What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-26 compared with 2021-10-26 · 124 added, 190 removed, 250 unchanged (56% of the section changed)

8 unchanged sentences

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

• In both the Machine Clothing and Albany Engineered Composites segments, increasing labor, raw material, energy, and logistic costs due to supply chain constraints and inflationary pressures

• Across the entire Company, increasing labor, raw material, energy, and logistic costs due to supply chain constraints and inflationary pressures

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

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• Other risks and uncertainties detailed in this report.

General risks associated with macroeconomic conditions, as noted above, have changed during the first three months of 2022.

The recent escalation in the Russia-Ukraine military conflict has had and may continue to have profound effects on macroeconomic business conditions around the world, including in our Machine Clothing and Albany Engineered Composites segments.

Certain COVID-19 related disruptions and risks have persisted during the current year, causing inflationary pressure connected to global supply chain bottlenecks and elevated energy price pressures.

These challenges have only increased as a result of the Russia-Ukraine military conflict, which also has quickly prompted a global imposition of stringent sanctions that have resulted in a sharp decline in trade with Russia.

Correspondingly, and in union with the global community, we voluntarily decided to dissolve business relationships in Russia during the first three months of 2022, despite the associated cost to our investment and the loss of future revenue in the region.

While our Albany Engineered Composites segment does not have significant direct exposure in this region of the world, and our Machine Clothing segment has now significantly reduced its exposure, the broader economic ramifications of this conflict will indirectly affect all sectors of the economy.

This conflict, which may yet be in its early stages, including imposed sanctions, has amplified inflationary pressures, driving higher prices for global oil, natural gas, agricultural and metal prices, as well as causing additional supply-chain disruptions.

Further information concerning important factors that could cause actual events or results to be materially different from the forward-looking statements can be found in “Business Environment Overview and Trends” sections of this quarterly report, as well as in Item 1A-“Risk Factors” section of our most recent Annual Report on Form 10-K.

Although we believe the expectations reflected in our other forward-looking statements are based on reasonable assumptions, it is not possible to foresee or identify all factors that could have a material and negative impact on our future performance.

The forward-looking statements included or incorporated by reference in this report are made on the basis of our assumptions and analyses, as of the time the statements are made, in light of our experience and perception of historical conditions, expected future developments, and other factors believed to be appropriate under the circumstances.

perception of historical conditions, expected future developments, and other factors believed to be appropriate under the circumstances.

Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained or incorporated by reference in this report to reflect any change in our expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based.

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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.

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government contracts or programs.

Effect of Russia-Military Conflict

The war between Russia and Ukraine is affecting the economic and global financial markets and exacerbating ongoing economic challenges caused by impacts of the ongoing COVID-19 pandemic, including rising inflation and global supply chain disruptions.

Our MC segment generates approximately 2% of its annual net sales from customers in Russia and Ukraine.

In addition, a subsidiary within our Machine Clothing segment has been a partner in a joint venture (“JV”) that supplies paper machine clothing products to local papermakers in Russia.

In March 2022, we made the decision to cease doing business in Russia, including giving notice to our JV partner of our intent to exit the venture.

As a result, we recognized $1.8 million expense in cost of goods sold and in Selling, Administrative, and General expense, representing reserves against the risk of obsolescence of certain inventory destined for Russian customers and uncollectible receivables from Russian customers, respectively.

We also wrote down the net book value of our investment in the aforementioned JV to reflect our intent to exit such venture, resulting in $0.8 million impairment loss included in Other expense/income - net during the first quarter of 2022.

We anticipate approximately $10.0 million reduction in future annual net sales in the MC segment, due to our cessation of doing business in Russia.

During the first three months of 2022, energy costs soared, the supply market continued to tighten against strong demands and global logistics challenges persisted.

Our MC segment has continued experiencing price increases in raw materials, indirect supply, and logistics.

Moreover, the ongoing impact of the COVID-19 pandemic in certain regions, such as China where zero COVID tolerance policy is enforced, further limiting the availability of raw materials.

The ultimate financial impact due to the war between Russia and Ukraine, the ongoing COVID-19 pandemic, and inflationary environment is difficult to predict.

After consideration of possible offsets through corresponding price increases to our customers and productivity improvements, we currently estimate a net increase to the MC segment input costs of between $8.0 million and $10.0 million for the year ending December 31, 2022.

