What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-25 compared with 2022-07-26 · 145 added, 139 removed, 356 unchanged (44% of the section changed)

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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 six months of 2022.

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

The Russia-Ukraine war 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.

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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 six 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 input cost pressures.

Raw material costs increased due to higher crude oil and natural gas prices, coupled by non-contractual vendor surcharges to sustain price pressure and maintain their operations.

Supply limitation and high energy costs continue to put upward pressure on indirect supply costs.

Lastly, logistics costs remained elevated, due to higher fuel prices and limited availability.

For the year-to-date ended September 30, 2022, our segments saw higher input costs due to increased energy costs, tight supply market, and global logistics challenges.

During the quarter ended September 30, 2022, our MC segment experienced higher energy prices, driven by energy surcharges supporting increased raw material prices.

Such was due to capacity constraints, due to limited opportunity to move supply globally from Europe.

We continued to identify alternatives to secure materials in the face of intense supply constraints.

Logistics costs have begun to stabilize compared to the same period last year, though they remained higher than those pre-pandemic.

We anticipate inflationary pressure to remain for the balance of this fiscal year and energy cost escalation to be a primary input cost pressure in the near term.

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

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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.

However, it has not been immune from supply chain disruptions.

Increasing fuel prices coupled with higher demand has resulted in increased freight costs during the quarter, along with ongoing logistic constraints.

Due to the nature of AEC’s contracts with its customers, we currently anticipate passing through a majority of such cost increases to the customers.

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The following table summarizes our Net sales by business segment:

Three months ended June 30, Six months ended June 30,

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

(in thousands, except percentages)

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Three month comparison

• Changes in currency translation rates had the effect of decreasing Net sales by $7.4 million during the second quarter of 2022, as compared to 2021, principally due to a weaker Euro in 2022.

• Changes in currency translation rates had the effect of decreasing Net sales by $10.2 million during the third 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 16.5% compared to the same period in 2021.

• Net sales in MC decreased 1.8% compared to the second quarter of 2021, driven by declines in sales for engineered fabrics and tissue grades, partially due to our previously announced cessation of doing business in Russia.

• Net sales in MC increased 3.8% compared to the third quarter of 2021, driven by increased sales of packaging, pulp and engineered fabrics.

• Net sales in AEC increased 41.6%, mainly due to growth on CH-53K and LEAP programs.

Six month comparison

• Changes in currency translation rates had the effect of decreasing Net sales by $11.1 million during the first six months of 2022, as compared to 2021, principally due to a weaker Euro in 2022.

Nine month comparison

• Changes in currency translation rates had the effect of decreasing Net sales by $20.2 million during the first nine months 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 14.1% compared to the same period in 2021.

• Net sales in MC increased 1.8% compared to the first six months of 2021, primarily due to growth in sales for pulp and publication grades.

• Net sales in MC increased 2.5% compared to the first nine months of 2021, driven by increased sales of packaging, pulp and engineered fabrics.

• Net sales in AEC increased 37.7%, primarily due to growth on CH-53K and LEAP programs.

The following table summarizes Gross profit by business segment:

Three months ended June 30, Six months ended June 30,

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

(in thousands, except percentages)

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Three month comparison

The decrease in second quarter 2022 Gross profit, as compared to the same period in 2021, was due to a decline in MC Gross profit, partially offset by an increase at AEC.

The increase in third quarter 2022 Gross profit, as compared to the same period in 2021, was due to increased Net sales at AEC.

Gross profit as a percentage of sales:

• Decreased from 52.9% in 2021 to 52.0% in 2022 in MC, due to an increase in input costs.

• Decreased from 23.0% in 2021 to 19.8% in 2022 in AEC, principally due to a smaller impact from changes in the estimated profitability of long-term contracts, which increased Gross profit by $1.2 million for the second quarter of 2022, compared to an increase of $4.3 million for the second quarter of 2021.

Six month comparison

The increase in Gross profit during the first half of 2022, as compared to the same period in 2021, was due to an increase in AEC Gross profit, partially offset by a decline in Gross profit in MC.

• Remained consistent year over year in MC, increasing from 51.5% in 2021 to 51.7% in 2022.

• Increased from 16.1% in 2021 to 19.8% in 2022 in AEC, principally due to a favorable mix of program revenue and improved productivity, driven by CH-53K and LEAP programs.

