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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-02-25 · 161 added, 230 removed, 380 unchanged (51% of the section changed)

1 unchanged sentence

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company.

MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes included under Item 8 of this Form 10-K, which is incorporated herein.

MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes included under Item 8 of this Form 10-K.

The MD&A generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020.

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results or Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 25, 2021.

Business Environment Overview and Trends

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

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.

Declines in publication grades has been partially offset by demand for packaging and tissue grades and growth 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.

20 unchanged sentences

• Changes in currency translation rates had the effect of increasing 2021 Net sales by $12.7 million (1.4% of Net sales) compared to 2020.

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

• Excluding the effect of changes in currency translation rates:

• Consolidated Net sales decreased 14.8%.

• Net sales in MC decreased 5.1% compared to 2019, principally due to decreases in sales for publication grades.

• Net sales in AEC decreased 27.8%, principally due to declines in sales for the LEAP program.

• Changes in currency translation rates had the effect of decreasing 2019 Net sales by $14.8 million (1.4% of Net sales) compared to 2018.

That currency translation effect was principally due to the weaker euro and Chinese renminbi in 2019, as compared to 2018.

That currency translation effect was principally due to the stronger Euro and Chinese Yuan Renminbi in 2021, as compared to 2020.

• Excluding the effect of changes in currency translation rates:

• Consolidated Net sales increased 1.8%.

• Net sales in MC were flat compared to 2018, as increases in sales for tissue and packaging grades were offset by decreases in sales for publication grades.

• Net sales in AEC increased 23.4%, driven by growth in the LEAP, F-35, CH-53K and Boeing 787 programs.

Backlog in the MC segment was $190 million at December 31, 2020, compared to $166 million at December 31, 2019.

Backlog in the AEC segment decreased to $242 million at December 31, 2020, compared to $288 million at December 31, 2019.

The decrease in AEC’s backlog was due to the longer-than-expected delays in the Boeing 737 MAX return to service, and effects of the COVID-19 pandemic on the aerospace industry.

All of the backlog in MC and substantially all of the AEC backlog is expected to be invoiced during the next 12 months.

• Net sales in MC increased 6.1% compared to 2020, principally due to increases in sales for packaging grades and engineered fabrics.

• Net sales in AEC decreased 5.9%, primarily driven by lower sales for fuselage frames on the Boeing 787 program, offset in part by improving sales for the LEAP program.

Backlog in the MC segment was $190 million at both December 31, 2020 and December, 31 2021.

Backlog in the AEC segment increased to $347 million at December 31, 2021, compared to $242 million at December 31, 2020.

The increase in AEC’s backlog was primarily due to increased demand for LEAP engines on the Boeing 737 MAX and Airbus A320neo family of jets.

All of the backlog in MC and approximately 65% of the AEC backlog is expected to be invoiced during the next 12 months.

The following table summarizes Gross profit by business segment:

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55,934 69,928 88,060

Corporate expenses

$ 378,391 $ 371,072 $ 397,701

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40.7 % 41.2 % 37.7 %

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

The increase in 2021 Gross profit, as compared to 2020, was principally due to increased Net sales at the Machine Clothing segment, partially offset by decreased Net sales at the Albany Engineered Composites segment.

Gross profit as a percentage of sales:

• Increased from 51.5% in 2019 to 52.6% in 2020 in Machine Clothing, principally due to favorable foreign currency exchange rates (Brazilian real and Mexican peso), increased efficiencies, and product mix.

• Increased from 19.4% in 2019 to 21.3% in 2020 in AEC, principally due to a favorable shift in the mix of program revenue, partially offset by a slightly lower net favorable change in the estimated profitability of long-term contracts.

The increase in 2019 Gross profit, as compared to 2018, was principally due to the net effect of the following individually significant items:

• Increased from 48.6% in 2018 to 51.5% in 2019 in Machine Clothing, principally due to a $9.0 million reduction in depreciation expense that resulted principally from significant investments made approximately ten years ago that have become fully depreciated.

• Increased from 14.2% in 2018 to 19.4% in 2019 in AEC, principally due to Net sales increase impacting Gross profit by $12 million, and increased net favorable change in the estimated profitability of long-term contracts of $10.8 million in 2019, compared to a decrease of $2.0 million in 2018.

• Decreased from 52.6% in 2020 to 52.1% in 2021 in Machine Clothing, principally due to higher production costs, offset by improved absorption.

• Decreased from 21.3% in 2020 to 18.0% in 2021 in AEC, driven by an unfavorable shift in program revenue mix, coupled with lower net favorable changes in the estimated profitability of long-term contracts.

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

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21.4 % 22.1 % 19.1 %

The decrease in STG&R expenses in 2020 compared to 2019, was principally due to the following individually significant items:

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

• Travel expenses were approximately $6 million lower in 2020, as a result of the COVID-19 pandemic.

• Revaluation of nonfunctional currency assets and liabilities resulted in losses of $1.7 million in 2020 and $0.6 million in 2019.

• Changes in currency translation rates had the effect of decreasing STG&R by $1.3 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 $4.9 million principally due to expenses at CirComp, which the Company acquired in November 2019, and a charge of $0.5 million 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.