We estimate such net cost increases to unfavorably affect the MC segment gross margin by between 100 and 140 basis points for the year ending December 31, 2022.

Our Albany Engineered Composites segment does not have significant direct exposure in Russia.

However, it has not been immune from supply chain disruptions due to raw material shortages, abnormally high commodity prices, labor shortages, and logistic constraints.

Due to the nature of AEC’s contracts with its customers, we currently anticipate being able to pass through such cost increases to the customers.

Until the effects of the war between Russia and Ukraine, as well as the COVID-19 pandemic, on the economic and global financial markets subside, there can be no assurance that our input costs will not continue to rise beyond our current estimate, thus unfavorably impacting our future results of operations, financial position and liquidity.

Consolidated Results of Operations

The following table summarizes our Net sales by business segment:

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

Three months ended

(in thousands, except percentages)

2021 2020 % Change 2021 2020 % Change

2022 2021 % Change

Machine Clothing $154,062 $148,206 4.0 %

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The following tables provide a comparison of 2022 Net sales, excluding the impact of currency translation effects, to 2021 Net sales:

(in thousands, except percentages) Net sales as reported, Q3 2021 Increase due to changes in currency translation rates Q3 2021 sales on same basis as Q3 2020 currency translation rates Net sales as reported, Q3 2020 % Change compared to Q3 2020, excluding currency rate effects

Machine Clothing $ 154,171 $ 1,688 $ 152,483 $ 138,747 9.9 %

Albany Engineered Composites 78,271 90 78,181 73,252 6.7 %

Consolidated total $ 232,442 $ 1,778 $ 230,664 $ 211,999 8.8 %

(in thousands, except percentages) Net sales as reported, YTD 2021 Increase due to changes in currency translation rates YTD 2021 sales on same basis as 2020 currency translation rates Net sales as reported, YTD 2020 % Change compared to 2020, excluding currency rate effects

(in thousands, except percentages)

Net sales as reported, Q1 2022 Decrease due to changes in currency translation rates Q1 2022 sales on same basis as Q1 2021 currency translation rates Net sales as reported, Q1 2021 % Change compared to Q1 2021, excluding currency rate effects

Machine Clothing $ 154,062 $ (2,528) $ 156,590 $ 148,206 5.7 %

Albany Engineered Composites

Consolidated total $ 689,322 $ 14,185 $ 675,137 $ 673,753 0.2 %

Three month comparison

• Changes in currency translation rates had the effect of increasing Net sales by $1.8 million during the third quarter of 2021, as compared to 2020, principally due to stronger Euro and Chinese Yuan Renminbi in 2021.

• Excluding the effect of changes in currency translation rates:

• Net sales increased 8.8% compared to the same period in 2020.

• Net sales in MC increased 9.9% compared to the third quarter of 2020, due to growth in all major grades of product, led by engineered fabric and packaging grades.

• Net sales in AEC increased 6.7%, mainly due to growth on LEAP and CH-53K programs, partially offset by a decline in sales for the Boeing 787 and F-35 platforms.

Nine month comparison

• Changes in currency translation rates had the effect of increasing Net sales by $14.2 million during the first nine months of 2021, as compared to 2020, mainly due to stronger Euro and Chinese Yuan Renminbi in 2021.

90,107 (1,158) 91,265 74,156 23.1 %

Total $ 244,169 $ (3,686) $ 247,855 $ 222,362 11.5 %

Changes in currency translation rates had the effect of decreasing Net sales by $3.7 million during the first quarter of 2022, as compared to 2021, principally due to a weaker Euro in 2022.

Excluding the effect of changes in currency translation rates:

• Net sales increased 11.5% compared to the same period in 2021.

• Net sales in MC increased 5.1% compared to the same period in 2020, primarily due to growth in engineered fabric and packaging grades, offset by a decline in publication grades.

• Net sales in AEC decreased 8.3%, primarily due to declines in sales for the Boeing 787 program, partially offset by growth on the LEAP program.

• Net sales in MC increased 5.7% compared to the first quarter of 2021, driven by growth in sales for packaging and tissue grades.

• Net sales in AEC increased 23.1%, mainly due to growth on LEAP and CH-53K programs, partially offset by a decline on the F-35 platform.