Changes in the estimated profitability of long-term contracts increased Gross profit by $2.6 million for the third quarter of 2022, compared to an increase of $2.1 million for the third quarter of 2021.

Nine month comparison

The increase in Gross profit during the first nine months of 2022, as compared to the same period in 2021, was due to increased Net sales at AEC.

Gross profit as a percentage of sales:

• Decreased from 52.2% in 2021 to 51.7% in 2022 in MC, due to an increase in input costs.

• Decreased from 19.7% in 2021 to 17.0% in 2022 in AEC, driven by changes in the estimated profitability of long-term contracts, which decreased Gross profit by $0.6 million in the first half of 2022, as compared to an increase in Gross profit of $3.7 million in the first half of 2021.

In addition, during the first quarter, reserves were recorded on inventory that was damaged at an off-site storage facility, further reducing gross profit as a percent of sales.

• Remained consistent year over year in MC, decreasing from 52.0% in 2021 to 51.7% in 2022 in MC, due to an increase in input costs.

• Decreased from 18.5% in 2021 to 18.0% in 2022 in AEC, primarily driven by reserves recorded on inventory that was damaged at an off-site storage facility in the first quarter, reducing gross profit as a percent of sales.

Changes in the estimated profitability of long-term contracts were also less favorable, increasing Gross profit by $2.0 million in the first nine months of 2022, as compared to an increase of $2.4 million for the same period last year.

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

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

Three months ended June 30, Six months ended June 30,

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

(in thousands, except percentages)

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Three month comparison

The overall decrease in STG&R expenses in the second quarter of 2022, compared to the same period in 2021, was due to the net effect of the following:

• In MC, changes in currency translation rates had the effect of decreasing STG&R by $1.8 million during 2022, driven by the weaker Euro, as compared to an increase to expense by $1.9 million during 2021.

The overall decrease in STG&R expenses in the third quarter of 2022, compared to the same period in 2021, was due to the net effect of the following:

• In MC, changes in currency translation rates had the effect of decreasing STG&R by $1.5 million during 2022, driven by the weaker Euro.

• In AEC, selling and general expenses increased $0.7 million due to investment in business development activities, and research expense increased $0.8 million over the prior year.

Six month comparison

The overall increase in STG&R expenses in the first six months of 2022, compared to the same period in 2021, was due to the net effect of the following:

• In MC, changes in currency translation rates had the effect of decreasing STG&R by $0.8 million during 2022, driven by the weaker Euro, as compared to an increase to expense by $1.4 million during 2021.

Nine month comparison

The overall increase in STG&R expenses in the first nine months of 2022, compared to the same period in 2021, was due to the net effect of the following:

• In MC, changes in currency translation rates had the effect of decreasing STG&R by $3.1 million during 2022, driven by the weaker Euro.

This favorability was partially offset by customer credit loss reserve increases related to our dissolution of business relationships in Russia.

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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 June 30, Six months ended June 30,

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

(in thousands) 2022 2021 2022 2021

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

Three months ended June 30, Six months ended June 30,

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

(in thousands) 2022 2021 2022 2021

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Other Earnings Items

Three months ended June 30, Six months ended June 30,

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

(in thousands) 2022 2021 2022 2021

Interest expense, net $ 3,794 $ 3,734 $ 11,336 $ 11,521

Pension settlement expense 49,128 — 49,128 —

AMJP grant — (5,832) — (5,832)

Other (income)/expense, net (6,918) 2,753 (17,891) 4,215

Income tax expense 14,458 13,446 25,456 23,486

Income tax expense/(benefit) (3,183) 12,889 22,273 36,375

Net income/(loss) attributable to the noncontrolling interest 129 80 635 150

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

Pension settlement expense

In the third quarter, the Company took actions to settle certain pension plan liabilities in the U.S., leading to charges totaling $49.1 million.

No similar charges were incurred in the prior year.

During the third quarter of 2021, the Company was awarded an Aviation Manufacturing Jobs Protection Program ("AMJP") grant of $5.8 million, under the American Rescue Plan of the U.S.

Department of Transportation.

No such award was granted during 2022.

Other (income)/expense, net

Other (income)/expense, net, included foreign currency related transactions which resulted in gains of $7.3 million and $11.0 million in the three and six month periods ended June 30, 2022, respectively, as compared to losses of $0.2 million

and $0.3 million in the three and six month periods ended June 30, 2021, respectively.