The increase in STG&R expenses in 2019 compared to 2018, was principally due to the following individually significant items:

• In MC, revaluation of nonfunctional currency assets and liabilities resulted in losses of $0.6 million in 2019 and gains of $0.8 million in 2018.

• In AEC, STG&R expenses decreased $2.1 million principally due to lower spending on research and development in 2019, as compared to 2018.

• Corporate STG&R expenses increased principally due to costs in 2019 for terminations and professional fees associated with various initiatives.

Consolidated STG&R expenses in 2021 were effectively flat compared to 2020, due to the net effect of the following:

• In MC, changes in currency translation rates had the effect of increasing STG&R by $1.9 million during 2021.

Reductions in current expected loss reserves reduced STG&R $1.0 million in 2021.

In addition, the revaluation of nonfunctional currency assets and liabilities resulted in gains of $0.3 million in 2021 and losses of $1.7 million in 2020.

• Former CEO termination costs of $2.7 million were recorded in Corporate expenses during the first quarter of 2020.

• In AEC, Research expenses increased $3.1 million during 2021.

Research and Development

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$ 1,331 $ 5,736 $ 2,905

In 2020, AEC reduced its workforce at various locations, principally in the United States, leading to restructuring charges of $2.8 million.

In 2017, the Company announced a proposal to close its MC production facility in Sélestat, France, and the proposal was approved by the French Labor Ministry in 2018.

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

We recorded restructuring expense of $10.7 million in 2018, $0.9 million in 2019, and $1.2 million in 2020, which included severance and outplacement costs for the approximately 50 positions that were terminated under this plan.

To date, we have recorded $13.9 million of restructuring charges related to these actions.

Annual cost savings associated with this action principally resulted in lower Cost of goods sold in 2019 and 2020.

In 2018, the Company discontinued certain manufacturing processes at its AEC facility in Salt Lake City, Utah, which resulted in $1.9 million of restructuring in 2018, which included a non-cash restructuring charge of $1.7 million, and an additional $0.2 million for severance.

The non-cash restructuring charge resulted from writing down manufacturing equipment used in that line of business to its estimated value.

In 2019, the Company wrote off the remaining $1.2 million book value of that equipment as the Company was unable to sell it.

To date, we have recorded $3.1 million of restructuring charges related to these actions.

For more information on our restructuring charges, see Note 5 of the Consolidated Financial Statements, included under Item 8 of this Form 10-K, which is incorporated herein.

In 2021 and 2020, Machine Clothing and Albany Engineered Composites reduced its workforce at various locations, leading primarily to termination restructuring charges.

For more information on our restructuring charges, see Note 5 of the Consolidated Financial Statements, included under Item 8 of this Form 10-K.

Operating Income

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$ 14,891 $ 13,584 $ 16,921

AMJP grant (5,832) — —

Other (income)/expense, net

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290 (1,346) 985

See Note 1 for the discussion around the Aviation Manufacturing Job Protection ("AMJP") grant.

Interest Expense

Interest expense, net, decreased $3.3 million in 2020 principally due interest income of $0.9 million related to the Brazil tax refund noted below, and also the effect of lower debt balances.

Lower interest rates on debt in 2020 were partially offset by a slightly higher interest rate spread under the amended and restated Revolving Credit Facility Agreement.

Interest expense, net, was higher during 2021 as compared to the same period of 2020, primarily due to the Company's successful resolution of its claim for a rebate of foreign sales taxes paid in previous years.

This resolution resulted in the reduction of interest expense by $0.9 million in 2020.

In addition, the Company completed amortizing its swap buyouts during the first quarter of 2021, eliminating interest income amortization of $0.6 million.

See “Liquidity and Capital Resources” for further discussion of borrowings and interest rates.

Other (income)/expense, net

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

• In 2020 revaluation of foreign currency revaluations of cash and intercompany balances resulted in a loss of $13.6 million in 2020, compared to net gains of $4.5 million in 2019, and $0.1 million in 2018.

The change in Other (income)/expense, net was driven by the revaluation of foreign currency cash and intercompany balances, which resulted in a gain of $1.2 million during 2021 and a loss of $13.6 million during 2020.

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

• In 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.

• In 2019, we recorded a $0.5 million charge related to the freezing of defined benefit plan accruals in the United Kingdom.

• In 2018, we recorded a $2.2 million charge related to the settlement of a portion of our non-U.S.

defined benefit pension plan liabilities and a curtailment gain of $0.7 million related to the restructuring in Sélestat, France.

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% in 2020.

The jurisdictional location of earnings is a significant component of our effective tax rate each year and, therefore, on our overall income tax expense.

The Company’s effective tax rate for fiscal years 2020, 2019, and 2018 was 30.1%, 25.2%, and 28.0%, 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 and 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 years 2021, 2020 and 2019, included the following (percentages reflect the effect of each item as a percentage of income before income taxes):

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Changes in uncertain tax positions 232 0.1 252 0.2 (2,874) (1.5)

Resolution of tax audits, net 500 0.3 — — 1,981 1.7

Impact of amended tax returns (2,098) (1.2) 500 0.3 — —

Tax effect of non-deductible foreign exchange loss on intercompany loan — — 3,801 2.7 — —

Changes in opening valuation allowance — — — — (1,385) (0.8)

Creation of valuation allowance 168 0.1 860 0.5 — —

Provision for/adjustment to beginning of year valuation allowances 957 0.6 168 0.1 860 0.5

True-up of prior year estimated taxes (1,584) (1.0) (2,420) (1.8) (1,637) (1.0)

Impact of mandatory repatriation — — — — (1,003) (0.9)

Tax rate change — — (112) — 2,066 1.8

Enacted tax legislation and rate change 352 0.2 — — (112) —

Other tax adjustments (741) (0.5) (14) 0.2 — —

Effective Tax Rate $ 47,163 28.4% $ 41,831 30.1% $ 44,829 25.2%

For more information on income tax, see Note 7 to the Consolidated Statements in item 8, which is incorporated herein by reference.

