contract asset position. There were no impairment losses related to our Contract assets during the three month periods ended March 31, 2021 and March 31, 2020. Contract liabilities decreased $ 0.3 million during the three-month period ended March 31, 2021, primarily due to revenue recognized from satisfied performance obligations exceeding amounts invoiced to customers that were in a contract liability position. Revenue recognized for the three-month periods ended March 31, 2021 and 2020 that was included in the Contract liability balance at the beginning of the year was $ 4.3 million and $ 1.9 million, respectively. 12. Inventories Costs included in inventories are raw materials, labor, supplies and allocable depreciation and overhead. Raw material inventories are valued on an average cost basis. Other inventory cost elements are valued at cost, using the first-in, first-out method. The Company writes down the inventories for estimated obsolescence, and to lower of cost or net realizable value based upon assumptions about future demand and market conditions. If actual demand or market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Once established, the original cost of the inventory less the related write-down represents the new cost basis of such inventories. As of March 31, 2021 and December 31, 2020, Inventories consisted of the following: (in thousands) March 31, 2021 December 31, 2020 Raw materials $ 60,391 $ 57,789 Work in process 41,593 40,416 Finished goods 15,038 12,273 Total inventories $ 117,022 $ 110,478 13. Goodwill and Other Intangible Assets Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. Our reportable segments are consistent with our operating segments. Determining the fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates, and future market conditions, among others. Goodwill and other long-lived assets are reviewed for impairment whenever events, such as significant changes in the business climate, plant closures, changes in product offerings, or other circumstances indicate that the carrying amount may not be recoverable. To determine fair value, we utilize two market-based approaches and an income approach. Under the market-based approaches, we utilize information regarding the Company, as well as publicly available industry information, to determine earnings multiples and sales multiples. Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, 15 Index which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. In the second quarter of 2020, management applied the quantitative assessment approach in performing its annual evaluation of goodwill and concluded that no impairment provision was required. As part of this evaluation, the Company considered projected cash flows and market multiples for the Company’s Machine Clothing reporting unit and three AEC reporting units. Management performed these quantitative assessments and concluded that each reporting unit’s fair value continued to exceed its carrying value. In addition, there were no amounts at risk due to the estimated spread between the fair and carrying values. Accordingly, no impairment charges were recorded. Management is scheduled to perform the 2021 annual goodwill impairment test during the second quarter. 14. Financial Instruments Long-term debt, principally to banks and noteholders, consists of: (in thousands, except interest rates) March 31, 2021 December 31, 2020 Revolving credit agreement with borrowings outstanding at an end of period interest rate of 3.56 % in 2021 and 3.50 % in 2020 (including the effect of interest rate hedging transactions, as described below), due in 2024 $ 384,000 $ 398,000 Other debt, at an average end of period rate of 5.50 % in both 2021 and 2020, due in varying amounts through 2021 2 9 Long-term debt 384,002 398,009 Less: current portion ( 2 ) ( 9 ) Long-term debt, net of current portion $ 384,000 $ 398,000 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”). 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. The Credit Agreement contains customary terms, as well as affirmative covenants, negative covenants and events of default that are comparable to those in the Prior Agreement. The Borrowings are guaranteed by certain of the Company’s subsidiaries. Our ability to borrow additional amounts under the Credit Agreement is conditional upon the absence of any defaults, as well as the absence of any material adverse change (as defined in the Credit Agreement). On November 27, 2017, we terminated our interest rate swap agreements, originally entered into on May 9, 2016, that had effectively fixed the interest rate on $ 300 million of revolving credit borrowings, in order to enter into a new interest rate swap with a greater notional amount, and the same maturity as the Credit Agreement. We received $ 6.3 million when the swap agreements were terminated, which has been fully amortized into interest expense through March 2021. On November 28, 2017, we entered into interest rate swap agreements for the period December 18, 2017 through October 17, 2022. These transactions have the effect of fixing the LIBOR portion of the effective interest rate (before addition of the spread) on $ 350 million of indebtedness drawn under the Credit Agreement at the rate of 2.11 % during the period. Under the terms of these transactions, we pay the fixed rate of 2.11 % and the counterparties pay a floating rate based on the one-month LIBOR rate at each monthly calculation date, which on March 16, 2021 was 0. 11 %, during the swap period. On March 16, 2021, the all-in-rate on the $ 350 million of debt was 3.735 %. These interest rate swaps are accounted for as a hedge of future cash flows, as further described in Note 15. No cash collateral was received or pledged in relation to the swap agreements. 16 Index Under the Credit Agreement, we are currently 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. As of March 31, 2021, our leverage ratio was 1.20 to 1.00 and our interest coverage ratio was 15.72 to 1.00. We may purchase our Common Stock or pay dividends to the extent our leverage ratio remains at or below 3.50 to 1.00, and may make acquisitions with cash, provided our leverage ratio does not exceed the limits noted above. Indebtedness under the Credit Agreement is ranked equally in right of payment to all unsecured senior debt. We were in compliance with all debt covenants as of March 31, 2021. 15. Fair-Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting principles establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Level 3 inputs are unobservable data points for the asset or liability, and include situations in which there is little, if any, market activity for the asset or liability. We had no Level 3 financial assets or liabilities at March 31, 2021, or at December 31, 2020. The following table presents the fair-value hierarchy for our Level 1 and Level 2 financial and non-financial assets and liabilities, which are measured at fair value on a recurring basis: March 31, 2021 December 31, 2020 Quoted prices in active markets Significant other observable inputs Quoted prices in active markets Significant other observable inputs (in thousands) (Level 1) (Level 2) (Level 1) (Level 2) Fair Value Assets: Cash equivalents $ 14,390 $ — $ 17,508 $ — Other Assets: Common stock of unaffiliated foreign public company (a) 762 — 748 — Liabilities: Other noncurrent liabilities: Interest rate swaps — ( 10,918 ) — ( 12,714 ) (a) Original cost basis $ 0.5 million. Cash equivalents include short-term securities that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities. The interest rate swaps are accounted for as hedges of future cash flows. The fair value of our interest rate swaps are derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve, and is included in Other assets and/or Other noncurrent liabilities in the Consolidated Balance Sheets. Unrealized gains and losses on the swaps flow through the caption Derivative valuation adjustment in the Shareholders’ equity section of the Consolidated Balance Sheets. As of March 31, 2021, these interest rate swaps were determined to be highly effective hedges of interest rate cash flow risk. Amounts accumulated in Other comprehensive income are reclassified as Interest expense, net when the related interest payments (that is, the hedged forecasted transactions), and amortization related to the swap buyouts, affect earnings. Interest (income)/expense related to payments under the active swap agreements totaled $ 1.7 million for the three month period ended March 31, 2021, and $ 0.5 million for the three month period ended March 31, 2020. Additionally, non-cash interest income related to the amortization of swap buyouts totaled $ 0.3 million for the three month period ended March 31, 2021 and $ 0.1 million for the three month period ended March 31, 2020. 16. Contingencies Asbestos Litigation 17 Index Albany International Corp. is a defendant in suits brought in various courts in the United States by plaintiffs who allege that they have suffered personal injury as a result of exposure to asbestos-containing paper machine clothing synthetic dryer fabrics marketed during the period from 1967 to 1976 and used in certain paper mills. We were defending 3,617 claims as of March 31, 2021. The following table sets forth the number of claims filed, the number of claims settled, dismissed or otherwise resolved, and the aggregate settlement amount during the periods presented: Year ended December 31, Opening Number of Claims Claims Dismissed, Settled, or Resolved New Claims Closing Number of Claims Amounts Paid (thousands) to Settle or Resolve 2016 3,791 148 102 3,745 $ 758 2017 3,745 105 90 3,730 55 2018 3,730 152 106 3,684 100 2019 3,684 51 75 3,708 25 2020 3,708 152 59 3,615 57 2021 (As of March 31) 3,615 5 7 3,617 $ — We anticipate that additional claims will be filed against the Company and related companies in the future, but are unable to predict the number and timing of such future claims. Due to the fact that information sufficient to meaningfully estimate a range of possible loss of a particular claim is typically not available until late in the discovery process, we do not believe a meaningful estimate can be made regarding the range of possible loss with respect to pending or future claims and therefore are unable to estimate a range of reasonably possible loss in excess of amounts already accrued for pending or future claims. While we believe we have meritorious defenses to these claims, we have settled certain claims for amounts we consider reasonable given the facts and circumstances of each case. Our insurance carrier has defended each case and funded settlements under a standard reservation of rights. As of March 31, 2021, we had resolved, by means of settlement or dismissal, 37,954 claims. The total cost of resolving all claims was $ 10.4 million. Of this amount, almost 100 % was paid by our insurance carrier, who has confirmed that we have approximately $ 140 million of remaining coverage under primary and excess policies that should be available with respect to current and future asbestos claims. The Company’s subsidiary, Brandon Drying Fabrics, Inc. (“Brandon”), is also a separate defendant in many of the asbestos cases in which Albany is named as a defendant, despite never having manufactured any fabrics containing asbestos. While Brandon was defending against 7,709 claims as of March 31, 2021, only twelve claims have been filed against Brandon since January 1, 2012, and a negligible amount of settlement costs have been incurred since 2001. Brandon was acquired by the Company in 1999, and has its own insurance policies covering periods prior to 1999. Since 2004, Brandon’s insurance carriers have covered 100 % of indemnification and defense costs, subject to policy limits and a standard reservation of rights. In some of these asbestos cases, the Company is named both as a direct defendant and as the “successor in interest” to Mount Vernon Mills (“Mount Vernon”). We acquired certain assets from Mount Vernon in 1993. Certain plaintiffs allege injury caused by asbestos-containing products alleged to have been sold by Mount Vernon many years prior to this acquisition. Mount Vernon is contractually obligated to indemnify the Company against any liability arising out of such products. We deny any liability for products sold by Mount Vernon prior to the acquisition of the Mount Vernon assets. Pursuant to its contractual indemnification obligations, Mount Vernon has assumed the defense of these claims. On this basis, we have successfully moved for dismissal in a number of actions. We currently do not anticipate, based on currently available information, that the ultimate resolution of the aforementioned proceedings will have a material adverse effect on the financial position, results of operations, or cash flows of the Company. Although we cannot predict the number and timing of future claims, based on the foregoing factors, the trends in claims filed against us, and available insurance, we also do not currently anticipate that potential future claims will have a material adverse effect on our financial position, results of operations, or cash flows. 18 Index 17. Changes in Shareholders’ Equity The following table summarizes changes in Shareholders’ Equity for the period December 31, 2020 to March 31, 2021: Class A Common Stock Class B Common Stock Additional paid-in capital Retained earnings Accumulated items of other comprehensive income Class A Treasury Stock Noncontrolling Interest Total Equity (in thousands) Shares Amount Shares Amount Shares Amount December 31, 2020 39,115 $ 39 1,618 $ 2 $ 433,696 $ 770,746 $ ( 132,408 ) 8,391 $ ( 256,009 ) $ 3,799 $ 819,865 Net income — — — — — 27,582 — — — 27 27,609 Compensation and benefits paid or payable in shares 20 — — — ( 13 ) — — — — — ( 13 ) Options exercised 6 — — — 128 — — — — — 128 Shares issued to Directors' — — — — — — — — — — — Dividends declared Class A Common Stock, $ 0.20 per share — — — — — ( 6,150 ) — — — — ( 6,150 ) Class B Common Stock, $ 0.20 per share — — — — — ( 324 ) — — — — ( 324 ) Cumulative translation adjustments — — — — — — ( 15,955 ) — — ( 210 ) ( 16,165 ) Pension and postretirement liability adjustments — — — — — — 509 — — — 509 Derivative valuation adjustment — — — — — — 752 — — — 752 March 31, 2021 39,141 $ 39 1,618 $ 2 $ 433,811 $ 791,854 $ ( 147,102 ) 8,391 $ ( 256,009 ) $ 3,616 $ 826,211 The following table summarizes changes in Shareholders’ Equity for the period December 31, 2019 to March 31, 2020: Class A Common Stock Class B Common Stock Additional paid-in capital Retained earnings Accumulated items of other comprehensive income Class A Treasury Stock Noncontrolling Interest Total Equity (in thousands) Shares Amount Shares Amount Shares Amount December 31, 2019 39,099 $ 39 1,618 $ 2 $ 432,518 $ 698,496 $ ( 175,981 ) 8,409 $ ( 256,391 ) $ 4,006 $ 702,689 Adoption of accounting standards (a) — — — — — ( 1,443 ) — — — — ( 1,443 ) Net income — — — — — 9,109 — — — ( 1,515 ) 7,594 Compensation and benefits paid or payable in shares 13 — — — ( 682 ) — — — — — ( 682 ) Options exercised — — — — — — — — — Shares issued to Directors' — — — — — — — — — — — Dividends declared Class A Common Stock, $ 0.19 per share — — — — — ( 5,834 ) — — — — ( 5,834 ) Class B Common Stock, $ 0.19 per share — — — — — ( 307 ) — — — — ( 307 ) Cumulative translation adjustments — — — — — — ( 25,747 ) — — 109 ( 25,638 ) Pension and postretirement liability adjustments — — — — — — 890 — — — 890 Derivative valuation adjustment — — — — — — ( 7,708 ) — — — ( 7,708 ) March 31, 2020 39,112 $ 39 1,618 $ 2 $ 431,836 $ 700,021 $ ( 208,546 ) 8,409 $ ( 256,391 ) $ 2,600 $ 669,561 (a) The Company adopted the provisions of ASC 326, Current Expected Credit Losses (CECL) effective January 1, 2020, which resulted in a decrease to Retained earnings of $ 1.4 million. 18. Recent Accounting Pronouncements In March 2020, an accounting update was issued which provides optional guidance for a limited time to ease the potential accounting burden associated with transitioning away from reference rates such as LIBOR. In January 2021, an additional accounting update was issued to extend certain optional expedients to derivative contracts modified as a result of rate reform, including certain derivatives that do not reference LIBOR or other reference rates that are expected to be discontinued. The expedients and exceptions provided by this update will not be available after December 31, 2022. We are currently assessing the potential impact on our financial statements. 19 Index