The weaker Euro during the three and six month periods ended June 30, 2022 led to the gains on foreign currency related transactions during such periods.

Other (income)/expense, net, was primarily driven by foreign currency gains of $6.6 million and $17.7 million in the three and nine month periods ended September 30, 2022, respectively, as compared to losses of $0.5 million and $0.8 million in the three and nine month periods ended September 30, 2021, respectively.

The weaker Euro during the three and nine month periods ended September 30, 2022 led to the gains on foreign currency during such periods.

Income Tax expense/(benefit)

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

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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 Company’s effective tax rates for the second quarter of 2022 was 26.9%, lower compared to 30.0% for the same period in 2021, mainly due to favorable discrete tax adjustments in the current period.

For the first half of 2022, the Company’s effective tax rate was 27.4%, lower compared to 28.5% for the same period in 2021, mainly due to a lower forecasted annual effective tax run rate.

The decrease in the forecasted annual effective tax run rate is mainly attributable to a change in forecasted earnings mix and the foreign exchange loss on previously taxed income targeted for future repatriation.

The Company’s effective tax rates for the third quarter of 2022 was (41.6%), lower compared to 29.4% for the same period in 2021, mainly due to favorable discrete tax adjustments in the current period.

For the first nine months of 2022, the Company’s effective tax rate was 22.2%, lower compared to 28.8% for the same period in 2021, mainly due to favorable discrete tax adjustments in the current year.

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

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Machine Clothing Segment

Machine Clothing is our primary business segment and accounted for 60% of our consolidated revenues during the six months of 2022.

Machine Clothing is our primary business segment and accounted for 60% of our consolidated revenues during the first nine months of 2022.

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

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Our strategy for meeting these challenges continues to be to grow share in all markets, with new products and technology, and to maintain our manufacturing footprint to align with global demand, while we offset the effects of inflation through continuous productivity improvement.

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

Review of Operations

Three months ended June 30, Six months ended June 30,

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

(in thousands, except percentages)

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• Net sales decreased by 0.5%.

• Changes in currency translation rates, driven by a weaker Euro, had the effect of decreasing second-quarter 2022 sales by $5.4 million.

• Excluding the effect of changes in currency translation rates, Net sales in MC decreased 1.8% compared to the second quarter of 2021, driven by declines in sales for engineered fabrics and tissue grades, partially due to our decision to cease doing business in Russia.

Six month comparison

• Changes in currency translation rates, driven by a weaker Euro, had the effect of decreasing third-quarter 2022 sales by $6.6 million.

• Excluding the effect of changes in currency translation rates, Net sales in MC increased 3.8% compared to the third quarter of 2021, driven by increased sales of packaging, pulp and engineered fabrics.

Nine month comparison

• Net sales decreased by 0.7%.

• Changes in currency translation rates, driven by a weaker Euro, had the effect of decreasing 2022 sales by $14.5 million compared to the same period in 2021.

• Excluding the effect of changes in currency translation rates, Net sales in MC increased 1.8% compared to 2021, driven by growth in sales for pulp and publication grades.

For the three and six month periods ended June 30, 2022, the decrease in MC Gross profit was primarily due to lower sales as noted above, as well as increases in input costs.

• Excluding the effect of changes in currency translation rates, Net sales in MC increased 2.5% compared to 2021, driven by growth in sales of packaging, pulp and engineered fabrics.

For the three and nine month periods ended September 30, 2022, the decrease in MC Gross profit was primarily driven by changes in currency translation rates, principally the weaker Euro, as well as increases in input costs.

Operating Income

The reduction in Operating income was driven by lower gross profit, partially offset by the effect of currency translation rates, most notably the weaker Euro, reducing STG&R expenses.

The increase in Operating income was driven by lower STG&R expenses over the prior year.

Albany Engineered Composites Segment

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Review of Operations

Three months ended June 30, Six months ended June 30,

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

(in thousands, except percentages)

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Operating income 9,958 2,917 20,688 13,019

For the three and six month periods ended June 30, 2022, the increase in Net sales was mainly due to growth on CH-53K and LEAP programs.

For the three and six month periods ended June 30, 2022, the decrease in Gross profit was primarily driven by changes in the estimated profitability of long-term contracts, which were more muted during 2022, as compared to larger favorable changes in the prior year.

We recognized $0.6 million net unfavorable change in the estimated profitability of long-term contracts during the first six months of 2022, as compared to a favorable change of $3.7 million in the first six months of 2021.