The following table summarizes Gross profit by business segment:

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

Three months ended

(in thousands, except percentages)

2021 2020 2021 2020

Machine Clothing $ 79,345 $ 76,393

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37.5 % 39.8 %

Three month comparison

Third quarter 2021 gross profit increased 5.4% compared to that for the same period in 2020.

Gross profit as a percentage of sales:

• Was flat at 51.5% in MC.

• Decreased from 21.6% in 2020 to 16.1% in 2021 in AEC, driven by a smaller impact from changes in the estimated profitability of long-term contracts, lower fixed cost absorption, and the effect of sharing with our customer base a portion of the AMJP grant received during the quarter.

We recognized $2.1 million net favorable change in the estimated profitability of long-term contracts during for the third quarter of 2021, compared to a $3.5 million net favorable impact during the same period in 2020.

Nine month comparison

Gross profit for the third quarter of 2021 was effectively flat compared to that for the same period in 2020.

Gross profit as a percentage of sales:

• Decreased from 53.1% in 2020 to 52.0% in 2021 in MC, due to higher production costs, offset by improved absorption.

• Decreased from 21.2% in 2020 to 18.5% in 2021 in AEC, driven by unfavorable shift in program revenue mix.

The increase in 2022 Gross profit, as compared to the same period in 2021, was due to the effect of higher Net sales in MC and AEC business segments.

Gross profit as a percentage of sales at Machine Clothing was flat at 51.5% as compared to the prior year, and at AEC decreased from 16.4% in 2021 to 13.6% in 2022, driven by recognition of reserves recorded on inventory that was damaged at an off-site storage facility.

We recognized $0.7 million net unfavorable change in the estimated profitability of long-term contracts during the first quarter of 2022, compared to an insignificant amount in the first quarter of 2021.

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

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

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

Three months ended

(in thousands, except percentages)

2021 2020 2021 2020

Machine Clothing $ 29,477 $ 26,099

Albany Engineered Composites

9,769 8,646 28,909 26,664

Corporate expenses 12,055 11,451

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% of Net sales 21.5 % 21.0 %

Three month comparison

The overall decrease in STG&R expenses in the third quarter of 2021, compared to the same period in 2020, was primarily due to foreign currency revaluation gains as compared to a foreign currency revaluation losses in the same quarter of last year, offset by higher travel and R&D expenses.

Nine month comparison

The overall increase in STG&R expenses in the third quarter of 2021, compared to the same period in 2020, was due to the net effect of the following:

• Revaluation of nonfunctional currency assets and liabilities in Machine Clothing resulted in a gain of $0.2 million in 2021, compared to a gain of $1.3 million in 2020.

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

• Higher incentive compensation in all business segments in 2021.

The overall increase in STG&R expenses was driven by customer credit loss reserve increases related to our dissolution of business relationships in Russia, higher incentive compensation costs, and the unfavorable effect of the revaluation of foreign currency balances.

Restructuring Expense, net

In addition to the items discussed above affecting gross profit and STG&R expenses, operating income was minimally affected by restructuring costs during the year-to-date period ended September 30, 2021, but totaled $4.2 million for the same period in 2020.

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

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

In addition to the items discussed above affecting Gross profit and STG&R expenses, operating income was affected by restructuring expenses, as summarized in the following table:

Three months ended

(in thousands) 2022 2021

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Total $ 254 $ 52

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

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

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

Restructuring expense, net was insignificant in both the current and prior year, and was related primarily to the winding down of restructuring actions taken in prior periods.

Operating Income

The following table summarizes operating income/(loss) by business segment:

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

Three months ended

(in thousands) 2022 2021

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Other Earnings Items

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

Three months ended

(in thousands) 2022 2021

Interest expense, net $ 3,609 $ 3,569

AMJP grant (see Note 1) (5,832) — (5,832) —

Other expense/(income), net (3,928) 600

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Interest Expense, net

Interest expense, net was higher during the quarter and year-to-date ended September 30, 2021, compared to the same periods in 2020, primarily as a result of the following.

During 2020, the Company successfully resolved its claim for a rebate of foreign sales tax paid in previous years, reducing interest expense for the year-to-date ended September 30, 2020 by $0.9 million.

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

Interest expense, net, was largely in line with the prior year.

See the Working Capital, Liquidity and Capital Structure section for further discussion of borrowings and interest rates.