For more information on income tax, see Note 7 to the Consolidated Statements in item 8.

Segment Results of Operations

21 unchanged sentences

215,654 190,805 191,965

• Net sales decreased 4.7%

• Net sales increased 8.0%

• Changes in currency translation rates had the effect of increasing 2021 sales by $10.8 million compared to 2020.

That currency translation effect was principally due to the stronger euro as compared to 2019.

• Excluding the effect of changes in currency translation rates, Net sales in MC decreased 5.1% compared to 2019, principally due to declines in sales for publication grades.

• Net sales decreased 1.7%

• Changes in currency translation rates had the effect of decreasing 2019 sales by $10.5 million compared to 2018.

That currency translation effect was principally due to the weaker euro and Chinese renminbi in 2019, compared to 2018.

• Excluding the effect of changes in currency translation rates, Net sales in MC were flat compared to 2018, as increases in sales for tissue and packaging grades were offset by decreases in sales for publication grades.

• MC Gross profit decreased principally due to lower Net sales, partially offset by favorable foreign currency movements (a weaker Brazilian real and Mexican peso).

• MC Gross profit increased principally due to a reduction of $9.0 million in depreciation expense due primarily to a number of significant investments made approximately ten years ago, that have become fully depreciated.

That currency translation effect was principally due to the stronger Euro and Chinese Yuan Renminbi in 2021, as compared to 2020.

• Excluding the effect of changes in currency translation rates, Net sales in MC increased 6.1% compared to 2020, principally due to increases in sales for packaging grades and engineered fabrics.

• MC Gross profit increased principally due to increased Net sales, partially offset by higher freight, wage, and supply costs.

Operating Income

The decrease in Operating income was principally due to the net effect of the following individually significant items:

• Gross profit decreased $8.5 million, principally due to lower Net sales as described above.

• STG&R expenses decreased $8.9 million, principally due to lower travel expenses, partially offset by year-over-year changes in foreign currency revaluation gains and losses, as described above.

• Restructuring charges were $2.7 million in 2020, compared to $1.1 million in 2019.

The increase in Operating income was principally due to the net effect of the following individually significant items:

• Gross profit increased $12.2 million, principally due to lower depreciation expense as described above.

• STG&R expenses increased $1.2 million, principally due to year-over-year changes in foreign currency revaluation gains and losses, as described above.

• Gross profit increased $21.3 million, principally due to increased Net sales as described above.

• STG&R expenses decreased $2.0 million, principally due to reductions in current expected loss reserves, partially offset by year-over-year changes in foreign currency revaluation gains and losses, as described above.

• Restructuring charges were $1.2 million in 2021, compared to $2.7 million in 2020.

Albany Engineered Composites Segment

The Albany Engineered Composites (AEC) segment, including Albany Safran Composites, LLC (ASC), in which our customer SAFRAN Group owns a 10 percent noncontrolling interest, provides highly engineered advanced composite structures to customers primarily in the aerospace (both commercial and defense) industry.

AEC’s largest program relates to CFM International’s LEAP engine.

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

The Albany Engineered Composites (“AEC”) segment, provides highly engineered, advanced composite structures to customers in the commercial and defense aerospace industries.

The segment includes Albany Safran Composites, LLC (“ASC”), in which our customer, SAFRAN Group, owns a 10 percent noncontrolling interest, AEC, through ASC, is the exclusive supplier to the LEAP program of advanced composite fan blades and fan cases under a

long-term supply contract.

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 CH-53K helicopter, and the fan case for the GE9X engine.

AEC’s largest aerospace customer is the SAFRAN Group and sales to SAFRAN (consisting primarily of fan blades and cases for CFM’s LEAP engine) accounted for approximately 12 percent of the Company’s consolidated Net sales in 2021.

Other significant programs served by AEC include the F-35, Boeing 787, Sikorsky CH-53K, and JASSM programs.

AEC also supplies vacuum waste tanks for the Boeing 7-Series programs, and specialty components for the Rolls Royce lift fan on the F-35, as well as the fan case for the GE9X engine.

Review of Operations

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16,160 31,536 55,520

The decrease in Net sales was principally due to the net effect of the following individually significant items:

• Excluding the effect of changes in currency translation rates, Net sales decreased 27.8%, primarily driven by lower sales for the LEAP program.

The increase in Net sales was principally due to the net effect of the following individually significant items:

• Excluding the effect of changes in currency translation rates, Net sales increased 23.4%, primarily driven by growth in the LEAP, F-35, CH-53K and Boeing 787 programs.

The decrease in AEC Gross profit in 2020 was principally due to the net effect of the following individually significant items:

• The decrease in Net sales decrease for the LEAP program, reduced Gross profit by approximately $20 million, compared to 2019.