In addition, incremental reserves in excess of $2 million were recorded on inventory that was damaged at an off-site storage facility, decreasing Gross profit during 2022.

Long-term contracts

For the three and nine month periods ended September 30, 2022, the increase in Net sales was mainly due to growth on CH-53K and LEAP programs.

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 40 percent of segment revenue for each of the first six months of 2022 and 2021.

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

LEAP engines are currently used on the Airbus A320neo, Boeing 737 MAX, and COMAC 919 aircraft.

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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.

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 cost allocations, which are treated as period expenses.

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

For the three and nine month periods ended September 30, 2022, the increase in Gross profit was primarily due to a favorable mix of program revenue and improved productivity, driven by CH-53K and LEAP programs.

Gross profit during the nine month period ended September 30, 2022, was reduced by a $2 million reserve recorded on inventory that was damaged at an off-site storage facility.

Changes in the estimated profitability of long-term contract had an insignificant effect on Gross profit year over year.

Operating Income

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Cash Flow Summary

Six months ended June 30,

Nine months ended September 30,

(in thousands)

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Net cash used in investing activities (52,832) (32,148)

Net cash provided by/(used in) financing activities 35,404 (62,504)

Net cash used in financing activities (9,119) (69,339)

Effect of exchange rate changes on cash and cash equivalents (30,910) (2,111)

Increase in cash and cash equivalents 18,834 12,014

(Decrease)/increase in cash and cash equivalents (25,554) 44,901

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

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

Cash provided in operating activities was $37.7 million in the first six months of 2022, compared to $95.6 million in the same period last year.

Cash provided in operating activities was $67.3 million in the first nine months of 2022, compared to $148.5 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, during second quarter of 2022, the Company made necessary investments in working capital as it prepared to execute on its recently expanded CH-53K scope of work.

In addition, during 2022, the Company made necessary investments in working capital as it prepared to execute on its recently expanded CH-53K scope of work.

Customer payment is expected to be collected in a later period.

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

In the third quarter of 2022, we made contributions of approximately $12.6 million to the U.S.

pension plan, in line with the Company's plan to reduce pension obligations over time.

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

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 $36.0 million and $23.1 million for the first six months ended June 30, 2022 and 2021, respectively, comprised of both sustaining and return seeking projects.

Our capital expenditures totaled $52.8 million and $32.1 million for the first nine months ended September 30, 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.

Net cash provided by financing activities during 2022 was $35.4 million compared to net cash used in financing activities of $62.5 million in 2021, driven by increased borrowings during the current year that were partially used to fund repurchases of shares.

Net cash used in financing activities during 2022 was $9.1 million compared to net cash used in financing activities of $69.3 million in 2021, driven by increased borrowings during the current year that were 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.

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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, $485 million of borrowings were outstanding as of June 30, 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 June 27, 2022, the spread was 1.625%.

Under the Credit Agreement, $447 million of borrowings were outstanding as of September 30, 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 26, 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 Adjusted EBITDA (as defined in the Credit Agreement), and without modification to any other credit agreements, as of June 30, 2022, we would have been able to borrow an additional $215 million under the Agreement.

We were in compliance with all debt covenants as of June 30, 2022.

Based on our maximum leverage ratio and our Consolidated Adjusted EBITDA (as defined in the Credit Agreement), and without modification to any other credit agreements, as of September 30, 2022, we would have been able to borrow an additional $253 million under the Agreement.

We were in compliance with all debt covenants as of September 30, 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 June 30, 2022, we had cash and cash equivalents of approximately $321 million and availability under our Credit Agreement of $215 million, for a total liquidity of approximately $536 million.

As of June 30, 2022, $288.5 million of our total cash and cash equivalents was held by non-U.S.

As of September 30, 2022, we had cash and cash equivalents of approximately $276 million and availability under our Credit Agreement of $253 million, for a total liquidity of approximately $529 million.

As of September 30, 2022, $245.6 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 June 30, 2022, and are intended to remain indefinitely invested in foreign operations.

were approximately $190.2 m illion at September 30, 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.

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

During the first six months of 2022, we paid $13 million in dividends and repurchased 1 million shares of our Class A Common shares at a cost of $85 million under the $200 million share repurchase program that our Board approved in October 2021.

During the first nine months of 2022, we paid $20 million in dividends and repurchased 1 million shares of our Class A Common shares at a cost of $85 million under the $200 million share repurchase program that our Board approved in October 2021.