Other (income)/expense, net

Other (income)/expense net included losses related to the revaluation of nonfunctional-currency balances of $0.8 million for the first nine months of 2021, compared to losses of $14.7 million for the first nine 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, the revaluation effects are recorded in Other comprehensive income.

Other (income)/expense, net, included foreign currency related transactions which resulted in gains of $3.7 million in the first three months of 2022, as compared to losses of $0.2 million in the same period last year.

Current year gains were primarily driven by the remeasurement of intercompany demand loans payable by a Mexican subsidiary.

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

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

Three and nine month comparison

The Company’s effective tax rates for the third quarter of 2021 and 2020 were 29.4% and 24.7%, respectively, and for the nine months ended September 30, 2021 and 2020, were 28.8% and 35.0%, respectively.

The Company’s effective tax rates for the first quarter of 2022 and 2021 were 28.1% and 26.7%, respectively.

The tax rate is affected by recurring items, such as the income tax rate in the U.S.

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

The increase in the Q3 2021 income tax rate from continuing operations, excluding discrete items, was driven by an increase in losses in a foreign jurisdiction that were excluded in calculating the quarterly income tax provision.

The effective tax rate for the nine months ended September 30, 2020 was significantly affected by a non-recurring tax adjustment due to non-deductible foreign exchange losses, which occurred in the first quarter of 2020.

For more information on income tax, see Note 5 to the Consolidated Financial Statements.

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Machine Clothing Segment

Machine Clothing accounted for approximately 67% of our consolidated revenues during the nine months of 2021.

Machine Clothing is our primary business segment and accounted for 63% of our consolidated revenues during the first three months of 2022.

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

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Review of Operations

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

Three months ended

(in thousands, except percentages)

2021 2020 2021 2020

Net sales $ 154,062 $ 148,206

4 unchanged sentences

Operating income 49,644 50,363

Three month comparison

Net sales increased by 4.0%.

• Changes in currency translation rates had the effect of increasing third-quarter 2021 sales by $1.7 million compared to the same period in 2020.

That currency translation effect was mainly due to stronger Euro and Chinese Yuan Renminbi in the third quarter of 2021, compared to 2020.

• Excluding the effect of changes in currency translation rates, Net sales in MC increased 9.9% compared to the third quarter of 2020, principally due to growth in sales for packaging grades and engineered fabrics, partially offset by declines in other grades.

Nine month comparison

• Net sales increased by 7.8%.

• Changes in currency translation rates had the effect of increasing 2021 sales by $11.8 million compared to the same period in 2020.

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

• Excluding the effect of changes in currency translation rates, Net sales in MC increased 5.1% compared to 2020, due to growth in all major grades of product, led by engineered fabric and packaging grades.

Three and nine month comparison

MC gross profit margin was flat at 51.5% in each of the third quarters in 2021 and 2020.

For the nine months ended September 31, 2021, gross profit margin was lower compared to the same period in 2020, due to higher input and fixed costs, partially offset by improved absorption.

Changes in currency translation rates, driven by a weaker Euro, had the effect of decreasing first-quarter 2022 sales by $2.5 million.

Excluding the effect of changes in currency translation rates, Net sales in MC increased 5.7% compared to the first quarter of 2021, driven by growth in sales for packaging and tissue grades.

The increase in MC Gross profit was primarily due to higher sales as noted above, while MC gross margins were maintained at 51.5% year over year.

Operating Income

Three and nine month comparison

The operating income improvement in the third quarter of 2021, compared to the same period in 2020, was primarily due to higher gross profit and lower STG&R expenses.

The increase in operating income in nine months ended September 30, 2021 was driven by higher gross profit, offset by higher STG&R expenses, compared to the same period in 2020.

Operating income remained largely in line with the prior year, as higher STG&R expenses, driven by customer credit loss reserve increases related to our dissolution of business relationships in Russia, higher incentive compensation, and the unfavorable effect of the revaluation of foreign currency balances, more than offset the increase in gross profit.

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.

The Albany Engineered Composites segment, including Albany Safran Composites, LLC, 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 LEAP engine is used on the Boeing 737 MAX, Airbus A320neo and COMAC aircraft family of jets.

Other significant AEC programs include components for the F-35, components for the CH-53K helicopter, fuselage frames for the Boeing 787, and the fan case for the GE9X engine.

