ALBANY INTERNATIONAL CORP /DE/ 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying Notes. Forward-looking statements This quarterly report and the documents incorporated or deemed to be incorporated by reference in this quarterly report contain statements concerning our future results and performance and other matters that are “forward-looking” statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” ”look for,” “will,” “should,” “guidance,” “guide” and similar expressions identify forward-looking statements, which generally are not historical in nature. Because forward-looking statements are subject to certain risks and uncertainties, (including, without limitation, those set forth in the Company’s most recent Annual Report on Form 10-K or prior Quarterly Reports on Form 10-Q) actual results may differ materially from those expressed or implied by such forward-looking statements. There are a number of risks, uncertainties, and other important factors that could cause actual results to differ materially from the forward-looking statements, including, but not limited to: • Conditions in the industries in which our Machine Clothing and Albany Engineered Composites segments compete, along with the general risks associated with macroeconomic conditions, including continuation of COVID-19 pandemic effects for an extended period of time; • 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; • In the Albany Engineered Composites segment, longer-than-expected timeframe for the aerospace industry to utilize existing inventories, and unanticipated reductions in demand, delays, technical difficulties, or cancellations in aerospace programs that are expected to generate revenue and drive long-term growth; • Failure to achieve or maintain anticipated profitable growth in our Albany Engineered Composites segment; and • Other risks and uncertainties detailed in this report. 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. 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 war, 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 quarter 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 war will indirectly affect all sectors of the economy. This conflict, 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 23 Index 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. Business Environment Overview and Trends Our reportable segments, Machine Clothing (“MC”) and Albany Engineered Composites (“AEC”), draw on the same advanced textiles and materials processing capabilities, and compete on the basis of product-based advantage that is grounded in those core capabilities. 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. Some of the markets in which our products are sold are expected to have low levels of growth and we face pricing pressures in all markets. Despite these market pressures on revenue, the MC business retains the potential for maintaining stable earnings in the future. MC has been a significant generator of cash, and we seek to maintain the cash-generating potential of this business by maintaining the low costs that we have achieved through continuous focus on cost-reduction initiatives, and competing vigorously by using our differentiated and technically superior products to reduce our customers’ total cost of operation and improve their paper quality. The AEC segment provides significant longer term growth potential for our Company. Our strategy is to grow by focusing our proprietary 3D-woven technology, as well as our non-3D technology capabilities, on high-value aerospace (both commercial and defense) applications, while at the same time performing successfully on our portfolio of growth programs. AEC (including Albany Safran Composites, LLC (“ASC”), in which our customer, SAFRAN Group, owns a 10 percent noncontrolling interest) supplies a number of customers in the aerospace industry. AEC’s largest aerospace customer is the SAFRAN Group and sales to SAFRAN, through ASC, (consisting primarily of fan blades and cases for CFM’s LEAP engine) accounted for approximately 12 percent of the Company’s consolidated Net sales in 2021. AEC, through ASC, also supplies 3D-woven composite fan cases for the GE9X engine. AEC’s current portfolio of non-3D programs includes components for the CH-53K helicopter, components for the F-35, missile bodies for Lockheed Martin’s JASSM air-to-surface missiles, fuselage components for the Boeing 787, and vacuum waste tanks for Boeing 7-Series aircraft. AEC is actively engaged in research to develop new applications in both commercial and defense aircraft engine and airframe markets. In 2021, approximately 47 percent of AEC sales were related to U.S. 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 $1.6 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 (income)/expense, 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. 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. 24 Index 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. After consideration of possible offsets through corresponding price increases to our customers and productivity improvements, we 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, or an unfavorable impact to the segment gross margin of up to 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. 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. 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. 25 Index Consolidated Results of Operations Net sales The following table summarizes our Net sales by business segment: Three months ended September 30, Nine months ended September 30, (in thousands, except percentages) 2022 2021 % Change 2022 2021 % Change Machine Clothing $153,389 $154,171 -0.5 % $459,121 $462,298 -0.7 % Albany Engineered Composites 107,174 78,271 36.9 % 306,980 227,024 35.2 % Total $260,563 $232,442 12.1 % $766,101 $689,322 11.1 % 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 2022 Decrease due to changes in currency translation rates Q3 2022 sales on same basis as Q3 2021 currency translation rates Net sales as reported, Q3 2021 % Change compared to Q3 2021, excluding currency rate effects Machine Clothing $ 153,389 $ (6,570) $ 159,959 $ 154,171 3.8 % Albany Engineered Composites 107,174 (3,637) 110,811 78,271 41.6 % Total $ 260,563 $ (10,207) $ 270,770 $ 232,442 16.5 % (in thousands, except percentages) Net sales as reported, YTD 2022 Decrease due to changes in currency translation rates YTD 2022 sales on same basis as 2021 currency translation rates Net sales as reported, YTD 2021 % Change compared to 2021, excluding currency rate effects Machine Clothing $ 459,121 $ (14,545) $ 473,666 $ 462,298 2.5 % Albany Engineered Composites 306,980 (5,631) 312,611 227,024 37.7 % Total $ 766,101 $ (20,176) $ 786,277 $ 689,322 14.1 % Three month comparison • 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 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. 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 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. Gross Profit The following table summarizes Gross profit by business segment: 26 Index Three months ended September 30, Nine months ended September 30, (in thousands, except percentages) 2022 2021 2022 2021 Machine Clothing $ 79,232 $ 79,437 $ 237,434 $ 240,427 Albany Engineered Composites 21,261 12,605 55,256 41,889 Total $ 100,493 $ 92,042 $ 292,690 $ 282,316 % of Net sales 38.6 % 39.6 % 38.2 % 41.0 % Three month comparison 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: • 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: • 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 September 30, Nine months ended September 30, (in thousands, except percentages) 2022 2021 2022 2021 Machine Clothing $ 21,941 $ 23,717 $ 75,427 $ 78,501 Albany Engineered Composites 11,302 9,769 34,568 28,909 Corporate expenses 13,564 13,883 39,314 38,405 Total $ 46,807 $ 47,369 $ 149,309 $ 145,815 % of Net sales 18.0 % 20.4 % 19.5 % 21.2 % Three month comparison 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. Nine month comparison 27 Index 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. • In AEC, selling and general expenses increased $3.0 million, and research expense increased $2.7 million over the prior year. Restructuring Expense, net 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 September 30, Nine months ended September 30, (in thousands) 2022 2021 2022 2021 Machine Clothing $ 42 $ 251 $ 255 $ 193 Albany Engineered Composites — (81) — (40) Corporate expenses — 17 13 77 Total $ 42 $ 187 $ 268 $ 230 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, (in thousands) 2022 2021 2022 2021 Machine Clothing $ 57,247 $ 55,467 $ 161,752 $ 161,731 Albany Engineered Composites 9,958 2,917 20,688 13,019 Corporate expenses (13,561) (13,898) (39,327) (38,479) Total $ 53,644 $ 44,486 $ 143,113 $ 136,271 Other Earnings Items 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/(benefit) (3,183) 12,889 22,273 36,375 Net income/(loss) attributable to the noncontrolling interest 129 80 635 150 Interest Expense, net 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. 28 Index 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. AMJP grant 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, 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. The majority of these countries had income tax rates that are above the United States federal tax rate of 21 percent during the periods reported. The jurisdictional location of earnings is a significant component of our effective tax rate each year. The rate impact of this component is influenced by the specific location of non-U.S. earnings and the level of our total earnings. 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. The tax rate is affected by recurring items, such as the income tax rate in the U.S. and non-U.S. jurisdictions and the mix of income earned in those jurisdictions. The tax rate is also affected by U.S. 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 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. 29 Index Segment Results of Operations Machine Clothing Segment 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. We feel we are well-positioned in these markets, with high-quality, low-cost production in growth markets, substantially lower fixed costs in mature markets, and continued strength in new product development, technical product support, and manufacturing technology. Recent technological advances in paper machine clothing, while contributing to the papermaking efficiency of customers, have lengthened the useful life of many of our products and had an adverse impact on overall paper machine clothing demand. Additionally, we face pricing pressures in all of our markets. The Company’s manufacturing and product platforms position us well to meet these shifting demands across product grades and geographic regions. Our strategy for meeting these challenges continues to be to grow share in all markets, with new products and technology, and to maintain our manufacturing footprint to align with global demand, while we offset the effects of inflation through continuous productivity improvement. Review of Operations Three months ended September 30, Nine months ended September 30, (in thousands, except percentages) 2022 2021 2022 2021 Net sales $ 153,389 $ 154,171 $ 459,121 $ 462,298 Gross profit 79,232 79,437 237,434 240,427 % of Net sales 51.7 % 51.5 % 51.7 % 52.0 % STG&R expenses 21,941 23,717 75,427 78,501 Operating income 57,247 55,467 161,752 161,731 Net Sales Three month comparison • Net sales decreased by 0.5%. • 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 2.5% compared to 2021, driven by growth in sales of packaging, pulp and engineered fabrics. Gross Profit 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 increase in Operating income was driven by lower STG&R expenses over the prior year. 30 Index Albany Engineered Composites Segment 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 Airbus A320neo, Boeing 737 MAX, and COMAC 919 aircraft. Other significant AEC programs include CH-53K, F-35, JASSM, and Boeing 787 programs. Review of Operations Three months ended September 30, Nine months ended September 30, (in thousands, except percentages) 2022 2021 2022 2021 Net sales $ 107,174 $ 78,271 $ 306,980 $ 227,024 Gross profit 21,261 12,605 55,256 41,889 % of Net sales 19.8 % 16.1 % 18.0 % 18.5 % STG&R expenses 11,302 9,769 34,568 28,909 Operating income 9,958 2,917 20,688 13,019 Net Sales 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 nine months of 2022 and 2021. LEAP engines are currently used on the Airbus A320neo, Boeing 737 MAX, and COMAC 919 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 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. 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. Gross Profit 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 The increase in Operating income was driven by higher gross profit, partially offset by higher research and selling expense. 31 Index Working Capital, Liquidity and Capital Structure Cash Flow Summary Nine months ended September 30, (in thousands) 2022 2021 Net income $ 78,267 $ 89,992 Depreciation and amortization 51,908 55,347 Changes in working capital (a) (89,899) (9,959) Changes in other noncurrent liabilities and deferred taxes (21,542) 1,440 Other operating items 48,573 11,679 Net cash provided by operating activities 67,307 148,499 Net cash used in investing activities (52,832) (32,148) Net cash used in financing activities (9,119) (69,339) Effect of exchange rate changes on cash and cash equivalents (30,910) (2,111) (Decrease)/increase in cash and cash equivalents (25,554) 44,901 Cash and cash equivalents at beginning of year 302,036 241,316 Cash and cash equivalents at end of period $ 276,482 $ 286,217 (a) Includes Accounts receivable, Contract assets, Inventories, Accounts payable, and Accrued liabilities. 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 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 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 $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 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. 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, $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 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. 32 Index 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 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 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. 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 have also returned cash to shareholders through dividends and share repurchases. 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 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 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 financial 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. 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 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 debt; Net leverage ratio; and Adjusted earnings per share (or Adjusted EPS). 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. dollars at the exchange rate of a prior period. These amounts are then compared to the U.S. dollar amount as reported in the current period. 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. The 33 Index 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 September 30, 2022 (in thousands) Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company Net income/(loss) (GAAP) $ 57,247 $ 9,958 $ (56,382) $ 10,823 Interest expense, net — — 3,794 3,794 Income tax expense/(benefit) — — (3,183) (3,183) Depreciation and amortization expense 4,913 11,303 818 17,034 EBITDA (non-GAAP) 62,160 21,261 (54,953) 28,468 Restructuring expenses, net 42 — — 42 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 Pre-tax (income) attributable to noncontrolling interest — (176) — (176) Adjusted EBITDA (non-GAAP) $ 59,057 $ 21,462 $ (12,458) $ 68,061 34 Index Three months ended September 30, 2021 (in thousands) Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company 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 (a) (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 