Off-Balance Sheet Arrangements

As of June 30, 2022, we have no off-balance sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.

As of September 30, 2022, we have no off-balance sheet arrangements required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.

Recent Pronouncements

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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.

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Non-GAAP Measures

This Form 10-Q contains certain non-GAAP measures, including:

Net sales, and percent change in Net sales, excluding the impact of currency translation effects (for each segment and on a consolidated basis);

EBITDA and Adjusted EBITDA (for each segment and on a consolidated basis, represented in dollars or as a percentage of net sales);

This Form 10-Q contains certain non-GAAP measures, that should not be considered in isolation or as a substitute for the related GAAP measures.

Such non-GAAP measures include net sales and percent change in net sales, excluding the impact of currency translation effects ;

EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin;

Net leverage ratio;

and Adjusted earnings per share (or Adjusted EPS).

Such items are provided

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

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

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

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

An understanding of the impact in a particular quarter of specific restructuring costs, 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.

Management believes that these non-GAAP measures provide additional useful information to investors regarding the Company’s operational performance.

Presenting Net sales and change in Net sales, after currency effects are excluded, provides management and investors insight into underlying sales trends.

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

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dollar amount as reported in the current period.

The Company calculates EBITDA by removing the following from Net income:

Interest expense net, Income tax expense, and Depreciation and amortization expense.

Adjusted EBITDA is calculated by:

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

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

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

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

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

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

restructuring charges;

former CEO severance costs;

inventory write-offs associated with discontinued businesses;

charges and credits related to pension settlements and curtailments;

foreign currency revaluation losses (or gains);

and acquisition-related expenses.

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

Such measures are not considered measurements under GAAP, and should be considered in addition to, but not as substitutes for, the information contained in the Company’s statements of income.

EBITDA (calculated as net income excluding interest, income taxes, depreciation and amortization), Adjusted EBITDA, and Adjusted EPS are performance measures that relate to the Company’s continuing operations.

Company defines Adjusted EBITDA as EBITDA excluding costs or benefits that are not reflective of the Company’s ongoing or expected future operational performance.

Such excluded costs or benefits do not consist of normal, recurring cash items necessary to generate revenues or operate our business.

Adjusted EBITDA margin represents Adjusted EBITDA expressed as a percentage of net sales.

The Company defines Adjusted EPS as basic earnings per share (GAAP), adjusted by the after tax per share amount of costs or benefits not reflective of the Company’s ongoing or expected future operational performance.

The income tax effects are calculated using the applicable statutory income tax rate of the jurisdictions where such costs or benefits were incurred or the effective tax rate applicable to total company results.

The Company’s Adjusted EBITDA, Adjusted EBITDA margin, and Adjusted EPS may not be comparable to similarly titled measures of other companies.

Net debt aids investors in understanding the Company’s debt position if all available cash were applied to pay down indebtedness.

Net leverage ratio informs the investors of the Company's financial leverage at the end of the reporting period, providing an indicator of the Company's ability to repay its debt.

We encourage investors to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.

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

Three months ended June 30, 2022

Three months ended September 30, 2022

(in thousands) Machine Clothing Albany Engineered

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and other Total Company

Operating income/(loss) (GAAP) $ 54,861 $ 9,535 $ (13,681) $ 50,715

Interest, taxes, other income/(expense) — — (11,346) (11,346)

Net income/(loss) (GAAP) $ 57,247 $ 9,958 $ (56,382) $ 10,823

Interest expense, net — — 3,794 3,794

Income tax expense — — 14,458 14,458

Income tax expense/(benefit) — — (3,183) (3,183)

Depreciation and amortization expense 4,913 11,303 818 17,034

1 unchanged sentence

Restructuring expenses, net 42 — — 42

Foreign currency revaluation (gains)/losses (1,816) 210 (7,271) (8,877)

Foreign currency revaluation (gains)/losses (a) (2,931) 122 (6,633) (9,442)

Dissolution of business relationships in Russia (214) — — (214)

Pension settlement expense — — 49,128 49,128

Acquisition/integration costs — 255 — 255

1 unchanged sentence

Adjusted EBITDA (non-GAAP) $ 59,057 $ 21,462 $ (12,458) $ 68,061

Three months ended June 30, 2021

Three months ended September 30, 2021

(in thousands) Machine Clothing Albany Engineered

1 unchanged sentence

and other Total Company

Operating income/(loss) (GAAP) $ 55,902 $ 7,164 $ (13,100) $ 49,966

Interest, taxes, other income/(expense) — — (18,526) (18,526)

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

4 unchanged sentences

Restructuring expenses, net 251 (81) 17 187

Foreign currency revaluation (gains)/losses 1,908 (244) 174 1,838

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

AMJP grant — 963 (5,832) (4,869)

Acquisition/integration costs — 297 — 297

1 unchanged sentence

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

Six months ended June 30, 2022

Nine months ended September 30, 2022

(in thousands) Machine Clothing Albany Engineered

1 unchanged sentence

and other Total Company

Operating income/(loss) (GAAP) $ 104,505 $ 10,730 $ (25,766) $ 89,469

Interest, taxes, other income/(expense) — — (22,025) (22,025)

Net income/(loss) (GAAP) $ 161,752 $ 20,688 $ (104,173) $ 78,267

4 unchanged sentences

Restructuring expenses, net 255 — 13 268

Foreign currency revaluation (gains)/losses (759) 633 (11,011) (11,137)

Foreign currency revaluation (gains)/losses (a) (3,690) 755 (17,644) (20,579)

Dissolution of business relationships in Russia 1,573 — 781 2,354

Pension settlement expense — — 49,128 49,128

Acquisition/integration costs — 806 — 806

1 unchanged sentence

Adjusted EBITDA (non-GAAP) $ 174,606 $ 56,408 $ (35,886) $ 195,128

Six months ended June 30, 2021

Nine months ended September 30, 2021

(in thousands) Machine Clothing Albany Engineered

1 unchanged sentence

and other Total Company

Operating income/(loss) (GAAP) $ 106,264 $ 10,102 $ (24,581) $ 91,785

Interest, taxes, other income/(expense) — — (32,735) (32,735)

Net income/(loss) (GAAP) $ 161,731 $ 13,019 $ (84,758) $ 89,992

4 unchanged sentences

Restructuring expenses, net 193 (40) 77 230

Foreign currency revaluation (gains)/losses 1,415 332 341 2,088

Foreign currency revaluation (gains)/losses (a) (156) 363 813 1,020

AMJP grant — 963 (5,832) (4,869)

Acquisition/integration costs — 911 — 911

7 unchanged sentences

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

Three months ended June 30, 2022

Three months ended September 30, 2022

(in thousands, except per share amounts) Pre tax

2 unchanged sentences

Restructuring expenses, net $ 42 $ 6 $ 36 $ 0.00

Foreign currency revaluation (gains)/losses (8,877) (2,492) (6,385) (0.20)

Foreign currency revaluation (gains)/losses (a) (9,442) (2,694) (6,748) (0.22)

Dissolution of business relationships in Russia (214) (18) (196) (0.01)

Pension settlement expense 49,128 11,947 37,181 1.20

Tax impact of stranded OCI benefit from Tax Cuts and Job Act (TCJA) for pension liability (b) — 5,217 (5,217) (0.17)

Acquisition/integration costs 255 77 178 0.01

Three months ended June 30, 2021

Three months ended September 30, 2021

(in thousands, except per share amounts) Pre tax

2 unchanged sentences

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

Foreign currency revaluation (gains)/losses 1,838 781 1,057 0.03

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

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

Acquisition/integration costs 297 89 208 0.01

Six months ended June 30, 2022

Nine months ended September 30, 2022

(in thousands, except per share amounts) Pre tax

2 unchanged sentences

Restructuring expenses, net $ 268 $ 75 $ 193 $ 0.01

Foreign currency revaluation (gains)/losses (11,137) (3,135) (8,002) (0.25)

Foreign currency revaluation (gains)/losses (a) (20,579) (5,829) (14,750) (0.47)

Dissolution of business relationships in Russia 2,354 314 2,040 0.06

Pension settlement expense 49,128 11,947 37,181 1.20

Tax impact of stranded OCI benefit from TCJA for pension liability (b) — 5,217 (5,217) (0.17)

Acquisition/integration costs 806 241 565 0.03

Six months ended June 30, 2021

Nine months ended September 30, 2021

(in thousands, except per share amounts) Pre tax

2 unchanged sentences

Restructuring expenses, net $ 230 $ 67 $ 163 $ 0.00

Foreign currency revaluation (gains)/losses 2,088 646 1,442 0.04

Foreign currency revaluation (gains)/losses (a) 1,020 332 688 0.02

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

Acquisition/integration costs 911 273 638 0.03

The following table contains the calculation of Adjusted EPS:

Three months ended June 30, Six months ended June 30,

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

Per share amounts (Basic)

3 unchanged sentences

Restructuring expenses, net — — 0.01 —

Foreign currency revaluation (gains)/losses (0.20) 0.03 (0.25) 0.04

Foreign currency revaluation (gains)/losses (a) (0.22) (0.02) (0.47) 0.02

Dissolution of business relationships in Russia (0.01) — 0.06 —

Pension settlement charge 1.20 — 1.20 —

Tax impact of stranded OCI benefit from Tax Cuts and Job Act (TCJA) for pension liability (b) (0.17) — (0.17) —

AMJP grant — (0.11) — (0.11)

Acquisition/ integration costs 0.01 0.01 0.03 0.03

Adjusted Earnings per share (non-GAAP) $ 1.15 $ 0.83 $ 3.13 $ 2.72

(a) Foreign currency revaluation (gains)/losses represent unrealized gains and losses arising from the remeasurement of monetary assets and liabilities denominated in non-functional currencies on the balance sheet date.

(b) Our Adjusted EPS excluded the benefit from the reclassification of stranded income tax effects caused by the TCJA associated with the US pension plan liability that was eliminated in September 2022, a one-time event that would not recur in the future.

Such stranded income tax effect represented a one-time benefit that distorted the effective tax rate for the quarter and year-to-date ended September 30, 2022 , and would not be indicative of ongoing or expected future income tax rate at the Company.

Management believes excluding pension settlement expense and its income tax impact, including the stranded income tax effects, from its Adjusted EBITDA and Adjusted EPS for the quarter and year-to-date ended September 30, 2022 would provide investors a transparent view and enhanced ability to better assess the Company’s ongoing operational and financial performance.

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

3 unchanged sentences

(in thousands)

June 30, 2022 March 31, 2022 December 31, 2021

September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021

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

7 unchanged sentences

The Company calculates net leverage ratio by subtracting cash and cash equivalents from total debt, and then dividing by trailing twelve months Adjusted EBITDA.

The calculation of net leverage ratio as of June 30, 2022 is as follows:

The calculation of net leverage ratio as of September 30, 2022 is as follows:

Total Company

Twelve months ended Six months ended Trailing twelve months ended

(in thousands) December 31, 2021 June 30, 2021 June 30, 2022 June 30, 2022 (non-GAAP) (a)

Operating income/(loss) (GAAP) $ 178,011 $ 91,785 $ 89,469 $ 175,695

Interest, taxes, other income/(expense) (59,243) (32,735) (22,025) (48,533)

Twelve months ended Nine months ended Trailing twelve months ended

(in thousands) December 31, 2021 September 30, 2021 September 30, 2022 September 30, 2022 (non-GAAP) (c)

Net income/(loss) (GAAP) $ 118,768 $ 89,992 $ 78,267 $ 107,043

4 unchanged sentences

Restructuring expenses, net 1,331 230 268 1,369

Foreign currency revaluation (gains)/losses (1,442) 2,088 (11,137) (14,667)

Foreign currency revaluation (gains)/losses (a) (1,442) 1,020 (20,579) (23,041)

Aviation Manufacturing Job Protection (AMJP) grant (4,731) (4,869) — 138

Dissolution of business relationships in Russia — — 2,354 2,354

Pension settlement expense — — 49,128 49,128

Acquisition/integration costs 1,166 911 806 1,061

1 unchanged sentence

Adjusted EBITDA (non-GAAP) $ 250,891 $ 190,321 $ 195,128 $ 255,698

(in thousands, except for net leverage ratio) June 30, 2022

(in thousands, except for net leverage ratio) September 30, 2022

Net debt (non-GAAP) 170,518

1 unchanged sentence

Net leverage ratio (non-GAAP) 0.67

(a) Calculated as amounts incurred during the twelve months ended December 31, 2021, less those incurred during the six months ended June 30, 2021, plus those incurred during the six months ended June 30, 2022.

(c) Calculated as amounts incurred during the twelve months ended December 31, 2021, less those incurred during the nine months ended September 30, 2021, plus those incurred during the nine months ended September 30, 2022.

Quantitative and Qualitative Disclosures about Market Risk

1 unchanged sentence

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