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

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

Review of Operations

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

Three months ended

(in thousands, except percentages)

2021 2020 2021 2020

Net sales $ 90,107 $ 74,156

2 unchanged sentences

STG&R expenses

9,769 8,646 28,909 26,664

Operating income 1,195 2,938

Three and nine month comparison

Third quarter 2021 net sales increased compared to third quarter 2020, mainly due to growth on LEAP and CH-53K programs, partially offset by a decline in sales for the Boeing 787 and F-35 platforms.

Net sales for the nine months ended September 30, 2021 decreased compared to those in the same period in 2020, primarily due to declines in sales for the Boeing 787 program, partially offset by growth on the CH-53K programs.

Three and nine month comparison

The decrease in gross profit for the third quarter in 2021 compared to the same period in 2020 was driven by a smaller impact from changes in the estimated profitability of long-term contracts, lower fixed cost absorption, and the effect of sharing with our customer base a portion of the AMJP grant received during the quarter.

For the year-to-date ended September 30, 2021, gross profit was lower compared to that for the same period in 2020, driven by unfavorable shift in program revenue mix.

The increase in Net sales was mainly due to growth on LEAP and CH-53K programs, partially offset by a decline on the F-35 platform.

The increase in Gross profit of $0.1 million was primarily driven by the increase in Net sales, offset by reserves recorded on inventory that was damaged at an off-site storage facility.

Long-term contracts

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

Revenue earned under these arrangements accounted for approximately 34 percent of segment revenue for year-to-date ended September 30, 2021 and 29 percent for the same period of 2020.

Revenue earned under these arrangements accounted for approximately 40 percent of segment revenue for each of the first three months of 2022 and 2021.

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

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

In accounting for those contracts, we estimate the profit margin expected at the completion of the contracts and recognize a pro-rata share of that profit during the course of the contracts using a cost-to-cost approach.

Changes in estimated contract profitability will affect revenue and gross profit when the change occurs, which could have a significant favorable or unfavorable effect on revenue and gross profit in any reporting period.

In accounting for those contracts, we estimate the profit margin expected at the completion of the contract and recognize a pro-rata share of that profit during the course of the contract using a cost-to-cost approach.

Changes in estimated contract profitability will affect

revenue and gross profit when the change occurs, which could have a significant favorable or unfavorable effect on revenue and gross profit in any reporting period.

For contracts with anticipated losses, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known.

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Operating Income

Three and nine month comparison

Operating income was lower for the three and nine months ended September 30, 2021 compared to the same periods in 2020, primarily due to lower gross profit and higher STG&R expenses.

Liquidity and Capital Resources

Operating income was lower for the three months ended March 31, 2022 compared to the same period in 2021, primarily due to lower profit margins and increased STG&R expenses.

Working Capital, Liquidity and Capital Structure

Cash Flow Summary

Nine months ended

September 30,

Three months ended

(in thousands)

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Net cash provided by/(used in) operating activities (5,391) 33,686

Net cash (used in)/ provided by investing activities (32,148) (31,475)

Net cash used in investing activities (15,754) (12,536)

Net cash (used in)/provided by financing activities 26,875 (21,694)

Effect of exchange rate changes on cash and cash equivalents (351) (2,901)

Increase/(decrease) in cash and cash equivalents 44,901 19,764

(Decrease)/increase in cash and cash equivalents 5,379 (3,445)

Cash and cash equivalents at beginning of year 302,036 241,316

2 unchanged sentences

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

Operating activities

Cash flow provided by operating activities was $148.5 million in the first nine months of 2021, compared to $83.7 million in the first nine months of 2020.

This improvement was due to improved working capital cash flows in AEC, primarily due to higher income from the LEAP program, and an increase in consolidated net income.

Cash paid for income taxes was $27.8 million and $21.9 million for the first nine months of 2021 and 2020, respectively.

The increase is primarily due to an increase in corporate income tax payments in Brazil, China and Switzerland related to prior year tax liabilities, partially offset by a decrease in corporate income tax payments in the United States due to an increase in prior year state overpayments.

At September 30, 2021, we had $286.2 million of cash and cash equivalents, of which $223.1 million was held by subsidiaries outside of the United States.

Investing and Financing Activities

Capital expenditures for the first nine months were $32.1 million in 2021 and $31.5 million in 2020.

Net cash outflows from financing activities for the year-to-date ended September 30, 2021 were higher than those for the same period in 2020, primarily due to increased net principal payments on debt.