• Favorable adjustments to the estimated profitability of long-term contracts increased Gross profit by $9.9 million in 2020, compared to $10.8 million in 2019.

• AEC Gross profit was also increased in 2020 by favorable shift in the mix of program revenue.

The increase in AEC Gross profit in 2019 was principally due to the net effect of the following individually significant items:

• Favorable adjustments to the estimated profitability of long-term contracts increased Gross profit by $10.8 million in 2019, compared to a decrease of $2.0 million in 2018.

• The Net sales increase in 2019, as described above, increased Gross profit by approximately $12 million.

• AEC Gross profit was also increased in 2019 by productivity improvements.

Excluding the effect of changes in currency translation rates, Net sales decreased 5.9%, primarily driven by lower sales for fuselage frames on the Boeing 787 program, offset in part by improving sales for the LEAP program.

The decrease in AEC Gross profit in 2021 was principally due to an approximately $12 million decline in profitability of major programs as a result of lower Net sales in 2021 compared to 2020.

In addition, favorable adjustments to the estimated profitability of long-term contracts increased Gross profit by $6.2 million in 2021, compared to $9.9 million in 2020.

AEC Gross profit was effected by:

• The decrease in Net sales of components for certain F-35 programs reduced gross profit by approximately $5 million compared to 2020.

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 arrangement.

Revenue earned under these arrangements accounted for approximately 29 percent of segment revenue in 2020 and 49 percent in 2019 and 2018.

Revenue earned under these arrangements accounted for approximately 36 percent of segment revenue in 2021, 29 percent in 2020, and 49 percent in 2019.

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

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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 operating income by $9.9 million in 2020, $10.8 million in 2019, and decreased AEC operating income by $2.0 million in 2018.

favorable effects in 2020 and 2019 were largely attributable to efficiency improvements during the ramp-up of several programs.

The sum of net adjustments to the estimated profitability of long-term contracts increased AEC operating income by $6.2 million in 2021, $9.9 million in 2020, and $10.8 million in 2019.

The favorable effects in each year were largely attributable to efficiency improvements during the ramp-up of several programs.

Operating Income/(Loss)

The decrease in Operating income of $15.4 million in 2021 was principally due to the net effect of the following individually significant items:

• A decrease in Net sales, as described above.

• An increase of $1.0 million in Restructuring expenses, as described above.

The increase in Operating income of $38.9 million in 2019 was principally due to the net effect of the following individually significant items:

• An increase in Net sales and strong productivity, as described above.

• A decrease of $1.2 million in Restructuring expenses, as described above.

Liquidity and Capital Resources

• A decrease in Net sales and Gross margin, as described above.

• An increase of $3.1 million in Research expense, offset by a reduction of $2.8 million in Restructuring expenses, as described above.

Working Capital, Liquidity and Capital Structure

Working Capital

Payment terms granted to paper industry and other machine clothing customers reflect general competitive practices.

Terms vary with product, competitive conditions, and the country of operation.

In some markets, customer agreements require us to maintain significant amounts of finished goods inventory to assure continuous availability of our products.

In addition to supplying paper, paperboard, and tissue companies, the MC segment is a leading supplier to the nonwovens (which includes the manufacture of products such as diapers, personal care and household wipes), building products, and tannery and textile industries.

These non-paper industries have a wide range of customers, with markets that vary from industrial applications to consumer use products.

The AEC segment primarily serves customers in the commercial and defense aerospace market through both engine and airframe applications.

AEC's working capital levels rose sharply in the last few years.

In 2018 and 2019, the increased working capital was associated with revenue growth while, in 2020, a slowdown in several key programs resulted in working capital increases, primarily Contract assets In 2021, we were able to reduce some of those Contract Assets balances as volumes recovered on commercial programs.

In the MC segment, the Chinese New Year, summer months, and the end of the year are often periods of lower production for some of our customers, which, in the past contributed to seasonal variation in sales and orders.

In recent years, shorter order cycles and lower inventory levels throughout the supply chain have become a more significant factor in quarterly sales.

The impact of these combined factors on any quarter can be difficult to predict, and can make quarterly comparisons less meaningful than annual comparisons.

While seasonality is generally not a significant factor in the Albany Engineered Composites segment, the commercial terms of the supply agreement governing the LEAP program resulted in fourth quarter sales volatility in recent years.

Cash Flow Summary

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Write-off of pension liability adjustment due to settlement/curtailment

411 450 1,494

Other operating items

4 unchanged sentences

(53,699) (42,390) (98,748)

Net cash provided used in financing activities (60,669) (100,307) (27,258)

Net cash used in financing activities (99,635) (60,669) (100,307)

Effect of exchange rate changes on cash flows

8 unchanged sentences

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

Operating activities

Cash provided by operating activities was $140.3 million in 2020, compared to $200.4 million in 2019, and $132.5 million in 2018.

The net decrease in cash provided by operating activities in 2020 was due to lower net income and increased levels of working capital for the AEC segment.

The net increase in cash provided by operating activities from 2018 to 2019 was principally due to increased profitability in both businesses.

Cash flows for Contract assets

and Inventories was a use of $72.8 million in 2020, and was driven by delays in the Boeing 737 MAX return to service and a challenging economic environment in 2020, which caused a slowdown in several key aerospace programs.