Nine months ended September 30, 2022 (in thousands) Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company Net income/(loss) (GAAP) $ 161,752 $ 20,688 $ (104,173) $ 78,267 Interest expense, net — — 11,336 11,336 Income tax expense — — 22,273 22,273 Depreciation and amortization expense 14,716 34,792 2,400 51,908 EBITDA (non-GAAP) 176,468 55,480 (68,164) 163,784 Restructuring expenses, net 255 — 13 268 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 Pre-tax (income) attributable to noncontrolling interest — (633) — (633) Adjusted EBITDA (non-GAAP) $ 174,606 $ 56,408 $ (35,886) $ 195,128 Nine months ended September 30, 2021 (in thousands) Machine Clothing Albany Engineered Composites Corporate expenses and other Total Company Net income/(loss) (GAAP) $ 161,731 $ 13,019 $ (84,758) $ 89,992 Interest expense, net — — 11,521 11,521 Income tax expense — — 36,375 36,375 Depreciation and amortization expense 15,272 37,326 2,749 55,347 EBITDA (non-GAAP) 177,003 50,345 (34,113) 193,235 Restructuring expenses, net 193 (40) 77 230 Foreign currency revaluation (gains)/losses (a) (156) 363 813 1,020 AMJP grant — 963 (5,832) (4,869) Acquisition/integration costs — 911 — 911 Pre-tax (income) attributable to noncontrolling interest — (206) — (206) Adjusted EBITDA (non-GAAP) $ 177,040 $ 52,336 $ (39,055) $ 190,321 35 Index The Company discloses certain income and expense items on a per-share basis. The Company believes that such disclosures provide important insight into the underlying quarterly earnings and are financial performance metrics commonly used by investors. The Company calculates the quarterly per-share amount for items included in continuing operations by using the income tax rate based on either the tax rates in specific countries or the estimated tax rate applied to total company results. The after-tax amount is then divided by the weighted-average number of shares outstanding for each period. Year-to-date earnings per-share effects are determined by adding the amounts calculated at each reporting period. The following tables show the earnings per share effect of certain income and expense items: Three months ended September 30, 2022 (in thousands, except per share amounts) Pre tax Amounts Tax Effect After tax Effect Per share Effect Restructuring expenses, net $ 42 $ 6 $ 36 $ 0.00 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 September 30, 2021 (in thousands, except per share amounts) Pre tax Amounts Tax Effect After tax Effect Per share Effect Restructuring expenses, net $ 187 $ 55 $ 132 $ 0.00 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 Nine months ended September 30, 2022 (in thousands, except per share amounts) Pre tax Amounts Tax Effect After tax Effect Per share Effect Restructuring expenses, net $ 268 $ 75 $ 193 $ 0.01 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 Nine months ended September 30, 2021 (in thousands, except per share amounts) Pre tax Amounts Tax Effect After tax Effect Per share Effect Restructuring expenses, net $ 230 $ 67 $ 163 $ 0.00 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 36 Index The following table contains the calculation of Adjusted EPS: Three months ended September 30, Nine months ended September 30, Per share amounts (Basic) 2022 2021 2022 2021 Earnings per share (GAAP) $ 0.34 $ 0.95 $ 2.47 $ 2.78 Adjustments, after tax: Restructuring expenses, net — — 0.01 — 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. The Company calculates Net debt by subtracting Cash and cash equivalents from Total debt. Total debt is calculated by adding Long-term debt, Current maturities of long-term debt, and Notes and loans payable, if any. The following table contains the calculation of net debt: (in thousands) September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 Current maturities of long-term debt $ — $ — $ — $ — Long-term debt 447,000 485,000 427,000 350,000 Total debt 447,000 485,000 427,000 350,000 Cash and cash equivalents 276,482 320,870 307,415 302,036 Net debt (non GAAP) $ 170,518 $ 164,130 $ 119,585 $ 47,964 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. The Company calculates net leverage ratio by subtracting cash and cash equivalents from total debt, and then dividing by trailing twelve months Adjusted EBITDA. 37 Index The calculation of net leverage ratio as of September 30, 2022 is as follows: Total Company 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 Interest expense, net 14,891 11,521 11,336 14,706 Income tax expense 47,163 36,375 22,273 33,061 Depreciation and amortization expense 74,255 55,347 51,908 70,816 EBITDA (non-GAAP) 255,077 193,235 163,784 225,626 Restructuring expenses, net 1,331 230 268 1,369 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 Pre-tax (income) attributable to noncontrolling interest (510) (206) (633) (937) Adjusted EBITDA (non-GAAP) $ 250,891 $ 190,321 $ 195,128 $ 255,698 (in thousands, except for net leverage ratio) September 30, 2022 Net debt (non-GAAP) 170,518 Trailing twelve months Adjusted EBITDA (non-GAAP) 255,698 Net leverage ratio (non-GAAP) 0.67 (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. Item 3. Quantitative and Qualitative Disclosures about Market Risk For discussion of our exposure to market risk, refer to “Quantitative and Qualitative Disclosures about Market Risk”, which is included as an exhibit to this Form 10-Q.