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

Decisions with respect to whether a dividend will be paid, and the amount of the dividend, are made by the Board of Directors each quarter.

Future cash dividends will also depend on debt covenants and on the Board’s assessment of our ability to generate sufficient cash flows.

Capital Resources

Cash used in operating activities was $5.4 million in the first three months of 2022, compared to cash provided by operating activities of $33.7 million in the same period last year.

AEC experienced particularly strong working capital cash flows in Accounts receivable and Contract assets during 2021, driven by significant deliveries of LEAP components throughout the year.

In addition, timing of customer and vendor invoice payments, as well as higher incentive compensation payouts during the first three months in 2022 compared to the same period in 2021, contributed to the net cash used in operating activities.

Net cash provided by financing activities during 2022 increased $48.6 million compared to 2021, driven by increased borrowings, partially used to fund repurchases of shares.

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 to be insignificant.

The majority of our cash balance at September 30, 2021 was held by non-U.S.

subsidiaries.

Based on cash on hand and credit facilities, we anticipate that the Company has sufficient capital resources to operate for the foreseeable future.

We were in compliance with all debt covenants as of September 30, 2021.

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.

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, $350 million of borrowings were outstanding as of September 30, 2021.

Under the Credit Agreement, $427 million of borrowings were outstanding as of March 31, 2022.

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 September 16, 2021, the spread was 1.625%.

At the time of the last borrowing on March 31, 2022, 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 September 30, 2021, we would have been able to borrow an additional $350 million under the Agreement.

Based on our maximum leverage ratio and our Consolidated EBITDA, and without modification to any other credit agreements, as of March 31, 2022, we would have been able to

borrow an additional $273 million under the Agreement.

We were in compliance with all debt covenants as of March 31, 2022.

For more information, see Note 13 to the Consolidated Financial Statements.

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 March 31, 2022, we had cash and cash equivalents of approximately $307 million and availability under our Credit Agreement of $273 million, for a total liquidity of approximately $580 million.

As of March 31, 2022, $289.5 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 March 31, 2022, 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 $15.8 million and $12.5 million for the first three months ended March 31, 2022 and 2021, respectively, comprised 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 the first three months of 2022, we paid $6.7 million in dividends and repurchased 515 thousand shares of our Class A Common shares at a cost of $43.9 million under the $200 million share repurchase program that our Board approved in October 2021.

Off-Balance Sheet Arrangements

As of September 30, 2021, we have no off-balance sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.

As of March 31, 2022, we have no off-balance sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.

Recent Pronouncements

On March 9, 2022, the SEC issued a proposed rule to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies.

The proposed rules are intended to provide more consistent, comparable and decision-useful information so that investors can better evaluate the Company’s exposure to cybersecurity risks, incidents, and strategies to mitigate risks and incidents.

We will continue to monitor developments around this proposed rule.

On March 21, 2022, the SEC issued a proposed rule that would enhance and standardize the climate-related disclosures provided by public companies.

Under the proposed rule, we would be required to provide quantitative and qualitative disclosures in registration statements and annual reports that include climate-related financial impact and expenditure metrics as well as a discussion of climate-related impacts on financial estimates and assumptions, all of which would be presented in a footnote to the financials statements.

Such disclosures would also be subject to management's internal control over financial reporting ("ICFR") and external audit.

As a Company, we have long been committed to sustainable practices and corporate social responsibility and have more recently taken steps to articulate our values and goals, some of which are summarized in our published sustainability report that is included at our website www.albint.com.

In 2020, we began establishing more formalized and scalable approaches to our sustainability practices, reporting and systems, in order to ensure we prioritize efforts that are impactful to our business and stakeholders.

We have begun to incorporate certain climate-related disclosures and risk factors in our existing disclosures to this point, but recognize the benefit of clearly defined rules and metrics that may drive more measurable, consistent, comparable and reliable information for investors.

We will continue to monitor developments around this proposed rule, which once finalized, is expected to allow for a multi-year phased transition to achieving compliance.

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 quarter of specific restructuring costs, former CEO termination 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 quarters in which such items had a greater or lesser effect, or no effect.