The Noncurrent receivables held by AEC generated cash of $4.2 million in 2020, compared to a use of cash of $1.3 million in 2019 and $12.2 million in 2018.

Changes in long-term liabilities, deferred taxes and other liabilities resulted in an increase to cash flows of $8.7 million in 2020, $7.1 million in 2019 and $3.5 million in 2018, principally due to the use of deferred tax assets.

Cash paid for income taxes was $25.1 million, $25.9 million, and $28.1 million in 2020, 2019, and 2018, respectively.

At December 31, 2020, the Company had $241.3 million of cash and cash equivalents, of which $201.4 million was held by subsidiaries outside of the United States.

No income taxes have been provided on the indefinitely invested foreign earnings.

The accumulated undistributed earnings of the Company’s foreign operations not targeted for repatriation to the U.S.

were approximately $132.3 million at December 31, 2020, and are intended to remain indefinitely invested in foreign operations.

If these earnings were distributed, the Company could be subject to income taxes and additional foreign withholding taxes.

Our current plans do not anticipate that we will need funds generated from foreign operations to fund our domestic operations or satisfy debt obligations in the United States.

In the event that such funds were repatriated to fund operations in the U.S., and if associated accruals for taxes have not already been provided, we would be required to record additional tax expense.

Investing Activities

On November 20, 2019, the Company acquired CirComp GmbH, a privately-held developer and manufacturer of high-performance composite components located in Kaiserslautern, Germany for net cash of $30.8 million.

Total company capital expenditures for continuing operations, including purchased software, were $42.4 million in 2020, compared to $68.0 million in 2019 and $82.9 million in 2018.

In the AEC segment, capital expenditures were $23.7 million in 2020, compared to $48.8 million in 2019 and $60.1 million in 2018.

Financing Activities and Capital Resources

Cash provided by operating activities was $217.5 million in 2021, compared to $140.3 million in 2020.

The increase in cash provided by operating activities in 2021 was primarily due to higher net income and improved working capital at the AEC segment, offset by cash paid for income taxes.

Significant deliveries of LEAP components occurred throughout 2021, resulting in $25.4 million of cash inflows to Contract Assets compared to $59.1 million of cash outflows in 2020, driven by delays in the Boeing 737 MAX return to service and a slowdown in several key aerospace programs.

These cash inflows were offset by cash paid for income taxes of $32.5 million in 2021, as compared to $25.1 million in 2020.

Capital expenditures for 2021 were $11.3 million higher than those for 2020, mainly due to increased investment to support AEC's organic growth.

Net cash used in financing activities during 2021 increased $39 million compared to 2020, driven by cash paid to fund our share repurchases and higher net payments from borrowings under our Credit Facility, reducing long-term debt from $398 million at December 31, 2020 to $350 million at December 31, 2021.

Liquidity and Capital Structure

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 December 31, 2020 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 December 31, 2020.

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”).

4 unchanged sentences

Based on our maximum leverage ratio and our Consolidated EBITDA, and without modification to any other credit agreements, as of December 31, 2021, we would have been able to borrow an additional $350 million under the Agreement.

For more information, see Note 17 of the Consolidated Financial Statements, included under Item 8 of this Form 10-K, which is incorporated herein.

Off-Balance Sheet Arrangements

As of December 31, 2020, we have no off-balance sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.

Contractual Obligations

As of December 31, 2020, we have the following cash flow obligations:

Payments Due by Period

(in millions) Total Less than one year One to three years Three to five years After five years

Total debt $ 398.0 $ — $ — $ 398.0 $ —

Interest payments (a)

39.9 14.1 19.9 5.9 —

Pension plan contributions (b)

2.5 2.5 — — —

Other postretirement benefits (c)

31.0 3.7 6.9 6.4 14.0

Restructuring accruals 2.2 1.9 0.3 — —

Other noncurrent liabilities (d)

Operating leases 20.5 5.1 7.0 3.8 4.6

Finance leases 24.1 2.8 5.8 6.0 9.5

Totals $ 518.2 $ 30.1 $ 39.9 $ 420.1 $ 28.1

(a) The terms of variable-rate debt arrangements, including interest rates and maturities, are included in Note 17 of the Consolidated Financial Statements, included under Item 8 of this Form 10-K, which is incorporated herein.

The interest payments are based on the assumption that we maintain $48 million of variable rate debt until the October 2020 Credit Agreement matures on October 27, 2024, and the rate as of December 31, 2020 (3.50%) continues until October 17, 2022, then continues at 1.78% until maturity.

Both rates include the effects of interest rate hedging transactions.

(b) We estimate the total of pension benefits to be paid directly by the Company and pension contributions to be $2.5 million in 2021.

However, that estimate is subject to revision based on many factors.

The Company may also make voluntary contributions to pension trusts that exist in certain countries.

The amount of contributions after 2021 is subject to many variables, including return of pension plan assets, interest rates, and tax and employee benefit laws.

Therefore, contributions beyond 2021 are not included in this schedule.

(c) Estimated cash outflows for other postretirement benefits is consistent with the expected benefit payments presented in Note 4 of Item 8 Financial Statements and Supplementary Data for the next five years.

Beyond five years, expected benefit payments are not consistent with those presented in Note 4, due to the many variables associated with this estimate.

(d) Estimated payments for deferred compensation, interest rate swap agreements, and other noncurrent liabilities are not included in this table due to the uncertain timing of the ultimate cash settlement.

Also, this table does not reflect unrecognized tax benefits, the timing of which is uncertain.

Refer to Note 7 of Item 8 Financial Statements and Supplementary Data for additional discussion on unrecognized tax benefits.

The foregoing table should not be deemed to represent all of our future cash requirements, which will vary based on our future needs.

While the cash required to satisfy the obligations set forth in the table is reasonably determinable in advance, many other cash needs, such as raw materials costs, payroll, and taxes, are dependent on future events and are harder to predict.

In addition, while the contingencies described in Note 21 of Item 8 Financial Statements and Supplementary Data are not currently anticipated to have a material adverse effect on our Company, there can be no assurance that this may not change.

Subject to the foregoing, we currently expect that cash from operations and the other sources of liquidity described above will be sufficient to enable us to meet the foregoing cash obligations, as well as to meet our other cash requirements.

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

For more information, see Note 17 of the Consolidated Financial Statements, included under Item 8 of this Form 10-K.

We believe cash flows from operations and availability under our Credit Agreement will be adequate to cover our operations and business needs over the next twelve months.

As of December 31, 2021, we had cash and cash equivalents of approximately $302 million and availability under our Credit Agreement of $350 million, for a total liquidity of approximately $652 million.

As of December 31, 2021, $273.3 million of our total cash and cash equivalents was held by non-U.S.

subsidiaries.

The accumulated undistributed earnings of the Company’s foreign operations not targeted for repatriation to the U.S.

were approximately $190.2 million at December 31, 2021, and are intended to remain indefinitely invested in foreign operations.

Our cash planning strategy includes repatriating current earnings in excess of working capital requirements from certain countries in which our subsidiaries operate.

While we have been successful in such endeavor to date, there can be no assurance that we will be able to cost effectively repatriate funds in the future.

Repatriating such cash from certain jurisdictions may also result in additional withholding taxes.

We strategically deploy our cash with a focus on investing in our business and new technologies to provide our customers with enhanced capabilities, to increase shareholder value, and to position ourselves to take advantage of new business opportunities as they arise.

Based on such strategy, we have continued to invest in our business and technologies through capital expenditures, research and development, and when appropriate, selective business acquisitions.

Our capital expenditures totaled $53.7 million and $42.4 million for the year-ended December 31, 2021 and 2020, respectively, comprising of both sustaining and return seeking projects.

In the recent past, a portion of our capital expenditures consist of investments which improve operational productivity, in addition to producing a meaningful impact on energy and resource efficiency.

We have also returned cash to shareholders through dividends and share repurchases.

During 2021, we paid $25.9 million in dividends and repurchased 285 thousand shares of our Class A Common shares at a cost of $24.4 million under the $200 million share repurchase program that our Board approved in October 2021.

At December 31, 2021, we had no off-balance sheet arrangements.

We have contractual commitments to repay debt, make payments under operating leases and financing leases, contribute to our pension and postretirement plans, and settle obligations related to agreements to purchase goods and services, income taxes, compensation plans, and as applicable, interest rate swaps.

We estimate these contractual commitments amount to $469.1 million as of December 31, 2021, of which $45.5 million is expected to paid within the next year.

Such commitments are not representative of all our future cash requirements, which will vary based on future needs.

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is set forth in Item 8 Financial Statements and Supplementary Data, Note 1, which is incorporated herein by reference.

A discussion of recent accounting pronouncements is set forth in Item 8 Financial Statements and Supplementary Data, Note 1.

Critical Accounting Policies and Estimates

For the discussion of our accounting policies, see Item 8 Financial Statements and Supplementary Data, Note 1, which is incorporated herein by reference.

For the discussion of our accounting policies, see Item 8 Financial Statements and Supplementary Data, Note 1.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates that directly affect the amounts reported in the Consolidated Financial Statements.

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Revenue Recognition

Effective January 1, 2018, the Company adopted the provisions of ASC 606, Revenue from contracts with customers .

The standard replaces numerous requirements in U.S.

GAAP, including industry-specific requirements, and provides companies with a single model for recognizing revenue from contracts with customers.

See additional information in Item 8.

Contracts with customers in the Machine Clothing segment have various terms that can affect the point in time when revenue is recognized.

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AEC’s largest source of revenue is derived from the LEAP contract under a cost-plus-fee agreement.

Beginning in 2018, the fee is variable based on our success in achieving certain cost targets.

The fee is variable based on our success in achieving certain cost targets.

Revenue is recognized over time as costs are incurred.

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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.

The Albany Engineered Composites segment also has some long-term aerospace contracts under which there are two phases:

AEC has long-term aerospace contracts under which there are two phases:

a phase during which the production part is designed and tested, and a phase of supplying production parts.

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Fulfillment activities that create resources that will be used in satisfying performance obligations in the future, and are expected to be recovered, are capitalized in Other assets.

The capitalized costs are amortized into Cost of goods sold over the period which the asset is expected to contribute to future cash flows which includes anticipated renewal periods.

The capitalized costs are amortized into Cost of goods sold over the period which the asset is expected to contribute to future cash flows, including anticipated renewal periods.

Accumulated capitalized costs are written-off when those costs are determined to be unrecoverable.

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Contract loss provisions include contract options that are probable of exercise, excluding any profitable options that might be expected to follow.

Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative cost allocations, which are treated as period expenses.

Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative costs, which are treated as period expenses.

We are required to limit our estimate of contract values to the period of the legally enforceable contract.

While certain contracts are expected to be profitable over the course of the program life when including expected renewals, our estimate of contract revenues and costs is limited to the estimated value of enforceable rights and obligations, excluding anticipated renewals.

While certain contracts are expected to be profitable over the course of

the program life when including expected renewals, our estimate of contract revenues and costs is limited to the estimated value of enforceable rights and obligations, excluding anticipated renewals.

In some cases, the contract period may result in a loss contract provision at the inception of the contract.

Also, refer to information under Long-term Contracts in Item 7, Management’s Discussion and Analysis of this Form 10-K, which is incorporated herein by reference.

Pension and Postretirement Liabilities

The Company has pension and postretirement benefit costs and liabilities that are developed from actuarial valuations.

Inherent in these valuations are key assumptions, including discount rates and expected return on plan assets, which are updated on an annual basis.

As of December 31, 2020, total liabilities under our defined benefit pension plans (including unfunded plans) exceeded plan assets by $6.7 million, of which $2.2 million was for plans outside of the U.S.

Additionally, at December 31, 2020, other postretirement liabilities totaled $48.0 million, substantially all of which related to our U.S.

As of December 31, 2020, we have unrecognized pretax net losses of $53.4 million for pension plans and $7.8 million for other postretirement benefit plans that may be amortized into earnings in future periods.

We are required to consider current market conditions, including changes in interest rates, in making these assumptions.

For 2021, we anticipate pension contributions and direct payments to retirees to total $2.5 million, and payments for other postretirement benefit plans to be $3.7 million.

Changes in the related pension and other postretirement benefit costs or credits may occur in the future due to changes in the assumptions.

The amount of annual pension plan funding and annual expense is subject to many variables, including the investment return on pension plan assets and interest rates, and actual contributions could vary significantly.

Assumptions used for

determining pension and other postretirement plan liabilities and expenses are evaluated and updated at least annually.

In the ordinary course of business, there is inherent uncertainty in determining assets and liabilities related to income tax balances.

We exercise significant judgment in order to estimate taxes payable or receivable in future periods.

Tax-related balances may also be impacted by organizational changes or changes in the tax laws of any country in which we operate.

We assess our income tax positions and record tax assets and liabilities for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date.

For those tax positions where it is more likely than not that a tax benefit will be sustained, we have determined the amount of the tax benefit to be recognized by estimating the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.

Deferred tax assets are expected to be realized through the reversal of existing temporary differences and future taxable income.

A valuation allowance is established, as needed, to reduce net deferred tax assets to the amount expected to be realized.

In the event it becomes more likely than not that some or all of the deferred tax asset valuation allowances will not be needed, the valuation allowance will be adjusted.

We sponsor several pension and postretirement benefit plans.

Our liabilities under these defined benefit plans are determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate, health care cost inflation rate and the long-term rate of return on plan assets.

We review our actuarial assumptions on an annual basis and make modifications to the assumptions when appropriate.

Discount Rate Selection

We select a discount rate for purposes of measuring obligations under defined benefit plans by matching cash flows separately for each plan to the yields on high-quality zero coupon bonds.

We use the RATE:

Link 60-90 model (the "RATE Link").

We believe the projected cash flows used to determine RATE Link provide a good approximation of the timing and amounts of our defined benefit payments under our plans and no adjustments to RATE Link has been made.

Measurement of our postretirement benefit obligations requires the use of several assumptions about factors that will affect the amount and timing of future benefit payments.

The assumed health care cost trend rates are the most critical estimates for measurement of the postretirement benefit obligation.

Changes in the health care cost trend rates have a significant effect on the amounts reported for the health care benefit obligation.

Long-term Rate of Return on Plan Assets Assumption

Our expected long-term rate of return on plan assets is derived from our asset allocation strategies and anticipated future long-term performance of individual asset classes.

Our analysis gives consideration to recent plan performance and historical returns;

however, the assumptions are primarily based on long-term, prospective rates of return.

The weighted average long-term rate of return on plan assets for our defined benefit pension plans is 7.0% for 2021.

Based on information provided by actuaries and other relevant sources, the Company believes that the assumptions used to estimate expenses, assets and liabilities of pensions and postretirement benefits are reasonable;

however, changes in these assumptions could impact the Company’s financial position, results of operations or cash flows.

We regularly assess the likelihood that deferred tax assets are expected to be realized through the reversal of existing temporary differences and/or future taxable income.

To the extent we believe that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established.

The amount of a valuation allowance is based upon our best estimate of our ability to realize the deferred tax assets.

Goodwill and Intangible assets

Goodwill is not amortized, but is tested for impairment at least annually.

Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including expected future operating results.

Estimating the fair value of reporting units requires the use of estimates and significant judgments, including but not limited to revenue growth rates, operating margins, discount rates, and future market conditions.

It is possible that these judgments and estimates could change in future periods.

The determination of the fair value of intangible assets acquired in a business acquisition, including the Company’s acquisition in 2019, is subject to many estimates and assumptions.

We review amortizable intangible asset groups for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.

The determination of the fair value of intangible assets acquired in a business acquisition is subject to many estimates and assumptions.

Among such estimates and assumptions are royalties, discount rate and useful life.

We review amortizable intangible asset groups for impairment whenever events and changes in circumstances indicate that the related carrying amounts may not be recoverable.

Non-GAAP Measures

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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 period of specific restructuring costs, former CEO severance costs, acquisition and integrations 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 periods in which such items had a greater or lesser effect, or no effect.

An understanding of the impact in a particular period of specific restructuring costs, former CEO severance costs, acquisition/ integrations costs, currency revaluation, government grants, 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 periods 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.

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dollars at the exchange rate of a prior period.

These amounts are then

compared to the U.S.

These amounts are then compared to the U.S.

dollar amount as reported in the current period.

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adding (or subtracting) revaluation losses (or gains);

subtracting income (net of associated costs) recognized related to government grants;

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

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

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

Adjusted EBITDA may also be presented as a percentage of net sales by dividing it by sales.

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charges and credits related to pension settlements and curtailments;

income (net of associated costs) recognized related to government grants;

foreign currency revaluation losses (or gains);

and acquisition-related expenses.

and acquisition/ integration costs.

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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(1,442) 15,444 (3,190)

Aviation Manufacturing Jobs Protection (AMJP) grant (4,731) — —

Pension settlement/curtailment expense

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(in thousands)

Year ended December 31, 2020 Machine Clothing

Albany Engineered Composites

Corporate expenses and other

Total Company

Year ended December 31, 2021

Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company

Operating income/(loss) (GAAP) $215,654 $16,160 ($53,803) $178,011

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Foreign currency revaluation (gains)/losses (307) 50 (1,185) (1,442)

Former CEO termination costs — — 2,742 2,742

AMJP grant — 1,101 (5,832) (4,731)

Acquisition/integration costs — 1,166 — 1,166

Pre-tax loss attributable to noncontrolling interest — 1,348 — 1,348

Pre-tax (income) attributable to noncontrolling interest — (510) — (510)

Adjusted EBITDA (non-GAAP) $ 236,740 $ 68,401 $ (54,250) $ 250,891

(in thousands)

Year ended December 31, 2019 Machine Clothing

Year ended December 31, 2020

Machine Clothing

Albany Engineered Composites

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Foreign currency revaluation (gains)/losses 1,743 130 13,571 15,444

Pension curtailment expense — — 478 478

Former CEO termination costs — — 2,742 2,742

Acquisition/integration costs — 1,272 — 1,272

Pre-tax (income) attributable to noncontrolling interest — (1,308) — (1,308)

Pre-tax loss attributable to noncontrolling interest — 1,348 — 1,348

Adjusted EBITDA (non-GAAP) $ 215,598 $ 85,603 $ (49,296) $ 251,905

(in thousands)

Year ended December 31, 2018 Machine Clothing

Year ended December 31, 2019

Machine Clothing

Albany Engineered Composites

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Foreign currency revaluation (gains)/losses 630 643 (4,463) (3,190)

Pension settlement/curtailment expense — — 1,494 1,494

Pension curtailment expense — — 478 478

Acquisition/integration costs — 421 200 621

Pre-tax (income) attributable to noncontrolling interest in ASC — (1,308) — (1,308)

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(in thousands, except per share amounts)

Year ended December 31, 2020 Pre tax

Year ended December 31, 2021

Restructuring expenses, net $ 1,331 $ 399 $ 932 $ 0.02

Foreign currency revaluation (gains)/losses (1,442) (323) (1,119) (0.04)

AMJP grant (4,731) (1,404) (3,327) (0.11)

Acquisition/integration costs 1,166 349 817 0.04

(in thousands, except per share amounts)

Year ended December 31, 2020

Restructuring expenses, net $ 5,736 $ 1,862 $ 3,874 $ 0.11

Foreign currency revaluation (gains)/losses (a) 15,444 896 14,548 0.46

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(in thousands, except per share amounts)

Year ended December 31, 2019 Pre tax

Year ended December 31, 2019

Restructuring expenses, net $ 2,905 $ 824 $ 2,081 $ 0.06

Foreign currency revaluation (gains)/losses

(3,190) (904) (2,286) (0.07)

Pension curtailment charge 478 91 387 0.01

Acquisition/integration costs 621 156 465 0.01

(in thousands, except per share amounts)

Year ended December 31, 2018 Pre tax

Restructuring expenses, net $ 15,570 $ 4,904 $ 10,666 $ 0.34

Foreign currency revaluation (gains)/losses

(341) 3 (344) (0.01)

Pension settlement/curtailment charge 1,494 348 1,146 0.04

The following table contains the calculation of full-year Adjusted EPS, excluding adjustments:

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(0.04) 0.46 (0.07)

AMJP grant (0.11) — —

Former CEO termination costs — 0.06 —

Pension settlement/curtailment charge

Pension curtailment charge — — 0.01

Acquisition/integration costs 0.04 0.04 0.01

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Current maturities of long-term debt

$ 9 $ 20 $ 1,224

Long-term debt

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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-K

Item 7. Management’s Discussion and Analysis