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

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

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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;

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

Three months ended September 30, 2021

(in thousands) Machine Clothing Albany Engineered

Composites Corporate expenses

and other Total Company

Operating income/(loss) (GAAP) $ 55,467 $ 2,917 $ (13,898) $ 44,486

Interest, taxes, other income/(expense) — — (13,544) (13,544)

Net income/(loss) (GAAP) 55,467 2,917 (27,442) 30,942

Interest expense, net — — 3,734 3,734

Income tax expense — — 12,889 12,889

Depreciation and amortization expense 5,014 12,265 935 18,214

EBITDA (non-GAAP) 60,481 15,182 (9,884) 65,779

Restructuring expenses, net 251 (81) 17 187

Foreign currency revaluation (gains)/losses (1,571) 31 472 (1,068)

AMJP grant — 963 (5,832) (4,869)

Acquisition/integration costs — 297 — 297

Pre-tax (income) attributable to noncontrolling interest — (95) — (95)

Adjusted EBITDA (non-GAAP) $ 59,161 $ 16,297 $ (15,227) $ 60,231

Three months ended September 30, 2020

Three months ended March 31, 2022

(in thousands) Machine Clothing Albany Engineered

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Foreign currency revaluation (gains)/losses 1,057 423 (3,740) (2,260)

Dissolution of business relationships in Russia 1,787 — 781 2,568

Acquisition/integration costs — 282 — 282

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Adjusted EBITDA (non-GAAP) $ 57,654 $ 13,687 $ (10,305) $ 61,036

Nine months ended September 30, 2021

Three months ended March 31, 2021

(in thousands) Machine Clothing Albany Engineered

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

AMJP grant 963 (5,832) (4,869)

Acquisition/integration costs — 314 — 314

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

Nine months ended September 30, 2020

(in thousands) Machine Clothing Albany Engineered

Composites Corporate expenses

and other Total Company

Operating income/(loss) (GAAP) $ 149,418 $ 22,749 $ (41,073) $ 131,094

Interest, taxes, other income/(expense) — — (61,461) (61,461)

Net income/(loss) (GAAP) 149,418 22,749 (102,534) 69,633

Interest expense, net — — 10,042 10,042

Income tax expense — — 37,504 37,504

Depreciation and amortization expense 15,142 36,192 2,972 54,306

EBITDA (non-GAAP) 164,560 58,941 (52,016) 171,485

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

Foreign currency revaluation (gains)/losses (1,265) 501 14,705 13,941

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

Acquisition/integration costs — 867 — 867

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

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

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

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

Three months ended September 30, 2021

(in thousands, except per share amounts) Pre tax

Effect After tax

Effect Per share

Restructuring expenses, net $ 187 $ 55 $ 132 $ 0.00

Foreign currency revaluation (gains)/losses (1,068) (314) (754) (0.02)

AMJP grant (4,869) (1,446) (3,423) (0.11)

Acquisition/integration costs 297 89 208 0.01

Three months ended September 30, 2020

Three months ended March 31, 2022

(in thousands, except per share amounts Pre tax

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Foreign currency revaluation (gains)/losses (2,260) (653) (1,607) (0.05)

Dissolution of business relationships in Russia 2,568 332 2,236 0.07

Acquisition/integration costs 282 84 198 0.01

Nine months ended September 30, 2021

Three months ended March 31, 2021

(in thousands, except per share amounts) Pre tax

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

AMJP grant (4,869) (1,446) (3,423) (0.11)

Acquisition/integration costs 314 94 220 0.01

Nine months ended September 30, 2020

(in thousands, except per share amounts) Pre tax

Effect After tax

Effect Per share

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

Foreign currency revaluation (gains)/losses (a) 13,941 (483) 14,424 0.46

Former CEO termination costs 2,742 713 2,029 0.06

Acquisition/integration costs 867 259 608 0.03

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

The following table provides a reconciliation of Earnings per share to Adjusted Earnings per share:

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

The following table contains the calculation of Adjusted EPS:

Three months ended March 31,

Per share amounts (Basic)

2021 2020 2021 2020

Earnings per share (GAAP) $ 0.87 $ 0.85

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Foreign currency revaluation (gains)/losses (0.05) 0.01

AMJP grant (0.11) — (0.11) —

Former CEO termination costs — — — 0.06

Dissolution of business relationships in Russia 0.07 —

Acquisition/integration costs 0.01 0.01

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(in thousands)

September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020

March 31, 2022 December 31, 2021 March 31, 2021

Current maturities of long-term debt $ — $ — $ 2

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis